Helix Energy Solutions Group Inc (HLX) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Monday, October 23, 2017.

I would now like to turn the conference over to Erik Staffeldt, CFO. Please go ahead, sir.

Good morning, everyone, and thanks for joining us today for our conference call on our third quarter 2017 earnings release.

Participating on this call for Helix today is Owen Kratz, our CEO; Scotty Sparks, our COO; Alisa Johnson, our General Counsel; and Tony Tripodo, Executive VP and Senior Adviser; and myself.

Hopefully, you've 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 facts, 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 of 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, 2016.

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 reconciliations, along with this presentation, the earnings press release, our annual report and a replay of this broadcast are available on our website.

Owen?

Good morning, everyone.

We'll start with Slide 5, which is a high-level summary of Q3 results. Our third quarter financial results were comparable to our second quarter results. Revenues increased by $13 million to $163 million in Q3 from $150 million in Q2 and EBITDA was $30 million in Q3, in line with Q2.

Our revenue increases were driven by increased seasonal activity in Robotics and the benefit of a full quarter of activity and improved rates for the Siem Helix 1 and Well Ops Brazil. This was offset by lower rates in the Gulf of Mexico Well Ops as both the Q4000 and the Q5000 worked primarily in the spot market. Our operations in the third quarter were negatively impacted by 15 days of mechanical downtime on the Well Enhancer. In addition, both the Q5000 and the Q4000 experienced idle down -- idle time between projects.

Turning to Slide 6. Our Well Intervention utilization was down slightly to 88% in Q3 from 90% in Q2. In the North Sea, the Seawell was almost fully utilized while the Well Enhancer experienced 15 days of mechanical downtime. In the Gulf of Mexico, the Q4000 utilization increased to 86% in Q3, benefiting from the completion of drydock activities in Q2. The Q5000 was 75% utilized for the quarter, experiencing idle time prior to remobilizing on the BP campaign in early September. Our Well Intervention unit benefited from a full quarter of operation and from improved financial performance of the Siem Helix 1 in Brazil as we addressed the majority of items identified during the vessel acceptance process. Our Robotics unit slowed slightly -- showed slight improvement quarter-over-quarter due to normal increased activities -- level during the summer months. Production facilities continue to be a steady performer, operating at full rates the entire quarter.

On Slide 7, you'll see from a balance sheet perspective our cash levels at quarter end decreased to $357 million from $390 million at the end of Q2. We invested $37 million in capital expenditures and $13 million of scheduled debt repayment. Our net debt increased to $147 million at quarter end compared to $125 million in the second quarter.

I'll now turn the call over to Scotty for a more in-depth discussion of operations.

Thanks, Owen.

Moving on to Slide 9. Revenue in the third quarter increased to $163 million from $150 million in the second quarter. Gross profit margin increased to 13% resulting in $21 million profit, up from $18 million in Q2 due to achieving good utilization across the Well Intervention fleet, increased seasonal activity and trenching utilization in the Robotics fleet. In the North Sea Intervention business, both vessels have high utilization with oil projects undertaken requiring our unique fully integrated diving services. In the Gulf of Mexico, the Q5000 had a good quarter and successfully completed work for 2 additional clients prior to returning to BP in early September. The Q4000 worked on projects for several clients in the quarter. In Brazil, we had a strong quarter for the SH1. The vessel utilized 96% reflecting very good uptime.

Under our alliance with OneSubsea and Schlumberger, we completed works and have contracted further works under our shared risk mechanism. I'm proud to say across all business units, we, as expected, produced strong results relating to safety performance.

