Helix Energy Solutions Group Inc (HLX) 2016 Q2 法說會逐字稿

Welcome to the second-quarter 2016 earnings conference call. 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 today, Wednesday, July 20, 2016. I will now turn the conference over to Mr. Erik Staffeldt, Vice President, Finance and Accounting. Please go ahead, sir.

Good morning, everyone, and thanks for joining us today for our conference call for our Q2 2016 earnings release. Participating on this call for Helix today is Owen Kratz, our CEO; Tony Tripodo, our CFO; Alisa Johnson, our General Counsel; and Scotty Sparks, our COO.

Hopefully, you have had an opportunity to review our press release and the 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. Alisa?

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 a 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, 2015.

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 the reconciliation of certain non-GAAP measures to comparable GAAP measures. That 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 will start on slide 5, which is the high level summary of Q2 results. Generally speaking, Q2 results were marginally better than the first quarter as revenues increased from $91 million to $107 million and EBITDA improved from $1 million to $15 million. The improvement in second-quarter financial performance reflected the startup of the BEP Q5000 contract, albeit later than expected, along with improved utilization within our North Sea well intervention fleet. After a nearly one and a half year period of not working, the Seawell finally was put into service in June.

The robotic business also realized a modest improvement in financial results during Q2.

Turn now to slide 6, if you will. The Q4000 continued to see high levels of utilization operating in the Gulf of Mexico. We expect the Q4000 to continue to see high levels of utilization for the remainder of 2016. The Q5000, once she commenced its operations in mid-May, worked continuously for BP the remainder of the quarter.

In the North Sea, the well enhancer realized 75% utilization, but more importantly successfully conducted coiled tubing operations. After spending a majority of 2015 undergoing her life extension program and subsequently idled due to weak market condition, the Seawell successfully reentered service in early June.

Two other noteworthy items occurred in Q2, both involving our contracts with Petrobras. First, we fully executed the amendment to our previously announced two-vessel contracts with Petrobras and construction of the Siem Helix 1 was completed in Germany. The vessel is now in Holland for topside integration. We expect her to sail from Brazil later in Q3 with the expectation that she will enter service in Q4.

On to slide 7, from a balance sheet perspective, our cash levels remained relatively steady from year-end 2015 ending the quarter with $492 million of cash compared to $494 million at 12/31/2015. We did sell 5.1 million shares of common stock under our previously disclosed ATM program, netting $39 million of cash. Furthermore, we paid down $24 million of our principal on our debt obligations, including the repurchase of 7.3 million of convertible notes in open market transactions. Erik will provide more details on that later.

Our revolving credit facility remained undrawn, although access to the revolver is presently very limited based on our trailing 12 months of EBITDA. You may recall in February, we amended the credit facility to provide us with more cushion with the respect of covenant compliance.

I will now turn the call over to Scotty for an in-depth discussion of our operating results.

Moving on to slide 9. Revenue in the second quarter increased to $107 million from $91 million in the first quarter. Gross profit margin returned to being positive increasing to 5% compared to a negative 19% and Q1 results made a profit of $6 million. The gain to mitigate caused a number of vessels to remain stacked until operation required for contract commencement. In the UK, the Skandi Constructor remained stacked the entire quarter, and the Seawell remained stacked for two months of the period.

In robotics, the REM Installer was returned to the owner and cold stacked until the charter concluded mid-July.

In the Gulf of Mexico, the H534 remained cold stacked and completely (inaudible).

Moving on to slide 10, throughout Q2 we achieved a number of highlights for the well intervention business. In the Gulf of Mexico, we commenced the BP contract, and after complete immobilization, the vessel works the rest of the quarter on full rates of low down time. The Q5000 is on contract for BP for the remainder of 2016.

Q4000 worked for the entire quarter for three clients with 99% utilization. The schedule for the Q4000 for the remainder of 2016 is fairly full. IRS 1 and 4 are being stored (inaudible) and available to the market.

In the UK, the Seawell was reactivated after its winter stacking period and went to work on a successful project activating all the new equipment from its 10-year life extension, including the new tower. The Well Enhancer was operational for most of the period with some small gaps between projects. The vessel completes this first-ever ride to the (inaudible) and intervention project successfully. This is a development that has been anticipated by the North Sea oil and gas industry for some time and should add benefits to clients' future works.

The Siem Helix 1 completed two trials and acceptance from the FSG yard in Germany. The derrick has been installed onto the vessel, and we are currently finalizing the mobilization and commission at the remaining topside components at the [Houston] yard in Holland. At this time, we expect the vessels to commence transit to Brazil in the first part of August, arriving later that month to commence clients' acceptance.

