Helix Energy Solutions Group Inc (HLX) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2018 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded today, Tuesday, July 24, 2018.

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

Good morning, everyone, and thanks for joining us today on our conference call for our Q2 2018 earnings release. Participating on this call for Helix today is Owen Kratz, our CEO; Scotty Sparks, our COO; Alisa Johnson, our General Counsel; and Geoff Wagner, our Chief Commercial Officer; and myself. Hopefully, you've had an opportunity to review our press release and the related slide materials, released last night. If you do not have a copy of these materials, both can be accessed through our 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, 2017. Also, during this call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slide of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The reconciliation, along with this presentation, the earnings press release, our annual report and a replay of this broadcast are available on our website.

Owen?

Good morning, everyone. Thanks for joining us. I'll start on Slide 5 of the presentation, which is a high-level summary of Q2 results. Our second quarter 2018 results improved significantly compared to first quarter, as our North Sea assets benefited from a full quarter of activity following the normal seasonal low during Q1. Our quarter was positively impacted by a full quarter of operations of both Well Intervention vessels in the U.K. and improved utilization in execution from our Robotics unit, benefiting all areas of our financial performance. Revenues in Q2 2018 increased to $205 million compared to $164 million in Q1. Our gross profit increased in Q2 2018 to $43 million compared to $13 million in Q1 2018. Our net income increased to $18 million in Q2 2018 compared to a loss of $3 million in Q1 of 2018. For the quarter, we generated adjusted EBITDA of $52 million compared to $28 million in Q1 2018, and $30 million in Q2 of 2017.

Turning to Slide 6. Our Well Intervention utilization on our fixed vessels increased to 88% in Q2 from 73% in Q1. In Brazil, the Siem Helix 1 was 92% utilized for Q2 compared to 99% in Q1. During the quarter, the vessel completed its planned shipyard maintenance, resulting in 7 days of downtime. The Siem Helix 2 was 99% utilized in Q2 compared to 88% in Q1. The performance of our vessels improvements in Brazil has been a positive development in the first half of 2018. In the Gulf of Mexico, utilization for the quarter was 74% compared to 93% in Q1. The Q5000 was 71% utilized for the quarter; the vessel completed its UWILD regulatory inspection with 14 days of downtime in Q2. The Q4000 with 76% utilized in the quarter compared to 100% in Q1. The vessel was idle at the end of the quarter between projects. Our North Sea vessels were utilized 95% in Q2 compared to 31% in Q1. During the quarter, the Well Enhancer completed 2 coil tubing projects. Our Robotics segment also benefited from increased activity in the U.K. market during the quarter. ROV vessel utilization increased to 70% from 56%, with 54 days of spot vessels in Q2. Utilization on our ROVs increased to 38% from 30%, with 146 days of trenching work in Q2. Production facilities continue to be a steady performer, operating at full rates the entire quarter.

On to Slide 7. From a balance sheet perspective, our cash levels at quarter-end increased to $288 million from $274 million at the end of Q1 2018. We generated $47 million of cash from our operations, offset by capital expenditures of $21 million and $10 million in scheduled principal payments in connection with our financing. Our net debt position decreased to $171 million from $193 million in Q1.

I'll now turn the call over to Scotty for an in-depth discussion about our operating results.

Thanks, Owen. Moving on to Slide 9. Q2 continues what has been a good year so far for us considering the current market conditions. We had strong utilization across all business lines in the company with very good uptime performance, and all business units produced our usual high standards in regard to safety performance. Revenue increased in the second quarter in line with our performance to $205 million compared with $164 million in the first quarter. Again, this was a significant increase from the same period of 2017. Gross profit margin was at 21%, resulting in a profit of $43 million, increasing from $13 million in Q1. In the North Sea Intervention business, both vessels commenced operations in March and had high utilization throughout the quarter with very little downtime.

Both the Q4000 and Q5000 had another strong quarter with good uptime performance in the Gulf of Mexico. In Brazil, both vessels performed very well, achieving high utilization. The SH1 completed its dock and maintenance period in the planned time and immediately returned to work for the clients. SH2 now settled well into the fleet and is achieving expected performance targets. Robotics increased utilization to 70% across the vessel chartered fleet by completing numerous projects globally and commencing the trenching season, conducting 141 days of trenching in the quarter. Spot work on the number of vessels in the global market contributed to the increase as well. Slide 10 provides an overview of our Well Intervention business in the Gulf of Mexico. The Q5000 continued with BP throughout the quarter working on 2 well locations, utilizing the alliance jointly owned 15K IRS system to undertake production enhancement activities. At the start of the quarter, the vessel completed its planned mid-period underwater hull inspection, originally planned to be undertaken entirely in Q1.

The Q4000 had a good quarter with no commercial downtime in all their programs that were undertaken. The unit did, however, have some noncontract base. The unit performed well, doing work on a 3-well P&A program and completed a 4-well production enhancement program.

IRS 2 worked in a stand-alone rental unit on the P&A contract in West Africa and then commenced shipment back to our base in Houston. IRS 1 is idle at our facility in Houston. The Helix OneSubsea 15K IRS remained contracted to BP on the Q5000 throughout the quarter, conducting work on another production enhancement high-pressure well. The unit also completed its longest dive to date.

Moving to Slide 11. Our North Sea Well Intervention business experienced a good quarter with both vessels reactivated in March and going straight to work for numerous clients throughout the second quarter. Both vessels achieved high utilization with strong uptime work in mostly production enhancement programs. The Well Enhancer worked 94% of the quarter, working for 4 clients in production enhancement projects. Two of the projects utilized our coil tubing system successfully. The Well Enhancer is the only vessel available to the market that can perform coil tubing operations and diving operations simultaneously. The Seawell worked 97% of the quarter working for 3 clients entirely in diving mode on a mixture of production-enhancement and pre-P&A programs.

