Helix Energy Solutions Group Inc (HLX) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Helix Energy Solutions Group review of the fourth-quarter 2013 results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, Thursday, February 20, 2014. I would now like to turn the conference over to Terrence Jamerson, Director of Finance and Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us. 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 last night. If you do not have a copy of these materials, both can be accessed through the Investor Relations page on our website at www.HelixESG.com. 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 this 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. I'm going to start off with some comments to slide 5, which is a high-level summary of the Q4 results.

We have very good Q4. EBITDA increased $82 million from $70 million in Q3, while EPS moved down to $0.35 per share from $0.42 per share. This was primarily driven by a much higher tax rate in Q4 -- 29% in Q4 versus 13% in Q3, plus the fact that we had a net non-recurring gain of $0.04 per share in Q3. For the year, we wound up with $300 million of EBITDA, spot on our original guidance.

Moving to slide 6 and 7, our well intervention business realized strong levels of utilization in Q4 at 94%. More importantly, the outlook as well as our backlog for this business continues to improve and grow. More on this later, including the recent announcement of the Petrobras award.

The successful introduction of the Skandi Constructor in the well-intervention operations in September has been a nice incremental contribution to our results. The vessel has performed very well and a big hats off to our team in Aberdeen for introducing this vessel with very smooth operational launch.

Our robotics chartered vessel fleet realized 88% utilization in Q4, which is relatively good for this business segment given our exposure to the North Sea market, where activity levels generally tail off the late fall and winter months.

Our good performance in Q4 overcame the fact that the Well Enhancer went into dry dock in mid-December, earlier than we had planned, and the Skandi went off-hire as well, in mid-December, transiting to West Africa. In addition, the Helix Producer 1 was out of service for 46 days in Q4 for its regulatory dry dock. Given all these events, I especially feel our Q4 performance is very good.

On to slide 7, from a balance sheet perspective, our cash and liquidity levels remain very strong. Cash stayed flat, at approximately $480 million, with liquidity levels staying strong at approximately $1.1 billion, when adding the unused capacity in our revolving credit facility. Net debt to book cap remains a very conservative 5%, which gives us the confidence to take advantage of the many market opportunities available to us.

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

All right, thank you.

As you can see from our summary results, contracting services and revenues as a whole increased by $11 million quarter over quarter, while gross profits remained the same, at around 30%. As Owen alluded to in his opening remarks, this was a very impressive quarter, where strong performance in robotics and our well-intervention fleet more than made up for the shortfall in revenues of the Helix Producer 1 and the Well Enhancer, both being in dry dock for a portion of the fourth quarter. I would also like to point out that we included the sale of our spoolbase facility located Ingleside in early January; that is completing our exit from the subsea construction business.

Moving on to slide 10, the well ops overview, in the Gulf of Mexico the Q4000 utilization was 100% for the second, second quarter. Our spare intervention riser system, IRS number 2, remained under contract in standby rates for the entire quarter and started earning operational rates when it went on hire in the beginning of late November and through the end of December. Also after a rather complex and lengthy reinstatement process, the Helix 534 is now operational and on hire for the remainder of the year.

Over in North Sea, both the Seawell and Skandi Constructor achieved 100% utilization for the quarter, while the Well Enhancer was fully utilized up until she entered dry dock in mid-December. The Well Enhancer then returned to service in late January.

For the fourth quarter, all three vessels remained busy on a variety of well intervention projects in the North Sea, while the Skandi transited to offshore West Africa in mid-December to begin approximately 60-day well intervention campaign.

This is a similar campaign to the one we performed utilizing the Well Enhancer back in the fourth quarter of 2011 and through the first quarter of 2012. The Skandi is scheduled to return back to the North Sea later in the first quarter of this year.

Next on to robotics and moving to slide 11, the robotics utilization remained strong for the fourth quarter, during a season where we have typically seen decline in activity in the North Sea. Our chartered vessel fleet utilization was 88%, which was consistent of our five vessels under long-term charter. During the quarter, we also picked up three spot vessels for the Gulf of Mexico for a few short-duration jobs.

Utilization of the ROVs, trenchers, and the ROVDrills was relatively flat for the fourth quarter versus third quarter; however, the increase in trencher days offset the slight decrease in vessel utilization, thus keeping profits in line with the last quarter.

