Helix Energy Solutions Group, Inc. (HLX) Q3 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Helix Energy Solutions Third Quarter 2014 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded today, Tuesday, October 21, 2014. I would now like to turn the conference over to Terrence Jamerson, Director of Finance and Investor Relations. Please go ahead.

Good morning, everyone and thanks for joining us today for our conference call on our Q3 2014 earnings release. Participating on this call for Helix today is Owen Kratz, our CEO; Tony Tripodo, CFO; Alisa Johnson, our General Counsel; and Erik Staffeldt, our Finance and Treasury Director. Cliff Chamblee, our Chief Operating Officer is off on a well-deserved vacation so I’ll serve in his place to provide the operational update. Hopefully you all have had an opportunity to review our press release and related slide presentation released last night. If you do not have a copy of these materials both can be accessed through the Investor Relations page on our website at www.helixesg.com. The press release can be accessed under the Press Releases tab and the slide presentation can be accessed by clicking on today’s webcast icon. Before we begin our prepared remarks, Alisa Johnson will make a statement regarding forward-looking information.

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 that are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual future results may differ materially from our projections and forward-looking statements due to a number and 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, 2013. 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 non-GAAP measures to comparable GAAP financial measures. A 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. Moving right over to slide five, which is a high level summary of Q3 results, I have to say we are very pleased with Q3 results. The $137 million of EBITDA and $0.71 of earnings per share represents a significant increase over a very good Q2, which came at a $109 million of EBITDA and $0.55 per share of EPS. Revenues increased to $341 million in Q3, up from $306 million in the prior quarter. Both the well intervention and the robotics business contributed to the 12% sequential increase in revenues. I believe Q3 represents good results for both well intervention and robotics businesses and demonstrates the earnings ability of our existing assets and service stays at high levels of demand and utilization. Turning to slide six, high utilization of our well intervention fleet at 97% in the third quarter continues to be a major factor in our strong operating results. In addition our financial results were bolstered by a high revenue project, performed by the Skandi Constructor off Canada. The combination of these two factors generated unusually high gross profit margins at 41% for Q3. The robotics business turned its best result since the Canyon business was acquired by Helix in the early 2000. 90% utilization of the long-term chartered fleet combined with a high level of trenching activity plus a 197 days as spot vessel utilization were the key factors in producing these strong results. As we previously indicated we normally expect Q3 to be our best quarter for robotics due to milder weather conditions in the North Sea. On to slide seven, from a balance sheet perspective our cash and liquidity levels continue to remain very strong. Cash increased to $547 million and that along with the unused portion of our credit facility kept total liquidity at a fairly consistent level of approximately $1.1 billion. Net debt at quarter end decreased and was roughly zero. I will now turn the call over to Terrence for an in-depth discussion of our contracting service results. Terrence.

As Owen said Q3 was another great quarter for Helix, putting us in a strong position for 2014. Especially given the fact that historically given that Q4 has been our weaker quarter compared to the previous Q2 and Q3. This year should be no different, given the fact that two of our vessels were in a drydock this quarter which I will touch on in the upcoming slide. Through the first nine months of the year we should expect revenues and profits to be higher compared to the same period in 2013, due to the addition of the H534 and also having a full three quarters of the Skandi Constructor. However the business units have done a great job of also improving margins each quarter this year as well as year-to-date 2014 versus last year. As Owen alluded to earlier in his opening remarks the two main catalysts being one, sustained levels of high utilization across the entire fleet as well as across the greater number of assets and two successful well interventions performed by the Skandi Constructor. This quarter she wrapped up a job in Canada and if you recall at the beginning of the year she finished up the job down in West Africa. Also our production facilities continue to produce a consistent return. For the year this business has yielded on average approximately $24 million in revenue each quarter with roughly 50% profit margins. Moving on to slide 10, in the Gulf of Mexico we have had high utilization on both of our vessels and the standalone IRS unit throughout the year. For Q3 the Q4000 had another strong quarter with 89% utilization. She was down approximately 10 days near the end of July for thruster repairs. We continue to be pleased with the performance of the…

