Helix Energy Solutions Group Inc (HLX) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Helix Energy Solutions Group, Inc. third-quarter 2016 earnings conference call.

(Operator Instructions)

This conference is being recorded Thursday, October 20, 2016. Now I would like to turn to 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 Q3 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've had an opportunity to review our press release and the related slide presentation release 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 collecting 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 of statements of historical fact are forward-looking statements and are made under the Safe Harbor provision 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, 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 a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The reconciliation, along with this presentation, the earnings release, our annual report, and a replay of this broadcast are available on our website. Owen?

Good morning, everyone. Moving to the slide 5, which is the high-level summary of Q3 results, as we suggested last quarter, Q3's results came in significantly better than the prior two quarters. Revenues increased from $107 million to $161 million and EBITDA improved from $15 million to $47 million on a sequential quarterly basis.

The improvement occurred across the board, with better utilization on the Q5000, a seasonal pickup in activity in the North Sea, well intervention business, as well as in the robotics business. We experienced relatively high utilization across our active well intervention fleet, with the exception of the Skandi Constructer and the H534.

Turning to slide 6, earnings per share came in at a positive $0.10 per share in quarter 3, flipping from a loss of $0.10 per share in quarter 2, with EBITDA at $47 million. The Q4000 continued to see high levels of utilization in the Gulf of Mexico, while the Q5000 did incur 15-plus days of downtime earlier in the quarter due to IRS repairs and modifications. We expect the Q4000 to continue to see high levels of utilization for the rest of the year, while the Q5000 is under contract for BP the remainder of the year.

Revenues for work scheduled on the Q4000 for quarter 4 were accelerated into quarter 3 as a take-or-pay contract was invoked. In the North Sea, the Well Enhancer and the Seawell realized 91% and 98% utilization, respectively, but the Skandi Constructer saw only 15% utilization. Higher utilization in the North Sea is due in large part to seasonal factors.

The same is true on the robotics side, with our robotics support vessel fleet booking 81% utilization and we even had a bit of spot market vessel utilization. The CM Helix 1 arrived in Brazil in late August and is presently going through the Petrobras inspection protocol. We expect the vessel to be placed in service soon.

Moving to slide 7, from a balance sheet perspective our cash levels remain relatively steady from year end 2015, ending the quarter with $482 million of cash compared to $494 million at 12/31/2015. We completed the second tranche of the ATM equity sales program late September. During the quarter we sold $58 million of common stock net of transaction costs under our ATM program, $9 million to complete the first tranche, and $49 million in completing the second tranche. Again, we're now finished with this program and don't expect to add to this program.

During the quarter we repaid -- or repurchased $35 million of principal on our debt obligations, including an additional $8 million of open market convertible note repurchases, which were at below par. $22 million of cash was used to fund capital expenditures during the quarter. 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 respect to covenant compliance.

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

Thanks, Owen. Moving on to slide 9, revenue in the third quarter increased to $161 million from $107 million in the second quarter. Gross profit margin increased to 25% compared to 5% in Q2, resulting in a profit of $40 million. [Booking or] take-or-pay contract in Q3 contributed to the gross margin uptick.

Throughout the period, we gained high seasonal utilization across all of our operation vessels in both the well intervention and the robotics fleets. To mitigate costs in the Gulf of Mexico, the H534 remained stacked and (inaudible) and in the UK, the Skandi Constructer was warm stacked for the quarter.

Our alliance with Schlumberger is continuing to gain momentum. We have now completed four projects under the combined efficiency terms and contracted three new for Helix. Combined Helix/Schlumberger sales efforts have increased globally.

The alliance jointly owned 15K IRS system is (inaudible) and on schedule for Q3 2017. We also commenced work on another jointly owned subsea system named ROAM, riserless open-water abandomant module. This is expected to be available between Q2 and Q3 of 2017.

Slide 10 provides an overview of our well intervention business in the Gulf of Mexico. Q4000 worked the entire quarter for three clients with 93% utilization and did have a small period of repair time to conduct wire change outs on the vessel cranes. All of the work undertaken was related to production enhancement scopes and contracted with combined efficiency terms with our alliance partner, Schlumberger. The schedule for Q4000 for the remainder of 2016 is nearly full.

The Q5000 continues under long-term BP contract and the vessel had 84% up time. The unit was on zero rates for 15 days downtime relating to the IRS system. We have now completed three work scopes and recently commenced the fourth scope.

The Q5000 should be utilized fully by BP for the remainder of 2016. IRS 1 and 4 have been (inaudible) available to the market as rental units.

Moving to slide 11, our North Sea Well intervention business had a strong quarter, with our two diver-based intervention vessels achieving high utilization. The Seawell was utilized 98% work on production enhancement programs for the majority of the time with one client and an abandonment intervention program for another client. All works included diving operations. The vessel has had very minimal downtime sense its reactivation of the 10-year life extension refit.

The Well Enhancer was operational, working on production enhancement scopes for three clients for most of the period, being idle for eight days between projects. The vessel has completed its first-ever riser (inaudible) coil tubing intervention projects successfully. The Skandi Constructor undertook a low revenue shorts project for subsea construction and remained warm stacked for the rest of the quarter.

Moving on to slide 12 for Brazil, the Siem Helix 1 completed mobilization and commission of all the top side components at the Houston yard in Holland. The vessel then transited to Brazil, arriving late August. The vessel has cleared all state importation requirements, including naval and Coast Guard certification.

In Q3 we commenced the mobilization of the client-provided equipment, services and personnel and commenced the client acceptance protocol. The vessel is expected to sail to the first well location within a few days after Petrobras acceptance is fully completed.