Moving to Slide 12. In Brazil, our operations for Petrobras continue to go very well. We achieved our best quarter to date. Both vessels are performing well for Petrobras, and we've received very positive feedback for the vessels. The Siem Helix 1 had a very strong quarter and was utilized in 92% working on 2 P&A wells in the quarter. The vessel undertook itself a service period as planned, resulting in 7 days of nonpaid time. Siem Helix 2 has settled well into the fleet and performed extremely well in the quarter, with 99% utilization. The vessel completed 5 wells during the quarter undertaking production enhancement programs. The vessel was also ranked first place 2 months in a row in the Petrobras ranking system for all rigs against safety, operations and efficiency. IRS 3 has been stored in Brazil at our facility for possible stand-alone rental opportunities.

Moving on to Slide 13 for the Robotics review. Q2 was an improvement for Robotics, with the vessel charter fleet utilization increasing to 70%, due to the commencement of our trenching works and also included a number of project-oriented spot market vessels undertaken back to back with client requirements. Grand Canyon worked in the North Sea, completing a 70 days of utilization, working primarily on trenching projects and undertaking short-duration IRM projects. Grand Canyon II, located in the Gulf of Mexico, worked 39 days in ROV support projects and now -- has now commenced a longer-term water work project.

Grand Canyon III completes a 64 days of utilization, performing 54 days on a trenching project and a 10-day short IRM project. We contracted 3 spot vessels during the quarter, working in back-to-back per the clients' project requirements, utilizing our ROVs and services on the vessels, achieving 54 days of project utilization across all 3 regions. Over to Slide 14. I will leave this slide detailing the vessels ROV and trenching utilization for your reference.

I will now turn the call to Erik for a discussion on the balance sheet and our 2018 outlook.

Thanks, Scotty. Moving to Slide 16. It outlines our debt instruments and the maturity profile at June 30. Our total funded debt at June 30th was $502 million, a reduction of $18 million from our year-end 2017 balance, primarily reflecting our scheduled principal payments and the refinancing of the 2032 convertible senior notes in Q1.

Moving to Slide 17. It provides an update on key balance sheet metrics, including gross and net debt levels as of year-end and June 30, 2018. Our net debt in Q2 decreased to $171 million from $193 million. The decrease in net debt attributable to -- is attributable to $47 million of cash being generated by operations offset by $21 million of CapEx and $10 million of debt repayments. Our cash position at quarter-end increased slightly to $288 million, our net debt to book capitalization was 10%.

Moving over to Slide 19. And this provides our outlook on the remainder of '18. We are maintaining our forecast for 2018 EBITDA in the range of $135 million to $165 million. This rate includes some key assumptions and estimates. Operations on the Siem Helix 1 and Siem Helix 2 have developed positively during the first half of 2018. Projects on the Seawell and Well Enhancer extend into the fourth quarter. However, considering the market in the Gulf of Mexico, vessel in that region -- vessel utilization in that region could be a challenge. The Robotics segment should continue to benefit from reduced charter cost and an increase in trenching work. Any significant variation of these key assumptions could cause our EBITDA to fall outside of the range provided.

Moving to Slide 20. Our 2018 backlog remains at $1.4 billion of backlog, of which $269 million is currently scheduled and estimated to be completed in the remainder of 2018. Our backlog continues to be heavily weighted to the BP Q5000 contract, the 2 Petrobras contracts and the Helix Producer 1 contract. In the Gulf of Mexico Well Intervention market, the Q4000 currently has some work in Q3 and identified opportunities into Q4. The vessel mobilized July 19th on a project and its utilization will be driven by near-term opportunities. The Q5000 has a 270 days program with BP with a 95-day gap, currently scheduled for October through December, that is subject to change. The IRS rental systems are currently idle. In the North Sea Well Intervention market, we're assuming a high level of activity for our vessels into Q4. We expect continued seasonal weakness during the winter months.

Over to Slide 21. After a slow start to 2018 for our Robotics segment due to the normal slowdown during the winter months, we expect the improvements seen in second quarter performance to continue for the remainder of 2018. The improvement partially stems from the return of the Deep Cygnus in Q1, lower charter cost in the Grand Canyon I due to a scheduled layoff and stronger wind farm trenching market.

Over to Slide 22, the CapEx for the year is forecasted at $135 million with most of the capital for the continued construction of the Q7000, including the forecasted ship payment in Q4. Our debt payment for 2018 -- our remaining debt payments for 2018 approximate $23 million, with the scheduled payments on our Q5000 loan debt and term loan. I'll skip slide 24 for your reference.

I will now turn the call over to Geoff for market outlook.

Thanks, Erik, and good morning, everyone. I'll spend the next few minutes walking through our present market outlook and highlight some of the key opportunities for Helix. With regard to customer sentiment, we believe that clients continue to be encouraged by Brent prices near $70 per barrel and remain focused on delivering production enhancement and field maintenance to capitalize on efficient near-term returns for their investment.