Moving on to slide 11 for our robotics review. Deep Cygnus continued the walk-to-work project in Equatorial Guinea for almost the entire quarter. The vessel commences numerous seasonal trenching and construction works now in the North Sea.

Grand Canyon had some smaller ROV supports and RIM contracts this quarter. The vessel will now also undertake seasonal trenching and RIM work.

Grand Canyon II had good utilization conducting ROV support work to various clients in the Gulf of Mexico.

As mentioned earlier, the REM Installer was stacked with the owner, and the charter was terminated mid-July.

Over to slide 12, I will leave this slide detail in the vessels' ROV and trenching utilization for your reference, turning the call over to Erik for a more in-depth balance sheet discussion.

Thank you, Scotty. Slide 14 outlines our debt instrument and maturity profile. I will leave this slide for your reference and move on to the next slide.

Slide 15 provides an update on some key balance sheet metrics, including our year-end growth and net debt levels and as of June 30. Our net debt position decreased to $219 million in the second quarter from $244 million in the first quarter. Our funded debt at June 30 decreased to $733 million, reflecting our scheduled quarterly principal payments of $7.5 million on our term loan and $8.9 million on our Q5000 loan and the repurchase of $7 million of convertible senior notes during the second quarter.

Our cash position increased this quarter by $4 million, driven by the receipt of the $39 million of proceeds from our ATM offering program and the cash generated by operations offset by debt repayments, $23 million in capital expenditures of $35 million.

Our liquidity at June 30 was approximately $543 million, comprised of a cash balance of $492 million and a revolver availability of $51 million.

I will now turn over the call to Tony for a discussion on our 2016 outlook.

Thanks, Erik, and I am going to move over to slides 17 through 20, just say the industry environment remains very weak and difficult. Although the price of oil has bounced off its early 2016 lows, we believe our customers will not change their approach to spending and continue to adhere to their 2016 budgets.

For the remainder of 2016, we expect our business to shape up as follows. On the well intervention side in the Gulf of Mexico, we anticipate both the Q4000 to Q5000 to see good utilization for the remainder of the year, although the Q5000 is currently experiencing repairs to the subsea system.

We are not confident -- as confident for the North Sea, although our financial performance for the North Sea well intervention business should improve in quarter three. As both the Well Enhancer and Seawell are presently working and have decent visibility for the remainder of the quarter, fourth quarter has a little less visibility. In fact, some work we had previously anticipated landing is likely not to materialize. More on this later when we talk about our updated guidance.

We are not forecasting either the Skandi Constructor or the H534 working the remainder of 2016. The Skandi does have some prospects for work in West Africa, and we plan to keep -- but we plan to keep the H534 cold stacked unless a lot more incremental work develops for the Q4000.

The robotics business should turn from lossmaking to profit making on an EBITDA basis first half to second half. Some of this improvement is normal seasonal patterns. Nonetheless, 2016 will turn out to be a very off year for the robotics business.

Overall, our backlog held steady at $1.7 billion with the substantial majority associated with the BP and the Petrobras contracts.

The CapEx forecast for the year is $230 million with most of this capital for the buildout of the two CM Helix vessels and continuing construction at the Q7000. As a result of a more muted outlook for the North Sea well intervention business in the second half of the year, plus the fact the Q5000 is not operating at full contracted rates at this time during repairs to its subsea systems, we have adjusted our EBITDA guidance range to $90 million to $120 million.

On slide 21, a bit more color on our balance sheet outlook. Our gross debt is set to decrease close to $80 million in 2016 due to scheduled principal payments on our debt instruments, as well as the previously mentioned repurchases of our convertible notes in quarter two. Our net debt levels are forecasted to end the year somewhere between $330 million and $390 million. This range, of course, is based on a number of assumptions which could vary quite a bit, including the amount of operating cash flow that has ultimately generated working capital changes, tax refunds, et cetera.

I will skip slide 23, leave it for your reference and turn the call back over to Owen for closing remarks.

Thanks, Tony. Well, there is not much new to report on the market to you. The market remains extremely challenging. The combination of factors is contributing to make 2016 the perfect storm for us. Included in these contributing factors are low utilization as a result of clients simply not doing the work, low rates that service providers compete for the work there is, operational issues, continuation of vessel charters we don't need, and delayed startup dates for the contracts for our new assets.

The producers are simply not spending the money to do the work their operations groups are proposing. There have and continue to be cancellations of projects previously identified to us as being planned.

With many producers, the final sanctioning of work is being rejected at upper management level. The resulting late cancellation is extra hard on us as no time is given to find alternative utilization or rescheduling work -- other work to fill the utilization gap.