Siem Helix 2 is now 80% into the build program at the FSG yard in Germany. The vessel is scheduled for delivery in Q1 of 2017 to commence topside integration. The vessel is then scheduled to transit to Brazil in Q3 to contract commencement in Q4 of 2017. We have now fully staffed all personnel for the office support in Rio and have contracted temporary yard space in (inaudible).

Moving to slide 13 for our robotics review, aside from trenching work, our charted robotics fleet is moving more towards repair and maintenance work rather than new construction projects. Rates continue to be challenging, however, we still achieved 81% utilization. The Deep Cygnus continued work on numerous seasonal trenching scopes and undertook smaller IRM and decommissioning projects in the North Sea. The vessel then commenced transit to Egypt for a large oil and gas trenching project.

Grand Canyon worked in the North Sea and also undertook seasonal trenching works and an IRM project. The vessel commenced a large wind farm trenching scope towards the end of the quarter. Grand Canyon II works with numerous clients with a mix of construction supports to higher end works in the Gulf of Mexico. Our standalone ROV and personnel service contracts continued as normal with numerous clients globally.

Over to slide 14, I will leave this slide detailing the vessels, ROV and trenching utilization for your reference. Turning the call over to Erik for a more in-depth balance sheet discussion.

Thanks, Scotty. Moving over to slide 16, it outlines our debt instrument and maturity profile. I will leave this slide for you reference and move on to the next slide.

Slide 17 provides an update of some key balance sheet metrics, including our year-end gross and net debt levels as of September 30. Our net debt position decreased to $196 million in the third quarter from $219 million in the second quarter. Our funded debt as of September 30 decreased to $698 million, reflecting quarterly principal payments; $15.5 million on term loan, including $8 million prepayment of the loan; $8.9 million on our Q5000 loan; $3 million on our MARAD debt and the repurchase of $8 million of convertible notes due 2032 during the quarter.

Our cash position decreased this quarter by $10 million to $482 million. The decrease in cash was driven by our debt repayments of $35 million, capital expenditures of $22 million and the cash used in operations, partially offset by the receipt of $56 million of net proceeds from our ATM offering program. Our liquidity at September 30 was approximately $499 million comprised of cash balance of $482 million and revolver availability of $17 million.

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

Thanks, Erik. Moving over to slide 19, now that we are three-quarters of the way through the year we have narrowed our 2016 EBITDA forecast range to $100 million to $110 million of EBITDA. We have moved the bottom end of the range up from $90 million and the top end of the range down from $120 million. While we still have some contracted revenues remaining for Q4, the biggest variable lap is really operational risk and timing on start-up of operations in Brazil with the Siem Helix 1.

On a positive note, our backlog actually increased from $1.7 billion last quarter to $1.9 billion at the end of quarter 3. This increase is directly attributable to a contract extension for the Helix Producer 1, with this FPU now firmly contracted through 2023. The CapEx forecast for the year is slightly lower at $220 million, with most of this capital for the build-out of the two Siem Helix vessels and continuing construction of the Q7.

On a more granular note, and as Owen suggested earlier, we expect high utilization for both the Q5 and the Q4 in the Gulf of Mexico quarter 4 but expect to keep the H534 stacked. In the North Sea, both the Seawell and Well Enhancer are working today, with utilization likely into November but seasonal factors will come into play thereafter, impacting utilization.

On to slide 23, on our balance sheet outlook, our gross debt is set to decrease approximately $94 million in 2016 due to scheduled principal payments on our debt instruments as well as the aforementioned of purchases of our convertible notes in quarters 2 and 3 and the additional $8 million of principal repayment made on our term loan in September. Our net debt levels are forecasted to end the year somewhere between $275 million and $325 million.

This range is based on a number of assumptions which could vary significantly, including the actual amount of EBITDA that is generated, working capital changes, tax refunds, et cetera, et cetera. However, this updated range is positively lower than the guidance we provided last quarter. In other words, our balance sheet looks to be better at the end of the year than we previously forecast it.

With that, I will turn the call over to Owen for closing remarks.

Thanks, Tony. At this point in the year, 2017 comes more into focus. While it's still too early in the budgeting process both for our customers and us to provide specific guidance, I can try to provide you with some color on a high-level basis.

Last year commodity prices fell sharply as the customers' budgeting process was concluding. This created an environment where the projects that were likely to be sanctioned or approved were required to be resubmitted for approval. Cash preservation became the overriding factor for customer behavior.

Many projects failed to move forward due to one or more partners declining to sanction. Other projects failed to meet commercial hurdles at the lower commodity prices and rigs on current contracts had no drilling to do. 2016 became a scramble with many uncertainties.

Looking forward, we're closely watching the following developments. First, commodity price stability during this budgeting process. Second, rig contracts rolling off in 2016 and 2017. Third, higher commodity pricing making more cash available to the clients.

I believe that the work is there to be done. I also believe that Helix is one of very few service providers that can handle (technical difficulty) and say that our EBITDA should grow over the next couple of years.

Besides the items we're watching that I just mentioned, we should have a full year with the Q5000 and hopefully have the start-up issues behind us that so negatively affected our EBITDA in 2016. With BP's commitment to 270 days, we will also have an additional 90 days versus 2016 available to contract the vessel over the time it was available this year.

We should have a full year of the Siem Helix 1 verse just a partial quarter in 2016 and this is our first of two vessels contracted to Petrobras in Brazil. Our second vessel going on contract to Petrobras should be available for other work in the second quarter of 2017 and is scheduled to start its contract with Petrobras in Q4 of 2017.

