Helix Energy Solutions Group Inc (HLX) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Helix Energy Solutions Group review of the second-quarter 2013 results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded, Tuesday, July 23, 2013. I would now like to turn the conference over to Director of Investor Relations, Mr. Terrance Jamerson. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today.

Joining me today is Owen Kratz, our CEO; Tony Tripodo, our CFO; Cliff Chamblee, Executive Vice President and Chief Operating Officer; Alisa Johnson, our General Counsel; and Erik Staffeldt, our Finance and Treasury Director. Hopefully you all have had an opportunity to review our press release and related slide presentation released yesterday evening. If you do not have a copy of these materials, both can be accessed through our website at www.HelixESG.com, under the For the Investor section. The press release can be accessed under the Press Releases tab, and the slide presentation can be accessed by clicking on today's webcast icon.

Before we begin our prepared remarks, Alisa Johnson will make a statement regarding forward-looking information.

During this conference call, we anticipate making certain projections and forward-looking statements based on our current expectations. All statements in this conference call or in the associated presentation other than statements of historical fact are forward-looking statements and are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual future results may differ materially from our projections and forward-looking statements due to a number and variety of factors, including those set forth in our slide 2, and in our annual report on Form 10-K for the year ended December 31, 2012. Also during the call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slides of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The reconciliation, along with this presentation, the earnings press release, our annual report, and a replay of this broadcast are available on our website.

Owen?

Good morning, everyone.

We'll start by going straight to slide 5, which is a high level summary of first-quarter results. Quarter two's revenues increased 18% from October 1 -- I'm sorry, the first quarter, at $232 million, up from $197 million in Q1. Operating earnings followed suit. EPS for quarter two amounted to $0.26, while EBITDA for the second quarter amounted to $75 million, up from the $42 million we reported in Q1 on a continuing ops basis.

Moving to slide 6, our robotics business represented the single biggest contribution to our quarter-over-quarter improvement. Coming off a seasonally weak Q1, robotics revenues increased 38% in Q2 as vessel utilization improved to 98%. The subsea construction business also had a nice contribution to our improved Q2 results, as the Express and Caesar combined at 95% utilization during the quarter, as they worked to complete their existing backlog prior to being sold. We closed the sale of the Caesar in June and the Express just last week. While the Well Intervention fleet enjoyed relatively high utilization at 93%, its revenues declined slightly, coming off of Q1, in which the fleet had 100% utilization. The Skandi Constructor entered the fleet in Q2, but worked in ROV support mode.

On to slide 7, from a balance sheet perspective, our cash and liquidity levels remain very strong. Cash stood at $514 million at quarter end, after paying down $150 million of debt during the quarter, with liquidity levels of approximately $1.1 billion. We entered into a new credit facility in June, which positions us very nicely financially to continue our -- to execute our growth plans, but more on this later.

I'll now turn the call over to Cliff for an in-depth discussion of our contracting service results.

Okay, thanks, Owen. Good morning.

As you can see from the summaries, also the contracting services, we had quite a turnaround in Q2 versus last quarter, where the seasonality of the robotics business [hampers]. As Owen stated, this quarter our robotics business posted a strong quarter-over-quarter improvement. We continue to have a strong utilization in our well intervention vessels, and our pipelay vessels remained working up until both sales were completed. More on this business unit in the following slides. Before I move on, I want to also point out a nice gain in revenue and profit in the production facilities, which we are benefiting from a combination of, number one, an increase in revenues under the new HB-1 contract for processing and production from [Fayetteville], and number two, the increase in quarterly HFRS fees, effective April 1 of this year as result of our new four-year agreement.