Slide 10 provides an overview of our Well Intervention business in the Gulf of Mexico. The Q5000 completed work with 3 clients in the quarter undertaking work on 4 well locations performing production enhancement activities on 1 well location to complete a temporary abandonment. In mid-August, we commenced an off-contract period to complete the change out and the successful deepwater charter of the Intervention Riser System. We're moving IRS 2 in replacement of IRS 4. On September 3, the vessel returned to the long-term BP contract and immediately commenced work conducting production enhancement activity. The Q4000 had strong utilization in the quarter due to completing work with numerous clients working on 10 well locations working mostly production enhancement activities. Working on 10 well locations in 1 quarter with 1 vessel highlights the efficiencies that our people, planning and equipment bring to the market. This was achieved because our deck allows quick interchangeability between services and by enabling the IRS to [phase] subsea working between wells. Regarding our intervention riser systems, IRS 1 is idle. And as mentioned earlier, IRS 4 was swapped out with IRS 2 on Q5000. During the quarter, we contracted IRS 2 as a stand-alone rental unit commencing in November for approximately 5 to 6 months work in West Africa. The 15K jointly owned alliance IRS system completed manufacturing and testing and was shipped to the OneSubsea facility in Louisiana for final commissioning. The system is being contracted with the permeate clients to undertake works this winter who is due to ship out to the client location before year-end. Manufacturing continues on ROAM, the Riserless Open-water Abandonment Module, and we expect the system to be shipped to the U.S. in Q4, and it will now be operationally ready in early 2018.

Moving to Slide 11. Our North Sea Well Intervention business had a good quarter with both vessels experiencing high utilization on projects that fully utilize our unique integrated onboard diving services, and we also worked with some new clients. The Well Enhancer worked for 3 clients in the quarter. The vessel completed an 11-well P&A program performing suspension works with 0 downtime over the entire scope. For the next client, we completed a 3-well production enhancement project achieving very good results. Unfortunately, on the following project, we experienced 15 days of mechanical breakdown for the client relating to some of the tower handling equipment prior to completing some of the remaining scope. The Seawell also had a great quarter with 97% utilization in the period, working for 2 clients during the quarter, all work conducted with P&A projects. Both vessels are scheduled to be utilized into November 2017.

Moving to Slide 12. In Brazil, the Siem Helix 1 was utilized 96% in completed work and has now completed work on 7 wells, completing 5 wells in this quarter for the client. The vessel is performing very well and had minimal downtime. The vessel has continuously received very good ratings from the client-provided weekly feedback data, and the client continues to pay invoices timely. We have addressed almost all of the identified items from the vessel acceptance phase leading to improved financial performance. The Siem Helix 2 arrived in Brazil on September 18, clearing customs in (inaudible) before transit into Rio to commence regulatory inspections. The vessel is currently undergoing a client inspection phase and has commenced mobilizing client, equipment and third-party services. At this time, we are still targeting commercial operations towards the end of Q4.

Moving on to Slide 13 for the Robotics review. Grand Canyon was fully utilized performing trenching scope in the North Sea during the quarter. The vessel worked for almost -- the vessel worked for most of the quarter on a long-term wind farm power cable trenching project and also completed a small flowline trenching project. Grand Canyon II had 51 days of utilization performing 16 days on various ROV support opportunities in the Gulf of Mexico. And in late August, the vessel commenced a long-term walk-to-work project that is expected to keep the vessel utilized until -- through Q1 '18. Grand Canyon III had 50 days of utilization for an ROV support project in India. The vessel then transited to Egypt, and in early October, it will commence an oil and gas trenching project. Deep Cygnus was also in Egypt and must fully utilize on a longer-term ROV support project that commenced in mid-June. The project will continue for -- into Q4. The market, as expected, continued (inaudible) the Robotics side of the business. However, we've recently secured some good trenching projects, some of which are multiyear that will lead to increased trenching utilization.

Over to Slide 14. I'll leave this slide detailing the vessels, ROV and trenching utilization for your reference.

I will now turn the call over to Erik for a discussion on the balance sheet and our 2017 outlook.

Thanks, Scotty.

Moving to Slide 16. It outlines our debt instruments and our maturity profile. I'll leave the slide for your reference and move on to Slide 17.

Slide 17 provides an update on key balance sheet metrics, including gross and net debt levels at September 30. Our net debt in Q3 increased to $147 million from $125 million in Q2. The increase in Q3 is directly attributable to $37 million of CapEx outflows. Our cash position at quarter end decreased to $357 million, reflecting the CapEx outflows and paydown of $13 million of debt.

Moving over to Slide 19, which provides an updated outlook on 2017. Now that we're 3 quarters through the year, we are narrowing our forecasted 2017 EBITDA range to $105 million to $115 million. We have lowered the top end of our range, reflecting our year-to-date results and reduced upside potential based on the limited number of days remaining. With our contracted revenue in Q4, our biggest remaining variables are operational risks and uncontracted opportunities that we are pursuing in Well Ops UK and Canyon.