Thanks Terrence and good morning. Please turn to slide 14. Slide 14 provides an illustration of our debt mature, instrument maturity profile at September 30th. Debt reduction during the quarter was a result of the required quarterly payments of our term loan and the semi-annual payments of our MARAD debt. Moving on to slide 15, it provides an update of our year end gross and net debt levels historically and at September 30th. We continue to maintain a strong liquidity position with approximately [1.1 billion] of liquidity. Our net debt level was approximately [$7 million] decreasing quarter-over-quarter. Our year-to-date operating cash flow increased to $302 million driven by our strong operating results. We have used cash from operations to fund $208 million of capital expenditures, $70 million of debt repayments and $8.5 million of stock repurchases. Our cash position has increased by $68 million year-to-date. At quarter end our net debt-to-book capitalization ratio was less than 1%. I will turn the call over to Tony for a discussion on our 2014 outlook, Tony?

Thanks Erik. Let me move straight to slide 17 which presents our updated 2014 guidance. Given the much stronger than expected year-to-date results we now expect the full year 2014 to be better than we previously guided and lift our full year EBITDA level to greater than or equal to $390 million from our previous number of $360. With EPS now at somewhere between a $1.85 to a $1.95, I think it’s fair to say that we believe there is more upside to this number than downside. Of particular note we’re now forecasting a top line revenue growth of approximately 50% to the Well Intervention business and 23% in the robotics business. As previously suggested the fourth quarter will be a different story than Q3. As we’ve mentioned earlier both Skandi Constructor and the Seawell have drydocks during quarter four with the Seawell commencing an extended drydock for a major refurbishment that will extend for some 90 plus days in 2015. Furthermore the robotics business should experience its normal seasonal drop off and the large amount of spot market work we saw in quarters two and three is expected to decline in Q4. Again this is a normal weather-driven seasonal dip for the robotics business due to our strong market presence in the North Sea. Furthermore we have reduced our long-term charter fleet in the robotics business from five to four with the termination of Olympic Triton charter at the end of quarter three. This has been planned for quite some time now in anticipation of both the Grand Canyon II and the Grand Canyon III entering the fleet in 2015 plus our desire to reduce capacity in the usual seasonal low winter months. Moving over to slide 20, slide 20 discusses a broad view of Helix’s business outlook beyond…

Thanks, Tony. Previously I suggested that the company strategic plans call for us to grow our EBITDA on an average 20% per year through 2016. The updated forecast for 2014 is for an increase in revenues of 38%, an increase of EBITDA of 30% and an improvement in EPS of 77% to 87% year-over-year. Therefore we're off to a good start to realization of our long-term growth objectives. Q2 was very strong and Q3 was even stronger. This was primarily due to the tremendous efforts and the skill of our operating personnel. In 2014 we benefited from the addition of the H534 being added to the fleet, a strong winter level of work for the North Sea business, a much improved operating plan and execution from our robotics team and generally strong performance from all of our groups. Going in to each year our guidance takes into account the fact that there is always operating and market variables that create challenges in realizing our full earnings potential. While the 2014 results are exceeding the expectations reflected in our initial guidance, we believe that these results especially the Q3 results are indicative of the earnings potential from our existing assets and services. However before extrapolating too much from these Q3 results we need to refocus the perspective on the long-term growth plan. Heading into Q4 we've scheduled drydocks as has been mentioned for the Skandi Constructor and the Seawell. We're also anticipating slower activity in the North Sea versus last winter. I believe this has less to do with any macro issues and is more of a result of producers scaling back activity in reaction to last winter. Compared to this last winter the past few years have seen relatively mild winters in the North Sea. Therefore producers scheduled more well…

(Operator Instructions). And we now have a question from the line of Jim Rollyson. Please go ahead. Jim Rollyson - Raymond James & Associates: Hey, good morning guys and great quarter this quarter.