As Scotty mentioned, the first 15,000-psi intervention riser system available to the broader industry is currently in construction with our alliance partner OneSubsea and should be in the market in the second half of 2017. In addition, our new ROAM 18 3/4 inch system for pulling tubing and other activities will be completed with OneSubsea during this year. This will allow our vessels to complete upper P&A tasks currently requiring a rig when 18 3/4 inch well control is required.

During 2016, we were pleased to provide initial projects for a number of new significant clients as a result of the integrated marketing contracting efforts with OneSubsea. I believe this is a really exciting development.

All off this is not to say that 2017 won't be challenging. The demand for intervention in the North Sea is a serious uncertainty. Robotics construction support will almost certainly continue to be weak and we will have to wait until 2018 for a meaningful incremental reduction in our vessel charter cost.

Robotics jet trenching should see an increase in demand from the wind farm market, but there will be pressure from competition as competitors look to focus on this market, meaning there is uncertainty in how much better it might be for us. We believe we are still the clear global technical leader in this market, but rate pressure will be there.

The demand for the Q4000 in the Gulf of Mexico appears likely to continue. With the extra available 90 days on the Q5000, it remains uncertain and probably unlikely that the H534 will be reinstated in 2017. We will continue to seek work for the Skandi Constructer as well as the 534, giving us both a light intervention and a heavy intervention asset to respond to market opportunities.

We will be seeking to expand our services more effectively to other geographic markets such as West Africa, Asia-Pacific, and broader North Sea. However, the outlook for these two vessels in the short term is not good.

Pressure on spot market rates likely continue in 2017, but I don't feel that there is much more to give on rates. I am hopeful that the industry might start turning to more creative contracting means as a result of more integrated contracting efforts. This may be a slow process as supply chain-driven clients come around to the advantages provided through such efforts. Time will tell. The OneSubsea alliance should give us an advantage in this respect.

As previously mentioned, we have repurchased $15 million of our outstanding convertible notes in open market transactions and we regularly consider opportunistic repurchases, subject to market conditions. As we previously discussed, we intend to deal with both the $185,000 -- I'm sorry, $185 million outstanding convertible notes in the term and the term loan ahead of their maturity to the extent possible.

This is about the most color I can provide on what lies ahead. As in the past, we will issue guidance for 2017 as we get further through the budgeting process.

Back to you, Erik.

Operator, at this time we'll take any questions.

(Operator Instructions)

The first question is from the line of Gregory Lewis with Credit Suisse. Please go ahead.

Thank you and good morning.

Good morning.

I guess, Owen, you touched on the fact that you have put the -- you said -- congratulations, first, I guess, on the two successful ATMs. You mentioned that, that has sort of been -- there is no need to go for that any more. What is driving that decision? Is that just you had conversations with your lenders and at this point we are comfortable in how 2017 plays out in terms of refinancing? Is it -- obviously, there is -- given the success of those, I'm just wondering why not potentially do another one?

At the heart of it is we look at our cash balance and our outstanding credit -- or capital obligations going forward, and then we take our EBITDA projections and we risk them to arrive at a load case, and then we look at the cushion that we have on liquidity for getting through that. When we do that, we feel like we're in a really strong position right now without any further need to raise additional capital.

Okay. Great. On the OneSubsea 15K, I guess that's being delivered in Q3. Is that going to be something that is jointly owned in this between Helix and Subsea? Was the driver of this coming from customers, or it was something that, as the joint venture alliance looks at the potential work scope in 2017 and beyond, it's something that, that piece of equipment is just really going to be needed? And then, as we think about deploying it, where should we -- is there a specific vessel that, that is going to be targeted for?

I'll take that one. The unit is jointly owned. It will be delivered to us in July and available to the market in August/September of next year. Primarily the market for it will be Gulf of Mexico. There is a number of 15K wells also in the Gulf -- in Brazil and the East -- West Africa arena, sorry. The reason for building it is mainly client driven. A lot of the 15K wells that are out there now are coming to maturity and have a requirement for well intervention, so it's client driven. Like we said earlier, our alliance is gaining momentum and some of those clients are now coming to Helix and Schlumberger's alliance, so we see the need for it.

On the last note, the system can be deployed from any of our heavy intervention assets. It can also be deployed from drilling rigs. As a rental unit, it will be available to all the assets and all of the producers.

Perfect. Thank you very much.

The next question is from the line of Vaibhav Vaishnav with Cowen and Company. Please go ahead.

Thanks for taking my question. I was trying to get a better handle on the amount of the cancellation [back] payment that you got in 3Q.

Well, let me take -- I'll start this and Tony may want to add something. From -- constantly, a well intervention project is about 20 days long, typical duration. We're in the spot market primarily. All through the year we constantly have shifting schedules due to partner approvals not coming through, regulatory permits not coming through, or clients just seek changing the scope work, reducing the scope work. This is a constant occurrence for us.

Periodically there will be one that occurs that's of a meaningful amount. I think we announced one back in 2015, with Anadarko. We also then announced the BP issues startup. That's why we made the disclosure of the acceleration of the revenues here. Taken in its entirety, and it would be a complex exercise for us to quantify, but if you look at all of the shifting events through the quarter, net-net, the impact from this accelerated revenue is probably -- and this is a wag, but it's probably less than $5 million on the quarter.

Now, having said that, we again we have a schedule to remanage for the Q4 -- for the fourth quarter. We do so. Then we looked at the likelihood of what that schedule is going to be and we revise our fourth quarter accordingly, and that's how we derived the final result of seeing no need to revise our annual guidance.