Moving over to Slide 20. Our backlog of $1.7 billion at the close of Q3 continues to be heavily weighted to the BP Q5000 contract, the 2 Petrobras contracts and the production handling contract for the Helix Producer I. In the Gulf of Mexico, the Q5000 is back working for BP for the remainder of 2017 and into 2018. The Q4000 is currently idle, but is scheduled to mobilize early November on its next contract. The vessel has contracted work into Q1. We're deploying the IRS rental system in late November with projected work into Q1. In 2017, we have benefited from the improved market activity in the North Sea Well Intervention market. Both vessels will work into the fourth quarter before seasonal factors affect our utilization. Upon completion of their 2017 campaigns, we will warm stack the vessels until activation for the 2018 season. In Brazil, the Siem Helix 1 is expected to have strong utilization and Siem Helix 2 is currently expected to start contract operations towards the end of Q4.

Over to Slide 21. The Robotics segment will continue to benefit from the seasonal activity early into the quarter, including wind farm trenching projects. Activity will pay for it towards the end of the quarter affected by the seasonal factors. Overall, it continues to be a difficult year for Robotics as subsea infrastructure spending has weakened and will likely lag an industry recovery.

Over to Slide 22. The CapEx flow cash for the year is approximately $245 million, with most of this capital for the completion build-out of the Siem Helix vessels and continuing construction on the Q7000, including a full cash of shipyard payment in Q4. Of the $245 million in projected CapEx, $230 million can be classified as growth CapEx. Our remaining debt payments for the quarter approximate $10 million.

I'll skip Slide 24 and leave it for your reference.

At this time, I'll turn the call back to Owen for closing comments.

Thanks, Erik.

As we've discussed, the third quarter results we're expecting -- and would have been better as some of the operational issues in the U.K. and the client in the Gulf of Mexico for the Q4000 deferring some work to the fourth quarter due to third-party equipment issues. The notice of delay was too late for us to make our customary work rescheduling to avoid gap in the utilization. But things are working well in the company. The SH1 in Brazil has seen an improving performance and with it, margin improvement. We've achieved the closeout of most items identified during vessel acceptance and next year should be a much improved result. The SH2 has arrived in Brazil and is now in the inspection process with Petrobras, which is proceeding smoothly. We see nothing that would indicate not meeting our current expectations of being on contract late Q4. Unfortunately, we had hoped to work the vessel prior to its arrival in Brazil, but in the end, we felt it prudent to extend the shipyard period to better prepare and, therefore, mitigate any possible issues that might jeopardize this move acceptance in Brazil.

In total, based on what we know today, we feel that the issues in Brazil are close to being behind us. We got off to a slow start but we're operating better, and we anticipate both vessels operating a full year in 2018. The continued weak Robotics market and the underperformance of this segment has been a challenge. The disappointing results will be somewhat self-correcting as our legacy high-rate charters and financial hedges roll off. Next year, we'll return the Deep Cygnus in April, and one of the financial hedges has just rolled off. We're also seeing a significant improvement in the trenching activity, which will help reverse the disappointing results from this year.

For 2018, we expect broader market activity to be flat or better compared to 2017. However, the market is still weak and continuing pressure on rates. As for what the path forward is for the company, from time to time, we evaluate our strategic alternatives and what makes sense for our company as we feel that exercise is part of fulfilling our duty to maximize value for our shareholders. We recently completed our strategic review, and our conclusion was that at this time, our focus should be on our balance sheet, executing operationally and expanding our profit margins. We'll not be further discussing this matter on the call or answering any questions about it as it's our policy not to comment on rumors or make disclosures about future strategic transactions unless we have something right to announce.

Strategically, we're at the near end of our -- we're near the end of our build program. The SH2 is now complete, undergoing customer inspection and the Q7000 is on sea trials as we speak. We now have the preeminent fleet in the industry for nonrig well intervention. We continue to focus on our balance sheet and options for optimizing our liquidity. Our midterm focus ahead will be operating and improving our profit margin. Looking forward, once our capital obligations are complete, we'll start out allocating our cash generation to reducing our net debt position and continue our aggressive principal repayment. We plan to reorganize our resources in the company from management of construction risk to appropriates on improving margin through operational efficiency and creative contracting in manners that may increase the producers' interest. The overall market is still challenging but Helix is in a better place now, and I feel positive about our position for the future.