That being said, we know that there is work that needs to be done. Next year is appearing to potentially bring greater volumes of work, but the uncertainties persist in the absence of demonstrable intent on the part of the producers.

However, for Helix, there are reasons to have a more optimistic outlook beyond a tough 2016. One, the Q5000 should have the startup issues behind us and will provide the first full-year contribution. The issues we have had to date are not marine issues with the vessel. In fact, our clients have expressed how impressed they have been with the vessel. Second, the visibility for ROV trenching next year is improved. Third, vessel charters will continue to roll off charter with substantial cost savings. And, four, the first CM Helix 1 vessel will make a full-year contribution from its contract in Brazil with the second vessel to follow in Q4 providing greater upside for 2018.

For now, we will just focus on two main things going forward. One is just managing the balance sheet, reducing debt and strengthening it as we can, and the balance sheet remains strong. Two, finding the issues that might incentivize producers to go forward on the work that needs to be done.

While it seems we are being conservative with our guidance revision, 2016 seems to be relentless to the downside. Hopefully, it is an upward trend from here.

And, having said that, I will turn the call back over. Eric?

Thanks, Owen. Operator, at this time, we will take any questions.

(Operator Instructions) Gregory Lewis, Credit Suisse.

Thank you. Owen, could you talk a little bit more about the Well Enhancer and the successful coil tubing project? Just any color you can provide in terms of the duration of the project.

And just, as I think about, you talk about the good utilization in Q3 and into November. Has it been able to win anymore coiled tubing projects and just sort of how you think about that going forward?

There are a number of clients that have expressed interest, and there was a lot of focus on watching what would happen out there with the well enhancer. I don't have the exact numbers here. I want to say -- and, Scotty, you may know -- do you know the duration of this last project?

Yes, it is a 27-day project.

It was 27 days. It went as planned. A very successful result. A real gold star for us with a lot of clients watching.

Now, we did have other clients behind it, which that is one of the cancellations that I have mentioned. But it wasn't a total cancellation; they've just moved it into next year with the commitment to do the work at that point now that they have seen a successful operation. And it is very important because in the North Sea, there are no riser intervention vessels capable of coiled tubing. All of the coiled tubing work must be done from a MODU. So to be able to successfully conduct it off of a relatively small monohull is a pretty big technical achievement.

Okay. Great. And then just shifting gears over to the EBITDA guidance. Clearly, you called out that the Q5000 is going through some maintenance, and you kind of laid out the opportunities or on the books work for the Well Enhancer and Seawell. When we think about the EBITDA or revenue guidance for well intervention, how much of that at this point is sort of unbooked work that the Company sort of is seeing things in the market and hopeful to get?

I would say at this point almost all of the work that is visible for next year is unbooked, relatively speaking. I mean, we do have some work booked, and we have clients that have made verbal commitments to a certain number of days. And then, we also have multi-year partial utilization contracts where the producers have an obligation to take days.

So compared to where we were last year, I would say next year is looking better for us.

George O'Leary.

Any discussions with customers who have been deferring P&A or intervention work for that matter that are looking to ramp that activity back up, potentially later this year? And I guess how would you just frame customer conversations generally at this point? Is there any pressure you are seeing from the regulatory entities either in the Gulf of Mexico or the North Sea seem to be pushing guys to actually execute their P&A or intervention programs, P&A in particular?

Well, there's two markets there. One is the P&A market, and then there is the other one, which is the production enhancement market. And you have two different regions with different drivers.

In the Gulf of Mexico, the P&A program is regulatory driven, and we have seen no let up from the regulators as to fulfilling the regulatory obligations by the producers. So that market remains fairly robust.

Production enhancement in the Gulf of Mexico is actually more robust than the North Sea, for instance.

Turning to the North Sea, the North Sea regulations are less strict on timing of the P&A. There is a concern about the safety because a lot of the wells have been left down there in an unsafe manner, meaning there is no barriers whatsoever. There is just a shed entry. So there is interest in getting the work done, but there is no regulatory pressure on the producers in the North Sea to do so.

On the production enhancement side, most of the work cancellations that I've been talking about are in the North Sea where the economics just have not -- initially, the economics were deemed to be sufficient to go ahead with the work, but other factors such as cash on hand, I guess, and balance sheet and making dividend payments has overwrote it at the upper management level. So we have seen a bit of cancellation of work.

Most of the work, though, that has been canceled is being talked about being deferred into next year, and that is where we are in the discussions with most of the clients is -- I would not expect to see a lot of additional work hit in the third and fourth quarters here versus what we already had booked and are aware of. Most of it is being talked about for next year. I hope that is helpful. I hope that answers (multiple speakers).