Moving on to slide 10, in the Gulf, the Q4000 utilization was down at 86%, primarily due to required scheduled inspection of vessel by the US Coast Guard. This ends a consecutive streak of three quarters with full utilization. Toward the end of the second quarter, IRS number 2 went back on hire, and will remain for the rest of the year. As for the 534, we continue our conversion efforts on this vessel over in Singapore, and based on our last work [scope], we now expect her to begin working the Gulf late in Q4. Over in the North Sea, the Skandi Constructor entered the fleet in the second quarter, where we saw 95% across all three vessels during the quarter. We originally expected to mobilize the Seawell along with Skandi, and perform necessary modifications in June, but due to vendor delays, she is currently dock side and having the work performed this month. Once completed, the Skandi Constructor, as well as both the Seawell and the Well Enhancer are fully booked the remainder of 2013.

If we move on to slide 11, on robotics, with vessel utilization being the primary driver of this business, our chartered vessel utilization improved to 98% in Q2, up 29% over Q1 utilization of 69%. The Deep Cygnus, which as you may recall sat idle for 75 days in the first quarter, it achieved near full utilization on a ROV drill project in the North Sea during the second quarter. The rest of our long-term charter fleet also had strong utilization where we also managed to work five additional spot vessels rightly through the quarter. With the contract extension in India on the Olympic Canyon that allows us to keep a long-term shored vessel in the region over the next 1.5 years. Also, not exactly a Q2 event, but in July, we have just taken delivery of the REM Installer, where she immediately went to work in the North Sea on our Combinations Project.

Moving on to slide 12, on our subsea construction business, with the closing of the sales of the Caesar and the Express, that only leaves us with a [shorebase] facility, which we have now entered into an agreement to sell to the same buyer for these pipelay assets. The deal is expected to close in January of 2014.

Moving on to slide 13, I'll leave this slide detailing a bunch of utilization for your reference.

And with that, I'll turn it over to Erik on our key balance sheet metrics.

Thanks, Cliff. Good morning.

Please turn to slide 15. Slide 15 provides an illustration of our debt maturity profile, reflecting the retirement of high-yield notes with the proceeds of the term loan completed yesterday. Moving on to slide 16, slide 16 provides an update on our gross and net debt levels historically and at June 30. After the sale of the Express last week, on a current snapshot basis, we are roughly in a zero net debt position. As a frame of reference, since the end of 2008, we have reduced our gross debt levels by over $1.5 billion and our net debt position by $1.8 billion. At quarter end, our net-debt-to-book capitalization ratio was down to a very conservative 2%.

Tony?

Thank you, Erik.

Slide 18 represents our updated 2013 outlook. We call it update, although the numbers are remarkably the same as last quarter. We continue to forecast total EBITDAX at approximately $300 million for 2013. Our forecast remains intact at $300 million, despite the delay in putting the H534 in service. The H534, as Owen mentioned, remains in Singapore undergoing refurbishment and modifications, taking longer than expected, due to an increased amount of work to make sure the vessel is in the best possible condition. The 534 is now set to transit to the Gulf of Mexico in late August and go to work late in Q4. Fortunately, underlying strength in our well intervention business for the existing fleet is able to offset the delay in putting the 534 to work. When backing out the stub impact of our divested operations, both oil and gas and pipelay, and throwing into the equation a full year's impact for the two vessels that entered the fleet in 2013, the Skandi Constructor and the Helix 534, our expected pro forma exit rate EBITDA for 2013 is more like $350 million. Year over year for ongoing operations, we are forecasting a revenue growth of 27% this year.

Total CapEx spending remains the same at $365 million. Let me detail the major items for your reference. We're going to spend $135 million this year for the Q-5000, which is currently under construction in Singapore; modifications and refurbishment of the 534, which is still in Singapore, expected to be $80 million this year. [Building] new intervention riser systems for well intervention operations and new vessels is $64 million, and additional robotics vessels and trenchers at $40 million. We still expect to spend $11 million this year for Seawell life extension, and a dry dock for the HP-1, which is expected to go to dry dock October 1, is $20 million.

Backlog is up from March 31. At March 31, we announced record backlog at $1.6 billion, and 90 days later, we're up even beyond that to $1.8 billion. Most of that backlog relates to the well intervention business, and we have a solid foundation to support our business for years to come. For example, the Q4000 is spoken for through 2015, with additional commitments and progress beyond. The Seawell and Well Enhancer are now fully booked for 2013 and 2014, with backlogs starting to build for 2015. The H534 is fully booked through 2014, and we're filling in backlog through -- into 2016. And the Skandi Constructor is now fully committed for the remainder of 2013. Canyon, our robotic unit, is forecasting a strong second half for 2013.

