Helix Energy Solutions Group Inc (HLX) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to your third quarter 2018 earnings conference call. (Operator Instructions) As a reminder, today's call is being recorded, Tuesday, October 23, 2018. Now I'd like to turn the call over to Erik Staffeldt, CFO. Please go ahead, sir.

Good morning, everyone, and thanks for joining us today on our conference call for our Q3 2018 earnings release. Participating on this call for Helix today is Owen Kratz, our CEO; Scotty Sparks, our COO; Alisa Johnson, our General Counsel; Geoff Wagner, our Chief Commercial Officer; 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 our Investor Relations page on our website at www.helixesg.com. The press release could be accessed under the Press Releases tab, and the slide presentation can be accessed by clicking on today's webcast icon. Before we begin our prepared remarks, Alisa Johnson will make a statement regarding forward-looking information.

During this conference call, we anticipate making certain projections and forward-looking statements based on our current expectations. All statements in this 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 material provides a reconciliation of certain GAAP measures to -- 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?

Thank you, Alisa. Good morning, all. I will start with Slide 5, which is a high-level summary of Q3 results. Our third quarter 2018 results saw improvement as compared to the second quarter results, as improved performance from our Robotics segment was partially offset by a decline in IRS rentals and our Well Intervention segment. During the quarter, our Robotics segment benefited from 219 days of trenching operations and near full utilization of its chartered vessel fleet, including 113 days of spot vessel work. Our Well Intervention segment was negatively impacted by lower IRS rentals in Q3, 26 days of rentals in Q3 compared to 120 days in Q2. This was partially offset by higher utilization of our Well Intervention fleet. Revenues in Q3 increased to $213 million from $205 million in Q2.

Our gross profit increased in Q3 to $52 million from $43 million in Q2. Our net income increased to $27 million in Q3 from $18 million in Q2. For the quarter, we generated adjusted EBITDA of $59 million compared to $52 million in Q2 and $30 million in Q3 of 2017.

At quarter end, our cash position increased by $37 million to $325 million. In the third quarter, we generated $63 million of cash from operations. Turning to Slide 6. On a year-to-year basis, our results have improved significantly over the same period last year. Our improved results are primarily from opening 2 vessels in Brazil -- operating, I'm sorry, 2 vessels in Brazil. Only the SH1 was operational during the third quarter of 2017 and improving offshore North Sea market and cost reductions in our Robotics segment. On a year-to-date comparative basis, our revenue has increased $163 million, and our net income and EBITDA have each improved by $63 million. With the start of operations in Brazil and the near completion of our CapEx program, our fee -- our free cash flow is improved by $185 million. Turning to Slide 7. Our Well Intervention utilization on our 6 vessels increased to 91% in Q3 2018 from 88% in Q2 2018.

In Brazil, our utilization averaged 95% in Q3, in line with Q2 utilization. The Siem Helix 2 experienced a few days of unplanned maintenance time during Q3. The performance of our vessels and crews in Brazil continues to be a positive development in 2018.

In the Gulf of Mexico, utilization for the quarter was 69% compared to 74% in Q2. The Q5000 worked on the BP contract for the entire quarter, completing its annual commitment on October 3.

The Q4000 was 59% utilized in the quarter compared to 76% in Q2. The vessel was idle at the end of the quarter between projects. Our North Sea vessels were utilized 99% in Q3 compared to 95% in Q2. During the quarter, both vessels primarily operated in diving intervention mode. Our Robotic segment also benefited from increased activity in the U.K. market during the quarter.

ROV vessel utilization increased to 98% from 70% with 113 days of spot vessels in Q3. Utilization on our ROVs increased to 42% from 38%, with 219 days of trenching work in Q3. Production Facilities continue to be a steady performer, operating at full rates for the quarter. Now on to Slide 8. From a balance sheet perspective, our cash levels at quarter end increased to $325 million from $288 million at the end of Q2. We generated $63 million of cash from our operations, offset by capital expenditures of $13 million and $13 million in scheduled principal payments in connection with our financing. Our net debt position decreased to $123 million from $171 million in Q2.

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

Thanks, Owen. And good morning, everyone. Moving on to Slide 10. Q3 has been one of our best quarters in recent times. We had utilization across all of our business lines in the company with very good upside performance. The quarter was recordable incident free in terms of safety performance with our TRIR at lowest levels ever achieved. Across the fleet, we conducted works on 27 wells globally. Revenue increased in the third quarter, in line with our performance, to $213 million compared to $205 million in the second quarter. Gross profit margin increased to 24%, resulting in a profit of $52 million, increasing from $43 million in Q2.