Okay. Thank you. On the Seawell and Enhancer you guys have work into November. How likely that work or another work can be opt in, in December? Just trying to think about the near-term risk to those two vessels in December.

I think right now it's likely we'll keep the Well Enhancer busy through November and the Seawell through mid-November. Possibly longer, but right now it looks good through mid-November. I say beyond that it's awfully speculative. There's opportunities out there, but we're not counting on it.

I think in terms of how you might want to think about those two vessels, think about work into November and if anything happens beyond that, it will be gravy. There is a chance that we might enter into some minor dry-dock exercises during December because if the vessels are idle, we might as well do it while it's idle. They are pretty minor dry docks. Scotty, about two weeks in duration, would you say?

Two weeks per vessel.

Yes. Even though we like the performance in Q3, I think we're going to see the normal seasonal factors start to happen as quarter four drags on.

Okay. One last, if I may, on Canyon II, which I believe is in Gulf of Mexico. How should we think about -- or what's a good utilization number to put as a placeholder? Is 25% a good number, or am I being too pessimistic around that?

I would say at the moment a lot of the work we are chasing to the fourth quarter for the Grand Canyon II is speculative. We generally get 40% to 50% utilization going into the fourth quarter for this region. Along those lines is what we would expect.

Okay. That's very helpful. Thank you for taking my question.

The next question is from the line of Ole Slorer with Morgan Stanley. Please go ahead.

Thank you very much. I want to just ask a little bit more about the alliance with OneSubsea and Schlumberger to what kind of tangible benefits you can point to, if any, of having had this relationship in place now for a little while. You mentioned something about four projects -- four new projects. Could you elaborate on that? Are these new customers for you, or are they new types of products? What did you mean by new projects?

Okay. Under the alliance for Helix we have now achieved three new clients, target clients, due to the alliance. What I was saying is on four of the projects that have recently been completed, they have been under the joint alliance efficiency terms whereas we both take risk on our services. The client pays one price for our vessel, our SubSea system, our ROVs and also the service equipment from Schlumberger and then we derisk the client from taking joint downtime.

These three new clients, could you shed some light on who they are?

Yes. Recently we've worked for Hess, for BHP, and Chevron. Two of those have been target clients over the last few years.

These are all new clients for you, or clients that previously would use a drilling rig instead?

Yes. I would say so. They are all new clients primarily in the Gulf of Mexico. (Multiple speakers) previously in Africa.

Okay. What has the feedback been where these one-off projects have been testing your system or are they likely to come back for more work now that -- these are presumably three clients that you never worked for in the Gulf before?

I would say that all of those three clients are very satisfied with the service and how the contract terms worked for them. I would like to think they will be repeat work. There is nothing -- actually, one of them has contracted repeat work, and we are in discussions with the others for further work.

This is a client who previously -- the previous -- or previously would have used a drilling rig instead?

Yes. All three of those clients would have previously used drilling rigs in the Gulf of Mexico. Yes.

Okay. That's interesting. On the -- turning second question to Brazil. The Siem Helix I, 1st of November, that's a slightly earlier start of business than your prior guidance?

Well, our partner got until, we just said, sometime in Q4. Now that we're down there and far enough along in the inspection process, we believe November 1 is a reasonable date for start-up here in terms of modeling. I mean, there is certainly there are things that could go wrong, but certainly there are things that could go right, that could accelerate that date. Right now, in our own thinking we -- and in our forecast assumptions, we have assumed a November 1 start-up date.

We're down there. We are well advanced through the inspection protocols. You never know with Petrobras, but there is no reason why we shouldn't meet the November 1 date. On the other hand, we still don't have the final sign-off either.

Okay. Ten days away, that means that you are practically ready to go?

Yes. All of the clients' third-party services equipment, their own equipment and all of their personnel are on board the vessel now. We expect in the coming days to sail to the first well location. We're getting close.

Okay. Well, that will be a good one to get under the belt. With all of that, how come you're taking down the high end of the guidance for the fourth quarter? I understand why you're taking up the low end, but I am not really sure what brings the high end down. Is it the North Sea that's a little bit more shaky than you prior thought, or are there other -- is it just an insurance policy in case something does slip? I can't see what incrementally got the risk to the upside.

A couple things that drove the upper end of the guidance down. A, we booked a reserve in the third quarter, $2.7 million. We didn't anticipate that last time, accounts receivable reserve. Some of the un-contracted work that was in our prior forecast in the North Sea is now highly unlikely to materialize. There is still a possibility. And we had more down days on the Q5 early in Q3 which impacted our EBITDA to a significant nature. We have also booked some noncash stock comp costs that was not previously forecasted as our stock price rose. There's a number of factors that drove the top end down.

Well, I am happy about the noncash stock comp costs. I think you guys deserve every bit of that after what you have done. The rest of it sounds a little bit suspicious. I will leave you at that. I will hand it back. Thank you.

The next question comes from the line of Joe Gibney with Capital One. Please go ahead.

Thanks, good morning, guys. A couple quick clarifications on the vessel side. On the Skandi, this short-term stub of work you picked up on the construction side but you still characterize that visibility is obviously poor. Trying to understand. Is there work scope that's spilling into 4Q at all or is that a quick short-term job that happened in the third quarter and that was it?

Yes, that's a very quick two-week short-term low-revenue project. We don't expect any work for the vessel in Q4 at this time.

Okay. On the Siem II, could you recharacterize when it's available for work? I think you referenced 2Q 2017 could potentially be in the fleet and marketed for other customers? Is that accurate, and if so, where would you maybe target Gulf of Mexico? Trying to understand how that vessel shakes out before it potentially goes down to Brazil.