Lead times, the time from contract signing to contract commencement, remain short, and clients appear to be unwilling to commit to durations in excess of what is absolutely necessary. Operators continue to work off the remaining backlog of mobile offshore drilling unit contracts that they committed to previously. While not all of our units compete directly with MODU's, we do see the decline of this type of backlog as encouraging for our intervention business. In the Gulf of Mexico, we continue to see weakness and competition from drilling contractors, who are willing to operate their vessels at or near breakeven rates in order to keep the rigs warm. However, if past cycles are any indication, we would not expect this situation to continue. But this is the reality of the market we are in and it may affect our ability to continuously contract the Q4000 and Q5000 during this industry lull. It is our believe that with our proven track record, the design capabilities of our vessels and the performance of our crews, we are able to differentiate our offerings and keep our services at the forefront of intervention and P&A operations in the Gulf of Mexico.

In the U.K. market, there is less competition from drilling units. Right now, the pricing in the North Sea appears to be slightly positive. We have visibility on both the Seawall and the Well Enhancer into Q4 of this year. With oil prices remaining high, it seems that more operators are committed to performing maintenance work to enhance their production and there is continued discussion of North Sea P&A work in 2019 and beyond. Regarding the Q7000, we are currently completing the integration of owner-furnished equipment and upgrades, and expect to have the vessel ready to work around Q2 of 2019. In terms of the construction of the vessel, I think it is worth pausing here to highlight that the Q7000 is uniquely designed as an efficient BP 3-Well Intervention vessel with a high transit speed, heavy weather capabilities and a fit for purpose design that differentiates this vessel from some cookie-cutter drilling rigs that are being delivered today. The Q7000 is the combination of our learning in the heavy Well Intervention space and this vessel, under experienced hands, should serve our clients well.

As stated previously, although we have the option with the shipyard to defer delivery until the end of 2019, we are working hard on identifying opportunities to bring the vessel to market earlier in that year. Due to the competitive nature of these opportunities, I will not go into too much detail, but will say that we have expanded our marketing capabilities and continue to pursue programs in West Africa, Brazil and the North Sea, where the well populations, the design capabilities of the Q7000 and Helix's business model should offer the market significant value. Let's switch gears and discuss Canyon offshore for a minute. As far as our outlook is concerned, we currently expect that Canyon will show -- should show market improvement year-over-year for the remainder of this year on the basis of greater utilization, driven primarily by a strong trenching market. We have better visibility on backlog in Canyon this year than we did in 2017, and while the oil and gas market remains tight, our belief is that it will begin picking up for construction work in 2019 and onwards.

Canyon is positioned as a Robotics-based company with ROVs, trenchers and vessels, serving both the oil and gas, IRM, light-construction market as well as focusing on the renewable sector. As such, Canyon is strongly leveraged to benefit from any potential market recovery. So to summarize our market outlook, while we continue to be in the tough market, we believe that Helix has the preeminent non rig intervention fleet and best-in-class Robotics capability. We continually look for ways to expand our service offerings and contracting formats around these enabling assets, with a focus on improving our margins and utilization and increasing the value that we deliver to our clients.

At this time, I will turn the call back over to Owen for closing comments. Owen?

Thank you, Geoff. We are back to free cash flow positive position and expect to continue that on an annualized basis, going forward. Cash flow did continue to improve, once we made the final payment on the Q7000, and the market conditions improve at all. We're clearly pleased with the Q2 results, given the challenging market conditions but we're -- but remember, we're very early in any kind of market recovery and therefore, there is upside ahead that should be achievable. Utilization of our assets improved in the quarter, but there is still room for improved utilization. In the U.K., we actually lost work due to a lack of availability, which is very positive sign of work volume that exists in the season.

In fact, we're in discussion with -- discussions about some work to be done in Q4, which might potentially be the beginning of the market expanding for seasons beyond our current assumptions. However, there continues to be alternative supply which could hinder any efforts to achieve higher rates. The Gulf of Mexico is a bit of a different picture. Available work to be done continues to be at a low volume and clients are abnormally slow in committing to contracts. Rig rates continue to be low as a result of oversupply and competition. Our utilization could be better, or at least the visibility of what utilization lies ahead could be better. The 2 vessels in Brazil continue to see strong utilization other than the brief period that the SH1 was in regulatory-required dry dock. We took advantage of that time to upgrade the cranes and eliminate some of the last outstanding penalties, which will help the economics going forward.

Our Robotics group started to show improvement in utilization, not only in trenching but -- as was expected, but in the work-class segment as well. We actually picked up some vessel of opportunities to fill work that our long-term chartered vessels could not cover. That said, the market continues to be oversupplied with a lot of competition for work. On a positive note, our Robotics group has the capacity to fill any uptick in market conditions without adding significant cost. Therefore, it has great leverage for EBITDA improvement on a mark -- on any market improvement. While there are some positives on the utilization side, remain -- rates remained depressed with the weight of oversupply across the board. We see drilling contractors and financially stressed companies attempting to generate backlog by offering what can only be described as unsustainable rates offered out of desperation. We're assuming that this oversupply condition and pressure on rates will continue into or through 2019. It's our opinion that refinancing has reached its limits and the process of weaker players exiting the market, combined with consolidation, will begin to hasten the recovery process from the current oversupply combined with increasing demand.

We anticipate that rates will be strongest and hold in the U.K. 2018 rates in the Gulf of Mexico have not been favorable, but in my opinion they do seem to have bottomed. Brazil margins should show some marginal improvement as a result in the elimination of the 4 penalties on the SH1 previously mentioned. Robotics rates for trenching are holding, though rates for world-class vehicles and vessels remain depressed. Looking forward, we see a little changing in market conditions going into 2019 until some of the oversupply is rectified. We will continue to improve our operational efficiency, and we should see Canyon return to profitability with ongoing long-term charter roll off. In addition, we do have the Q7000 ready to come to market next year, as Geoff has already covered. The balance sheet is in good condition. And having returned to free cash positive, even with the final payment of the Q7000, we expect to retain a good balance sheet.

