Helix Energy Solutions Group Inc (HLX) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Tuesday, April 21, 2015. And I would now like to turn the conference over to Mr. Terrence Jamerson, Director of Finance and Investor Relations. Please go ahead, sir.

Good morning, everyone, and thanks for joining us today for our conference call for our Q1 2015 earnings release. Participating on this call for Helix today is Owen Kratz, our CEO; Tony Tripodo, our CFO; Cliff Chamblee, our COO; 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 (technical difficulty) for the year, ended December 31, 2014.

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. We'll start off with slide 5, which is the high-level summary of the Q1 results. From a financial perspective, Q1 was marginally better than Q4.

From an operational standpoint, as we suggested in the February call, Q1 was much like Q4. Our vessel utilization and operating margins came in slightly better, however.

It was primarily lower SG&A cost that drove the better EBITDA performance. As a result, Q1 EBITDA came in at $51 million versus $39 million of EBITDA in Q4, while EPS increased to $0.19 per share compared to $0.08 per share in Q4.

Turning to slide 6, although revenues declined, we had slightly better vessel utilization, and a contract cancellation fee mitigated the cost of revenues associated with the idle days on the H534 caused by the cancellation. Thus, we realized slightly higher margins.

EPS was also bolstered by a 2% effective tax rate and lower variable stock compensation expense. All in all, given the difficult industry conditions, I feel that the $51 million of EBITDA is relatively respectable.

A couple of important milestones were achieved during the quarter. One, we reached agreement with a major customer to extend the contract for Well Intervention services on the Q4000 for another three years. And two, our contract to provide emergency well containment services with the Helix Fast Response System has been extended through March of 2018.

On to slide 7. From a balance sheet perspective, our cash and liquidity levels remain strong. Cash decreased to $415 million as we continued to progress and work through our CapEx program, which is mainly focused on the four vessels under construction.

Cash, along with the unused portion of our credit facility, has our liquidity levels at $1 billion. Net debt at quarter-end was $131 million.

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

Okay, thanks, Owen. Good morning, everyone. Q1 was a decent quarter and good start for what will prove to be a challenging 2015 for our industry. Gross profit for both Well Intervention and Robotics business improved quarter over quarter, primarily driven by strong utilization throughout the quarter for the Q4000 and the Well Enhancer. As well an increase as in vessel (technical difficulty) in Robotics.

We also managed to keep the 534 relatively busy, after having to scramble to fill gaps this year. And this year's schedule -- were being canceled late last quarter. As Owen mentioned, the termination fee mitigated the impact of the cancellation.

Over in our Production Facilities business, profits were lower this quarter versus Q4. This reflects the decrease in revenues realized on the verbal portion of our throughput fee from the Helix Producer 1, which is tied to oil and gas prices.

There was also lower production from the Phoenix field this quarter as a result of the field being shut-in versus developmental activities. Also during this down time, we took the opportunity to perform some required maintenance on the HP1.

I'm moving on to slide 10 for our well [ops] review. In the Gulf of Mexico, the Q4000 was on-hire the entire quarter, although we worked at reduced rates for the first 11 days of the quarter due to IRS mechanical issues. We initially encountered these issues at the end of Q4, and the work to resolve the issue carried over into early January.

As I mentioned in the previous slide, the team in the US did a great job scrambling to find work for the 534 and keep her busy, after a contract that was canceled in the fourth quarter last year initially left a huge gap in the schedule as she entered 2015. IRS Number 2 and our spare rental intervention riser system was on-hire for the entire quarter, on standby. Just to give a quick update on the Q5000 before moving on to the North Sea, the vessel has performed sea trials and we expect her to depart Singapore heading to the Gulf of Mexico around mid-May.

Now moving on over to the North Sea, vessel utilization for the quarter was 54%. This number does not include the Seawell, which is out of service during her life-extension dry dock.

The Well Enhancer was fully utilized, while the Skandi performed [plumbing] operations early in the quarter, but for the most part, remained dockside as she struggled to find work. The Skandi begins a 120-day campaign later this month. And the Seawell's life-extension in dry dock now extends into late Q2. We'll touch on both of these items in more detail in the upcoming slides.

So moving on to slide 11 (technical difficulty), Robotics review. In Robotics, Q1 looked like Q4 of last year in terms of revenue and profit, which is a positive. Given that these are normally our weaker quarters for this business, 86% charter vessel fully utilization up 7 percentage points over Q4 was key to profitability in the quarter, as we were starting the see utilization for the ROVs trend downward slightly.