I'm going to skip slides 22 and 23, leave them for your reference, and turn the call back over to Owen for closing remarks.

Thanks, Tony.

Well, things are going pretty well. The (inaudible) are -- Excuse me. Sorry about that. The transformation of the Company is now complete. We've transitioned from a complex business model burdened with high debt into a simplified business model and strong growth niches of well intervention and robotics with a very strong balance sheet. Our financial reporting this quarter is starting to reflect this simplification. By Q4, the financials should easily reflect the business we have now. That's why we're -- we've included guidance to the exit EBITDA rate of $350 million, in order to provide some visibility beyond the last of the noise.

From here on, we expect to report clear growth. The Skandi Constructor receives its intervention system this quarter and starts its roll-in intervention; the H534 will go into service in Q4. Next year, we will also see the -- our next new trencher, and the new build Grand Canyon II go into service. The Q-5 will be delivered in early 2015, and it's our intention to begin the construction of the next Q class [semi] in the near future. Additional assets for growth will be added as the market dictates and our balance sheet allows. Our focus is on building our capabilities for delivering high quality, technically sound assets at commercial costs, so stay tuned. There's a lot to come.

At this time, we'll be able -- we'll end the call and we'll open it up for questions.

(Operator Instructions)

The first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.

Owen, you guys mentioned your bid in the Q4000 all the way into '18. Can you maybe talk about a couple things on that front? One being how pricing looks out that far relative to what you're getting today? And maybe stepping back from that, your thoughts as you look forward. There's a lot of discussion about all the new-gen semi-submersibles coming into the market over the next few years, and maybe some of the pressure that puts on the older semis, and the thoughts on those possibly coming into the market and competing with you down the road?

That's a lot of questions. Let me tackle the first one on the rates. In fact, Cliff can probably speak to the rates first, but we do expect rates to go up in the future as build costs for any new assets continues to rise.

Yes, on the Q, some of this backlog we've had is older contracts, [master] agreement, so we are increasing the rates as those expire. We're increasing the rates gently, I guess, as the market will accept them. And because further out in time those will obviously increase as our cost and the market dictates to us to do. From the, I think your question was, are we seeing any pressure from the older rigs coming in, in the well intervention market. And at this point, we're seeing the clients wanting to use the rigs to do drilling, do productive drilling and expand their portfolio in using the well-intervention assets strictly for what they're designed for.

Right. I was thinking more down the road, if you think that becomes a concern at some point. It seems like you're locking things up a ways out now, and that keeps getting deeper, so.

I'll jump back in, Jim. Everything is a concern to me. But to be practical about it, I think some of the people might have seen what we're doing with the 534. And therefore, you start thinking, well, maybe other older rigs can be put into the same service. We have looked for a long, long time and looked at the concept of using older rigs. Our decision was to go with new builds rather than the old rigs. And the primary reason is we picked up the 534 because of the ability to get it to market faster than a new rig, but our preference, by far, is for a newer rig due to the efficiencies involved. Even though you take an older rig, it's still a drilling rig, and there are a lot of dissimilarities between the drilling rig and what we build as a new-generation intervention vessel. And you don't get the same efficiencies out of an old drill ship, but I think the 534 is going to serve its -- it has a good market niche facing it, primarily well P&A. And that's where we intend to use it.

One final for Tony maybe. SG&A came down nicely, Tony, in the second quarter. Maybe what your thoughts are on a run rate going forward, post all the pipelay asset sales.

I expect Q2 -- the future quarters to look similar to Q2, absent any extraordinary items, and trend downward.

The next question comes from the line of Travis Bartlett with Simmons. Please go ahead.

Start by saying congratulations on the quarter and completing the sale of those pipelay vessels.