Next, net debt to equity is at 10% with net debt of $171 million at the end of Q2, and our focus will be on further reducing debt. However, our main objective going forward will be on finding ways to improve margin. There a lot of opportunities for us to work on it there. With respect to 2018, we will not be revising our guidance. Consistent with what I stated on the last call, we continue to trend in the upper half of the range previously given but still face market uncertainties in Q4 and have less visibility during the quarter at this point in the year than we had in prior years.

And with that, I'll turn it back over to you, Eric, and we can open up for questions.

Thanks Owen, and operator, at this time we'll take questions.

(Operator Instructions) And the first question is from the line of Jim Wicklund.

The outlook is what we struggle with. Good quarter, I mean, there is no question. You surprised everybody. I think the concern has been -- you really haven't changed your outlook, which is conservative and that's good. But in looking at utilization, you're right: and Q4 on, we don't have a really good idea of what's going to happen. In terms of trenching, how do we get some handle on the confidence or sustainability or level of future work? That's a -- seems to be a big business for Canyon and the rig part isn't recovering. So how do we feel about trenching? We don't -- how do we get a handle on that, guys?

Scott?

Jim, it's Scotty here. I'll take that. We feel very good about trenching and the -- one of the Canyon vessels is booked up all the way through for nearly all of '19 from now in the trenching market. And then, we have backlog in '20 and '21 for trenching across 2 of the vessels. So all of that work secured, we feel very well. The rates, are higher than they were last year and they're holding. We're also seeing a return to some oil and gas trenching. This quarter, for instance, 60% of the trenching work undertaken is actually oil and gas trenching, not just reliance on the recent upsurge in the renewables market. So we have a good backlog in trenching. We're operating very well. Our clients like us, rates are holding. And we're quite confident in the trenching market going forward at this time.

Okay. That's very helpful because that was one unknown. And then I guess it's really just the Gulf of Mexico. Brazil is doing fine, North Sea, you know it's improving. Oversupply of rigs, you're competing against rigs. The rig stocks are up 40% year-to-date, and I guess that's on expectation of the future? You guys aren't seeing an improving rig market. How do we get warm and fuzzies about '19 for the Gulf of Mexico? Or do we?

Well -- Go ahead.

You take it Owen, that's good.

Well, I'll just say we see the same thing, but we're just trying not to get ahead of ourselves on the positive news. If you dig deeper, we're still seeing rigs going out at low rates, and until we see an inflection point in those rates, I think we're a little conservative on calling a balancing having occurred. And I think we're still a little away from that. The reason that we tend to be conservative is primarily around the Q4 and the 95 days of the Q5 in the fourth quarter. That really is the bulk of our uncertainty and why we remain a little bit cautious on our guidance.

Okay. You guys notice that consolidation needs to take place and probably will. And in every other sector over many years, when things have started to bottom, and no longer catching the falling knife, you really do start to see consolidation -- Tidewater and GulfMark in the boat business. What is consolidation look like in you all's business? Are you a buyer? Are you a seller? Are you a merger? What's the consolidation look like at your end of the range how do you guys play in that?

Let me jump in and take the Well Intervention consolidation first of all, and then I'd like to add Geoff to sort of give his view of where the drilling market comes -- is coming into play on the consolidation. On the Well Intervention side, we really don't have that many nonrig competitors. And we certainly don't have any competitors that have the breadth of capability that we do. So I don't see us as being as a consolidator of what's basically a very small niche. I think we are the dominant player in that niche and we'll continue to do so even with our assets. For me, the consolidation move for us would be to expand our business model to be more than perceived as just a vessel rental company, but to expand the service offerings around the intervention activities in a well -- both upstream and downstream so that we're offering a better value proposition to the producers and therefore able to be a little more creative on the silent contracting in part by a relatively unique niche in that part of the market. That's where I see the company going.

And Canyon? Okay, good. Go ahead.

And Canyon? Canyon I think -- well, Scotty why don't you talk about the Robotics market since you're the most connected with that.

Yes, I think there has to be some color and consolidation of the robotics industry. There is a lots of ROV companies out there that we know are suffering a lot of pain, and we're uniquely positioned because the trenching side doesn't have much competition. There's probably 1 or 2 other players that work in the trenching market, but ROVs have become a commodity and there is a number of ROVs on the beach right now for these companies. With every up, there's always been a bunch of small operators that -- small ROV companies that come to the market. We know that those guys are in pain. We know that quite a few of them have already gone under, and I'd be shocked if there's not some more consolidation or others that go under. But we're turning more to our trenching side and it's going well. And we are seeing a slight uptick in the work class availability. We are seeing that some of our main contractors on the construction side of it, some of our clients are booking work out in late '19 and 2020 that will therefore utilize our ROVs again. So a portion of our ROV's are already on their vessels. So I see quite a fallout over the next couple of years of smaller ROV companies. And a lots of the ROVs that are out there are quite aged and will no longer be able to be utilized in the market. And so it's definitely going to change, but it's going to take time. And that's my take on that.

Well I was just going to add a little more color. In the ROV market, I sort of perceive there is Tier 1 ROV providers and then there are thousands of the smaller guys. And so trying to consolidate the ROV market is a little bit difficult if you're talking about the smaller guys. So as Scotty said, they're commodities -- they spring up in good times, and they disappear in bad times. The only time that you would look at consolidating the number of smaller ROV operators is if you really wanted the extra hardware for an expanding market. We're not in that position, we have plenty of hardware to cover any market expansion. In fact, that's what I alluded to is that we have leverage there without significant cost. The Tier 1 operators, though, are really differentiated in the fact that they have engineering support, tooling, and global support behind their operations. And I think there it does make sense to possibly look for consolidation opportunities, creating a really large sustainable operation that could help -- well, help, may be the wrong word, but could be more competitive as the small ROV operators depress the market here in trying to hang on longer.