The Grand Canyon 1 was fully utilized, and she continues working offshore Qatar on trenching work that commenced in Q4 of last year. The Deep Cygnus also performing trenching projects over the North Sea for various clients. The REM Installer was transited over to the Gulf of Mexico region from the UK last quarter, working ROV support projects here in the Gulf during the quarter.

The Olympic Canyon remains in India performing ROV support work and is fully utilized for the quarter. We expect the Grand Canyon II to enter the fleet later this month, and she is expected to go to work shortly thereafter utilizing the T750 trencher.

Moving on to slide 12. I'll leave this slide detailing the vessel utilization for your reference, and (technical difficulty) I'll turn the call over to Erik for the key balance sheet metrics.

Thanks, Cliff, and good morning. Please turn to slide 14. Slide 14 provides an illustration of our debt instrument maturity profile at March 31.

Debt reduction during the quarter was a result of the required quarterly payment of our term loan and the semi-annual payment of our MARAD debt. During the second quarter, we expect to take delivery of the Q5000 from Jurong shipyards in Singapore.

We will draw on our Nordea Q5000 facility to make the final shipyard payment. The balance of the loan, approximately $150 million, will be used for corporate purposes. This transaction allows us to bolster our cash position during this market downturn.

Moving to slide 15, it provides an update on our year-end gross and net debt levels, historically end at March 31. We continue to maintain a strong liquidity position, with approximately $1 billion of liquidity.

Our net debt level was approximately $131 million. Cash position has decreased by $61 million this quarter, primarily due to CapEx spending. I'll turn over the call for Tony for a discussion on our 2015 outlook.

Okay, good morning, everyone. Moving over to slide 17.

At our February conference call, we avoided providing specific quantitative 2015 guidance, due to the fast-changing and declining industry conditions. At that time, we provided more qualitative guidance suggesting that 2015 would be a substantially lower year for profitability, due to the severe decline in commodity prices and the customers' response to this dynamic. We also cited several Company-specific factors, such as the relatively high vessel dry dock schedule, the strong US dollar and other items that would serve as friction to our 2015 results.

Although industry conditions remain very challenging and the same issues we mentioned in February persist today, 2015 is coming more into focus. Thus, we believe the overall 2015 EBITDA results will fall in the $200 million to $240 million range, with EPS falling in the $0.55 to $0.70 range. In terms of capital spending, we are now forecasting lower capital spending than what we guided in February, with CapEx now estimated at $360 million, down from the $400 million we originally estimated.

On slide 18, our backlog as of March 31 remains above $2 billion, again, despite the challenging industry conditions. The Well Intervention business is shaping up as follows for the remainder of 2015.

In the Gulf of Mexico, the Q4000 is expected to have fairly good utilization after her dry dock, which is currently underway and expected to be completed in mid-May. The H534 has some backlog in advance of her scheduled dry dock in August.

In the North Sea, we expect the Well Enhancer and the Skandi Constructor to have decent utilization and backlog in Q2 and Q3. The Seawell's life-extension dry dock continues and is not expected to be completed until June. Once it is completed, she does have backlog in the summer months. Visibility at present in the North Sea market is weak for Q4.

On to slide 19, we're pleased to announce that the REM Installer has recently entered into a 150-day master service agreement with a major subsea customer for robotics construction work here in the Gulf of Mexico. The MSA should provide good visibility for this vessel in 2015.

Grand Canyon II is expected to enter the fleet any day now, and she has committed trenching work upon delivery. The Olympic Canyon continues to work offshore India, with committed work through September. Whereas the Deep Cygnus has decent utilization for the remainder of Q2.

Over to slide 20 and CapEx, as previously mentioned, we have now educed our forecast for 2015 CapEx spending down to $360 million from the $400 million we originally estimated. We continue to look for areas to reduce CapEx not only this year, but in the future.

As this slide shows, most of the 2015 CapEx is for vessels under construction in shipyards. And in the case of three of the four vessels, under contract to customers.

And an important milestone -- the Q5 has recently performed sea trials offshore Singapore. Once the last bit of punch list items are completed, she should set sail under tow to the Gulf of Mexico in mid-May. She is scheduled to go to work for BP in April of 2016.

We are in discussions with the shipyard for the Q7000 to slow it down and delay delivery of this vessel until 2017. If we are able to reach agreement, this will defer a substantial amount of CapEx from the 2016 to 2017.