In the North Sea Intervention business, combined vessel utilization of 99% was achieved throughout the quarter with no downtime. Both vessels are contracted at higher seasonal rates, with most wells requiring diving services.

In the Gulf of Mexico, the Q5000 had another strong quarter with 0 downtime. The Q4000 had some gaps between projects and achieved 59% utilization, undertaking preventive maintenance while between projects. Performance in Brazil was strong, both vessels performed very well, achieving high utilization. The SH1 achieved 100% utilization and the SH2 achieved 90% utilization. Helix ranks #2 as the same contract is in the Petrobras ranking system for safety, efficiency and performance.

Robotics achieved very good utilization of near 100% for all 3 Grand Canyon vessels, since the vessels working full-time on trenching projects on a mix of oil and gas trenching and renewables trenching in the North Sea. We also enabled 113 days of project works globally on spot vessels. Slide 11 provides a more detailed review of our operations for our Well Intervention business in the Gulf of Mexico. The Q5000 was 100% utilized for BP throughout the quarter with 0 downtime, working on 3 well locations to undertake production-enhancement activities. In early October, the vessel concluded its yearly campaign with BP. The Q4000 achieved only 59% utilization. The vessel performed well with no commercial downtime working on an abandoned program for 1 client and a production-enhancement project for another client. IRS 1 and 2 was stored at our facility in Houston with IRS 2 undertaking preventive maintenance following completion of the campaign in Africa earlier this year. The Helix-OneSubsea alliance 15K IRS remain contracted to BP on the Q5000 for the first well in the quarter and was then demobilized to the OneSubsea facility for maintenance.

Moving to Slide 12. Our North Sea Well Intervention business experienced a good quarter with both vessels working virtually the entire quarter with almost 0 commercial downtime. Both vessels worked at stronger seasonal rates during the quarter, working 93% in diving mode. The vessels worked on 13 wells during the quarter, conducting a mix of the abandonment work and production-enhancement programs.

The Well Enhancer worked 100% of the quarter, working primarily for 1 client on well maintenance and production-enhancement projects. The Seawell worked 98% of the quarter working for 2 clients on pre-P&A programs.

Moving to Slide 13. In Brazil, our operations for Petrobras continue to go very well and we achieved another strong quarter. Both vessels continue to perform well for Petrobras. We're extremely pleased to be ranked in second place in the Petrobras ranking system of 10 drilling contractors based on safety, efficiency and performance.

The Siem Helix 1 achieved 100% utilization working on free wells in the quarter, and the Siem Helix 2 was utilized 90% working on 6 wells. Unfortunately, the vessel had 2 downtime events during the quarter due to testing of topside manifold system and an unplanned change-out of the main power wire. IRS 3 continues to be stored at our facility in Brazil for possible stand-alone and rental opportunities.

Moving on to Slide 14 for our Robotics review. Q3 was a good quarter for Robotics. It was one of their best in recent times, with vessel chartered fleet utilization at almost 100%, with 2 vessels 100% utilized on trenching projects in the North Sea and 1 vessel contracted on a work to work project in the Gulf of Mexico. We also contracted 113 days globally on the 5 -- on 5 project-oriented spot market vessels taken on back-to-back with client requirements. One of the contracts includes utilization for the ROVDrill units and is continuing into the fourth quarter.

Grand Canyon work in the North Sea completing 92 days of utilization working on trenching projects. Grand Canyon 2, located in the Gulf of Mexico, worked 90 days, concluding the short construction scope and then completed the walk to work project for the remainder of the quarter. Grand Canyon III had 92-day utilization, performing works on trenching projects. Under our alliance, we also contracted 2 ROV units to Schlumberger for the first time in the APAC region to undertake support on a pumping project.

As of Slide 15, I'll leave this slide detail and the vessels' ROV trenching utilization for your reference. I'll now turn the call over to Erik for a discussion on the balance sheet and our 2018 outlook.

Thanks, Scotty. Moving to Slide 17, it outlines our debt instruments and the maturity profile September 30, 2018. Our total funded debt at September 30 was $489 million with a reduction of $13 million from our June 30 balance for scheduled principal payment during the quarter. Slide 18 provides an update of key balance sheet metrics, including growth in net debt levels at year end in September 30, 2018.

Our net debt in Q3 decreased to $123 million from $171 million in Q2. The decrease in net debt is being attributable primarily to $63 million of cash generated by operations offset by $13 million of CapEx. Our cash position at quarter-end increased to $325 million. Our net debt-to-book capitalization was 7%.