And our next question is from the line of Ian MacPherson.

Can you maybe help us frame the possibilities for Q4 for the Q4000 and Q5000? What are you considering in terms of the range of outcomes? Worst case being no work for either one of them. Is that too penal? Would you consider stacking one, so you only having to fill up 1 vessel? Would you consider taking one of them out of the Gulf of Mexico and marketing it internationally? What's on the table?

I'll take that one on. I think we shouldn't paint too bad a picture here on Q4000. Q4000's always had high utilization. And so far, this year, we've had high utilization. What we've said for a number of calls now is that market is leading more towards a spot market and we're picking up that work as it comes along. But going into Q4, we have visibility for a number of projects out there. We know we're competing against some idle rigs. We know some of those rigs are actually being taken up and moving out of the region. We track the rigs that generally give us -- that bring our rates down, so we keep a good eye on that. But there is opportunity out there. There is the obvious chance that we could get 0 work. I don't believe that will happen. And if we did, we would -- we wouldn't take one of the rigs out of the market, we would warm stack it. There was a number of projects this year that have been put off in 2018, that will go ahead in '19, where BSEE allowed some of their operators to move the P&A works by giving them a year extension on P&A type activities. So I expect that work to come back. But again, I expect it to be a bit bumpy. I expect that the rates will be somewhat lower than what we've had in the past. But then, on the backstop of that, we have the Key 5000 contract that achieves good utilization for the BP assets. We also have some unique tool that will enable some work to come to us, the 15K system, that's been proven now and it's worked on a number of high-pressure wells and that can be used off either rig and is being mobilized. We also have the Schlumberger contracts that allow for all Blue equipment to be mobilized on the equipment and allow us to move from project-to-project quite smoothly without having to mobilize equipment, demobilize equipment. So we're up against some rig competition. We have -- we are working today on both rigs. We have visibility to work, but we do not have full contracts in place at this time but we're in discussions with many.

To summarize it a little bit, I think there's 3 things that keep us conservative about the fourth quarter. We know the work is out there and the Q4000 has achieved utilization in the past. But there is 3 things that are occurring; one is we are keeping an eye on the rogue rigs and that rates that they're charging, that's one issue. Two, is the deferment by the BSEE allowing P&A to slide into next year, that's an uncertainty. And three, the clients just seem to be waiting until the last minute to make any kind of a contracting decision, which is a little abnormal for us. In the past, they usually give us a lot of lead time, but that was driven by fear of not getting in our schedule and that fear has subsided somewhat for them.

Okay. Owen, and then, I appreciate that, on the Q7000, what would be your criteria in terms of profitability to bring out the vessel earlier next year as opposed to waiting for the market to firm? You think you could get a better price, a better day rate if you withheld the vessel longer? Or do you think that's not really the point and really just lining up the vessel with the right project is really the objective?

Yes, I can take that from here, this is Geoff. We're looking for projects around that will give us stability, when we come out. We want to make sure, again, that we're not taking an unsustainable view where we're coming out for a very short project without visibility behind that. And we want to deploy the vessel to a region with a strong population of wells that will support it into the future. Again, talking before about the design capabilities of the vessel, it does have a very high transit speed, which allows it to move between regions very quickly. It also has enabling features that allow for a much higher efficiency. But usually, that's worn out against a large number of wells to really see that efficiency. So again, I don't think I'll comment specifically on the profitability but it's really more of the outlook for the region, the sustainability of the business model and the ability to get it up and running as quickly as we can there.

On the profitability side, I would add that I think there is actually strategic value in bringing the vessel out earlier rather than waiting for pricing to move. Producers are typically nervous about being a first in -- a first-in user. By having the vessel in the market shake -- go through its shakedowns and have some successful projects demonstrating its success could actually be more beneficial to longer-term pricing than waiting for the market demand to increase.

And our next question is from the line of George O'Leary.

So Q3 for you guys tends to be a stronger quarter, Q2 and Q3 generally some of your strongest quarters in the year. Seems like there's good visibility into the third quarter of this year. I guess, 2 questions, any reason why that wouldn't be the case this year? Or why Q3 wouldn't be one of your strongest quarters, if not the strongest? And then, two, on the rental side. Is there any other -- any green shoots that are emerging on the rental side that tends to be a high-margin -- There's going to be high-margin revenue dollars for you guys when those go to work, so just want to make sure I understand how you guys are thinking about that for the third and fourth quarter of the year.

I think, Erik if you answer question 1, and I'll answer question 2.

Okay, as far as -- you're correct, the third quarter has been historically been one of our strongest quarters and I -- we don't expect that to be any different this year from our standpoint, the contract that we have on schedule; and the lack of visibility that we have is towards the fourth quarter. So I think, in general, the third quarter expectations are similar to what we've had in previous years, it being one of our stronger quarters of the year.

And then, regarding the rental systems, IRS 2 just completed a project that commenced realistically in November of 2017 and got back to the base there about a week ago. We do see sporadic opportunities that come up than more sort of on a global basis. We are in talks with a number of clients for rental opportunities, but nothing is really materializing. It's not something we're holding our hats on with the systems. We'd also have to undertake some maintenance period here on IRS 2 before it's ready to go again. We are seeing quite a bit of activity regarding the 15K system, but I think mostly that work could be enablers for Q4000 and the off period for Q5000, to put those vessels to work in the Gulf of Mexico on the high-pressure wells. So it's quite sporadic, the opportunities for the rental systems. I would say there has been a few more tenders coming recently over the -- compared to recent years and I believe that's probably because more drilling rigs have been stacked -- would you agree with that, Geoff?