Yes. I'll take that. There is a couple of options. Number one, we are tendering some West Africa work. Two, with the visibility we have on the Q4000 and Q5000, should that 90 days on the Q5000 become booked up we wouldn't have additional capacity in the Gulf of Mexico, so that's a potential. I think our preference would be to find some test wells in the North Sea, deploy our new 18 3/4 ROAM system and demonstrate the technology. That would be probably our preferred route. We have multiple options on finding work for it but the North Sea being our first preference.

Okay. Last one for me. Just trying to touch a little bit on Robotics outlook. It's a lot of moving pieces, a lot of which are obviously still pretty murky. Sounds like the trenching non oil and gas out of the business, looks like it has better visibility but comes at competition and price, Subsea install construction obviously lower. It all, in some respects, comes down to the R&M side of the piece, which -- just trying to get your sense. As you sit here now today versus maybe where we were last year on that side of the business, is it reasonable to think about the repair and maintenance scope of work within Robotics being higher next year in 2017? Obviously, a lot of moving pieces there. Trying to get a sense of maybe that stub of the business.

I think you're right. There are an awful lot of moving pieces. We do have visibility into the trenching scopes that are out there. We also know where the competition has picked up work and what works we should be targeting. We have some awards for trenching for next year. Repair and maintenance [IRN]-type scopes, I believe there will be more clients for us to go after but there will be an awful lot more competition. I don't necessarily see that there's going to be a vast uptick in that work and we will be scraping around at low rates trying to win it. And, obviously, we see the construction market dropping off considerably for the Robotics side.

Okay. Fair enough. I appreciate it, guys. I'll turn it back.

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

Congratulations on the quarter. Just had a question on North Sea. It sounds like that could be a swing factor as you look out to 2017/2018. Just with your discussions with customers, is there a commodity price range that they have in mind where they might pick up the well intervention activities?

That's a hard question to answer. If we look back on 2016, the North Sea was a huge disappointment to us versus the visibility we thought we had on the work in talking to the operating groups in the North Sea. Going into 2017, the operating groups still have that same work, plus more.

The problems are not just commodity price. It's balance sheet related to the producers in the North Sea. All the fields have multiple partners. If one partner doesn't sanction the process, it has knock-on effects to even the stronger partners. It really is a very uncertain market right now.

We're going to be really digging into it. We have been spending a lot of time talking with the producers. At the operating levels, things are looking more positive, but you just have to wait and see what happens at the corporate levels on the final sanctions.

Okay. The West African market, it seems like there would be a large enough installed base of mature trees to support a well-intervention vessel, at least I would think for part of the year. Why do you think that, that hasn't really taken hold?

Again, that's another complex question. Number one, every country has its own laws governing contracting in the region. Some require joint venture partners. Others require a permanent presence. Then you have the issue that you have -- there is probably very few single clients that have sufficient work to employ an intervention, a non-rig intervention vessel on a full-time basis.

Then you get into trying to put together a rig pool. Again, that has certain government regulatory hurdles that you have to get over. Bottom line is there is no permanently deployed vessel for a rig alternative intervention in West Africa. And on a spot basis, with one client with one scope of work, it makes it very marginal on the commerciality to mobilize a vessel from outside the region. So, you have got a number of things that's going to take a little time for the region to mature and get over these regulatory hurdles and have more cooperation between the producers.

Yes. I will add to that. It's very complex to take a vessel between countries in Africa. There is a lot of different tax, NGTs, and customs issues. Also, the clients down in Africa, they have large well counts that would require a permanent vessel. Still have quite a lot of rig overhang at the moment in Angola, for instance.

Okay. If I could sneak one more question. The ROAM system, it seems like a pretty important extension of your capabilities. Could you maybe talk about how you see that fitting into your well-intervention program next year?

Yes. We see it as an [adapt] to any of the fleets. The system will be able to go down, latch on to the well without a need for a riser and be able to deal with the upper parts of the abandonment project. They will be able to clean out the tubings and then we will be able to recover the tubings open water. It'll add efficiencies to the client where they don't need to bring a full module in and 18.5-inch BOP and riser deployments.

We see that we should be able to offer solutions where our lighter intervention vessels can go in, undertake the lower part of the abandonment, do the prep work, and then we should be able to come in with the heavier vessel and then do the upper completions. It adds more to the heavy intervention vessels. It can be deployed from the lighter intervention vessels also because it's wire-line deployed.

Okay. Thank you.

The next question is from the line of Haithum Nokta with Clarksons Platou Securities.

Good morning, guys.

Good morning.

A couple of fleet questions here. On the Q5000, the 90 days that you guys will have available to -- for spot work, is that still likely to come up during the summer months?

It's more towards the end of the summer next year that it will be available.

Okay. And then, on the termination revenues that you recognized during the third quarter, I presume that, that's related to the Q4000. I guess I am just curious, does that mean that you basically just recognized these revenues through the income statement, or was the Q4000 idle for a certain period -- idle for 42 days while it earned those revenues, or was it working that entire period?

Actually, the contract was not specific to the Q4. The work could have been done either Q4 or H534. The cancellation really just involved an acceleration of what we would have done on either the Q4 or the 534 in the fourth quarter. The Q4, as we previously stated, was almost fully utilized, in any event, in Q3. But it's work we had on the schedule in quarter four. The one thing the cancellation did impact is it's unlikely we'll bring out the 534 now since some incremental work that we landed is strictly going to be put on the Q4 now.