Just to add to that, in the Gulf of Mexico, where the P&A is regulatory driven, we have seen the Q4000 schedule almost full out for the year. And the Q5000 schedule for BP is all one intervention production enhancement for the next five years. So that sort of shows how the market splits there.

So that is all very helpful commentary. Thank you. And then, could you guys just frame the competitive landscape? Any in particular in the Gulf of Mexico, or are you seeing rigs try to get more aggressive in capturing some of that share of the intervention market? And is there anything to read into -- I think we have seen a couple of rigs pick up some six-month-ish programs, primarily directed towards doing P&A work and then, alongside that, competitive landscape discussion. How would you frame the pricing dynamics that you are seeing in the market today?

Scotty, you want to take that about what you are seeing with the rig?

Sure. Yes. We have seen one or two rigs take work. Usually it has been after those rigs have rolled off contract and have managed to keep the rigs fully manned up. And, obviously, because of that, they have gone in at lower rates to enable that utilization.

As we see those rigs take that work, we have also seen as the work has dropped off, those rigs have then been stacked and possibly scrapped as well. So the rigs guys are not going to keep the rigs around for a one-month P&A job fully manned up. The cost is just too prohibitive. (multiple speakers). Sorry?

I'm sorry. I was just going to add, in the North Sea, also the rig awards that you see in the North Sea are a direct result of the fact that light intervention vessels cannot pull tubing. So in a full P&A, the only part of the work that we are doing in the North Sea is the lower P&A. And then, clients must get a MODU to be able to pull the tubing and do the upper section.

Now, that will change next year as we bring on a new technology that we have developed in concert with OneSubsea, our partner, which is an 18 3/4 inch well control system for being able to pull tubing without a MODU.

That's really helpful, and that was actually my next question. So you expect to be able to pull the tubing open water and work into 7-inch tubing next year in the North Sea?

We won't be pulling it exactly open water. It is yes and no. We will be pulling the tubing open water, but we will have 18 3/4 inch well control on the wellhead that is capable of shutting in and making the well safe in case of an incident.

Matt Marietta.

I wanted to dig into the guidance a little bit, specifically in robotics. When you kind of back into what is implied in the back half of the year, it sounds like we are really expecting a pretty nice pickup in the third and maybe even fourth quarter. The intervention business is somewhat locked in it sounded like from your comments earlier, Owen.

But when I look at robotics year to date, the top-line guide, I mean how can we think about the rest of that revenue within guidance? Is this going to occur mostly in the third quarter? Should we expect the fourth quarter to decline from the third quarter, or is it going to be pretty flat into the fourth quarter? Maybe help us understand the timing of what is implied in the guidance.

Okay. I will take that, Matt. I think from a robotics perspective, you're going to see your typical seasonal pickup in Q3. So we do expect better financial performance, and our visibility, while not 100%, is pretty decent for the third quarter.

We expect -- our forecast assumes that we will continue to do better in the fourth quarter than we did the first half of the year. But when we get to the fourth quarter -- and this is pretty normal when it comes to the robotics business -- the visibility isn't as clear. I mean, that is not unusual. We have some expectation for work that may or may not happen, but like I said, that is a typical style of visibility for the robotics business.

And what would be your gut in terms of an oil price, or how can we think about how much of that -- of the robotics work in the fourth quarter is locked in or already on the book to occur? I am trying to just get a sense for if there were to be another shoe to fall, I guess, in the guidance, how impactful could it be in the robotics business if the fourth quarter were to suffer a little bit more?

I will take that, Tony. A good portion of the work that we have contracted in the fourth quarter is our standalone ROV and personnel contracts. For two of the vessels, we have trenching works that are contracted. The largest trenchings that we have is not oil price related. It is windfarm related.

That is helpful. I appreciate that color. Thanks there.

And then, the last one out of me, we talked a little bit about some of the work being pushed out by your customers. Can you help us with kind of their psychology or what they are thinking here in delaying some of these projects that they were initially talking about earlier in the year? Are they stacking stuff into 2017? Are they delaying their entire budget and backlog of projects that they would have had? I mean how can we think about the catch back up in some of the stuff that is getting delayed or if this is just simply moving everything to the right?

That is a tough one because, number one, I think each producer has their own drivers. Some of them have very strapped balance sheets. Others have debt covenant issues. Others have dividend payments that take precedence over paying for the work. I think each producer is different in that it would be almost impossible for me to sort of give an across-the-board answer to that.