All four of our trenchers were utilized during the quarter, which was a first in 2014. The T1200 and iTrencher were on board the Grand Canyon for oil and gas trenching, while the T750 on the Deep Cygnus and T600 primarily performed trenching for renewables in the renewables sector.

We continue to make progress with our ROVDrill technology, where we completed a job offshore West Africa with the asset. We've also extending our existing multi-ROV services contract with a client in Malaysia; this contract runs through January of next year.

We move on to slide 12. I will leave this slide detailing the vessel utilization for your reference, and with that, I will turn it over to Erik for our key balance sheet metrics.

Thanks, Cliff, and good morning. Please turn to slide 14. Slide 14 provides an illustration of our debt-maturity profile at December 31. Debt reduction during the quarter was a result of the required quarterly payment of our term loan.

Moving on, slide 15 provides an update on our gross and net debt levels historically at December 31. We continue to maintain a strong liquidity position, with approximately $1.1 billion of liquidity.

Our net debt level was approximately $88 million and remained constant quarter over quarter. Our total net debt reduction for the year was approximately $500 million. Over the past five years, we have reduced our gross debt levels by over [$12.4 billion] and our net debt position by over $1.7 [billion]. Tony?

Thank you, Erik. Let me move straight to slide 17, which presents our initial 2014 guidance.

Consistent with the exit-rate guidance we provided throughout 2013, we expect 2014 EBITDA to approximate $350 million. This guidance takes into consideration three vessels entering, or in the case of the Well Enhancer, having a dry dock in 2014 as follows -- the Skandi Constructor expected to enter dry dock sometime in September; the Well Enhancer actually went into dry dock in mid-December, and successfully completed its dry dock in late January and is now back to work.

We plan for the Seawell to go into dry dock in December for the purpose of performing some major improvements in order to extend their useful life well beyond what might be considered a normal operating life. The vessel was built in 1987, and she is still performing at a high level and is much appreciated by our North Sea customer base. We feel the investment we plan to make will add many years to her life and represents a good return on investment.

As we indicated earlier, the H-534 ended service in mid-February. So with all of the above taken in consideration, we still forecast a $350-million EBITDA number for 2014, overcoming the dry dock hurdles as well as the late start for the H-534.

The outlook for the robotics business is much stronger at this stage of the new year versus 2013. We expect all geographic regions for robotics to improve in 2014.

The trenching market, a strong niche for us, should pick up nicely in 2014. As such, we are presently working on two major trenching programs right now. The Grand Canyon II is slated to enter the fleet very late in 2014 and is not expected to contribute much, if anything, in 2014. When you look at our revenue guidance for 2014 for ongoing ops, we are forecasting a revenue growth of 28%.

Our backlog amounted to $2 billion at December 31. The vast majority of this backlog is represented by the well intervention business, and this number does not include the two-vessel contract we recently announced for Brazil. We expect to announce backlog at the end of the first quarter of 2014 when adding the recently signed Petrobras contract at an amount approaching $3 billion.

By vessel, the Q4000 is spoken for through 2015, with additional commitments beyond. The Seawell, Well Enhancer, and Skandi Constructor have relatively high levels of backlogs and commitments through 2015, which should lead to continuing high levels of utilization. Note the prior commentary regarding dry docks and life extension.

They Helix 534 has a full backlog, or is otherwise committed through 2016, with backlog reaching into 2017. The Q5000 has a five-year contract with BP for a minimum of 270 days of utilization per year once she is placed in service.

Our CapEx for 2014 is now forecasted at $400 million. Of this number, approximately $320 million is growth capital, including progress payments for the Q5000; spending on the Q7000; ROV fleet additions; a new ROV trencher, the T1500; and initial spending to furnish the two vessels to be constructed for the Petrobras contract.

I will skip slides 21 through 24 and leave them for your reference. At this time, I'll turn the call back over to Owen for closing comments.

Well, things are good. In spite of some challenges like the Skandi Constructor delay going into full well intervention service for a few months, no contribution from the H-534 for the entire year, and an early dry dock of the Well Enhancer, strong performance from the rest of the well intervention fleet and a stronger production facility business allowed us to meet the guidance of $300 million EBITDA issued at the beginning of the year.