As a final note, I'd like to take this opportunity to announce that after 15 years with Helix, 8 years as a member of the Board of Directors, including a stint as Audit committee Chair; and 7 years serving as CFO and subsequently, Senior Advisor, Tony Tripodo will be retiring at the end of this year. Tony has been an invaluable member of our -- both our board and the executive management team over the years and the company has benefited immensely from his contributions, and we wish him all the best in the future. Just on a personal note, I'd like to say thank you for Tony. When I came back into the company as CEO in '08, I asked Tony to join us as CFO. He probably didn't think long enough about that. But following the financial collapse of '08, we certainly went through some challenging times. We restructured the company business model, cleaned up the balance sheet, started rebuilding the company. Everything was going exceedingly well, and then the oil price collapse of '15 put us into another challenging period. So it's been some ups and downs, but the company is here. We've come through it well, and we're positioned well for the future. And to a large extent of that is due to Tony's contribution over the time.

So with that, Erik, I'll turn it back over to you.

Thanks, Owen.

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

(Operator Instructions) And the first question comes from the line of Ian MacPherson.

Tony, congratulations on your retirement. Thanks for all the help over the years. I guess my first question, Owen, it sounds like there -- if I'm just feeling correctly, it sounds like there is improved utilization visibility for IRS systems. And hopefully, as well for the ROAM system next year when that becomes available. And that sort of mitigating what is looking to be probably a choppier utilization outlook for Q4000 this quarter and into next year. How do you see those competing dynamics sort of offsetting into kind of a net better or worse outlook for asset employment over the next year, excluding Brazil?

All right. Well, excluding Brazil, I think the biggest variable in there are the 2 vessels in the North Sea, where we see continued robust utilization. I think that market is strong, and we see it continuing into next year. With regard to the Q4000, I'm not -- I don't share the pessimism over the Q4000 utilization going forward. I think that Q4000 has shown itself to be the preeminent intervention vessel, and every year, we're able to book it. I think the challenge for us next year is in -- basically, the pressure on rates that we've seen this year. When will that abate, that has the large -- that largely depends on the drilling market. But then there are a lot of things that we can do taking our own action. We've been experimenting with some creative contracting terms, and I think that will make us more attractive to the clients and achieve better margins. So I think there are things that we can do. All in all, I don't see next year as being a -- like I said, this is my commentary, I see next year being flat to an increase across the board. The big -- you mentioned the IRS rental market. We're not really seeing as robust a rental market as we did in the past. Scotty, you might have a better outlook on that.

Yes. The rental market is more opportunistic and whilst there's rigs available in the Gulf of Mexico, I think it's quite a flat market. The 15K is generating a lot of interest. Our alliance system shared with Schlumberger, that brings a different dynamic to the rental market. And we've more to go that contracted up for the first job. So I think that all led utilization toward the Q4000 there as a stand-alone system. There's a lot of interest there.

Okay. That's helpful. For a follow-up question there. We've seen a little bit more CapEx creep here in Brazil. It looks like another -- I think $7 million of the $10 million of CapEx increase is attributable to that project, and then it looks like the deferred mobilization cost for this year has crept up a little bit as well. Can you just comment on those changes? And sort of where we are in terms of the finality of these revisions for that CapEx program?

Oh, we're in the process of finalizing the actual accounting of the CapEx. It was sort of a sloppy year for us to keep track of. As you know, we completely changed the -- last year, when we ran into the issues with the SH1 acceptance in Brazil, we revamped the SH2 program. We took all of the comments and issues raised by Petrobras, and we created a new scope of work for the SH2, extending its time in the shipyard. Due to the rapid nature of that transition, we did the best we could on estimating what that cost was going to be. I think the CapEx creep that you see is just the fact that we weren't -- there were some things that we just didn't have costed them properly. I think you're at the end of that, we're complete with the SH2 and under acceptance right now. The only risk to that would be if we see some new issues raised by Petrobras. We've addressed all of the ones that they've raised on the SH1. But that's not to say that Petrobras, they're very creative in finding ways to try and penalize you. But so far, I'd say that the inspection is going relatively smoothly, and all of the extra time and the extra CapEx that we've spent getting prepared for the acceptance looks like it's going to pay dividends.

Our next question comes from the line of Vaibhav Vaishnav.