Okay. That is helpful. The Q4 was utilized for that full 93% period during the quarter. Okay. You mentioned the Skandi Constructer, a poor outlook for the near term. If I recall, that charter comes up in about six months. Is that something that you guys have started to have discussions on with the vessel owner? Do you anticipate redelivering that or giving it as part of your fleet to enhance your product offering? Have you -- just give us some thoughts around that.

I'd start it off by saying we have a very good relationship with DOF around that charter. I think our interests are aligned in trying to find utilization and keep the vessel working. To that extent, we have a contractual commitment that expires April 1, and thereafter we have been in discussion with them about what we do. Other than that, I don't know that there is a whole lot to say other than we'll continue to seek -- my reference to expansion into other geographic markets such as Asia-Pacific and the broader North Sea probably are specific to the Skandi Constructer potential.

Understood. Okay. Just the last one, I believe you mentioned you chartered in some spot days in the Robotics fleet. Can you give a sense of what magnitude of days that was?

We did the charter on the other vessel.

The Athene.

Okay.

In Robotics.

Yes. We had a spot charter partner arrangement with Olympic for the Olympic Athene in the Gulf of Mexico. We didn't take any costs associated with the vessel. It was more trying to find it work and to be honest with you, we didn't really achieve much utilization for the vessel.

It was a couple of weeks, wasn't it?

About 14 days or so.

It was a couple weeks worth of spot market work. I think -- interesting thing is we really didn't expect any spot market work this year since we have capacity with our (technical difficulty) fleet. The fact that we got anything was a little bit of a bonus for us.

Yes. Certainly surprising in this environment. All right. That's all for me. Thank you.

The next question is from the line of Matthew Marietta with Stephens. Please go ahead.

Good morning. Thanks for taking the questions. I really wanted to clarify some of the details on the Q4000 take-or-pay proceeds. I think you guys said about $5 million or just under $5 million of impact. I guess on 42 days, that implies a daily payment of $120,000. Can you help us how that payment is determined? Is that a margin? Is that a day rate? How do we think about how that is determined?

Matt, the $5 million that Owen referred to earlier was net of a lot of items that you want to -- we consider special that happened during the quarter. If you take that as a plus and then the minuses that Owen referred to, the net effect of all those items were sub-$5 million. The sub-$5 million didn't relate just to the Q4 take-or-pay at impact, okay?

Got it. So there is really -- so we can't back into anything with that $5 million number, obviously?

Right.

That's what I'm trying to get to.

Yes, that's right.

Okay. You noted the outlook for the utilization on the Q4 was strong. I guess does this mean you picked up a bunch of spot work after that termination for the fourth quarter?

Yes.

I guess --

An important point is, and it's somewhat complex here in terms of the entire impact of what happened with that take-or-pay situation, but we did land incremental work, which is good. We're putting it on the Q4. But we did lose the opportunity to bring the 534 out, which would have been a plus, too.

But then again, we didn't incur the cost of reinstating the vessel.

Right.

That's what makes it complex to figure out.

Right. It's fairly complex. I think the better way to look at it from your perspective, Matt, is what happened to our outlook for the year. I think our outlook for the year, despite all this stuff, remained fairly intact.

Got it. Essentially, the work was just shifted as a result of that take-or-pay termination. Okay. That helps us understand it operationally, I think.

Yes. We would have booked it in Q4. It was pretty good margin work. All we did was we had the opportunity to accelerate it into Q3. Simple as that.

I might add, we had -- we have other scheduling shifts that occur. The reason that we mentioned this one, though, is just because of the dollar amount of this one.

Got it. I guess when you -- if you pull the 534 back out, what would be the capital associated with reactivating that vessel to give us an understanding if we want to run that sensitivity and think about that from a CapEx or cash flow perspective?

I think to bring the vessel back out would take about six to eight weeks and we would be looking at about $5 million to do so.

Okay. Great, thanks. And then --

It's still fleet certified. It still would have been flagged COC. It would just be a case of remanning the vessel and getting it going.

I should point out, though, that, that's the current -- to reinstate it in the current market. I should point out that a situation that we're looking at, as well as all rig owners are looking at, is that the longer a vessel stays stacked, at a certain point your reinstatement costs start increasing almost exponentially. There is a shelf life to the stacking period of a vessel.

Maybe to clarify that, at what point do you think the economics of reactivating the vessel become more challenging given the current day-rate environment? Are we looking out a year from now or six months from now? Help us understanding the time of that step-up in the reactivation.

It would step up cost-wise about a year from now. That's when we would be having some recertification for certain aspects of the vessel.

Thanks. And then, last question out of me. With the Siem II, is there any recourse or ability of the customer, Petrobras, to change the start-up? I guess I ask that question in the context of the ongoing start-up of the Siem I. If there are any operational hiccups, can that impact the Siem II or are these totally independent of each other in the way that the contracts are negotiated? I just want to understand maybe what risk there could be on the Siem II, if any, if there are any issues with the Siem I.

Firstly, we have no issues with the Siem I. It's starting its contract pretty much bang on time for what we expected. The two vessels are on totally separate contracts and will be undertaking totally different work scopes in Brazil. One will be working on well [workover] and intervention purposes and the other one will be working more on P&A type works.

Okay.

I would add, though, that putting a vessel through the approval process in Brazil was a first-time experience for us. And having done it now with the Siem Helix I, my expectations would be that there's lessons to be learned that could make the Siem Helix II go a little smoother. Not saying that this has gone badly, but there is room for improvement.

Is it more on the procedural front than anything operational? Is that what you're referring to?