Thanks Jim.

Thanks Jim. Jim Rollyson - Raymond James & Associates: Again, Owen trenching in the robotics businesses has certainly been one bright spot for you this year and obviously 4Q will suffer just the seasonal issues that you talked about. Do you have any visibility at this point or maybe you can provide some color on what visibility you do have looking into next year because it seems like this is usually the shorter cycle of your business lines and just kind of curious what you are seeing developed for 2015 in that front?

The others may have some insight on it as well, Jim but from my perspective the trenching always seems to be a bright spot for us but it is very difficult to anticipate the actual timing of the projects. But I think they shift to the right very easily. I think if you go back to 2013 we were anticipating a good trenching year and the projects slipped into 2014. Looking out forward we do see projects on the horizon for 2015. So I am not forecasting a bad year but I would caution that the uncertainty of the timing of those projects could shift to the right.

Let me add this Owen, we have one anchor large long-term trenching project in the Middle East next year which will serve as foundation for our trenching activity next year. We expect it to be good but it’s too early to tell whether it’s going to be as good as 2014 or not. Jim Rollyson - Raymond James & Associates: Understood, makes sense, it’s been a great year for that. I presume your comments on the North Sea winter activity just going to normal levels versus what you saw last year, is that the driver behind the Skandi coming to the Gulf of Mexico and maybe any color you have for work opportunity you have for Skandi Constructor in the Gulf?

Certainly we are using the Skandi Constructor. I mean she’s finished the job last winter in Africa and then Canada. So we are definitely looking at the Skandi Constructor as our sort of global asset. Too early for us to really comment on any Gulf of Mexico activity but we will have more color on that once we get through with our budgeting process. Jim Rollyson - Raymond James & Associates: Perfect. And last one Owen; obviously this market’s has been very focused on the declining oil prices here in the last couple of months. Just curious from your perspective when you guys are going through budgeting and evaluating things how you think about the world, if we have extended lower oil prices kind of at current levels, where that impacts your businesses and how much do you think that impacts your business? Thanks.

One of the things that I love about our business is that we’ve moved from being upstream player which is in the more cyclical side of the business to being like a field oriented. When the oil prices drop and the drill bits stop turning the producers typically turn to more intervention to enhance the existing reserves. So I think we have somewhat of a natural hedge in that regard. So it really doesn’t worry me any. Jim Rollyson - Raymond James & Associates: Great, I appreciate it.

And our next question is from the line of Jeffrey Campbell. Please go ahead.

Good morning.

Good morning.

I guess in line with the last question about the oil prices and just one that I hear from a lot of clients with [inaudible] in Gulf of Mexico rig day rates at or below $300,000 now is there any evidence that you can see of movement of these assets to well intervention?

I think that first I think it’s important to note that it’s the rigs that have historically always done the intervention work over. What has been transpiring is an evolution in the marketplace to use non-rig alternatives. With these lower oil prices there is going to a lot of movement to find lower cost. I think the rig rate is the only part of the equation though. When you add in the fact that we are so much faster at our rig at doing the same work we have a lot of headroom before the rig rate become a problem for us. Right now our fleet also you can see by the utilization, demand is in excess of what we have the capacity for right now. So I guess the rig rates could come down, I guess it could slow the growth and how quickly our rates can expand at that point but right now I don’t see any problem from the rigs.

Okay, right. That's very helpful. I noticed that the rental intervention riser system had its straight quarter of rising utilization and I was wondering if you see any appetite for additional IRS assets as rentals and is there something that you would consider putting capital to.

Very much though. I think it’s proven itself to be a new niche in the market where there is a lot of demand. I think that went a long ways behind the announcement of our alliance with OneSubsea. So the plan for the OneSubsea alliance is to build rental systems and own them jointly with OneSubsea and expand our market share into that market.