Moving over to Slide 20, which provides an outlook on 2018. We are adjusting our forecast for 2018 EBITDA to a range of $148 million to $160 million. This adjustment is based on our year-to-date results and our estimates for the fourth quarter. This rate includes some keys assumptions and estimates. During the fourth quarter, we expect our operations in the North Sea to be impacted by normal slowdown in activity during the winter months. This will impact both our Well Intervention and Robotics operations in the North Sea. Projects on the Seawell are expected to run into mid-December and Well Enhancer into early December. In Brazil, operations on Siem Helix 1 and 2 continue at a high level, and we're assuming the same in the fourth quarter.

Activity levels in the Gulf of Mexico Well Intervention market continue to be weak with most opportunities falling into 2019. Any significant variation for these assumptions could cause our EBITDA to fall outside of the range provided.

Moving to Slide 21. Our 2018 backlog remains at $1.2 million of which $120 million is currently scheduled and estimated to be completed in the remainder of 2018. Our backlog is heavily weighted to the BP Q5000 contract and 2 Petrobras contract and the Helix Producer I contract. In the Gulf of Mexico Well Intervention market, the Q4000 currently has some work in Q4 with limited opportunities. The vessel entered the quarter idle and is scheduled to mobilize for 5 well project in December. The Q5000 completed its 207-day BP. Vessel has some work in Q4 and identified opportunities. We have in our forecast approximately 50% utilization across both vessels in the region. The IRS rentals systems are currently idle with potential work on 15K system late in the quarter.

In the North Sea Well Intervention market, we're assuming a high-level activity for our vessels into December and we expect continued seasonal weakness during the winter months.

Moving to Slide 22, in Robotics we expect a slowdown in activity with the onset of the winter months in the North Sea.

Over to Slide 23. The CapEx for the year forecasted approximately $135 million, subject to timing of deliveries with most of the capital for the continuing construction on the Q7000, including a forecasted shipyard payment in Q4.

Our remaining debt payments for 2018 approximate $10 million, with scheduled payments on the Q5000 m-term loan. I'll skip Slide 25 and leave it for your reference. I'll now turn the call over to Geoff for market outlook.

Thanks, Erik, and good morning, everyone. I'll spend the next few minutes describing our present market outlook and highlight some of the developments for Helix.

Regarding customer sentiment, Brent front-month contract prices have increased recently. And speaking with our customers it appears they're interested in bringing known production back online, and we're having many discussions about opportunities for our services as the industry is entering the budgeting season. While there is still plenty of sensitivity to price, an increase in the volume in serious conversations has been witnessed.

In the North Sea and Brazil, we are also encouraged by the current trend of increasing divestment of assets from the majors to operators that place a higher priority on enhanced recovery, thereby requiring more production enhancement and Well Intervention services. For the Q7000, we continue to pursue programs in West Africa, Brazil and the North Sea where the design capabilities of the Q7000 should offer the market significant efficiency gains over our competitors. Although still a rough market in the Gulf of Mexico, we are hopeful that our assets and our industry experience will stand us out from the crowd. We are very into operating on a spot market basis and our ability to turn around our assets in a relatively short time between campaigns can bring good value to our customers. On the downside, consolidation of oil companies, increased client financial discipline, and competition from drilling contractors continues to negatively influence our ability to build significant additional backlog on our Gulf of Mexico assets.

In the U.K. North Sea, there is less competition from drilling units due to the unique capability of services we provide in the region. We currently have visibility on both the Seawell and the Well Enhancer into December, and we're starting to build out our 2019 schedules. We see customer demand continuing to increase and pricing trends remain positive. Regarding Canyon, activity is trending similar from 2018 to 2019, with a potential upside bias due to higher commodity prices and increase confidence in project economics. Trenching remains strong, and we have engaged several vessels on opportunity -- I'm sorry, excuse me, we have engaged several vessels of opportunity on a pay-as-you-go basis in trenching and IRM work to meet periods of demand in excess of our base contracted fleet. We have good visibility of our Canyon future work when entering the present budgeting season. And our cost basis for 2019 will be improved due to the expiring of the Grand Canyon 2 hedge and the lack of carrying the Deep Cygnus during the year.

To summarize our overall market outlook, we're seeing pockets of improvement, but we are not yet at the point to see all boats rising to the tide. We continue to evaluate ways to leverage our assets to improve our margins and increase the value we deliver to our clients.