All I know is that there are some producers that are moving ahead with their planned work. There is others that are taking advantage of the lower pricing, but the vast majority are just still sitting on their cash on the balance sheets.

Okay. I'm just trying to get a sense if we should think about some of the stuff that has been pushed out. Could that be incremental to what, I guess, we kind of expect in our models for 2017 or if we should kind of think about that as the whole -- everything kind of moving? But thanks a lot for the color there.

I think, also, it is regional. Like you said, the Q5000 next year has a good portion of its schedule for doing intervention work with BP. The regulatory side in the Gulf of Mexico will drive utilization for Q4000. Where we are really seeing the effect of the clients is more into the North Sea, and that's just delay spend as much as they can at this time.

Chris Cook.

On the CapEx guidance of $230 million for the year, how much of that is new build/growth capital, and is there any capitalized interest in that number? And, if so, how much?

Yes. The number does contain capitalized interest from that standpoint. I believe the majority of it is growth related. I think $220 million of the $230 million is what we consider growth capital for our Q7000 vessel and then the CM Helix 1 and 2. In addition, there is capital also for the new intervention riser systems that are being built.

Got you. And how much CapEx -- capitalized interest is in the number?

Yes, I think it is approximately $10 million or so.

Got you. And so what would your expectations be for CapEx in 2017? Do you have any new build or contractual obligations to fulfill in 2017?

Yes. We have the Q7000 that we are continuing to progress, albeit at a slower pace. So there will be capital associated with the continuing build out of the Q7000. A little bit of CM Helix 2 to spill over into 2017. Beyond that, there is not much beyond those two items. Right?

And how much of the (multiple speakers) -- and so how much of the Q7000 and the CM Helix -- what are those going to cost you in 2017?

The Q7000 we have a scheduled shipyard payment of roughly [$70] million. In addition to that, there will be additional costs associated with that, I think, in the $10 million to $20 million range. The CM Helix, I believe, is just the final (multiple speakers).

I mean the final payments and the mobilization costs of the equipment onto the vessel. So it is not a big number going into 2017 CM Helix vessels.

Yes. We have the (inaudible) as well that we are going to complete next year, but that is not really significant in terms of total dollars.

Owen, do you want to add to that?

No. Other than to go back to the last earnings presentation, I believe we did put out CapEx guidance for the next three years. And I believe, off the top of my head, I believe the number for next year was $135 million.

$135 million. Okay. It sounds like $100 million associated with growth CapEx or construction CapEx?

(multiple speakers). Almost all of it.

Okay. And then, there are no -- I will take a look at that. It sounds like there are no big initiatives or obligations for 2018 and beyond?

(multiple speakers). Go ahead, Tony.

Yes. 2018 will have final shipyard payment on the Q7000 at the very end of the year.

Okay. I will take a look, thanks. How big is that payment, just off the top, for the end of 2018 for the Q7000?

It is approximately $140 million at delivery.

Martin Malloy, Johnson Rice & Company.

Just had a question about the IRS system that is idle. Can you maybe give us a feel for the discussions around that with customers, as well as what is in your guidance for that working the rest of the year?

We have nothing in the guidance that worked for the rest of the year. We are in discussion with two clients to take it on a -- both clients are looking at a two-well program, so 60 to 90 days, but it is by no means firm. It is more inquiries and discussions at this point.

Okay. And then, on the renewable wind side in the North Sea, can you maybe give us a little commentary about what you see out there for the next year or two in terms of potential work there? I think there are some large wind projects planned for off the coast of the UK.

Yes. There is and we monitor it closely. Over the last six, seven years, we have done an awful lot of power, cable and wind farm trenching. This year we have about 120 days of trenching work left in the forecast that is contracted that is related to wind farm work. And next year, we are seeing our bids total days increase. We have one project for windfarm work next year, but we are seeing the bid number increase about twofold for work going into 2017, and then we are also seeing an incremental increase going into 2018 for windfarm type related projects.

Okay. Great. Thank you.

[Vas Visnef].

On the Q5000, can you talk about how much day rates are you getting? What percent of normal day rates are you getting right now while it is undergoing repairs, and how long is that repair expected to last?

I will take that one. Don't really want to get into rates. That is between us and the clients. But they are good rates, and they are rates that everybody is happy with. The repairs that are currently underway at the moment, we are looking at possibly 10 to 14 days of work, and they are repairs and modifications at this time.

Okay. Under Siem 1, is it fair to say -- when do we -- when should we think about it going to work? Is it early fourth quarter or toward late fourth quarter?