Okay. That was also very helpful and my last question actually was with regard to the alliance and OneSubsea and specifically when you announced the collaboration you identified that expanding your vessel capabilities beyond established well intervention was an important consideration in forming the alliance. I was just wondering if you could expand on which additional capabilities are more likely to come sooner, maybe what might come later and why the alliance better positioned you for that kind of expansion than you might have done on your own and I am thinking here because you already have a relationship with Schlumberger, so that's really why I am asking that.

Yeah. That's -- I could talk for about three days on that question, I think. I see so much potential in this marketplace right now. If you take the analogy of what happened in subsea construction from the 70s through to 90s, you saw more and more specialization occurring of the assets to improve efficiencies and therefore there was a bifurcation in the market. You had flat bottomed barges going to semisubmersibles to reel layers, J-lay and they all created their own separate niches. I see the same thing occurring in the well intervention market and at a faster pace than what I first anticipated. You have several market niches of well intervention and if you expand the definition of well intervention to be anything that a drill rig is used for now that doesn’t require a 21 inch riser and 18-3/4 inch BOP then you get into a huge potential application for these vessels. I think the big driver historically up to this point has been decommissioning, that's decommissioning in situ. The marketplace right now because of regulatory factors is looking more at a deconstruction methodology for decommissioning. I think there is a lot of room for R&D coming up with a better methodology to keep the decommissioning cost low. That’s high on the priority list and that would be the first one I see coming. Beyond that on the well construction side in order to lower the cost of well construction there is an awful lot that can be done without a drill rig, the top hole section, the upper completion, clean up and commissioning of the well at the end can relieve 30% to 40% of the time of the drill rig onsite. I think that has a lot of potential. In fact the vessels that we're sending down to Brazil will be used more in that low then the next section which I'd say the well, the production enhancement section of the market. This is the one that's really dear to our heart. This is why we got into intervention and what we really focus on and that's really the place where you see the advantages of the very semi-submersible like the two -- the one we have and the two that we're building. So there is an awful lot of room for production enhancement including changing out of the submersible pumps. That's a big area of development and then beyond that starting to get in blue skies if you think about what could be done if coil tubings were deployed off of -- one of our vessels for coil tubing drilling then to a whole new horizon of opportunities. So in a nutshell given the time we’ve got, that sort of shows the potential of this market going forward.

That was a great overview. I just want to follow up real quick on one thing you said to make sure I understood. Are you saying that one of the goals coming down the line is -- would be sort of analogous to what we see onshore in the unconventional stuff where they are increasingly trying to drill more of the well with a top hole rig or a lower horsepower a less expensive rig and then turn less and less of the well over to the more expensive high horsepower rig, is that kind of an analogy that you were getting at there in well construction?

Yeah I think not only on well construction but I think on well de-commissioning as well. I think the industry is going to move to a multi-phase approach to de-commissioning where you’re using different types of vessels for different aspects of the de-commissioning to enhance the overall efficiency.

Thanks a lot, Owen that was really helpful.

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

Thanks, good morning, guys. Just a couple of vessel-related questions on my end. Just trying to calibrate a little bit on well ops revenue in the quarter, specifically on the Skandi and the well intervention job at Canada was there any sort of deferred mobilization revenue for the Skandi this quarter, just trying to isolate some of the boost that you guys saw sequentially there.

Yes Joe, there was both deferred revenues and deferred expenses associated with the mob period, so yes.

Okay on the H534, I know since it’s entered the fleet the mix has mostly been P&As, if not all of its work P&A focused, just curious about if that makes this holding and I know from a rate perspective you guys have sort of intimated this asset could go on a Q4000 like day rates. Are those the rates that it is garnering today, is it at that level and is that mix still P&A focused?

Yeah, the mix is still P&A and the focused rate -- I'm sorry Owen, go ahead.

No, go ahead Tony.

Yes and the rates are roughly comparable to the Q4000.

Okay helpful. Last one from me just Q7000, just for I know you cut steel as recently as April just what’s the expectation now on fleet entrance, is it still second half of ’16 and just maybe remind where you are in terms of discussions with operators in this potential asset?