Sticking with subsea construction here, thinking about the business excluding these vessels, can you talk about what we should be expecting in terms of margin impact, looking at the pro forma business? I'm assuming these vessels were dilutive to margin, so maybe if you could help us in terms of the margin benefit going forward, that would be helpful.

You're talking about overall margins for Helix absent subsea construction?

Correct.

Okay, Travis, I'll just give a more -- a pretty generic, longer-term answer to your question. Generally speaking our margins should lift as a total Company, without subsea construction. So just generally speaking, subsea construction over the years has had lower margins in both robotics and well intervention. That being said, there have been a few quarters here and there where subsea construction has put out pretty nice margins. For example, in Q2, subsea construction actually contributed very nice margins, but if you look it over the long term, our margins as a total Company will lift up without subsea construction.

Right.

I might add a little bit to that answer because I think it's not all about margins when you're looking at eliminating -- shifting the business model. The business model now is great. The reason subsea construction is so lumpy is you can see what's happening with some of our competitors is that it's -- that market is highly dependent on performance. And by the elimination of subsea construction, which focuses on well ops and Canyon, we greatly derisk the business model from that kind of lumpiness.

Right. Understood. That's helpful.

And secondly, just shifting gears here towards robotics, it looks like you guys modestly increased the robotics revenue guidance. And it seems like your guidance implies a pretty significant ramp in the second half of 2013 revenue generation. So my question is, how should we think about this revenue being split between Q3, Q4? And then in terms of the drivers, what are the big drivers of the guidance revision there?

Well, we have another vessel in the fleet, the REM Installer, so that in itself increases our ability to put out top-line revenues. But we expect a much stronger second half, Travis, for robotics over the first quarter. In fact, we expect a gradual increase in revenues as the year rolls out. So we don't have the kind of visibility in robotics that we have for well intervention, but just based on what's the opportunities are out there, our expectation is that the third quarter will be somewhat better than the second quarter, and the fourth quarter will be somewhat better than the third quarter.

Typically, the first quarter is always -- is our slowest quarter for utilization of vessels, because it's bad weather in the North Sea; it's bad weather in the Gulf of Mexico, so to speak. And people don't want to start the projects until April/May time frame. And so second and third quarter are typically our busiest seasons. That being said, also, a lot of this stuff that was planned for the third quarter gets pushed back into the fourth quarter. So second and third are busiest; fourth is next busiest; first is historically our slowest quarter.

Right, okay. Fair enough.

And then last one I had here on the production facilities, looks like you had a pretty nice improvement sequentially during the quarter in what has otherwise been a fairly static business. Can you elaborate a bit on what drove the sequential improvement there? And then is that maybe something we should expect going forward?

Travis, sure. First of all, as Cliff mentioned in his commentary, we re-upped the Helix fast response system contract with the consortium of operators in it, and it was re-upped at a higher rate. So that was one item. The second item, when we sold our E&P business, the buyer entered into a somewhat different arrangement with the Helix Producer 1 that was based in part on a fixed-fee and in part on volume. And the volume flowing through the HP1 is exceeding what our expectations were. So it's just as simple as those two reasons.

Next question comes from the line of Joel Luton with Westlake Securities. Please go ahead.

More of a bigger picture question and longer-term question, where do you see the Company in 5 to 10 years? With the cleaned up balance sheet and a focused business plan now, do you think that maybe down the road that you all potentially could become a take-over candidate?

I'll take the last part first. As far as a take-over candidate, I really don't worry about the things that we can't control. So I don't really think a whole lot about that. The other part, I live in the future. I live about five years out. I can't say that I actually live 10 years out. But five years from now, I see continued adding to our Q fleet of intervention vessels. I see continuing to add robotics. Basically, it's just a repetition of what we're starting here, and I can see easily doubling in the next five years.

The next question comes from the line of Michael Marino with Stephens Incorporated. Please go ahead.