Well, we are currently on schedule to sail in early to mid August. We expect to get to Brazil at the end of the month and then have some post-sail clearance that is quite minor. And then the big question there is our acceptance with Petrobras and getting onto the first well and making sure that everything is working.

So I would say sometime in the fourth quarter we will be working, but until we get to Brazil and start going through the basic acceptance criteria, it is hard to put a definite date on it. The client does have planned works and well data for us to target to, but again we have got some acceptance to get through.

Got you. Okay. For the deep Cygnus, the work is expected to start from September through November. Is the implication that July, August we expect it to be idle then?

No. We expect work through July and August. There is going to be some gaps in schedule, and then, as we go later in the year, we have contracted work for oil and gas (inaudible). And towards the end of that, when that project finishes, then we expect the vessel to come out.

Okay. And last one for me, REM Installer went off charter in July. Can you help me just think about the cost savings from that? If I say about $5 million a quarter cost savings from that, am I in the ballpark?

You are not far from it, yes.

Haithum Nokta.

Looking to reconcile a bit of the change in revenue per day from the first quarter to second quarter. And I guess the real question is, did the Q4000 go to a meaningfully lower rate for spot work in the second quarter compared to the first quarter?

Yes, that's correct. I believe the first quarter we were working off some legacy contracts, and second quarter was primarily, you could say, spot level type work.

Okay. And I guess just to carry that forward, what would be the expectation for the second half of 2016? Is it going to be kind of a mix or kind of where should we think about that pricing?

Yes. It is going to be kind of a mix. Actually, Q3 should be sort of a continuation of quarter two, and then Q4 our contractor rates will improve substantially, just based on the fact that we are working with customers where we have these multi-year contracts and those contracts that are higher rate. So it is going to be a mix, but the way it is scheduled out right now, Q4 rates will be dramatically better than Q3.

Okay. All right. And then, you guys have mentioned in your press release a couple of months ago that you came to an agreement with Petrobras. Can you give us any kind of level of guidance on what the disparity is in rates between those two vessels, qualitatively or quantitatively?

Owen?

I think that the -- I'm trying to figure out how to phrase this because -- I would say there is probably a $5 million a year EBITDA difference between the two vessels on rates.

Bill Dezellem.

Would you please discuss the CU well being reactivated this quarter?

Yes. We completed the 10-year life extension towards the end of last year. We stacked the vessel through the winter, just because of the weak market, and the vessel is now reactivated, and we expect it to work for a portion of the second quarter, and it is looking good for all of the third quarter. And then we are chasing work down for the fourth quarter. The new tower has been installed. The new trains have been installed. All the engines have been replaced. So the vessel is working well, and the life extension has been a success.

And so the stacking and reactivation was really as much a seasonal phenomenon as anything, just recognizing that it was going to be pretty quiet into Q1?

Yes. Yes, correct. All of the life extensions completed last year. We had some minor certification as we manned up the vessel in June, but it was just basically a weak market through the winter that forced us to stack the vessel.

Thank you. And then, Scotty, I believe that you made reference in an answer to a question or your opening comments about something that should lead to some increased activity in the North Sea. Would you please circle back to that and dive into some more detail, please?

It wasn't increased activity. It was more increased benefits to the clients, and that is relating to the well enhancer being able to undertake coiled tubing operations now. So the coiled tubing operations would usually be undertaken by a MODU, as Owen mentioned earlier. By being able to do this with a diver interfaced vessel small monohull, we can mobilize much quicker to the jobsite. And by using coiled tubing, we can penetrate further into the well, use different more complex tools that allows the client to do more work into the well. You can almost pinpoint where in the well the coiled tubing will end up, so you have got far more accuracy of the work that you undertake into the well.

So to balance or undertake coiled tubing shallow water in the North Sea that would generally be undertaken by a MODU and have anchors or jackups to set up, we are far more efficient and we can offer far more tools and the benefits to the client.

And to what degree are the clients recognizing this? Or was that the project that was being watched carefully, and now that it was successful, it is all eyes are on?

That is correct. This has been something the industry has been hunting for for many years. We finally have taken those technologies and completed a commercially successful project, and virtually every operator -- every client we had is aware of the job and is watching with keen interest.

That is helpful. And, finally, at OneSubsea, would you all provide an update with any activities and/or benefits seen there?

I will take that again. Yes, we are working very well with One Subsea. We have a very good joint marketing and sales effort that is going on globally. We are close to -- or we have actually landed some work that brings both parties in an alliance point of view to the client as a one-stop shop. And we are developing the 15-K system that should be ready for June, July of next year, and that will open up 15-K wells to the markets in the Gulf of Mexico.