Well, I'm currently sitting here in Singapore right now and I just saw the blocks of the Q7 and went over with the project team and everything is on schedule and running along pretty smoothly on that project. With regards to the contracting of it we’ve been trying to take our time on the contracting and I know that’s probably not what the investment community wants to hear. But with the opportunities that we’re starting to see globally it is the asset that we have that’s available coming out next. So we’re trying to really access all of the opportunities and make sure we place it in the right place on the best contract. So I know we said we were going to be shooting for a contract this year but I -- just because of the market conditions right now we’ve been sort of -- we’ve had the luxury of taking out time and looking at all of the options ahead of us. And I say luxury because with the capabilities of the Q4000, personally I'm not concerned with its utilization. So I just want to make sure that we put it in the right place that provides the best returns and the best strategic advancement for the company.

Sure, makes sense given what’s going on in the macro, appreciate your guys’ time, thank you.

(Operator Instructions). We now have a question from the line of Trey Stolz. Please go ahead.

Morning guys. Just one quick question on the guidance, or slide 20 looking forward, and trying to balance this and I know you don’t want to be too specific on 2015 yet but the language here, regulatory drydocks in 2015 and headwinds and when I look in my model at in the Q5000 which is a pretty significant bump up in operating income, should I be interpreting this otherwise that the cautionary language here on the drydocks or is 2015 still a pretty significant bump up on well intervention given that introduction of the Q5?

Let me take that Trey. First of all it I think it’s again premature to give specific guidance for 2015. We’re doing a bottoms-up approach on our budget, so we don’t even know the answer to that question today. I guess it was important for us to point out that we will have a significant amount of drydock days in 2015. You’ve got the Seawell out there for 90 plus or minus days, you have the Q4000 out there for plus or minus 45 days and the H534 for about 30 days. Then the question is if we say on schedule with the Q5 that will be a nice boost up but we really don’t know the answer to that question. We are still trying to sort it out. So I have given a long winded answer that says we can’t answer the question.

All right that…

I’ll just add a little something to that Tony and that’s what I was commenting on in my closing comments was just the refocus on the long-term plans. We’ve just gotten through a period here of introducing assets to our fleet and we are seeing the results of that in the marketplace. We do have the Q5 coming towards the second-half of next year but that’s the only major asset that we have being added. Than in 2016 we have three major assets being added. So all I was just trying to do is we saw a big jump up here as a result of the earlier efforts. 2015 was never planned to be a big growth year, 2016 is.

And you wouldn’t care to quantify what kind of increase in revenue we are seeing from day rates let’s say 2015 versus 2014 or looking ahead just what’s contracted in 2016?

Well, all of our contracts are pretty well established except for the Q7, our rates are pretty said set out through 2016. So there won’t be any -- I don’t see any great increases coming from rate increases and as one of the previous questions there are headwinds in the industry right now for how aggressive you can be on pushing the rates up. So I would anticipate that our rates are probably where they are going to be there for a little while.

All right, great, thank you.

Our next question is from the line of Martin Malloy. Please go ahead.

Hey, congratulations on the quarter. I have a question just in terms of looking out when you get the fleet up to nine well intervention vessels, I get to an EBITDA generation capability of close to $600 million and I don’t know maybe your maintenance CapEx is somewhere around $75 million. Could you talk maybe about a little bit about your thoughts on the uses of cash at that point?

Yeah, Marty.

You want to jump in Tony or…?

Yeah, I will jump in. First of all I think and this is why I think to Owen’s point is 2015 you have got all of these moving parts, and when you look at our earnings ability on a pro forma basis with the Q5 coming in, the [CM] vessels which again are all under contract, the number you cite is a reasonable number on pro forma basis. So I think that’s a good point, Marty. I think in terms of looking forward beyond the ship building phase we are going in, we expect to be sitting with a fairly and highly liquid position and I think it’s time that we evaluate returning money to shareholders in one form or another. That not saying we’ve concluded that, I am saying we are certainly evaluating it Marty, unless we see another strong phase of building vessels, right now we don’t have any new vessels planned beyond what’s announced and perhaps one more but going beyond that I think it’s incumbent upon us to take a serious look at returning money to shareholders. Owen you want to add to that?