Starting off on the Siem Helix 1, you guys mentioned that it -- the financial profile of that vessel is improving. Can we say by the end of September if that was on a fully contracted day rate? Or is there still a way to go?

If you dialed back to April, when we went on contract, I believe what I said at that time was that by the end of September, we'll have most, if not all of the conditions results. I think we're pretty much on schedule. Now there are a few conditions that are not possible for us to resolve. And we'll have to carry those forward. But they're very few. On the SH2, things are in better shape. But in general, we are right in line with where we said we would be in April.

Okay. So like for all intent and purposes, it's fair to think the exit rate for September would be a full day rate. Thinking about the Siem Helix 2. It has -- it is undergoing acceptance testing. Any feedback on that? And what -- how should we think about the time line over there?

I can just -- big transparent in what Petrobras is telling us. We're trying to go through the acceptance process here in a little more measured fashion than we did on the SH1, where all of the inspectors showed up at the same time. What we're doing right now is we're scheduling the different parts of the vessel that's being inspected. The vessel is at the dock in Rio de Janeiro right now. Going through the walk-on inspection phase. Right now, they do have a plan to go out on the dummy well testing portion of the acceptance at the end of October here. And we'll see how that goes, but typically, that's a plan for about a 30-day period.

Got it. And I think you touched upon this in the last question, but if I -- what needs to happen to think about Gulf of Mexico profitability and not see profitability being flat 2018 versus 2017?

What needs to happen?

Yes. If I say, it should be flat is -- am I being too optimistic? Or are there like bigger things that I'm missing over there?

No. I think going into 2018 versus this point in '16 going into '17, we actually have greater visibility on the amount of work that the clients are planning to do. Of course, we don't come out with guidance, because right now, the clients are still ahead of their budgeting process. Once they -- we get through the budgeting process, we'll be able to determine how much of that is real. But apples-to-apples versus this time last year, we're seeing an increase in available work. That's offset somewhat by the fact that the producers realized that the market is in oversupply, and therefore, they're dragging their heels on commitment, knowing that there's assets out there. And of course, that has the -- associated pressure on price. We're at the point now where we track our projects, and we see how profitable they are for our clients. We're pretty confident in where our rates are and the value that we bring to the clients. So hopefully, the pressure on rates won't be that rate, but we need a little more time to properly assess that going into '18.

I think we should expect the timing against Q4000 as well. In the North Sea, we've got a lot of visibility against work, but we have the niche of having to dive in, integrated onboard the vessel that no rig can supply. Q5000 is not up for a good portion of the year. And also in 2017, Q4000 had this -- the soft period we just had now because of a client's third-party issue. And also it had about 50 days of drydock. So there's more utilization available to us for Q4000 going into '18 as well.

Our next question comes from the line of Chase Mulvehill.

Tony, congrats on the retirement. You'll be missed. So Owen, I guess as a first question, if we could think about 3Q and -- was there any kind of negative one-off cost in 3Q? And maybe with the Siem Helix 2, that $14 million of mobilization costs, was any of that expensed?

Yes, the Siem Helix 2 -- no, the mobilization costs have not been expensed. That will start once the vessel starts its contract.

Okay. Was there any other kind of one-off cost in 3Q?

Yes. In the third quarter, like we said, we had an unexpected downtime event with the Well Enhancer. Usually, we have every good uptime on both the vessels in the North Sea, and we had a 15-day event on Well Enhancer. And like we said earlier, we had quite a significant schedule change on Q4000 because that happened last minute due to a client's third party. We were unable to fill that slot with other works. So there's 2 significant events in Q3.

Okay. And on the Q4000, you said it's idle right now but you've got some work contracted into 1Q. What kind of utilization would you expect in the fourth quarter for the Q4000?

From November 1 to the end of year, I expect it to be fully utilized. And we've got a good backlog going into Q1.

Okay. All right. And did I hear that you -- the Q7000 was on sea trials? Did I hear that?

Yes, it actually just arrived back in Singapore after sea trials of -- I think it was the day before yesterday, she arrived back in Singapore. So sea trials are over. The shipyard has a punchless now as a result of the sea trials that they need to accommodate. But that's all on the shipyard. For all intents and purposes, our construction phase is complete, except -- I will add, there are -- there's a few things that we still need to put on board the vessel. We have plenty of time to do that.