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

Thanks, Geoff. Well, 2018 is gone pretty much as we expected. Operationally, Helix is performing well, controlling costs, achieving utilization for the year that we expected to see and reducing downtime. The result is improving margins and cash flow. We're focusing on finding contract terms that should motivate our clients to budget more work. The work is there to be done and we're hopeful that it should pick up. Q3 results exceeded expectations, primarily as the result of BP work originally expected to be done in Q4 that was rescheduled into Q3, thus improving utilization on the Q5000 for the third quarter. All year we've been pointing to uncertainty we had for the Q4 in the Gulf of Mexico during the second half of the year. We've done well-to-book work for the fourth quarter, but this shift in scheduled work resulting in the stronger Q3 will now show up in Q4. However, my feeling is that it would be a mistake to read too much into a weaker Q4. Based on discussions with customers, our feel for the work in 2019 at this time is stronger than the visibility of work for 2018 that we had at this time a year ago. Helix as well as our clients are in the early phases of our budgeting process and therefore it's probably too early to provide details. Nonetheless, based on a number of factors, including an overall improving macroeconomic backdrop, it's our expectation at this time that 2019 will continue to trend for year-over-year improving results.

Every one of our business operations is up from 2017, with the sole exception of the Well Intervention results in the Gulf of Mexico. However, we do expect the Q4000 and Q5000 results in 2019 to be improved over this year. Just to give a bit of color by region in business segment, we expect that U.K. will continue to be strong for Well Intervention. In the Gulf of Mexico, the market continues to bounce along the bottom. Commodity prices have recovered, but this is not yet translated into demand sufficient to absorb supply overhang. Capital allocation by our clients is improving but not yet impacting the offshore conventional market to the degree that it will in the future. Utilization and pricing is still challenged. As our -- as mentioned, we currently anticipate improved results from the Q4000 and the Q5000 in the Gulf of Mexico. In Brazil, both the 2 chartered vessels there and our operations have performed very well in 2018. We did have a period of maintenance on the SH1 and that should repeat in 2019 on the SH 2. We also expect our Robotic trenching to realize another strong year. This strengthening of our Robotics will be further improved with the roll off of another charter hedge midyear as well as the high-cost charter due to roll over in Q4. We expect a softening in our 2019 results from our production facilities' business due to the end of the term of our existing HFRS contract in March and increased competition for that work.

We have previously stated our intentions to bring the Q7000 to market, ahead of our option to defer delivery until 2020. While we don't have a contract to announce at this time, we're continuing discussions that would make an early entry to the market possible. We hope to be able to include additional details in the guidance that we normally provide on the Q4 earnings call in the first quarter of 2019. We do see improving sentiment towards the traction of funds to offshore. We also see well work that's not been addressed for some time now that really needs to be done. We're seeing acquisition activity of producers seeking to buy reserves, and this is typical historically near the end of down cycle where there's been a lack of drilling for reserves. I'd stop short of predicting an upcycle for 2019, but it certainly feels to me that we're much nearer to that than we were a year ago. Our balance sheet is in good shape, and we're cash flow positive. We just have -- we have just the final payments to make on the Q7000. After that we should be strongly cash positive.

It continues to be our plan to further reduce debt while being watchful for opportunities ahead of the cycle that will be beneficial to our shareholders. From my perspective, in general, we're feeling good about 2019 and more optimistic than we were going into 2018. And with that, I'll turn it back over to you, Erik.

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

(Operator Instructions) And we do have a few questions queued up. We'll proceed with our first one from the line of Marshall Adkins.

I want to get drilled down into the cadence of the next few quarters. Your guidance suggest a pretty meaningful reduction in Q4 from this quarter, going from roughly $60 million EBITDA down to more or less $15 million at the midpoint. So number one, I just want to make sure I'm doing my math right. Number 2, I'm guessing we should assume going into Q1 some type of recovery. Then obviously for the full year it sounds like things look modestly better than '18 at this stage. Certainly, the oil prices where they are that makes a lot of sense to me. But for the next couple of quarters, could you help us with the cadence of what we should think about in our modeling process?

Yes, Marshall, this is Erik. I'll start with 2018 and then I'll pass it to Owen for high level on 2019. But your numbers are directionally correct. I think what we're seeing here in the fourth quarter is the slowdown in the North Sea is going to affect our operations in Well Intervention as well as Robotics. So we expect to see decrease in that area. And then the second area where we expect to see downturn is really in the Gulf of Mexico, with both vessels working the spot market, both the Q4000 and the Q5000. In addition to that, with activity levels being low in the fourth quarter, the visibility being low, that can be an area that's challenged. So those are really the 2 main, you could say, areas that are driving reduction from quarter-to-quarter here in the fourth quarter of '18. And then I don't know if you want to add color to that and then as you -- as we look towards '19?

