Helix Energy Solutions Group, Inc. (HLX) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2015 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, April 21, 2015. And I would now like to turn the conference over to Mr. Terrence Jamerson, Director of Finance and Investor Relations. Please go ahead sir.

Good morning, everyone, and thanks for joining us today for our conference call for our Q1 2015 earnings release. Participating on this call for Helix today is Owen Kratz, our CEO; Tony Tripodo, our CFO; Cliff Chamblee, our COO; Alisa Johnson, our General Counsel; and Erik Staffeldt, our Finance and Treasury Director. Hopefully, you all have had an opportunity to review our press release and the related slide presentation released last night. If you do not have a copy of these materials, both can be accessed through the Investor Relations page on our Web site 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 conference call are 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 in 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, 2014. Also, during this call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slides of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The reconciliation, along with this presentation, the earnings press release, our Annual Report and a replay of this broadcast are available on our Web site. Owen?

Good morning, everyone. We will start off with Slide 5, which is the high-level summary of the Q1 results. From a financial perspective, Q1 was marginally better than Q4. From an operational standpoint as we suggested in our February call, Q1 was much like Q4. Our vessel utilization and operating margin came in slightly better, however, it was primarily lower SG&A cost that drove the better EBITDA performance. As a result Q1 EBITDA came in at $51 million versus $39 million of EBITDA in Q4, while EPS increased to $0.19 per share compared to $0.08 per share in Q4. Turning to Slide 6, although revenue declined, we had slightly better vessel utilization and a contract cancellation fee mitigated the cost of revenues associated with the idle days on the H534 caused by the cancellation. Thus we realized slightly higher margins. EPS was also bolstered by a 2% effective tax rate and lower variable stock compensation expense. All in all given the very difficult industry conditions I feel that the $51 million of EBITDA is relatively respectable. A couple of important milestones were achieved during the quarter. One, we reached agreement with a major customer to extend the contract for Well Intervention Services on the Q4000 for another three years; and two, our contract to provide Emergency Well Containment Services with the Helix Fast Response System has been extended through March of 2018. On to Slide 7. From a balance sheet perspective, our cash and liquidity levels remain strong. Cash decreased to $415 million as we continue to progress and work through our CapEx program, which is mainly focused on the four vessels under construction. Cash along with the unused portion of our credit facility has our liquidity levels as $1 billion. Net debt at quarter end was $131 million. I will now turn the call over to Cliff for an in-depth discussion of our contracting services.

Okay. Thanks, Owen. Good morning, everyone. Q1 was a decent quarter and a good start for what would prove to be a challenging 2015 for our industry. Gross profit for both Well Intervention and Robotics business improved quarter-over-quarter primarily driven by a strong utilization throughout the quarter for Q4000 and the Well Enhancer. As well as increase in vessel utilization in our charter fleet and Robotics. We also managed to keep the 534 relatively busy after having to scramble to fill gaps this year. And this year's schedule were being canceled late last quarter. As Owen mentioned the termination fee mitigated the impact of the cancellation. Over in our Production Facilities business, profits were lower this quarter versus Q4. This reflects the decrease in revenues realized on the [variable] [ph] portion of our throughput fee from the Helix Producer 1, which is tied to oil and gas prices. There was lower production from the Phoenix build this quarter as a result of the field being shut in for some developmental activities. Also during this down time, we took the opportunity to perform some required maintenance on the HP 1. So moving on to Slide 10 for our well ops review. In the Gulf of Mexico, the Q4000 was on-hire the entire quarter although we worked at reduced rates for the first 11 days of the quarter due to IRS mechanical issues. We initially encountered these issues at the end of Q4 and the work to resolve the issue carried over into early January. As I mentioned in the previous Slide, the team in the U.S. did a great job scrambling to find work for the 534 and keep her busy after a contract that was canceled in the fourth quarter last year initially left a huge gap in the schedule as she entered 2015. IRS number 2 in our spare rental intervention riser system was on-hire for the entire quarter on standby. Just to give a quick update on the Q5000 before moving on to the North Sea, the vessel has performed sea trials and we expect her to [focusing] [ph] for heading to Gulf of Mexico around mid-May. Now moving on over to the North Sea, the vessel utilization for the quarter was 54%. This number does not include the Seawell, which is out of service during her life extension dry dock. The Well Enhancer was fully utilized while the Skandi performed plumbing operations earlier in the quarter, but for the most part remained dockside as she struggled to find work. The Skandi begins her 120-day campaign later this month in a Seawell's life extension dry dock now extents into late Q2. We will touch on both of these items in more detail in the upcoming slides. So moving to Slide 11 for the Robotics review. In Robotics, Q1 looked a lot like Q4 last year in terms of revenue and profit, which is a positive. Given that these are normally our weaker quarters for this business, 86% charter vessel fully utilization up 7 percentage points over Q4 was key to profitability in the quarter as we were starting to see utilization for the ROV trend downward slightly. The Grand Canyon I was fully utilized. And she continues working offshore in Qatar on trenching work that commenced in Q4 of last year. The Deep Cygnus also performing trenching projects over in the North Sea for various clients. The REM Installer was transited over to the Gulf of Mexico region from the U.K. last quarter to work on ROV support projects here in the Gulf during the quarter. The Olympic Canyon remains In India performing ROV support work and is fully utilized for the quarter. We expect the Grand Canyon II to enter the fleet later this month and she is expected to go to work shortly thereafter utilizing the T750 Trencher. Moving on to Slide 12. I will leave this slide detailing the vessel utilization for your reference and with that I will turn the call over to Erik for the key balance sheet metrics.