Okay. So still planning just to take delivery and start marketing the vessel at year-end '18? Is that right?

Right. Right. The plan right now is that we will be removing the thrusters and keeping the vessel in Singapore for 2018. We'll be -- like I said, we'll be adding a few things to the vessel. It's not big CapEx items and then bringing the vessel out to market in 2019. That's the current plan.

Okay. Last one and I'll turn it back over. For the Siem Helix 2, since you didn't do any break-in prior to the contract starting up later this quarter, how should we think about kind of first half '18 utilization for this vessel?

Should be fully utilized under the Petrobras contract. We have all of the work identified. That's all being engineered now. I think the vessel is going to be fine.

The client's mobilizing the equipment right now and all their third-party services. So...

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

Tony, I enjoyed working with you over the last couple of years and best of luck post-Helix.

Thanks, Marty.

Two questions. One on the Robotics segment. Could you maybe talk a little bit about the outlook into '18? And particularly, the nonenergy work outlook? And is that where the trenching interest is coming from that you spoke about?

Yes, it is. Like Owen said earlier in the call, we expect Canyon to self [right] itself somewhat in Q2, ahead drilling off, and we can get back our most expensive vessel charter at the end of March in '18. The -- we've secured quite a good backlog of trenching work. There's quite a significant amount of work, still at good trenching rates. And most of that work is wind farm or power -- interconnect power cable-related. We're also seeing a bit of an upturn in flowline trenching, but that's more '19 onwards.

Okay. And then in the North Sea, it sounds like things are a little better in terms of outlook into '18 and at the same time last year as you looked out into 2017. Is there any opportunity in that market to maybe raise pricing?

We have, slowly over this year, been increasing pricing. Our pricing is up probably 10% from what it was in 2016. And because of the niche we have there with the integrated diving spreads, we see a bit of a price increase but nothing major yet. Still planning that -- the procurement game of the operators at times. Certainly, compared to a year ago, there's a lot more visibility again with work, and there's a lot more interest in production enhancement-type activities.

And our next question comes from the line of [David Smith].

It seems like the Robotics operating cost increased by more than -- than just the higher activity levels. I was wondering if there was anything in the quarter that sticks out that helps explain the cost increase.

No. I think, David, from the standpoint comparing to second quarter, obviously, I think we had a full quarter now of the Grand Canyon III vessel from that standpoint. And I think everything -- all the other costs were routine costs as part of our projects.

We did have 1 or 2 quite expensive transits between regions. The Grand Canyon III went to India and then it transited back to Egypt, and that was on our ticket and obviously other -- the fuel expenses and stuff that go with that.

That makes sense. And I was wondering If you could quantify the impact of the release from -- as the hedge rolls off the first vessel, if you could say if that's a -- maybe slightly more than $0.5 million for the quarter?

Yes. For the quarter, it's in that range.

Our next question comes from the line of Haithum Nokta.

I'll echo the congrats for Tony. I just wanted to get some thoughts on the Deep Cygnus when it rolls off the charter. What -- how much uplift do you expect from it in '18? And then also, as your currency hedges roll off, do you expect a larger margin uplift from those?

Yes. The Deep Cygnus is -- like we said earlier, it's our most expensive charter that we have on the Robotics side. And I would say, it's plus $10 million, $12 million of an impact that will be removed from this year's numbers.

And on...

Its hedge is about $4 million or $5 million, I think.

Yes. The hedge has been in place for, I think, about 4 to 5 years from now as you've seen the devaluation compared to the Norwegian kroner. So from that perspective, we're talking, like we said, about $0.5 million a month or more.

And we have 2 remaining hedges.

We have 2 remaining hedges. So the benefit that we'll see next year is -- on the hedge that has rolled off this year.

The other thing that are -- is self-correcting over time on the Robotics side is the 3 chartered vessels that we have right now are charted in Athene, impacted the hedges. They are chartered at higher than market rates right now. So as they roll off and we were able to replace them with market rate vessels then that's further upside that's self-correcting over time.

And then, I guess based on those factors and the positivity on the trenching outlook for '18, do you see that being a EBITDA breakeven business in '18?

We'll know more as we work through our budget, and we'll give you a better idea of that with the total budget.

Okay. And then switching on to the Q4000. That'll be your first -- that won't have any of the legacy backlog. Then based on the current spot rates, what kind of utilization would you need to break even on that vessels for 2018?