Yes, I'd say, you're seeing more fixtures out there and there's an enhanced activity based from the operators to go out and look for production enhancement capabilities, and that's usually the fastest way to bring something back online, is to work it over and find a well that's already there. So we are seeing enhanced interest because of that and because of that, that can -- these units, these rental units can be used from rigs that are still in the backlog overhang for an operator and can help these vessels operate more efficiently. So yes, I think that's a fair statement.

And the next question from the line of Marshall Adkins.

So last couple of quarters we've talked about green shoots in offshore. It seems like you are in a full-blown cyclical recovery, at least in the North Sea. Your operations in Brazil are killing it, those operations of yours, you're doing phenomenal there. And you beat all of our expectations. Your guidance staying the same, appears to me to be the Gulf of Mexico. So I know you've talked about the Gulf a little bit, I want to drill down a little bit more on that. And the last question, sounded like you are seeing at least interest in things in the Gulf pickup, but there is still an overhand of assets. So I'm more curious, is it a problem with just operators deciding to get busy with work or is it more of the overhang of assets that's causing you to be a little more cautious on the Gulf?

I think...

Go ahead, Scotty.

Okay.

Well, from my perspective...

Go ahead, Owen. Let's start with you, Owen, then we'll go to Scotty.

Okay. From my perspective, I think the commodity price moves here in '18. The '18 budgets were cut last year. So I think there is a little bit of hesitancy in getting ramped back up. But I do think that you are seeing the volume of work in all the markets increase. The only difficulty for us is that there is just so much oversupply, and that's going to have to get worked out -- worked off before you can really say that the service industry is in its full-blown cyclical upturn. We're in the very early stages of that but I think utilization -- I think you've seen our utilization increase but we're not seeing it yet on the rate side.

So let me just make sure I heard that right. So sounds like you're seeing activity pick up, not just in North Sea, where clearly that's tightening. Activity is also picking up in the Gulf, but there's just more capacity in the Gulf is what I just heard you say.

I think that's accurate. But I think you have to also say in the Gulf of Mexico, for the activity increase on the production enhancement side, you've also seen a proclivity of the BSEE to defer P&A work that we would have thought would've hit in 2018, now that's falling to the following year. The question is going to be, are they going to allow multiyear deferments or is it a onetime shot?

Scotty, anything you want to add to that?

Yes, I would. I think Owen hit the nail on the head early on when he mentioned about the Gulf of Mexico summary, but there's a lot of visibility for the Gulf of Mexico, certainly. But it's whether or not the work is going to take place this year, in '19 or '20. There's projects out there -- like I said earlier, Q4000 had good utilization this year. It's working today, has a project straight on the back of this project. So there is work out there. A lot of this will come down to when the operators put it in their budget for 2019. And whether or not the BSEE allows any further expansions. BSEE has already allowed the expansions, so it'd be hard-pressed to keep just moving P&As and allowing them to kick the can down the road, especially with the price of oil increasing. When operators were trying to push the P&A activity out, they were claiming that they couldn't afford it, that the market had dropped and the price of oil recovery is -- I would say, has changed BSEE's position on that. BSEE also visits both of our rigs almost on a weekly basis, so they must be looking at our assets from a P&A standpoint. There is also the rig overhang, and I'll pass that over to Geoff, because he is more attuned to that market.

No, I think what Scotty and Owen said are both good, but there's plenty of conversations going on right now and how much of those conversations turn into action, that's the question. We usually see the activity picking up, the number of bids and fixtures climbing, utilization getting stronger, and then that's when you get your margin improvement. But right now, again, we're having a lot of conversations and the timing is still flexible on some of the projects. With regard to the rig overhang, I mean, we think that from the rig side, there's been a lot of focus on efficiency and trying to bring some rationalization of the fleets. But without continued consolidation, with continued rationalization, you're still going to fight this overhang until that backlog is worn off. But even with the backlog that operators do have, they are reaching out, like I said, for the IRS rentals and really do still have a lot of interest in doing production enhancement and looking for efficient tools to do that. So it's encouraging but the timing is still to be determined.

I'll just make another point. This is only really affecting the Q4000. Q5000 has a good backlog for the few years coming up with BP. So it's Q4000 that's in the mix. And again, we've had high utilization historically, and this year it's just going to be a bit more lumpy as we go forward.

Right. Last one for me. There's a clear change of tone on the Q7000 that I'm here on this call, that I haven't heard on the past calls. So it seems like you're more confident that, that's make sense to bring out early. And you've talked a little bit about this, but just expand upon that a little. What's giving you more confidence or am I just reading your change of tone incorrectly?

Yes. I guess -- this is Geoff, obviously. We continue to look for all available opportunities for the vessel. I don't think there is a significant change of tone in the Q7000 at this point, but I can tell you that we are working every opportunity through in all the regions that we focus on, and we've expanded our marketing capabilities to cover some of the areas that weren't maybe our core areas, previously. So I think those are some of the things that have changed. But Owen and Scotty, if you have any other comments?

No, other than to say, Geoff, I think we see the opportunities, it's just a matter of getting the clients to commit, but that just seems to be a persistent, nagging issue for us. They're not as quick to move as they were in the past. But the work is there. So I guess, that's where you're reading our confidence from.

And our next question is from the line of Joe Gibney.