There always seems to be give-and-take, and we can applaud the efforts of those that work at Helix for reaching to make this happen. Helix is now well into our promised growth strategy.

The Q5000 new construction is ongoing and appears to be under budget at this time. Jurong shipyards expressed their determination of an on-time delivery in Q1 next year. The Q7000 is progressing with first steel to be cut early this summer. The most recent news is the establishment of Helix in Brazil, with two chartered new build vessels for Petrobras.

We continue to add assets in robotics, as the market opportunities present themselves. This year should see the delivery of a new chartered vessel, the Grand Canyon II, a new trencher to serve the growing alternative energy markets, and several new work-class ROVs to upgrade and grow our fleet.

The market continues to have strong visibility for future well intervention demand, as well. If the concerns about a cyclical softening of rig rates does occur, we believe this should have little effect on Helix, as our assets are booked through 2015 and beyond, with demand increasing.

What we're seeing right now is a strong competition by the drilling rig contractors for the available labor pool. This is the most direct impact we're seeing from the drilling rig side of the industry.

Our balance sheet remains strong with over $1 billion in liquidity. We've opted to charter the two new build vessels from CM offshore for the Brazilian contract in order to minimize the capital investment and keep more options open for future growth, without over-stressing the balance sheet. We're committed to maintaining a prudent balance sheet.

I believe we are on track with our growth initiatives, and I'm very excited about the future.

At this time, we will turn it back over and open it up for questions.

(Operator Instructions)

Jim Rollyson. Please go ahead, sir.

Good morning, guys. Owen, you -- can we get a little bit of color on the two new deals in Petro -- for Brazil and for Petrobras? Four-year deals on contracts, are these full utilization? Some thoughts on how much cash flow these things could generate, some kind of color there?

Yes. They -- it's two vessels. The first vessel to be delivered mid-2016, with the second vessel to be delivered within six months after the first one. The total CapEx right now is budgeted at $240 million, and EBITDA contribution, give or take, it depends on the ramp-up -- the SG&A and everything, but EBITDA generation is going to be roughly $80 million for both vessels. So $40 million per vessel.

That's perfect. That's helpful. Historically, Petrobras has tried to do, it seems like everything on the cheap, and the $40 million EBITDA wouldn't suggest you guys are necessarily doing anything on the cheap. Is it a shift where they are actually paying [up] for quality or some thoughts around that?

Obviously, I would like to say absolutely that's the case. I think our relationship with Petrobras goes back many years. I think Petrobras has wanted us in Brazil, but we are not willing to go there unless it's the right contract and I think we have been very patient. There has been timing issues.

But Petrobras is also the leader, without a doubt, in the use of intervention vessels up to this point. So they are very savvy about what it takes and what the requirements are. And I would like to believe that the reason that we were awarded this contract was because of our long-standing track record and excellence in intervention.

Okay, that's helpful. Last one for me, any update on the contacting outlook for the Q7000?

This is Cliff. Yes, we're still working the contacting issues. We expect BP to finalize their commitment here sometime soon, and we've got several other contractors -- or clients that we're working with, as well. I think we will have more flavor on that in the June timeframe.

Perfect. Sounds like you guys are in pretty good shape from a backlog standpoint. Thank you.

Martin Malloy.

Congratulations on the good quarter.

Thank you, Martin.

I was wondering if you could talk a little bit more about the demand you're seeing on the ROV side. I'd noticed in the outlook section on page 19 of the slide deck that you had two five-year contracts for ROV services for two new ROVs. And that's -- I don't recall seeing those length of contracts before for your ROVs. Is that something new? And if you could talk about the number of ROVs that you are looking at over the next couple of years?

I will make a quick comment and turn it over to Cliff, because he is close to it. But in general, we are trying to transition that business model a little bit, and we are actively going after -- seeking longer-term contracts.

One of the issues that we had going into last year was that our visibility is on a [spot] market basis, and it's very difficult for us to sometimes get it right. Glad to say, we usually get it more right than wrong, but last year, for instance, we had excess vessel capacity that drug the ROV division down.

This year we have -- because we're switching and pursuing the longer-term contracts, our visibility has improved. And I think that is going to reflect an increased margin for us, because we were able to right-size the fleet better going into each year.

Do you have anything to add?