Yes. Haithum, I think you're correct in that the legacy backlog essentially rolls off in 2018. I think we have very minimal, maybe a 20-day contract or so. So from that perspective, it will be primarily spot rates that we have there. Given the current market, you would assume that to break even, you'd probably need greater than 75% utilization.

Great. I'm sorry. Go ahead.

That's the spot market rate.

But I think there's a lot of opportunity for us to contract through mechanisms that avoid pure spot market.

Can you maybe expand a little bit on that? Owen, I think you've talked a bit about this, but is this kind of purely through the alliance with Schlumberger? Or is this something that you're able to do on your own? Or...

I think, of course, the alliance with Schlumberger offers opportunities. But I -- and I don't want to get too detailed in the type of contracting that we are planning to propose for competitive reasons. But there -- we have the longest track record by far in doing this kind of work. We understand that extremely well. We have several different contracting models that we're discussing with the producers. And I'll leave it at that, but it's just terms -- it's terms that I think are attractive to the producers that might incentivize them to do work or, at least, go with us as we look forward here.

Our next question comes from the line of Gregory Lewis.

Tony, congratulations. It's been a pleasure.

Thanks, Greg. Appreciate it.

Owen, just following up on -- I mean, and you alluded to it in your prepared remarks about the creative contract structures that you're looking at, and you mentioned Schlumberger and the alliance. Is that the process of trying to move away from a day rate and try to starting to bid these projects? And -- from a cost-based -- from a performance basis as opposed to the traditional day rate basis, is that what we should be thinking about? Or is it something different?

I think that's a component of it. Another component of it is through the alliance. Schlumberger is very big, [I think] more integrated-approach basis. There's some pretty significant opportunities for us to bring better cost to performance execution. But then like you said, there is a lot of things that -- if you want to know what I'm talking about, you can just look at our history coming. In the past, we have done some very creative contracting styles that have worked out very well, of course. As the market moves to a more robust market, you tend to sort of kick back and just rely on your day rates because you become an order-taking company. Right now, this year, we're going to be really focusing on revising some of our more creative -- working closer with our alliance partner, working closer with the producers in coming up with different styles of contracting that brings greater value to them and greater margin to us.

And I think on Q4000 now, we have Schlumberger's equipment finally installed on the vessel so they're going through the process now of integrating their own teams. And once they're through that phase, we'll then be able to integrate our teams further and reduce the overall numbers on the vessel -- staffing numbers on the vessel families. And whilst their equipment's fully onboard, we, therefore, don't have high mobilization and demobilization cost of those services, and we're not aware of it either, we don't pay for that equipment they give us. There's some benefits that the alliance surely bring to us now.

Okay. Great. That sounds really good. And then just on -- just realizing we're not going to get into a pricing conversation here, but as we think about the deployment of the IRS system that the legacy won't now renew 15K IRS. As we think about maybe like a return hurdle for -- you have the asset sitting in -- on land to bring it out, is there some sort of minimum utilization? Is -- I mean, how do you think about the decision to deploy those units as opposed to just letting them stay on shore?

I think, Greg, from that standpoint, I think the cost of mobilizing and deploying or maintaining the equipment is not very significant. And so it's a situation where we expect -- when there's an opportunity to deploy for a customer, it would be an easy decision to make. There's -- it's not -- there's no benefit to leaving these systems up a beat, so to speak. I think the maintenance of them, they're maintained, ready to go, ready to be deployed. I don't know, Scott, if you want to add to that.

Yes. They're ready to be deployed. They're also -- the clients, when they pay for a rental unit, they pay from it, leave an opportunity, going out, being tested and mobilize on to whichever rig they put it on, and they pay for it to come back. And then also pay for any repairs or maintenance that's required afterwards. So it's quite an easy decision to put those systems out. The rates we are seeing are -- right now, are the same sort of the legacy rates we've always got for those systems. And if anything, we see increased rates for the fact that the 15K will be able to handle high-temperature, higher pressure in the market.

(Operator Instructions) And our next question comes from the line of Joe Gibney.