Yes. It's totally a matter of navigating through the bureaucracy of their procedure -- approval process.

Got it. Great. Thanks for the color. Really appreciate that. That's helpful.

The next question is from the line of Bill Dezellem with Tieton Capital Management. Please go ahead.

A couple of questions here. First of all, what is the incremental cost, the start-up cost with the Petrobras contract?

Sorry. Once again?

If you could repeat the question. We want to make sure we answer it correctly.

Sure. In the Q3 and the Q4, what is the cost of bringing the vessel on for Petrobras?

Okay. From an accounting standpoint, financial statement standpoint, all those costs are deferred and amortized over the contract life as well as the mobilization fee that we earn. We take the mobilization fee that we bill Petrobras and the mobilization costs and the net impact of that is amortized over the four-year contract commit.

Am I not remembering correctly that there was a reference in the press release to some costs associated with the start-up that it impacted Q3?

Yes. That is talking about the start-up of our office facilities, our overhead in Brazil. Obviously, we have been ramping up this year starting with the first quarter and here in the third quarter with the vessel, I guess, starting its transit, the cost for our overhead ramped up to a much higher level than the previous quarter.

We've got the storage facility (inaudible) and the warehouse. All those things are now in play.

The accounting treatment of those costs is different from the accounting treatment of the vessel.

That's correct. Those costs are expensed. We have incurred somewhere between $3 million to $4 million of those costs this year.

That's quite helpful. Thank you. The Q5000 hiccups that you had earlier in the Q3, what was the financial statement impact from those?

Financial statement impact for those was pretty significant. It was about $8 million.

Is that one of the costs that you are netting against the take-or-pay pull forward that you had referenced before to get to the less than $5 million number?

Yes.

Lastly, I think it was referenced as dubious before, but the $2.7 million of uncollectible accounts, can you talk just the details behind what happened with that client, so that, that nearly $3 million you wrote off?

Well, we routinely review our accounts receivable, and we have a process of looking at our accounts receivable and making judgment calls as to the ultimate collectability. We made one of those judgment calls this quarter. I don't want to get too deep into the circumstances of a specific client, but it's just really a part of our ongoing process of reviewing accounts receivable.

It would be fair to add, though, that it was in Robotics.

Yes.

On Well Intervention, knock on wood, we work primarily for the majors and, therefore, have had a relatively low occurrence of doubtful receivable analysis to undertake. Every now and then, though, in the robotics market you do work for the smaller contractors and this is one of the smaller contractors that is struggling.

That's a good point. If you look at historically where we have had booked reserves for accounts receivable, they have historically been on the Robotics end of the business.

That's helpful. I just want to, for clarity, I am not trying to put you into a box here, but that write-off was really a function of the client's financial status rather than some disagreement that you and they had over the work that was done?

That is correct. It really was an assessment of their financial status.

It's probably too early to ask this question, but as you look out over the scope of work that you are seeing, have seen and are projecting, are you seeing anything that's happening faster or better than you anticipated?

That's sort of a nuanced question, so let me give you a nuanced answer (laughter). The downturn is deeper than we expected. The visibility of the work is probably as expected because we're in the life-of-field business and, therefore, the work is pretty predictable that needs to be done. The number of differing reasons and the amount of work that has been impacted by the commodity price dropping during the budgeting process, the cash constraints, the partnership issues, and the permitting process has probably been a little more severe than what we anticipated.

The impact of rig overhangs on us from open-market competition with rigs is probably as expected, which is probably less than what the industry probably expected it to be. The impact to us from rig overhang of rigs that are remaining on contract with clients but have had canceled drilling programs has probably been greater impact on us than what our expectations were.

Thank you. I appreciate all the answers.

The next question is from the line of Marshall Adkins with Raymond James. Please go ahead.

Hey, guys. Owen, a couple of big-picture questions just to close this out. You have always had one of the better insights in the offshore markets I think than most. You talked about the competitive landscape a year ago not being as bad as people thought with the influx of availability of extra deepwater rigs. It seems like that's not really showing up on the competitive horizon as you predicted.

So, two questions. Update us on the competitive landscape, and I'd be also very curious to hear your opinion on the impact -- what you think the impact of activity would be if we get to $60 or $70 crude in terms of the mindset of the customer.

Wow. (Laughter)

That's a big one, I know.

Thanks for the compliment, but I have a feeling I am going to let you down on this one. Boy, there was a lot in that. If the market goes back to $60, it depends on what happens in the shales as to what the knock-on effect is going to be offshore. Certainly $60 revives a lot of the commerciality in the projects. I think the first commercial projects that come back onstream for the deepwater are the intervention production enhancement projects.

Of course, that, the $60, then makes the net asset value on a lot of the marginal fields more positive and, therefore, defers P&A work. $60, I don't know if it really moves the needle that much for our expectations. The rigs, the drilling programs, again, it depends on the drilling programs, and that again depends on the knock-on effect from what the shales do, so it's very hard for me to predict. The way we're managing the Company is just assume that we are going to have tough times for a while.

The competitive landscape, as you can see from the discussion on the acceleration of this take-or-pay contract and the plus and minuses that we constantly deal with, I think that gives you a really firsthand insight as to why the rigs are ill suited to come and compete in this spot market, because you are constantly changing your schedule. You're constantly moving things around and that's what gives us a competitive advantage. That extends beyond just the drillers to the competitors in the non-rig intervention market.

We had a joint venture between FMC and [Schwebs] called FTO that looked like it could have been a viable competitor. Since the announcement of the merger they've decided to close that effort down. I don't think that it's a statement on the viability of rigless intervention. I think it's just a timing issue for them, would be my guess. We have seen a recent acquisition of Oceaneering to buy Blue Ocean. Blue Ocean is a small private company with a couple of light intervention seal systems.