Well, I think we've always been concerned about the lack of visibility of work for the Q4000 in second half of the year. That's really the big variable. 59% utilization in Q3 shows that the work is just spotty out there.

I think it was -- we were doing really well in contracting work for the fourth quarter, but then BP shifted their work into the Q3, which took the fourth quarter back down. But I think that's just third -- fourth quarter. See -- a lot of this is seasonal. And what I've seen this year is that -- an improvement on our expectation is that we thought that the market was going to back to a much more seasonal basis. And I think what we've seen this year is that the season is expanding again. The both vessels in the North Sea are working into December, and we didn't expect that to happen. And I think right now it looks like the early visibility shows that they're going to be doing the work earlier next year than they did this year. So the season is expanding again. So that's why I think next year visibility is much stronger than -- and we don't have the same concerns about the weakness that we had this year. You have anything to add to that?

Yes, I think we should add, going into next year January 1, we get back on hire with BP. We go on hire, the 15K systems contract to go back out with BP as well. So Q1 we have visibility for Q4000 into Q1. We have BP back on contracts. And like you've said, we have a visibility towards an earlier start in the North Sea. So I've been expecting into '19.

As a follow-up there, Owen, the offshore rig business now seems to be rearing its head very slightly. Directionally, I think things seem to be improving there. It -- just give me your sense of how that might impact your business? Are you seeing any impact at all from the modest step up of -- in the offshore drilling side?

Well, I think you're starting to hear a lot of producers talking about going back to drilling, and I think that's promoted by the low rig rates. The rig rates definitely have a cap on our pricing, as they do. They've got a cap on everybody's pricing. But our only exposure to rigs from a competitive standpoint is in the Gulf of Mexico with the Q4000. That has not been a contributing factor to the utilization issues on the Q4000 because there simply just isn't work. We're not losing any work to rigs. I think going forward, I think the focus on the drillers is going to be getting their rigs back to work, which I think is good for us, it's a less focus on what we do, the emphasis is going to be on adding incremental reserves, which historically, coming out of a down cycle, we're the first to benefit from that. In the North Sea, we don't compete against rigs. So we have better pricing leverage there. I don't know, it's a little early to talk. If you look at our results, our utilization is not bad outside of the Q4000. It's just the rates are depressed. So when we're able to start getting the pricing leverage back is probably a little early to call, but I think there's some pricing leverage for 2019 we can see.

I think, right, (inaudible) is that once the utilization really starts to climb the rigs, you look -- as we said, we're competing in the Gulf of Mexico against the marginal rig. And it's the marginal rigs that's always held out, right? If you're not going to reactivate your the rig unless you have firm contract. That's a different market too that we play in. We're very good at the spot market and turning around small projects that are very short duration that most drilling units wouldn't reactivate for. So I do think that's a differentiation in what we have in the market that we compete in.

We'll get to our next question on the line from Ian MacPherson.

You gave us a sense as to what the Q4 utilization looks like for the North Sea. But given the sharp seasonality for fourth quarter Well Intervention revenues, I was wondering if you could also fill in the blanks for us a little bit with what the utilization bookings could be for the Q4000 and the Q5000 this quarter?

Yes, I think we spoke to that. Right now, I think the way that we see utilization for both vessels combined to be in the 50% range in the Gulf of Mexico for the fourth quarter.

Okay. And how booked would you -- I mean, how confident is that right now?

That's come to work. So...

Okay, understood. And then I wanted to also follow up. Owen, you mentioned that you have a bit of a roll off in profitability from your production facilities revenue next year as your well response -- retainer contract rolls, that's the wrong term, I'm sorry. But could you color that for us a little bit more, the magnitude of that as that is retendered or repriced?

We're restricted by CA with the HFRS from discussing the terms of it. I do expect -- I mean, we're at the end of the contract. We had some capital investment at the beginning, which has been repaid and a good return on it. The producers are looking for assistance on how to go forward, and we're in discussions with them, and that's about the most I can say about it.

Fair enough. In that case, I'll ask for another follow up since that one was an empty shot. Maybe if you could talk about the -- just the durability of the recovery that you're seeing for Canyon? Obviously, Q4 seasonality notwithstanding, I think that you all spoke to improving demand visibility both for trenching and for IRM. Can you describe what -- like, how much pricing and utilization factored into the outlook for '19? And how much of a improvement compared to Well Intervention? Sort of where we are in the cycle there just to get a little more context?