Thanks, Cliff, and good morning. Please turn to Slide 14. Slide 14 provides an illustration of our debt instrument maturity profile at March 31st. Debt reduction during the quarter was a result of the required quarterly payment of our term loan in the semi-annual payment of MARAD Debt. During the second quarter, we expect to take delivery of the Q5000 from Jurong shipyards in Singapore. We will draw on our Nordea Q5000 facility to make the final shipyard payment. Balance of the loan, approximately $150 million will be used for general [indiscernible] purposes. This transaction allows us to bolster our cash position during this market downturn. Moving on to Slide 15, it provides an update on our year-end gross to net debt levels historically end at March 31st. We continue to maintain a strong liquidity position with approximately $1 billion of liquidity. Our net debt level was approximately $131 million. Our cash position has decreased by $61 million this quarter primarily due to CapEx spending. I will turn over the call for Tony for a discussion on our 2015 outlook.

Okay. Good morning, everyone. Moving over to Slide 17. At our February conference call, we avoided providing specific quantitative 2015 guidance due to the fast changing and declining industry conditions. At that time, we provided more qualitative guidance suggesting that 2015 would be substantially lower year for profitability due to the severe decline in commodity prices and our customer's response to this dynamic. We also cited several company specific factors such as relatively high vessel dry dock schedule, the strong U.S. dollar and other items that would serve as friction to our 2015 results. Although industry conditions remain very challenging and the same issues we mentioned in February persist today, 2015 is coming more into focus. Thus we believe our overall 2015 EBITDA results will fall into $200 million to $240 million range with EPS falling in the $0.55 to $0.70 range. In terms of capital spending, we are now forecasting lower capital spending than what we guided in February with CapEx now estimated at $360 million down from the $400 million we originally estimated. On to Slide 18, our backlog as of March 31st remains above $2 billion again despite the challenging industry conditions. The Well Intervention business is shaping up as follows for the remainder of 2015. In the Gulf of Mexico, the Q4000 is expected to have fairly good utilization after her dry dock which is currently underway and expected to be completed in mid-May. The 534 has some backlog in advance of her scheduled dry dock in August. In the North Sea, we expect the Well Enhancer and the Skandi Constructor to have decent utilization and backlog in Q3 2 and 3. The Seawell's life extension dry dock continues and is not expected to be completed until June. Once it is completed, she does have backlog in the summer months. Visibility at present in the North Sea market is weak for Q4. On to Slide 19, we are pleased to announce that the REM Installer has recently entered into 150-day master service agreement with a major subsea customer for Robotics construction work here in the Gulf of Mexico. The MSA should provide good visibility for this vessel in 2015. The Grand Canyon II is expected to enter the fleet any day now. And she does have committed trenching work upon delivery. The Olympic Canyon continues to work offshore India with committed work through September whereas the Deep Cygnus has decent utilization for the remainder of Q2. Over to Slide 20, and CapEx as previously mentioned, we have now reduced our forecast to 2015 CapEx spending down to 360 from the 400 we originally estimated. We continue to look for areas to reduce CapEx not only this year, but in the future as this slide shows most of the 2015 CapEx is for vessels under construction and shipyards and in the case of three of the four vessels under contract to customers. An important milestone the Q5 has recently performed sea trials offshore Singapore. Once the last bit of punch list items are completed she should set sail under toe to the Gulf of Mexico in mid-May. She is scheduled to go to work for BP in April of 2016. We are in discussions with the shipyard for the Q7000 to slow it down and delay delivery of this vessel until 2017. If we are able to reach agreement, this will defer a substantial amount of CapEx from the 2016 to 2017. Although not a CapEx item, we have reached agreement with the vessel owner of Grand Canyon III to defer the start up of this chartered vessel to early 2016 in light of weak industry conditions. I will skip Slides 21 through 24 leave them for your reference. And at this time, I would like to turn the call back over to Owen for closing remarks.