No, I think you covered it there. But you are right, we have picked up some long-term contracts on two different vessels for the same client for two ROVs on each vessel. One of them started a few months back, and one has just gotten started, and we are pursuing more of those as we speak.

Okay. Any additional opportunities to add intervention riser systems that you might rent out to operators?

I think the rental riser business is an exciting opportunity. I know there is a lot of interest from the major fabricators in it. And we have -- I don't know how to put this, it's a challenge for us. We're not a fabricator, or historically, we have not been a fabricator of our own systems. We design them and had them built by others.

We have just taken on a new facility, though, where we're going to be taking over more of the assembly of our own systems. That should improve our production time for generating them.

Right now we are working very hard to produce enough systems for the new vessels that we are adding, and it is our intent that we get ahead of that. And we have one rental system that is out right now that does well, but we need redundancy there. And the market is certainly there to support additional systems. That's an exciting growth potential for us.

And where is the new facility that you took over?

It's just off of Hempstead Highway.

It's here in Houston.

It's here in Houston, so it's very close to our corporate headquarters.

Okay. Thank you.

(Operator Instructions)

Igor Levi.

Good morning. There's been a lot of concern in the market on the increased competition from rigs. So I was hoping you could talk a bit about how your vessels stack up against rigs as far as efficiencies for both the heavy intervention Q vessels and the light intervention vessels you have in the North Sea?

That's a long discussion. Let's take light intervention vessels first of all. It's absolutely a slam dunk that when it comes down to doing light-intervention tasks, our vessels are far more efficient than using a drill rig to run riser -- or water lines through the open water column. In fact, I don't even know that that is even a remote consideration by producers.

On running a riser system, [Standalone] did a study during the [cat b] tempering process that showed that we -- our vessels generated something around the order of a 40% efficiency gain over a rig. I think there is a lot of components to that. First of all, our vessels are permanently rigged up for intervention. Two, the equipment a specific to intervention, the open-sided derrick, the size of the winches and everything are optimized for intervention. The layout of in the handling of all the systems, that's a result of 25 years of doing it, and every little efficiency gain is worked into the new vessels.

I might say that we also are -- we price our vessels because they are smaller than a rig, the capital cost is lower. And therefore, we are able to price lower with the same return on capital. But there's a little misnomer, if you look at our quoted rates versus rig rates, they're not exactly apples to apples. Because if a rig rate -- if a rig is to do intervention work, you'd still have to put the intervention riser on board, along with some other equipment. So the rig rate is a rig rate plus, where ours is an all-inclusive rate, including the intervention riser, the ROVs, et cetera.

There's quite a bit of an efficiency gain. I might also say that I think that the producers are a little concerned in looking out. And I know there's a lot of talk about softening in the rig market right now, but I think producers have a longer-term vision. And they're a little concerned about a tight market in the future and where rig rates are or could go. And I think there is more and more of an acceptance of the intervention technology, and almost mandates starting to occur with the producers to use intervention vessels rather than rigs and the leave the rigs for the drilling.

So all in all, I've been listening to a lot of the talk about softening rig rates. Looking at the actual rig rates, some have gone up; some have gone down. It's not a concern for us.

Great. That's very helpful. And when you mentioned on the point of rig rates actually being rig rates plus the cost of setting up the intervention equipment, do you have any color on what that actually costs, so we can integrate that into what the comparable economics are, assuming a typical job is 2 to 3 weeks?

That is hard to do, because you have to look at each individual rig contact and see what they are not including, what they're not including. But order of magnitude, I would say somewhere close to $100,000.

Wow. Okay.

And I think that's understated, because then you get into some nuances like how much support is needed for the rig versus the support for our vessels. Our vessels come pretty much come all-inclusive, so the support cost is another delta. So it's probably greater than $100,000 difference, comparing the quoted rates.

That's extremely helpful. And lastly, any color on pricing for your vessels, what you are actually seeing up there for well intervention? Last call I think you mentioned that you could potentially see a slowdown in price increases. How is that -- what have you been seeing since then?

I think that was more of a hypothetical response to people asking what happens if rig rates fall sufficiently. Then, yes, at some point our rates would drop. But I think if you look at our track record, we've been pretty successful at pushing our rates up, and I would say that trend is continuing where we do have opportunity to increase rates.