Although not a CapEx item, we have reached agreement with the vessel owner of Grand Canyon III to defer the start-up of this chartered vessel to early 2016 in light of weak industry conditions. I'll skip slides 21 through 24, leave them for your reference.

And at this time, I'd like to turn the call back over to Owen for closing remarks.

Thanks, Tony. The visibility related to the impact of falling oil prices on our business seems to have improved from what we saw going into the first quarter. It has improved to the point where we feel comfortable in providing you our best estimates in quantifying what earnings might look like for 2015.

Going into the year, we knew that our customers' reaction to the decline in oil prices was going to be severe. However, at that time, we could not quantify the risk of how much work would be canceled or deferred, whether vessel contracts would be terminated or renewed, the extent that we could react with cost and spending reductions, and what our ability to fill gaps created by short-notice project cancellations might be.

We did guide that Q1 would most likely be similar to Q4 of 2014. Operationally, that turned out to be the case. However, we did have some positive financial impacts from the items we previously mentioned here, that resulted in a stronger quarter than the Q4 of 2014.

We also now have a better feel for Q2 and Q3, to the point where we can provide 2015 guidance in the range of $200 million to $240 million of EBITDA for the year. A caveat being that we're uncertain yet as to what Q4 might actually be. The fourth quarter is historically difficult to forecast due to winter seasonality factors, and this is made more unpredictable due to the current market conditions.

On a more granular level, I can report that, one, we have either absorbed the impact of the short-notice project cancellation we faced at the beginning of the year, or we have been able to fill the gaps in the schedule. Two, our longer-term contracts for our major assets, including Q4000, Q5000 and the two vessels for Brazil, are all in place and appear for now to be secure.

Third, we've been effective in reducing our SG&A, and continue to identify areas where we have potential for reducing our supply chain costs further. Four, we've been able to reduce our forecast for 2015 capital spending from over $400 million to an estimated $360 million.

Looking forward, we have a better feel now for how customers are looking at 2015, but we can't give any certainty as to the likely duration of this down cycle or what 2016 and beyond will look like. For now, it's too early to say whether we're at bottom or not.

On the dry dock front, 2015 will be a major year for us, with dry docks on the Q4000, H534, as well as an extended refurbishment of the Seawell. Our dry dock schedule for 2016 should be lighter.

Our people on the Robotics side of the Company have done well to scramble and fill the utilization gaps in the robotic fleet schedule. However, the construction market from which we derive a significant portion of our utilization is still in the process of working off backlog.

We are somewhat concerned that filling out the utilization will be a continuing challenge for our Robotics Group, although over recent years, the Group has done well to diversify into non-oil and gas markets, which should help us. The Group will also have the opportunity to reduce the size of the robotics vessel fleet over time, as our staggered charter schedule rolls over, should that become necessary.

We are also in discussions to extend the delivery of the Q7000 into 2017, with the result that capital obligations for 2016 would be greatly reduced. We've already negotiated the deferred delivery of the Grand Canyon III.

These moves will allow us to more closely align capital commitments with cash flow, preserving our strong liquidity position. In addition, we are set to close the project financing for the Q5000, as mentioned, upon its delivery in the next few weeks. And this will add to our liquidity position.

We're feeling a tad more comfortable now than we did during our Q4 conference call. While near-term contracted rigs at low rates do have an impact on us, longer-term, we're seeing that the industry's (technical difficulty) for greater (technical difficulty) prevention continues, and interest in rig alternative methods remains.

The potential threat of older rigs being converted into intervention vessels that some were concerned about, is less of an issue now, as we see a greater number of older rigs being scheduled for salvage or long-term stacking. We also note that the rumor and talk from potential competitors about new-build intervention vessels coming to the market, has gone way. Some scheduled builds have been canceled or may never be completed.

All in all, Helix is in good financial shape today, and we should occupy an even better competitive position going forward. We're about as pleased as we can expect to be, given the current cyclical market conditions. Now we have the opportunity to plan for how to make the best, as we emerge from the cycle.

And with that, I'll turn it back over, Terrence, for closing remarks -- or questions.

Operator, you can turn it over to questions now.

Thank you, sir.

(Operator Instructions)

Our first question is from the line of Marshall Adkins with Raymond James. Your line is open, please go ahead.

Good morning, guys. You certainly did a lot better than I thought you would in this tough environment, so good work. SG&A was one of the big variables here -- a remarkable reduction there. Fill me in on the repeatability of that, and help us on the modeling side to plug in how much of that's sustainable going forward.