I would just add that, that doesn’t mean that our growth becomes stymied. I think we just enter into a new era of how to grow. Right now we’ve gone from just essentially three intervention assets and we will be up to nine or ten. By 2018 I think our market outlook is calling for something for market demand for about 20. I think anytime that you start aspiring to hold on to greater than 50% of market share, I think you are really asking for -- you are tempting fate. But we have established ourselves as a strong credible leader in our marketplace. So that we have the luxury of sitting back then and really being a little more judicious about the rate of our build process. Right now we needed the fleet and we progressively put it into service. The next phase of growth though comes from starting to look at the fleet and figure out what services, soft services can be added around the hard assets in order to create value creation and sustain growth and now that’s a lot less capital intensive than what we are doing right now. So then that gets back to Tony’s comments at that point I think you have to start looking at returning to shareholders.

Thank you. Operator And our next question is from the line of [William Albock]. Please go ahead.

Hey, good morning guys.

Good morning.

So is Q4, 2013 a reasonable quarter to look at, [on a Q4] that we should think about for Q4 this year, thought in Q4 ‘13 you had down time for the Well Enhancer and zero contribution from the Helix 534. So can you do similar EBITDA which was around $77 million in Q4 ‘13 given the 534 is in the fleet even with the weaker winter?

Well, the other additional factors weighing for Q4 is both the Seawell and Skandi are in drydock, somewhat offset by having the 534 in the fleet but with those two vessels in drydock I’m not sure it’s a fair comparison.

Okay.

And I also think we had a much stronger trenching situation in fourth quarter 2013 than we are expecting in the fourth quarter 2014. So again without being too specific I think it’s maybe not a fair comparison.

Okay, In light of the weakness in the floater market how stable are the day rates on the Q4000 and the Helix 534?

Well, our rates for the -- as I mentioned before our rates are all set for the next few years. So they are pretty stable at where they are now.

Okay. Just one more, any color on how many days possibly for the Q4000 and H534 drydocks in 2014 and maybe when in 2014?

Sure, I mean this is just an estimate because you never know once you get into drydock. So we’re estimating about 45 days for the Q4 and about 30 days for the 534. In terms of timing and I don’t think this is going to vary that much. We expect the Q4 to enter drydock in early Q2 and the H534 to go into drydock in late Q2, early Q3.

Okay, thank you very much.

Our next question is from the line of [Joe Merwark]. Please go ahead.

Hello. You guys have a very healthy CapEx cycle here in ‘14 and ‘15 and for 2014 I would have expected net debt to tick-up a little bit each and every quarter and that’s been the wrong assumption particularly here in Q3. What can you do to help us out from a net debt perspective? Where do you guys think you will be at the year-end ‘14 and year-end ‘15? Thank you.

Good question, Joe I think we have a major shipyard payment on the Q5 that we expect to make here in the fourth quarter. So we expect our cash position to come down a bit from where it is today and in 2015 we expect, again we’re going to be completing the Q5000, we’ll have the final payment due on it. We’ll also have spending accelerating on the two CM vessels. So I would expect cash to come down a little bit too by the end of 2015. Nevertheless I expect our cash position, our liquidity to remain fairly healthy throughout the period of time. In other words I really don’t think our net debt is ever going to get above 10% through 2015. So we tend to be a little conservative in our thought process here, but we do expect net debt to tick up a little bit because our CapEx program is starting to peak during the next 18 months.

Thank you for the help.

There are no further questions at this time.

Okay, well thanks for joining us today. We very much appreciate your interest and participation and look forward to having you all on our fourth quarter 2014 call in next February. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.