Thank you. I will turn it back.

Michael Marino.

Owen, you addressed a lot of my concerns in the previous statements. I was curious on the backlog number, you guys at least had in the presentation of $1.8 billion was flat sequentially. I would be curious to know, is there any -- were there any changes within that in terms of rate? I'm getting at the same question or concerns that a lot of people have. Has there been any pushback in rate from customers, as we've seen some softness in the mid-water drilling fleet?

Michael, let me address this. I think what the investors have to look at is the bigger picture here. That not too long ago, that is at the end of 2012, our backlog was $850 million. And we're going to be likely to reporting a backlog number at the end of the first quarter close to $3 billion. That's a pretty significant increase. Over the last few quarters, our margins have held up very well, if not been higher.

Our backlog was essentially, I think in pure dollars, a little higher at the end of the fourth quarter than it was at the end of the third quarter, but I think the backlog has committed rates. So we're not at risk for rates. I think that's an important point to emphasize here; our backlog at $3 billion is not at risk for rates. What happens in the rig rate market is really of no concern for us in the next couple of years in terms of how it's going to impact our margins.

Could I jump back in for second? This whole dialogue we get into an awful lot. First of all, if we're talking about a change in rig rate, we're talking about something that's going to occur in 2016, 2017 or beyond before it would impact us. I mentioned a longer-term vision of visibility of what the producers are looking at. Plus, all of this is anecdotal.

But I would certainly like to challenge the analysts to actually look at -- take a full list of all of the existing third- and fourth-gen rigs in the world, look at which ones are suitable for well intervention, and you get down to a very small number. And then you look at the ones that are -- that have long-term committed contracts, and the threat to our market is not that significant.

Great. I really appreciate the color. Owen, if I could follow-up on that. It sounds like, from what your previous comments, that really customers have started to look at you guys in a -- it's a completely different decision process from using intervention vessel versus using a drilling rig. Is that a fair statement? We're comparing apples and oranges now?

I really think that's the case. I think you're seeing a bifurcation of the market here. I think there is an actual intervention market with its own business model, which is distinct and separate from the drilling model.

When do you --

The contracting style is different. The length of the contracts is different. The use of the equipment on the deck is different. It happens to be that semi-submersibles when you used for intervention just happen to have similarities in appearance, to a rig.

When you think that distinction really started to take place in the marketplace? Is it taking place today? Or is it something maybe Macondo helped trigger with the Q4000's use there? Or has it been -- or this something -- I guess it's been building for a while, but if you could shed some light on that -- how that process or that customer mindset is changing or has changed?

I don't think there's a singular trigger event. If you go back in history, you have to realize that we never achieved full utilization on a single vessel in well intervention until 2007. Even when the Q4000 was delivered in 2002, it was not readily and immediately accepted, and there was no trigger along the way. It's just incrementally gotten better and better, and I think that the credibility of the track record of what we have done, it's gained acceptance. The tightening of the rig markets and where rig rates have gone has also driven the producers to really look at the alternatives.

I think there was a period of time, and we're still in that period of time, where the producers are looking at various options, which makes it difficult, a little more difficult for us on a competitive front. Because there is a lot of ideas about how to do intervention. We have 25 years of mistakes, so we are pretty firmly entrenched on how we think it ought to be done, and I think the producers are starting to come around and trust us on our methodologies.

I don't think it's a singular event like Macondo. I think it's a natural progression of the industry going to deep water and a realization that, in deep water with the rising cost, there has to be a shift in paradigm as to how you distribute the work. If you look back historically at [Shell] roughly 50% of the work was done by drill rigs, 50% done by subsea construction assets. The construction market, which has been bifurcated and you had [crushing gas] assets doing particular tasks.

Moving into the deep water, the drill rigs were still used for all of the tasks conventionally used by drill rigs. So it's a natural progression that the market would start to look at the individual tasks done by drill rigs and start to separate them out and look for specialty vessel applications. And I think that's the process we've been going through.

Great. Thank you for the background and color, Owen.

(Operator Instructions)

We have no further questions at this time. I will call turn the call back over for any closing remarks.

Okay. Thank you for joining us today. We very much appreciate your interest and participation, and we look forward to having you on our first-quarter 2014 call in April. Thank you.

Thank you, Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.