So we are very happy with the alliance, we have worked very well together, and we are also looking at other technologies that Owen mentioned earlier that could enable other types of work from our vessels.

Joe Gibney, Capital One Securities.

Just a couple quick questions. I am just trying to understand on the Q5000, is this 10 to 14 days of work associated with a repair, or is this a customer-directed modification? I was just trying to understand specifically what was going on, and does this pertain to the IRS system once again? Just if you could give a little more color there, I would appreciate it.

Joe, I will try and cover that. The system in question that is on the vessel had modifications done to it in 2013 at the client request. And we have had a -- whether it is -- the root cause hasn't been done yet, but for one reason or another, a piece on it broke.

Now, I might add, though, that the system had been down for over 50 days working nonstop, which is a pretty envious track record for any intervention company to have a system that is able to work that long.

What is going on right now and the reason for it is just abundance of caution to have a third party come out and inspect everything. There are some modifications that we are going to take the time here at the client direction to make to the system and then just do the repairs and some maintenance that is just due on the vessel to be done. And then we will be going back into the water with it.

Okay. That is helpful. Question on the Skandi. I know you had talked about bidding some work for it in West Africa. You referenced that on the call. It will potentially come through in the fourth quarter if it did happen. So is it just sounding increasingly unlikely that you are seeing that happen? I know you referenced, Tony, that you don't expect it to work in your forecast in the fourth quarter. Just -- I mean, quarter over quarter, has that outlook just sort of gotten a little bit more bleak for the opportunity set there in West Africa for the Skandi?

I will take that one. We have bid numerous projects in West Africa, and we are currently doing so. The problem is, to take a boat down there, it is quite a high mobilization cost.

So, in this environment, the client has to pay a large immobilization cost, and the works we have chased to date have not been sanctioned at the top end because of those higher costs.

Okay. Makes sense. And the last one, on the notion of long-term charters rolling off in robotics, it was referenced for 2017 charters rolling off, I thought, on the call. Could you just clarify that a little bit? I thought with some recent charter reductions you had on your Grand Canyon vessels, that term had extended out maybe into 2019. What is up within your sort of long-term chartered fleet there on the ROV support side that would be coming around in 2017? I know the REM Installer has now been put back. You sort of pushed out the delivery of the Grand Canyon III activation, but is something coming due in 2017 on that long-term charter side?

Joe, this is Erik. In 2017, we don't have a vessel scheduled to be returned. I think the next one is in 2018.

Yes. Early 2018 we have the Deep Cygnus.

The Deep Cygnus. I think the statement may have been made in comparison to where we stand this year where we have been carrying four vessels in our robotics. We are now down to three, and we will be down to -- we will remain at that level up until, I think, May of 2017 when the Grand Canyon III is scheduled to join the fleet.

Okay. Makes sense.

Joe, just specifically, what I was referring to there is we do have the Skandi Constructor that charter term ends April 1. So what happens there is an optionality. And then also, the REM Installer is coming off the charter this year in July, but next year we will have a full year of (inaudible).

(Operator Instructions) Igor Levi.

The customers that you just earlier mentioned that you won over with the help of the JV with Schlumberger, is that incremental to what you talked about last quarter, and have there been incremental jobs awarded in the second quarter or the first half of the third quarter as a result of the JV?

I will try to answer that a little bit from a little different direction. The global presence that the JV gives us on marketing is showing a lot of potential. Right now, a lot of that is out of the North Sea and out of the Gulf of Mexico. It is in other regions. I think it is a little premature. There is nothing in our forecast for it, and I think it would be premature to talk about the specific award potentials. But there are a number of opportunities that have come to us because of the joint venture.

And then, in the Gulf of Mexico, we have a couple of new clients that also resulted as a result of our joint venture. We did some work for them this year with the expectation that if it went well and they were pleased, which they were, then that would lead to an increased amount of work later on.

Great. Thank you. And could you also talk a bit about what are the efficiency gains that the JV allows the customer to capture that will compel them to give you the work?

Scotty, could you take that? Hello?

I believe the other line disconnected. One moment, please. I will try to reconnect it.

While we are waiting, could you quickly maybe touch on the BP contract into 2017? I know last time you mentioned that, by middle of this year, they would let you know if they were planning to give you less days next year so that they only are obligated to take 270 days. So have they said anything or given you any indication at this point?

Right now, they are obligated to take 270 days. They have not fully exercised their option on the others, but they have told us that if they don't use the vessel, they intend to take a break during the July-August time period, which would be very beneficial because that is at the height of the season where we could easily capture days with it.

Great. Very helpful. Meanwhile, I can just turn it over, and if you are able to reconnect, you could answer that second half.