Thanks, Tony. The visibility related to the impact of falling oil prices on our business seems to have improved from what we saw going into the first quarter. It has improved to the point where we feel comfortable in providing your best estimates in quantifying what earnings might look like for 2015. Going into the year, we knew that our customers' reaction to the decline in oil prices was going to be severe. However, at that time, we could not quantify the risk of how much work would be canceled or deferred, whether vessel contracts would be terminated or renewed, the extent that we could react with cost in spending reductions and what our ability to fill gaps created by short notice project cancellations might be. We did guide the Q1 would most likely be similar to Q4 of 2014. Operationally that turned out to be the case. However, we did have some positive financial impacts from the items we previously mentioned here that resulted in a stronger quarter than the Q4 of 2014. We also now have a better feel for Q2 and Q3 to the point where we can provide 2015 guidance in the range of $200 million to $240 million of EBITDA for the year, a caveat being that we are uncertain yet as to what Q4 might actually be. The fourth quarter is historically difficult to forecast due to winter seasonality factors and this is made more unpredictable due to the current market conditions. On a more granular level, I can report that, one, we have either absorbed the impact of the short notice project cancellation we faced at the beginning of the year, or we have been able to fill the gaps in the schedule. Two, our longer term contracts for our major assets including Q4000, Q5000 and the two vessels for Brazil are in place and appear for now to be secure. Third, we have been effective in reducing our SG&A and continue to identify areas where we can – we have potential for reducing the supply chain costs further. Four, we have been able to reduce our forecast for 2015 capital spending from over $400 million to an estimated $360 million. Looking forward, we have a better feel now for how customers are looking at 2015, but we can't give any certainty as to the likely duration of this down cycle or what 2016 and beyond will look like. For now, it's too early to say whether we are at bottom or not. On the dry dock front, 2015 will be a major year for us with dry docks on the Q4000, H534 as well as an extended refurbishment of the Seawell. Our dry dock schedule for 2016 should be lighter. Our people on the Robotics side of the company have done well to scramble and fill the utilization gaps in the Robotics fleet schedule. However, the construction market from which we derived a significant portion of our utilization is still in the process of working off backlog. We are somewhat concerned that filling out utilization will be a continuing challenge for our Robotics group. Although over recent years the group has done well to diversify into non-oil and gas markets which should help us. And the group will also have opportunity to reduce the size of the Robotics vessel fleet over time as our staggered charter schedule rolls over should that become necessary. We are also in discussions to extend the delivery of the Q7000 into 2017 with the result that capital obligations for 2016 would be greatly reduced. We have already negotiated the deferred delivery of the Grand Canyon III. These moves will allow us to more closely align capital commitments with cash flow preserving our strong liquidity position. In addition, we are set to close the project financing for the Q5000 as mentioned upon its delivery in the next few weeks and this will add to our liquidity position. We are feeling a tad more comfortable now than we did during our Q4 conference call. While near term contracted rigs at low rates do have an impact on us, longer term we are seeing that the industry for greater efficiency intervention continues and interest in rig alternative methods remain. The potential threat of older rigs being converted into intervention vessels that some were concerned about is less of an issue now as we see a greater number of older rigs being scheduled for salvage or long-term stacking. We also note that the rumor and talk from potential competitors about new build intervention vessels coming to the market has gone away. Some scheduled builds have been canceled or may never be completed. All in all Helix is in good financial shape today. And we should occupy even better competitive position going forward. We are about as pleased as we can expect to be given the current cyclical market conditions. Now, we have the opportunity to plan for how to make the best as we emerge from the cycle. And with that, I will turn it back over to Terrence, for closing remarks or questions.

Operator, you can turn it over to questions now.

Thank you, sir. [Operator Instructions] And our first question comes from the line of Marshall Adkins with Raymond James. Your line is open. Please go ahead.