I'll take that one. And I think from '18 to '19, we will see very similar utilization across the Canyon fleet. I think, pricing and certainly the IRM portion of that will be stable. We have a very good backlog of trenching work going into next year and a lot of that work is contracted at similar, if not slightly better trenching rates going into '19. I think, the lightest difference we're going to see for Canyon getting to next year is we have the drop off going into '19 but not carrying the Deep Cygnus. The Deep Cygnus had 0 work in Q1 of 2018. And then, we drop off one of the hedges against the Grand Canyon and we also dropped of the Grand Canyon 1 in Q4 of next year. So our cost base realigns to where we see Canyons recovering. We won't be handling these vessel cost with no work or less handle a vessel cost with no work.

I'd just address the sustainability, I think we're looking at a multi-year outlook of strong trenching. IRM, more uncertain. The cost reductions are going to continue, and of course, they're permanent.

Yes, I mean, we have -- that's correct. We have trenching backlog into 2022. So there's a good backlog and stronger visibility towards trenching that's a niche play for us. Our cost can further reduce as we go further out past '19 so...

I also might add that we've only had 1 bad debt occurrence in the company going through this downtime, which is pretty remarkable and that did impact Canyon negatively this year, so that should not repeat.

We'll get to our next question on the line. It's in the line of a George O'Leary.

Just given you guys provided a little color around 2019, I want to prod a little bit further, If I could. Just curious, given you guys had the $20 million in reduction to EBITDA from low cost this year, should we think of a starting point? Do you think about 2019 is excluding those costs? Or are there some incremental costs that are amortized over the life of that contract that will still be reflected in 2019?

Yes, George, the mobilization cost is associated with the Petrobras contract that we talked about earlier this year. That will occur through -- during the years of the contract, the original term of the contract. So that $20 million that you referenced, it is -- we'll be recurring and then 2019.

Got it, that's very helpful. And then I thought the commentary around front-month contract prices was interesting. It's first time in a while we've heard much about pricing and potential pricing increases from you guys. So just curious if you could speak to maybe the regions of strength and maybe regions of weakness? And any color on, maybe magnitude of day rates. I realized you'll have to be general. But just any incremental color there would be helpful.

I'll start, and Scotty can chip in because I don't know what more I can say beyond -- we said that the North Sea is where we have our most pricing leverage. We've seen 2 incremental years of modest price increase there. There may be another year of little bit more, but the pricing is becoming pretty normalized in the North Sea.

Gulf of Mexico pricing is still very depressed, and that's a result of the rig overhangs. I think there is room this year for us to start exercising some upward movement there, but it's early in the budgeting process and how much we would -- how much thought we would put into that. I don't think we've determined yet. And Brazil pricing, our third market, is -- the pricing is already set. So there are results are more operationally focused. On the Robotics side, I wouldn't expect to see much movement on the IRM side. There is still gross oversupply in that market. I think we're doing fairly well just because of the quality of our service, not how cheap we are because everybody's cheap there. Trenching, we're still the leader. Pricing is strong there. I don't see incremental additional increase in the pricing in the trenching but I do see maintenance of the current level.

There's not much I can add to that. That's correct. Yes.

Do you agree with me one in a row.

Yes.

All right, I appreciate the color there. And then, I just want to make sure, I'm thinking about the Robotics correctly, moving forward, the pricing color was helpful. But you've taken a lot of cost out of the system there, taking out hedges, taking out contracts on vessels to see who you can play more in the spot market. Should Q4 '18 plush, and given the fact that you guys have a lot of trenching work in hand, should we think about a continued trajectory upward for that business maybe as we move beyond Q4 '18. I realized there will be some seasonality in Q4 '18. But just Robotics generally, now sitting in positive territory, should I be modeling that growing throughout 2019?

Yes, I think you can. From a bottom line, you'll see growth in Canyon. Like we said, our cost come down significantly year-over-year. Our utilization should be -- or is looking to be in line with this year. So there's definitely going to be an increase. As Owen said, we had a bad debt provision on -- with Canyon this year, so that's not there. So we certainly see Canyon -- if you go back couple of years, there's been quite a big increase from where they've. This is their best quarter since 2015, and we expect improvement in 2019. I wouldn't expect that improvement to be vast because the IRM side of the business is still subdued significantly, and people have put investments out as low as possible. Plus, operators haven't really started undertaking maintenance work in the field yet on the subsea perspective.