Okay.

Ladies and gentlemen, this is the operator. Both of the presenter lines have disconnected. I will place the line on musical hold until we have reconnected and we confirm the end of the call. One moment, please.

We had a power surge here that knocked out our phones for a bit, so hopefully people hung in there. And we are ready to take questions again.

Mr. Levi, you are still connected. Please go ahead.

Back to the second part of the question on the JV, I was hoping to get some insight into the types of efficiencies that the JV provides to compel the customers to award you the work.

Yes. It is not a JV, it is an alliance. But, so, first and foremost, we have a very good sales and marketing effort going on. The efficiencies that are provided to the clients are that we can offer a complete service from the vessel, and the client would usually take on Schlumberger services, OneSubsea services and other services, and that would be separate contracts. The vessels and our services would then also be separate contracts.

As an alliance, we have teamed up, and we have looked at personnel efficiencies and how we can share the risk and just offer one price to the client. So the client, therefore, doesn't have to contract with numerous different contracts, one point of contact, one contract and shared risk from the alliance.

Should we proceed to another question?

Yes. Let's proceed to another question.

Ian MacPherson.

I had a question looking at the seasonality of your EBITDA for the remainder of the year. Tony, that was a good insight that you provided regarding the Q4000 being on higher rates in Q4 than Q3, and presumably the Q5000 will also earn a little more in Q4 as well. But my current impression is that the North Sea seasonality would overwhelm those dynamics and that Q3 would be your peak quarter for EBITDA. Is that your assessment as well?

Not necessarily. I think this year might be -- and I emphasize the words, might be a year in which you could see a continuation of the so-called good times from quarter three into Q4 because of the rate structure that is inherent in the Gulf of Mexico for the fourth quarter. The big variable, though, Ian, and as a word of caution, is we are assuming some work for both the robotics business and the North Sea well intervention business that is not contracted yet. We expect the work to occur, but it is certainly not contracted. So there is some risk to my statement that Q4 could be a continuation of Q3, relatively speaking. So it is certainly not assured, but this could be a different year with respect to how EBITDA kind of plays out during the year.

Okay. That's good. Thanks. And then, I think you did clarify earlier as well the low end of your EBITDA guidance is mostly, but not entirely, in the books at this point. Is that correct?

I would say -- I would point to the commentary in the slides that, hey, look, we have done some downside-upside analysis. It could always be worse; it could always be better. It is just really a matter of -- I think what is critical here for that guidance range will be the uncontracted work that we expect to get in the North Sea and whether it happens or not. It is still big; it's variable in our forecast.

[Robert Weaver].

Yes, I apologize if this has already been addressed, but could you just give more color on the decision to buy back some of the convertible bonds and how your thinking on that will be going forward in terms of priorities versus other cash uses?

Okay. Robert, I think our decision is driven by the fact that, even though the bonds have a stated maturity of 2032, we view as long as stock price is substantially below the conversion price of $25, that it is likely to be put to us at the first put date in March of 2018.

So since we are going to more than likely have to satisfy that put, we view that if we could be opportunistic as we were able to be in Q2, we bought some of the bonds back at below par. I can't tell you whether we are going to do any more of that. We haven't made any decisions to, but that is how we looked at it for sure in quarter two.

[Vas Visnef].

Just one quick question. A quick question on the robotics. If you have to stack a vessel, how much is the stacking cost we are talking about?

It depends how far you are going to stack them. If you cold stack, it is far better, but it takes longer to bring that vessel out.

So, if we wall stack a vessel to the dock, there is probably about a 20% reduction on the charter rates we have. Obviously, we also take all of our operating costs among the ROV guys and some of the rigging guys and crane techs, that sort of thing come off the vessel.

If we go to full pulse, it would be about 35%, but then you are asking the owner of the vessel to not hull the vessel, and like I say, it would take longer to bring that vessel back out.

Okay. And in the North Sea, what is the swing factor, if I think about what is implied in the guidance? It seems like you have a decent amount of trenching work already lined up. What is that swing factor which could sway the results?

At this time, in robotics, we are not planning on stacking any of the current vessels. The Grand Canyon III will not come into the market into service until later in 2017. But Deep Cygnus, the Grand Canyon I and the Grand Canyon II, we expect to be working. Two of those vessels will be on trenching projects. One vessel will be over here in the Gulf of Mexico and has no firm work out in Q4, but we are chasing spot projects. So we don't expect to stack into this year any of the robotics fleet.

There are no further questions at this time.

Okay. Thanks for joining us today. We very much appreciate your interest and participation and look forward to having you for our third-quarter 2016 call in October. 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.