Good morning, guys. You certainly did a lot better than I thought you would in this tough environment. So good work. SG&A was one of the big variables here, a remarkable reduction there. Fill me in on the repeatability of that? And kind of help us on the modeling side to plug in how much of that is sustainable going forward?

Yes. That is a very good question, Marshal. Undoubtedly, in all transparency, we had a significantly lower SG&A in the first quarter than we had in Q4 and that will expect to have going forward as a result of having to book sort of speak mark-to-market on some of our long-term compensation due to decline in our stock price. However, going forward, we have taken measures here to reduce spending and we expect spending going forward to be lower than what you have seen historically. So while it probably won't be anywhere as low as Q1, it still will be lower than historical quarters that you saw in 2014 and earlier. And I think somewhere in the 7% to 8% of revenue for the year is a good metric here to apply, Marshal.

Well, impressive. For the second one, Owen, over to you, you did mention, on these older rigs, they are retiring them. You are not seeing any really new build competitors come in. What about those 4th and 5th Gen things that seem to be getting laid down. Do you sense any encroachment on the competitive landscape from those guys? And give us, in addition to that, your overall view of the overall competitive landscape and how that is shaping out in the downturn?

I think near term, Marshal, the 4th and 5th Gens might come down in the market, but I think heart in the fact that all of our major long-term contracts and this was after a lot of discussion, we didn't lose any of those. The producers are all firmly committed to the efficiency gains that we bring to the table. And there is, quite honestly, there was a lot of competition, discussion between us and our clients as to whether to go forward with us or whether or not to use these rigs that they got. And so far, it looks like, as I said in my remarks, they are staying consistent with their quest for longer term greater efficiencies. So we are the beneficiary of that.

So reading between the lines, it sounds like the whole plan and methodology of building these units to be purpose built is paying off so far?

I think that's an inevitable evolutionary step in our industry. I think this could slow the demand for it a little for a while, but I think we are firmly on the path to – the producers looking for alternatives.

Great work, guys. I will requeue. Thanks.

And our next question comes from the line of Chase Mulvehill with SunTrust. Your line is open. Please go ahead.

Hey, good morning, fellows. Nice quarter. I guess a question that I keep getting is on your direct cost in the first quarter. It declined about $22 million quarter-over-quarter. So can we kind of – I guess the Seawell is in dry dock for the full quarter. So were there any costs associated with the Seawell, any direct costs that were realized during the quarter? Or was everything capitalized or --

I would say for the most part all the activities surrounding the Seawell were part of the dry dock which gets capitalized.

Okay. So what is the associated costs for the Seawell once it comes out of dry dock. I'm trying to model this on a go forward basis.

Well, I don't want to get too specific as to numbers here, Chase. I think you are aware of our daily run rate for OpEx on these vessels. And she should have a full quarter only in quarter 3 and quarter 4 as again we expect her not to come out of dry dock in Q2. Hopefully that is helpful to you. But she does have work in Q3 and we think – it's will stay and it's all relative in today's market, have decent utilization in Q3. We ought to be able to cover her cost in Q3.

Okay. So you have good utilization in 3Q. Okay.

Yes.

And then when do you start recognizing cost on the Q5000.

We will start recognizing cost when she gets over here.

Okay. This quarter?

Some expenses associated with maintaining a crew before she goes to work. So we will start having some expenses hit our P&L. I don't have the number off the top of my head. But she should arrive here mid-August to early September and the cost from that point on will be expensed.

Okay. All right. And so assuming that you don't stack any of these vessels, how much of your well intervention direct costs are considered variable versus fixed?

Well, if you look at it from a cash standpoint, almost all of it is variable, Chase, in all honesty. We can reduce some spending and are looking to continuing to look at ways to reduce spending. If you look at it from a gross profit standpoint, most of the $100 million of depreciation we have associated with the well intervention business. So that is pretty fixed, right?

Right. Okay. And so then, if you would stack a well intervention vessel, what are the best prospects and then what does the timing look like for potential stacking?

Well, at the moment, we are not planning on stacking any, but we are always looking – I mean this is a conversation we have weekly looking at the schedule and planning for this. If we had to say that right now, as I said, we are not planning to stack any but a likely candidate would be the 534 and take some of the work off of it and put it on one of the other vessels that we have. And that's probably the most likely candidate possibly something to do with the Seawell later on in the year.

Okay. And then so what are the associated stacking costs of the 534 on a dollar per day.