I'd like to [indiscernible] because I think since we're talking about prices, they're a little misnomer. It's not all about price. During downturns, you really start -- margin is the first thing to go, but then you start competing on contract terms. The trick for us in achieving utilization and we're doing very well at it is to put out contracting terms that incentivize the clients to use us. Now the double-edged sword there is that you are in effect taking on extra risk, and it's very important to exercise those contracting terms without diminishing your margin. And I think if you look at our month -- our quarter-over-quarter, our margins are trending up along with our utilization. So I'm sort of -- I take heart in the fact that I think the way that we're creatively contracting with our clients outside of cost and the way that we're managing those risks is being done very well. And really expand on that concept is one of the primary focuses of Geoff Wagner here, which is to expand the creative contracting possibilities that we can put into the market because the problem in the market is just not enough work. But we know the work is there, it's just how they would incentivize the clients to do it and you do that through the contracting.

We'll get our next question on the line from James Wicklund.

You talk about -- you're bringing down your net debt, you're generating a lot of free cash flow, you kind of mentioned dry powder. Clearly, we're coming out of one of the worst downturns in the history of mankind. Your stock, your currency is doing exceptionally well this year. So it just seems that you're my wife with an open credit card in Harry Winston's jewelry store.

Which will never happen by the way.

What do you go shopping for? What would you like to come out of this downturn owning or owning more off that you don't have or don't have enough of now? And you can take that whatever concept you want to.

Yes, strategically, I'm the big fan of organic growth over acquisition. But if you look at our history, we rolled up the Gulf of Mexico under Cal Dive pretty successfully. Looking forward, coming out of this down cycle I'm certainly looking around, there's not that great of a consolidation opportunity in our niche. We are so dominant in it. And I think you have to watch out if you don't want to be 100% of a niche. But for a long time especially, as we rebuild the company. After the 2009 period, and we said the first thing that we were going to do strategically was to create the best-in-class asset-based floating assets on (inaudible) that we could defend our niche. We were now reaching the end of that process. The second phase is then adding services surrounding those hard assets, softer assets with less capital cost that allow us to both generate greater utilization and tap more into the value creation that our assets are capable of. So having said all of that, I am looking at acquisition opportunity that are in related niches but not consolidation plays.

Okay, but that's interesting. My follow-up, if I could, I know you're doing some trenching in the renewables business, I would assume. That first part that you would be looking maybe outside of oil and gas and into renewables. But the second part of my question and you can address that is, so far the recovery offshore has been shallow water, okay? It's been a surprise. North Sea has been more floaters and high-spec rigs. So the North Sea is stereotypical, but globally, it's been a shallow water lift to a market. You guys are primarily deep, do you really need Deepwater to come back and shallow water doing enough for you to bridge you? And is that a market, like renewables, that might be more interesting going forward since it's such a big class of rigs that revenue opportunity that's great but the class of rigs are so much larger?

Okay. I'll take that one. And firstly, we do an awful lot of work, as you know, in the North Sea. We can work very [indiscernible] in the North Sea. And we have the diving niche there also. And a good portion of our trenching, probably 60% of our current trenching backlog is -- and work that was undertaken this year is in renewables or more so large interconnect power cables and that's very shallow sometimes in working of 40 feet of water there. So we're already have a good plan to the shallow side. The deep side, Q5000 is under contract to BP, the 2 vessels in Brazil are obviously under contract, and that leaves us 2 Deepwater assets. Q4000, obviously, had its time here in the Gulf, and we'll stay in the Gulf and then Q7000 is available to the market. But Q7000 also is very shallow water capable. We can run a Q7000 in reasonably water depths there. Perhaps pass on to Geoff to aid some of the keystone collections.

Yes, I think that's a (inaudible) key point I wanted to make as well. The Q7, when you think about it, don't about it only as it competing with drillships. I mean this is -- this will go all the way down to jack-up range and can definitely work in those types of water depths. So it really does have a full operating envelope. I mean, this has a high angle disconnect and a lot more angle of deviation for the riser -- a smaller riser. So it really is a very functional asset across the full state. So even the Q4 and Q7, both I'd say, we have a much wider range than you may have visibility to.

But there's also another metric to bear in mind here. Outside of BP, which is nearly all production enhancement work for Q5000, the rest of our 1 intervention asset, so a rough estimate is 50% is against abandonment work or pre-abandonment work and 50% against production enhancement activities. They're not really water-depth related. The abandonment work happens as of when the oil runs out in the fields and the client is forced to spend the money from over regulatory or an environment point of view or the ideal line in the Gulf of Mexico. And production enhancement is to keep the production flowing, it's usually well maintenance. So not really water depth related as far side of the construction and drilling type of assets you're talking about.