Just had a question on the key vessels. Just wanted to get a little more granularity. You referenced a contract starting here mid-July and then some follow-on work, it sounds like, right on the backs of it. I mean, as it stands today, notwithstanding the conversations of what you are trying to target for the rest of 3Q but I mean, is -- how much, of 3Q is currently contracted now and spoken for, for the Q4? Is it 50% of the quarter tied up at this point, just curious? And then on the Q5, with the shift in off-hire time with BP, did some of the conversations you were having on filling some of that gap on the spot side fall away or are they shifting in the fourth quarter too in terms of the timing and they are still there? Just kind of curious on that perspective?

I mean, I think we've answered this already, but the Q4000 has had high utilization so far in the year. It's contracted right now and has follow-on work and we have visibility in 2 projects. And we face competition with Q4000 against some rig dropouts. That being said, we've achieved high utilization through this year, so we'll keep fighting to get those works. I mentioned earlier, it could be 0, it could be full utilization from -- I don't know, but it's a lumpy market out there for Q4000. Q5000, the reason we continued on into this quarter with BP is the use of the 15K system. And we're still out chasing work for the Q5000. It's our contract period, and we're talking to some of our premium clients. I mentioned earlier that we're seeing some of the competition on the drilling side that's been against us moving out and has secured some work for us, so that might help us but it might not, it might not materialize. And it's spot work for the foreseeable -- for this year.

Yes, Joe, this is Owen, just trying to answer your question a little directly. I think we said earlier that the third quarter -- it looks like we -- is looking okay for the Q4000. And as Eric said, we don't anticipate the third quarter not being stronger than the second quarter as historic -- which is historically accurate. Really, it's just the fourth quarter at this point. And you're right, the Q5000 idle time typically falls in the middle of the year and it has shifted to the fourth quarter in this year which just sort of adds the uncertainty to the volume of the utilization that we can generate in Q4, given the lack of full contract and utilization on the Q4000 plus the 95 days of the Q5000. Having said that, we do see the work. We know the work is there and we are chasing it, but whether or not we could get it to fall all in Q4 and make the quarter fill in or not, just remains to be seen and that's the basis for our uncertainty.

Understood, that's helpful. Just a question on spot rates in the North Sea; you referenced a little bit more upward momentum there. Just trying triangulate a little bit here on well ops revenues, given utilization was actually a little lower than would've thought just with some of the downtime with the Gulf of Mexico. So are rates moving higher in the North Sea than you previously intimated? I think, you talked about low single digit kind of moves; it's still pretty suppressed and there's still overcapacity, which I understand, but are you seeing a little bit more rate movement of late here in the North Sea? Just curious on some perspective there?

I think the...

The rate..

I'll take it Owen. I think the summer season, from April throughout to October, we have seen year-on-year increase in the rates and we've held those rates and we continue to secure work into the fourth quarter in the North Sea. So our rates have held. But you have to remember, some of that is an uptick in coil tubing activity, some of that is an uptick in diving activity. We have seen a fair bit more diving activity this summer. So the rates are there. There's an awful lot more maintenance work ongoing in the North Sea. The well population is older and therefore requires the divers to go in and access the wells for us. So back in 2016, we couldn't see any work and a lot of work got held off and now we're seeing that work come to light. And therefore, the rate is increasing. We will see the rates, as we go back into the winter periods, taper off again. We will try and get work for the boats, and to do that, we'll have to, however, take some lever risk or lower the rates and if we can't achieve a good portion of work for the winter months, really what we've done in the last 2 years, was warm-stack the vessels -- ready to go, coast guard compliant and keep the vessels in a warm position.

Okay, helpful. Erik, just a minor item question for you. I know it dances with the stock-based compensation, but it's had a fair amount of variability over the last couple of quarters. Could help us a little bit with thinking about G&A in the back half of the year?

Yes, we -- Here in the second quarter, we did have an increase in G&A, and that was driven by our equity-based compensation plan. The increase in our stock price from $5.73 to $8.30-or-so caused a significant increase here in Q2. I think, going forward, I think that it's probably going to be a little bit lower from that depending on variability, obviously, of the equity compensation plan. That's really been the variable -- uncertain variable.

And our next question is from the line of Vebs Vaishnav.

I guess question for Owen. When you talk about the upper end of the guidance, what is the embedded utilization level for your quarter Q4 and Q5? Like, I guess, you guys talked about Q3 being same or better for Q4000 and I guess, last year you were able to fill out 70 days of non-BP work. Is that a good assumption to think about second half?

Erik, why don't you help me out here with the exact numbers that are in the forecast.

Yes, I think that's in general, we -- in our assumptions, I think overall, in the first half of the year, the Q4000 had strong utilization. I think it was about 88% or so. I think in our general guidance going forward, Q3, Q4, we have assumed certain levels of utilization that complied in our guidance. We do not see it being as strong as the first half of the year but we do have obviously, utilization assumptions in there in the third and fourth quarter.

Okay. And on Q5, is that like 70 days a good benchmark?

Yes, last year we were able to secure about 70 days on the Q5000. I think in our assumptions that we have this year we actually probably have a little bit lower, based on the fact that the schedule has move now to the fourth quarter and the uncertainty that's associated with having both vessels in the spot market at that time.

Got it. Got it. And I guess, Erik, are you -- for the other questions that 3Q should be better than 2Q, just want to make sure that, that should be the case for both the segments. Is that fair like both intervention and...

So just to clarify, we said that historically, Q3 has been one of our strongest quarters. I think last year, third quarter -- second, third and fourth quarter were all roughly in the same range. Historically, the third quarter has been one of our stronger quarters and we expect that to be one of our stronger quarters of this year. We haven't specifically given -- whether this could be stronger than the second quarter or not.