That's a very good question, Marshall. Undoubtedly, in all transparency, we had a significantly lower SG&A in the first quarter than we had in Q4 and that we'll expect to have going forward, as a result of having to book, so to speak, a mark-to-market on some of the long-term compensation, due to decline in our stock price. However, going forward, we have taken measures here to reduce spending, and we expect spending going forward to be lower than what you've seen historically.

So while it probably won't be anywhere as low as Q1, it still will be lower than historical quarters that you saw in 2014 and earlier. And I think somewhere in the 7% to 8% of revenue for the year is a good metric here to apply, Marshall.

Well, impressive. For the second one, Owen, over to you. You did mention, on these older rigs, they're retiring them. You're not seeing any new-build competitors come in.

What about those fourth- and even fifth-gen things that seem to be getting laid down? Do you sense any encroachment on the competitive landscape from those guys? And give us, in addition to that, your overall view of the overall competitive landscape and how that's shaping out in the downturn.

I think near-term, Marshall, the fourth- and fifth-gens might come down in the market. But I take heart in the fact that all of our major long-term contracts -- and this was after a lot of discussion -- we didn't lose any of those. The producers are all firmly committed to the efficiency gains that we bring to the table.

And quite honestly, there was a lot of competition discussion between us and our clients as to whether to go forward with us or whether or not to use these rigs that they've got. And so far, it looks like they're -- as I said in my remarks, they're staying consistent with their quest for longer-term greater efficiencies. So we're the beneficiary of that.

So reading between the lines, it sounds like the whole plan and methodology of building these units to be purpose-built is paying off so far?

I think it's an inevitable evolutionary step in our industry. I think this could slow the demand for it for a little bit for a while, but I think we're firmly on the path to the producers looking for alternatives.

Great work, guys. I'll re-queue, thanks.

And our next question comes from the line of Chase Mulvehill with SunTrust. Your line is open, please go ahead.

Good morning, fellows. Nice quarter. A question that I keep getting is on your direct cost in the first quarter. It declined about $22 million quarter over quarter.

Can we kind of -- the Seawell was in dry dock for the full quarter. Were there any costs associated with the Seawell, any direct costs that were realized during the quarter? Or was everything capitalized or --

I would say for the most part, all the activities surrounding the Seawell were part of the dry dock that gets capitalized.

Okay. So, what is the associated costs for the Seawell once it comes out of dry dock? I'm just trying to model this on a go-forward basis.

Well, I don't want to get too specific as to numbers here, Chase. I think you are aware of our daily run rate for OpEx on these vessels.

Yes.

And she should have a full quarter only in quarter three and quarter four, as again, we expect her not out to come out of dry dock in Q2. So hopefully, that's helpful to you. But she does have work in Q3, and we think we'll stay -- and it's all relative in today's market -- have decent utilization in Q3. We ought to be able to cover her cost in Q3.

Okay. So the Seawell, you've got good utilization in 3Q.

Yes.

Okay. When do you start recognizing costs on the Q5000?

We'll start recognizing costs when she gets over here.

Okay. Which is -- this quarter?

We'll have some expenses associated with maintaining a crew before she goes to work. So we'll start having some expenses hit our P&L.

I don't have that number off the top of my head. But she should arrive here mid-August to early September, and the cost from that point on will be expensed.

Okay, all right. So assuming that you don't stack any of these vessels, how much of your Well Intervention direct costs are variable versus fixed?

Well, if you're looking at it from a cash standpoint, almost all of it's variable, Chase, in all honesty. We can reduce some spending and are continuing to look at ways to reduce spending. If you look at it from a gross profit standpoint, most of the $100 million of depreciation we have is associated with the Well Intervention business. So that's pretty fixed, right?

Right, okay. So if you were to stack a Well Intervention vessel, what are the best prospects? And then what does the timing look like for potential stacking?

Well, at the moment, we're not planning on stacking any. But we're always looking -- this is a conversation that we have weekly, looking at the schedule and planning for this.

If we had to say that right now, as I said, we're not planning to stack any. But a likely candidate would be the 534, and take some of the work off of it and put it on the other vessels that we have.

That's probably the most likely candidate. Possibly something to do with the Seawell later on in the year.

Okay. So what are the associated stacking costs of the 534, on a dollar-per-day?

I don't have that number handy. We'd obviously reduce the crew back to a minimal crew, and get rid of a lot of the services and stuff on there. But I don't have that number handy with me.