So you can stay busy with the offshore market we have today, but deepwater rig pricing and activity is going to have to come back for you to get pricing across the board and really crush it, is that fair summary?

Well, the Q4000, yes. I mean, the Q4000 is really the unit that has pricing pressure against drilling units.

(Operator Instructions) And we have another question queued up on the line from the line of Bill Dezellem.

I have a couple of questions. First of all, OneSubsea has not come up in great detail on the call. Would you please bring us up to speed what you're seeing there? And then secondarily, you had mentioned that there were 2 vessels that you had contracted for Schlumberger I believe, you said in the Asia PAC region. Would you discuss that phenomenon and the degree to which you think that might repeat?

Sure. I'd start with the latter part of that question. The 2 units that we're talking about in APAC were actually 2 RV units. Schlumberger provided a vessel for a pumping job in Malaysia, and we contracted on the V. Alliance to put 2 [RVs] on both the vessels. So it's actually the first time with the alliance truly outside of the Gulf of Mexico that we've been supporting each other in a different region. So hopefully, that covers that up it wasn't 2 vessels and 2 RVs. Regarding the alliance in the Gulf of Mexico, nearly all of the work on Q4000 is contracted as an integrated approach with mostly Schlumberger services on board. So that's all business as usual. It is fully integrated, allows quicker mobilizations and demobilizations and less cost in declines and that's safety factors by having the same teams on the vessel all the time. Q7000 will certainly come to the market as an integrated approach. We'll be mobilizing equipment on board before it leaves the yard. And that will come there and be able to offer a contract, a 1-contract approach to the market also. And then our 15K system, has a pretty good year. It messed up but its utilization expectations and its also contracted for a minimum 120 days on the start of the BP campaign on Q5000 commencing January 1. So still good activity going on.

That is helpful. But are you expecting or seeing the operators finding the integrated services with OneSubsea to be an appealing alternative at this point? Or is it really still too early and they're just not doing enough work to find much of anything appealing quite yet?

Like I said, I think it is appealing to them, nearly every contract this year for the Q4000 has had an integrated approach. It reduces the overall time on an average well program by 3 or 4 days, just based on mobilizing equipments and demobilizing equipment. So it has that benefit that allows the procurement teams and the operators to contract directly through us and not many segments or different companies on 1 asset. So we're definitely seeing the benefits. It's locked adding pricing at this time. It's adding utilization and more integrated approach from that point.

And we'll get to our next question from the line of David Smith.

Just thinking about the pricing discussions for the Q7000, is it fair to think there is a disconnect between the pricing operators have in mind today versus pricing you expect that vessel could earn after executing the few programs and demonstrating its capabilities?

I think that every vessel comes out of the gate and then we prove our efficiencies. The efficiencies that we have definitely settled in and improved over time. And I don't think that it changes pricing expectations on our side. It's definitely an ability to work with the spot market to prove out to an operator the value that they're receiving and then in the beginning, taking on enough exposure and risk with the client to work hand-in-hand with them. So I think just summarizing that was we expected to come out, we will follow the market. As we work our way up, we will prove our efficiencies to our clients. And then that value that's proven should be reflected over time.

Makes perfect sense. And when I look at the semisubmersibles working up to U.K. this year it looks like over 40% of that demand in 2018 is just for plug and abandonment and workovers. I imagine that's a pretty juicy target for the Q7000, especially as we're seeing rates keep up for the U.K. semis. So I was just curious how you think about the trade-off between trying to build term work for the Q7000 versus shorter-term programs to demonstrate capabilities and earn that pricing leverage?

Yes. And again, that's a balancing act between the 2. I mean, we're obviously looking for stability, but we're also looking for margins. We do find that our efficiencies in -- near the integrated approach to shorter mobilization and demobilization periods, the ability to contract and gain these efficiencies and deliver them are realized over the spot market as well as turn markets. So we'll have to justify what we do at that time.

And could we see that creative contracting approach for some of the initial work for the Q7000?

Yes, we're looking at it across the board.

Some of the abandonment programs in the North Sea were in the place where we can offer diving services from the smaller vessels and Canyon-related services also. (inaudible) abandonment program.

And Mr. Stafford, we have no further questions on the line. I'll turn it back to you for any closing remarks.

Thanks for joining us today. We very much appreciate your interest and participation and look forward to having you on our fourth quarter 2018 call in February of 2019. Thank you.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask you to please disconnect your lines. Have a good day, everyone.