Okay, okay, okay. And just, I guess from a -- talking about Robotics, it sounds like there is a better market in second half '18, year-over-year. You would get cost improve -- obviously cost improvement in the second half '18 versus second half '17. Fair to think that EBITDA should be better in second half '18 versus second half '17 for Robotics, specifically?

Yes, I think we've said previously that our cost basis for the Robotics business is going to be better in the latter part of this year. We dropped off the Deep Cygnus area this year. We dropped off one of the hedges against the -- one of the Grand Canyons, so our cost base has come down. We're seeing good utilization against 2 of the vessels. We still have to fill out work for one of the vessels -- that's more towards the end of the Q4. So I will think year-on-year, Robotics will be equal if not better, depending on how we fill out the final pieces of utilization. We certainly have a lot more contracted work than in '17 but we still got some utilization to fill out among the vessels.

And our next question is from the line of David Smith.

I had assumed that any high-priced legacy backlog on the Q4000 was pretty much gone by the end of '17. But I just wanted to double check if that was the case -- if there was any higher-priced legacy backlog on the Q4000 going into this year?

There was 1 contract left over, the well utilization contract that was higher priced -- not highest by any means but higher than market, and that was basically for one well of work.

Did that happen in the third quarter?

No, that work has already taken place in the second quarter.

Just -- I wanted to check because the well intervention revenues were little high than I expected given the utilization breakout. It seems like pricing on the spot vessels either took a step-up or the nature of the work improved. And I know you mentioned more diving on the North Sea vessels, but utilization aside, is there anything specific to the quarter that benefited revenues that maybe wasn't present last quarter, might not repeat in the second half?

No, I think the biggest variable was, as Scotty said, the coil tubing and the diving in the North Sea, those definitely helped the rates significantly. I think from the Gulf of Mexico, I think, overall was a spot market, we did have a small legacy contract in the second quarter. I think there is probably improvements in there from Brazil with the utilization of our vessels. So I think there's a lot of different components that are aggregating to a strong revenue quarter.

All right, appreciated. And a quick follow-up. We're seeing day rates for third gen rigs in the U.K. at around 130,000 a day for term P&A work. Looks 30% better than what sixth-gen semis are getting in the U.S. Gulf. I know in the Gulf of Mexico spot market, it looks like you're getting double the rates that sixth-gen semis get for similar work. Is there any reason that ratio wouldn't be as good or better? If the Q7000 goes head to head against the rigs for U.K. P&A work?

I think -- this is Geoff, I just think in the Gulf of Mexico, I wouldn't say it's a significant -- significantly differentiated rate between our vessel and the rigs available, especially if it's a sixth-gen quarter in the -- even the Gulf of Mexico. Where we differentiate ourselves is on our services and our efficiencies. So again, taking a base vessel price plus all the other services and equipment and the things that we deliver, you know that's where we differentiate ourselves is the whole package to the client, not just the vessel.

I think, there's another metric you need to think of here. When you see these rig rates, these are just pure rig rates. Our revenues are incorporated in the services, the subsea system, the ROVs and the people associated with that. So there is a bit of a difference there than just comparing directly rig-on-rig. And then in the North Sea against the third-gen moored rigs, we don't compete against those rigs. If Q7 was to go the North Sea, it's got a huge amount of advantages against the moored rigs. So for instance, in heavier weather, just to set the anchors on a moored rig can take 5 days per location and then to unset the anchors 2 or 3 days. So totally different dynamic in the North Sea. And then our MONOCLE Vessels in the North Sea have different services, including the diving, that no rig would have either.

(Operator Instructions) Our next question is from the line of [Bill Bivelin].

I had a couple of questions. The first one was relative to the third quarter compared to the second quarter, would you please discuss the swing factors that you see? And then secondarily, what's the prognosis for improved utilization on the 10-K IRS for the remainder of the year?

As far as -- we don't necessarily give quarterly guidance. I think, in general, what we try to paint the picture here, the second half of the year, is that our third quarter with our backlog contracts, we do expect it to be a strong -- one of our stronger quarters of the year. I think in general, the real swing factor between Q2 and Q3 would probably be the outcome of the Gulf of Mexico, how that turns out on the Q4000; the Q5 is pretty set. The Well Intervention vessels in the North Sea have strong backlogs and Brazil operationally is doing well. So from that standpoint, the contract risk -- for the third quarter is low and if -- it's more of an operational performance and so that will be a driver as we compare quarters here, 90 days from now or so. As far as the IRS, Scotty?

Yes, as I think we said earlier, the IRS, the one that we do put out for rent mainly, is just coming back from a long campaign, so there is a significant maintenance period. So at this time, we're not forecasting any utilization against 10-K IRS systems for the rest of this year.

And that's primarily due to the work that needs to be done on the equipment?

Well, that's after just some basic logistics and timing, after we let the guys have some time off, then we start the maintenance period. You're going to be well into the fourth quarter, and then contracting the unit and getting utilization for it would be problematic. We do have IRS 1 available…

But Scotty, it is a prolonged maintenance period. It's a 5 years COC maintenance regulatory driven that you have to do and that's -- it incorporates months of work.

Yes, that's what I mean. By the time we have the system ready, you're going to be well into the back-end of Q4000 before we can go back out. So plenty of rental opportunities this year. So it is a significant period of maintenance.

There are no further questions at this time.

Okay, thank you very much for joining us today. We very much appreciate your interest and participation, and look forward to having you on our third quarter 2018 call in October.

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.