Tony, I was wondering if you could help me, just to make sure I'm understanding the guidance correctly. But you've got -- you're guiding to $300 million of EBITDA this year. You've done roughly half of that to date. But you lose the subsea -- the construction vessels. The HP1 goes into dry dock. Is the difference, or you're making that up in the back half with the Skandi and continued improvement in the robotics business? Am I thinking about that right?

Absolutely right. That's it in a nutshell, Michael. Again, subsea contributed nicely to Q2. We lose that, but we pick up incremental capacity with the Skandi, and robotics is forecasted to have a much stronger second half than first half.

Okay.

So now -- and the 534 now is not expected to come and contribute until late in Q4. So there is a little bit of contribution with that, but not much.

So then the delta between the exit rate is really the 534 and maybe a little bit from the Skandi?

Yes, a full year of the Skandi, a full year of the 534, additional capacity were robotics, and if you subtract what subsea construction contributed this year and the little stub we had for ERT, but those two well intervention assets are significant contributors in terms of EBITDA.

Okay, and how much, or how long is the HP1 in dry dock? I'm just trying to understand how long --.

Our current schedule is anywhere between 45 and 60 days. It all depends on when she gets lifted up out of the water and what we see, but our current schedule has her out for 45 to 60.

Starting October, is that what you said?

Starting October 1.

What's not in that exit rate, though, is the new Trencher and the Grand Canyon II.

Yes.

Okay, so that would -- that's -- as a follow-up question, if I look in --

Yes, just to clarify, because I think Owen brings up a very good point. This is not a 2014 forecast. What it is, is what 2013 would have looked like if we weren't in subsea construction, we weren't in oil and gas, and we had the 534 and the Skandi in for a full year.

So looking out into '14, its growth in the robotics business that we should think about. And with that in mind, the five spot vessels that you guys are running right now, I think is towards the high end of what you've done historically. Maybe could you talk about what you see for that business looking out past six months? I know visibility is a little bit limited generally speaking, but if you could just --- since, Owen, you live out in the future, you could maybe help us with that.

We have the long-term vessels, and we know what those are. Spot vessels or vessels opportunities are just that, and they come along as we can, but that's a pretty average year. We -- it depends on the market a little bit. We expect the Gulf to be pretty good next year as well as the North Sea, so we would expect that or more from the vessels of opportunities. As Tony mentioned or we mentioned, we've also added the REM Installer, came in this year, so we'll have that all of next year. So we'll have all those vessels next year, as well as we'll have a partial year on the Trencher. And late in the year, we get the Grand Canyon II that will come into play, as well. I'm not sure exactly when it gets here, late October or so next year.

(Operator Instructions)

The next question comes from the line of Martin Malloy with Johnson Rice. Please go ahead.

Congratulations on the quarter.

Thank you, Marty.

Could you maybe talk about the opportunity for long-term contracts for the well intervention vessels? And similar to the BP-type contract, what that potential looks like out there as you look out the next year or two?

Yes, this is Owen.

It's sort of a complicated question, but if you go to the bottom line, I think there's probably one, two, three, four -- four or five operators who are not in the position right now of offering that kind of a contract, but will in the not-too-distant future. And vessel-wise, there's a market inquiry out from Petrobras right now looking for multiple vessels. There's probably multiple vessel opportunities in West Africa. So I think the market is more than ripe for multiple additions.

Okay. And then, I don't know if it's too early to -- for you to give us this information, but in terms of 2014, are there -- could you help us with any dry dockings that you expect next year?

Yes, we have got a few dry dockings next year. We have got the Seawell going in at the end of the year. It will be in through --back in '14, and into '15 as well, be in for 100, 120 days or so. What else have we got here? We have got one for the Well Enhancer for '14, as well, and I believe that's it.

Okay. You said the Seawell was 120 days?

Yes, we'll start -- because right now it's scheduled to start in December of '14, so it will be parts of '14 and '15.

Mr. Jamerson, there are no further questions at this time. I will turn the call back over to you.

Thank you. Thank you for joining us today. I very much appreciate your interest and participation, and look forward to having you participate on our third-quarter 2013 call in October. Thank you.