Okay. Last --

I think that's a hard number to come up with. Because it depends what the schedule looks like at the time, and whether or not you're going to cold-stack her or warm-stack her or hot-stack her. And that would depend on the schedule at the time.

And it seems like to be able to do something, first you would warm-stack it or hot-stack it. Fair?

That's what we've talked about, is a warm-stack, if we do any of it.

Okay, all right. Last question is on the termination payments in the first quarter. Could you give us an idea of roughly what those termination payments were during the first quarter?

Yes. The termination fee was around $11 million. And it more or less offset the idle days, plus the lower rates we had to accept on the 534 when we had to try to fill the gap.

Right, okay. That's all I have. Thank you.

And our next question comes from the line of Martin Malloy with Johnson Rice.

Good morning. I apologize if I missed with the last question. When is the timing in terms of when you'd make a decision potentially on the Helix 534, and warm stacking it?

Well, like I said, we look at it all the time. But we have a dry dock schedule for the vessel in July. So if we were going to do it, we'd probably try to make that decision prior to dry dock.

Okay. And I just had a question on the tax rate. It was low during the quarter. Can you talk about what we should model going forward?

Yes, Marty. I think for the year, we're probably looking at single-digit tax rates, the way the year is shaping up. We're going to make more money in overseas jurisdictions and not too much money in the US, which is the highest tax rate jurisdiction we operate in.

So when we looked out at where we are currently forecasting our profits to fall, jurisdiction-wise, we believe we're going to be in single-digits. Now, given the volatility that we're operating in these days, there could be a lot of movement in that. But we still expect it to be much lower than historical rates that you've seen, that Helix has booked in the past. So I would count somewhere in the single-digits, Marty.

Okay. And the Skandi Constructor lease -- can you remind us when that expires?

Yes. It's -- in the Robotics business, they're all chartered vessels, and they stagger off whenever. But you asked about the Skandi Constructor on the Well Intervention side, which is working over in the North Sea. We can give that back in April of next year -- so about a year from now. We have to make that decision at the back-end of this year, but we can give it back in April of next year.

Great, thank you.

(Operator Instructions)

Our next comes from the line of George O'Leary with Tudor, Pickering, Holt and Company. Your line is open.

Good morning, guys.

Good morning.

Great job on the quarter from a cost-cutting perspective. Just curious. You mentioned supply chain cost cuts. Can you hear me? Sorry. It looked like my phone cut out, sorry about that.

You mentioned supply chain cost cuts. Just curious from a timing standpoint when those supply chain cost cuts could actually start showing up? Is there a delay in negotiating those with your vendors?

Or is that more second-half weighted? And then any color on potential magnitude of some of the cost reductions you could get from vendors?

It's think it's really early to -- I'm sorry, go ahead, Cliff.

Okay. Well, from the supply chain standpoint, we started looking at that back -- I don't know, probably seriously in January. And so those are ongoing all the time, and there's a whole list of things that we're keeping track of, and what we're saving and how we do our business better, et cetera, dealing with our vendors, getting better pricing out of our vendors.

This goes on daily, but it started back in January and is continuing on through now. I don't have a number with me of what we've saved to-date. But that is a continuing exercise. I think that everyone is doing it, including us.

Okay, great, that's helpful color. And then as you look at your Well Intervention assets and are picking up some fill-in spot work, for example, like with the H534 in Q2 and Q3, are rates under pressure for that spot work? Are they below what that vessel is historically contracted at? And again, any color on magnitude would be great, but just some general commentary around that would be helpful.

On the 530 in particular, we're seeing pressure on rates and have for this year constantly. So yes, we have some reduced rates compared to what we would have been getting this time last year. I won't say substantial, but in the 10% range -- somewhere in there, that we've been seeing.

That's very helpful. And then are customers also pushing back on contracted vessel rates? Or have you seen those largely honored, up to this point?

A bit of both. And depending what the contract is and what we had to trade and what they had to trade for it. Some, we've maintained the rates as they are for 2015, because we were able to, and discounted going forward a couple of years. Others we haven't had to give any on, and some we have. It's a mixed bag.

All right, thanks very much for the color, guys.

And we have no further questions on the telephone lines at this time. I'll turn the call back to you, gentlemen.

Okay, thanks for joining us today. We very much appreciate your interest and participation, and look forward to having you on our second-quarter 2015 call in July. 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 your lines.