Just a quick question on the North Sea. I know this year is a bit abhorrent in terms of time frame for work starting up, you get that going early as February for a couple of these assets. So Well Enhancer, Seawell potentially move into warm stacked. You seem to be espousing a reasonable amount of visibility in the next year in the North Sea but the -- is it more of a typical pickup then given that potential move to warm stack? Or it's more very late 1Q kind of time frame for work to pick up there? Or really more of a 2Q run rate? Just trying to get a sense of what customer indications are, some of the things you have lined up for those vessels in the North Sea given the potential for warm stack near term.

Yes. The fact that we have warm stacked means that they can be activated very quickly. We're talking 2 to 3 days to be able to put the vessels back to the market. And the reason for the warm stack is primarily seasonal. The winters in the North Sea are very rough and clients at this time aren't really going to spend money or take weather risk through that period. So we see the vessels stacked into Q1. And right now, there is some visibility of work in Q1. That's -- it's going to be around sort of end of Q1, early Q2 when I expect the vessels to go back to work.

Okay. That's helpful.

And if those come to the table, we're ready to go very quickly.

Okay. And just circling back to Robotics. Just trying to understand what you're indicating here for fourth quarter. Your guidance, at least at the midpoint revenue-wise, it's sort of indicate a flat to up quarter sort of a bit counterintuitive coming off of seasonal utilization, just try to rationalize that. And then in terms of sort of the magnitude of trenching and thinking about mix, I understand the self-correcting aspects of profitability there you guys have described here, but trenching is sort of ballpark kind of 25% of the mix or so. I'm talking non-oil and gas works. So is that amplifying significantly given some of these long-term contracts you're referencing into next year that they're going to shift to that mix a little bit more? And all of those in conjunction are going to sort of maybe create a path where we get closer towards profitability again? Just help me a little bit with 4Q and the outlook there.

The reason why 4Q is better than 3Q is primarily 2 of the vessels will be working on trenching projects. Our trenching projects create about nearly 3 times of what we could get in the construction or IRM market. Now we're still holding very good rates for jet trenching and even better rates for cutting, mechanical cutting. Next year, there is a significant increase in trenching year-on-year. And a good portion of those rates we've both raised on mechanical cutting, which commands the highest rates that we can get for trenching. I would say, probably 30% to 40% of the vessel utilization next year will all be trenching-related.

Okay. That's helpful.

And also going into Q4, we've locked up the Grand Canyon II, where the client will now take it through to the end of Q1. So we haven't got any utilization risk for that vessel for the winter period as well.

Okay. And the 15K IRS system, the contract that you referenced that poised late '17 or early '18, did you indicate the duration of that contract? Is that short-term work or -- I wasn't sure if you disclosed that.

Right now, it's 1 well at work, but there's an option to do 3 wells. So that's sort of 30 to 90 days of work.

Our next question comes from the line of [Matt Dane].

I was curious, looking out at 2018 now, what color can you add around discussions with potential customers and quoting activity that you're seeing at this point in time versus a year ago? Is there anything that you can add around that?

Just that -- like we've said in all regions, we're seeing increased visibility to work. We're certainly seeing a lot more production enhancement-type activity. And I think if you go back a couple of years ago, about 40% of our work was production enhancement activity. The rest was G&A- or P&A-type work or abandonment activities. If you look at the fleet right now, the Q4000 is -- nearly all the work it's doing is production enhancement activity. Q5000 is all enhancement activity. All of the work that Well Enhancer did in the last 2 quarters has been enhancement-type activity. So I think the fact that the price of oil has increased is leading to clients to going back to that model of getting more out of their wells.

Okay. Okay. And was there any impact from the hurricanes that went through the Gulf here in the third quarter at all on you folks?

No. No. Nothing that we've seen.

And our next question is a follow-up question from the line of Vaibhav Vaishnav.

Just a quick question on Siem Helix 2. There were concerns that the day rate on Siem Helix 2 could be renegotiated down. It seems like -- if there is any update on that. And I would think if there were to be any day rate reduction, they would have been brought up by now. Just if -- if you could please update anything on that.

No. You're correct. There's been no discussions on reduction of day rates at all with either vessel. The day rates are -- they were contracted -- we did negotiate the first vessels down in 2015, I believe.

We signed the amendment in June of 2016.

Yes. That's when we signed.

Yes.

But the rate on the SH2 has never been adjusted and there's no discussions on any rate reductions.

And 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 on our fourth quarter 2017 call in February. 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.