I think it's worth noting that Oceaneering was in the non-rig intervention business a few years back in a joint venture with Superior where they built two seal systems. That joint venture didn't really pan out for them. They retained one of the systems and they have never done anything with it. So their acquisition of Blue Ocean, I can't speak for their mindset or what their intentions are, but I do take it as a validation of the non-rig intervention market's viability.

Beyond that, in the North Sea, we still have a serious competitor in the light intervention, which is Island Offshore. They have four vessels. One of them works in the UK sector and the others in the Norwegian sector. They are probably the most viable competitor that we have, but again it's on the light intervention side, and they don't -- currently they don't have diving capability, which gives us a big leg up.

Oh, let's see. Who else am I leaving out? Wild Well, which is part of Superior. Since they canceled the joint venture with Oceaneering, Superior has continued in the non-rig intervention market with Wild Well providing a seal system. Again, light intervention. They've done some pretty creative things. I think they just announced a new tool for going down hole that expands the capabilities of the seal system in P&A, in the upper P&A sector. There's steps that we can take easily to offset that competitor. I don't see a real competitive advantage there.

We're seeing a benefit with the alliance now like we said earlier. There's three new clients to Helix. We are offering those joint risk-derisk terms to all of the clients. We will also see that starting to move into the North Sea. The alliance adds a big factor to us.

Bottom line, Marshall, I think both rigs and rigless competitors will constantly look at this market. It's a very complex market to get your head around. We have got over 25 years of doing so. I feel very good about our position. We have some new technology such as this ROAM system, which we do have the IP on. I know there is others that will probably look at something similar, but we'll see how strong our IP is on that.

We're expanding through our alliance, our technical capabilities, the integration of the contracting styles, supplementing our service offerings with those of Schlumberger and OneSubsea. I'm feeling good about where we are sitting in the market.

That's hugely helpful. That's a good overview. It sounds like bottom line here is that you are not just holding your own in terms of share. That would certainly help in Schlumberger deal. You may even be creeping a little bit higher given all the moving parts of the landscape. Is that a fair summary?

Yes. Keep in mind, historically the work that we do was done 100% by drill rigs in the past. There's a lot of talk about drill rigs taking our market, but actually what's happening over the past decade here is that we have been encroaching on the drilling rig market. Now, this downturn may slow the pace of that encroachment, but I think it's a step change in technology that is becoming embraced by their producers on a broader and broader scale. And I believe going forward, Oceaneering's investment into the non-rig alternative shows the viability of the market and that it has (technical difficulty).

Thanks, guys.

The next question is from the line of Chase Mulvehill with Wolfe Research. Please go ahead.

Thanks for squeezing me in. I will try to make it quick. First, a point of clarification. The less than $5 million benefit in 3Q, can we assume that, that's just an EBITDA benefit? That's not a revenue number or anything like that? That's what drops to bottom line to EBITDA, right?

Yes, it's an EBITDA number.

Okay. All right. Were there any other big items other than the Q5000 and take-or-pay termination that affected that number?

No. I think we mentioned them all.

The rest were a multitude of smaller items.

Yes.

Okay.

I think we (multiple speakers) on the big ones, though, Chase.

Okay. All right. And then, as we think about your cash position and we think about what you have done with the ATM to give you more optionality, and so we look at the debt amortization payments that you have coming over the next few years. But just exclude that, how much cash do you think you need on your balance sheet to run the business just operationally?

Chase, I think you have to tie the cash to the debt. I think our cash needs ratchet down when our debt goes down, right? The other variable is also CapEx. I think once we get through our -- this CapEx program, then our cash needs start to lighten up as well. There are --

I guess --

There variables impact how much cash we'll feel we need. I think those are the biggest impacts. Obviously, we have two debt maturities coming up in 2018 that we intend to deal with sooner than that. We are looking into that. I don't think there is a pat answer we can give you today on how much cash we should run our business with.

Okay. I guess what I was trying to get at is, how much cushion do you have in your cash to be able to accelerate debt payments?

Time will tell based on EBITDA generation.

Yes. I think EBITDA affects our access to our revolver as well, Chase. As you can see, I don't think there is a rule-of-thumb answer we can give you.

I can tell you, I look at it very simply. We have enough cash to meet our capital obligations, which means EBITDA needs to cover our interest and amortization. As long as we are there, which is what drove the decision on the ATM being sufficient, once we get to that level, how much additional EBITDA we generate will then go -- long term, our strategic objective would be to lower debt once we get through the capital obligations.

Right. Okay. All right. Where do you stand about terming out or replacing some of the debt in 2018 that's coming due?

First of all, the term loan, we have historically and always seek to replace or rollover that facility a year plus prior to maturity. That's still our plan. We plan to go out in 2017 and try to accomplish that. As you note from our convert repurchases, we want to do something with the converts. I mean, that's still up, that's still something we're looking -- seeking to do.

Okay. All right. Last one and then I will turn it back over. Have any of your bigger customers that have these longer-term contracts come to you and tried to renegotiate price again on these contracts?

I would say last year and earlier in the year they did. We haven't had negotiations along those lines in the last six months.

Okay. All right.

That's what prompted my comment in the color section to say that I think we have given about all on rates that we can.

Okay. All right. Thanks for all the additional color. I will turn it back over.

There are no other questions.

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

Ladies and gentlemen, that will conclude the conference call for today. We thank you for your participation and you can now disconnect your lines.