Yes. I don't have that number handy. We would obviously reduce the crew back to a minimal crew and get rid of a lot of the services and stuff on there. But I don't have that number handy with me.

Okay. Last --

Flip, I think that's a hard number to come up with. Because it depends on what the schedule looks like at the time and whether or not you are going to cold stack her or warm stack her or hot stack her. And that would depend on the schedule at the time.

And it seems like if you were to do something first you would kind of warm stack it or hot stack it, fair?

That's what we talked about is a warm stack if we do any of it.

Okay. All right. Last question is on the termination payments in the first quarter. Could you give us an idea of roughly kind of what those termination payments were during the first quarter?

Yes. Termination fee was around $11 million. And it more or less offset the idle days plus the lower rates we had to accept on the 534 when we had to try to fill the gap.

Right. Okay. That's all I have. Thank you.

Okay.

And our next question comes from the line of Martin Malloy with Johnson Rice. Your line is open. Please go ahead.

Good morning. I apologize if I missed on the last – with the last question. What was the timing in terms of when you would make a decision potentially on the Helix 534 and warm stacking it?

Well, like I said, we look at it all the time. But we have a dry dock schedule for the vessel in July. So if we were going to do it, we would probably try to make that decision prior to the dry dock.

Okay. And I have a question on the tax rate. It was extremely low during the quarter. Can you talk about what we should model going forward?

Yes, Marty. I think for the year, we are probably looking at single-digit tax rates, the way the year is shaping up. We are going to make more money in overseas jurisdictions and not too much money in the U.S., which is the highest tax rate jurisdiction we operate in. So when we look out at where we are currently forecasting our profits to fall jurisdiction wise, we believe we are going to be in single digits. Now, given the volatility that we are operating in these days, there could be a lot of movement in that. But we still expect it to be much, much lower than historical rates that you have seen, that Helix booked in the past. So I would count somewhere in the single digits, Marty.

Okay. And the Skandi Constructor lease, can you remind us when that expires?

Yes. It's – in the Robotics business, they are all chartered vessels and they stagger off whenever. But you ask about the Skandi Constructor on the Well Intervention side which working over in the North Sea. And we can get that back in April of next year, so about a year from now. We have to make the decision at the backend of this year, but we can give it back in April of next year.

Great. Thank you.

[Operator Instructions] And our next comes from the line of George O'Leary with Tudor, Picking & Holt Company. Your line is open. Please go ahead.

Good morning, guys.

Good morning.

Great job on the quarter from a cost cutting perspective. Just curious you mentioned supply chain cost cuts. Can you hear me. Sorry. It looked like my phone cut off. You mentioned supply chain cost cuts. Just curious from a timing standpoint when those supply chain cost cuts could actually start showing up? Is there a delay in negotiating those with your vendors? Or is that second half weighted? And then maybe any color on potential magnitude of some of the cost reductions you could get from vendors?

I think it's pretty early to – go ahead, Cliff.

Okay. Well, from a supply chain standpoint we started looking at that back – I don't know, probably in – seriously in January. And so, those are ongoing all the time. And there is a whole list of things that we are keeping track of and what we are saving and how we do our business better, et cetera, dealing with our vendors asking getting better pricing out of our vendors. This goes on daily, but it started in January and it's continuing on through now. I don't have a number with me of what we save to date, but that is our continuing exercise. I think that everyone is doing it including us.

Great. That is helpful color. As you look at – as you look at your Well Intervention assets and are picking up some fill-in spot work for example like with H534 in Q2 and Q3, are rates under pressure for that spot work? Are they below what that vessel is historically contracted at? And again, any color on magnitude would be great, but just some general commentary around that would be helpful.

On the 530 in particular, I mean we are seeing pressure on rates and have for this year constantly. And so we have some reduced rates compared to what we would have been getting this time last year. I won't say substantial, but in the 10% range that we have been seeing.

And that's helpful. And then, are customers also pushing back on contracted vessel rates or have you seen those largely honored up to this point.

A bit of both, a bit of both. And depending what the contract is and what we had to trade and what they had to trade for it. Some we have maintained the rates as they are for 2015 because we were able to and discounted going forward a couple of years. Others we haven't had to give any on and some we have. It's a mixed bag.

All right. Thanks very much for the color, guys.

And we have no further questions on the telephone lines at this time. I will turn the call back to you, gentlemen.

Okay. Thanks for joining us today. We very much appreciate your interest and participation and look forward to having you on our second quarter 2015 call in July. 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.