Helix Energy Solutions Group, Inc. (HLX) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Helix Energy Solutions Third Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, October 20, 2015. I would now like to turn the conference over to Erik Staffeldt, Vice President of Finance and Accounting. Please go ahead, sir.

Good morning, everyone, and thanks for joining us today on our conference call for our Q3 2015 earnings release. Participating on this call for Helix today is Owen Kratz, our CEO; Tony Tripodo, our CFO; Alisa Johnson, our General Counsel; and Scotty Sparks, our Executive Vice President, Operations. 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, www.helixesg.com. The press release can be accessed under the press releases tab and the slide presentation can be accessed by clicking on today's webcast icon. Before we begin our prepared remarks, Alisa Johnson will make a statement regarding forward-looking information. Alisa?

During this conference call, we anticipate making certain projections and forward-looking statements based on our current expectations. All statements in this conference call or in the associated presentation, other than statements of historical facts, are forward-looking statements and are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual future results may differ materially from our projections and forward-looking statements due to a number 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, 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 those 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, will now make some opening remarks.

Good morning, everyone. We will start on slide 5, which is a high-level summary of Q3 results. From a bottom-line perspective, Q3 represented a decent improvement from Q2 results as EBITDA increased from $36 million in Q2 to $51 million in Q3. The increase was primarily driven by increased profitability in our robotics business unit. Robotics vessel utilization increased to 87% in Q3 led primarily by profitable trenching work in both the North Sea and Middle East. The increased volume and profitable trenching work in the robotics segment drove the increased overall gross profit margin during the quarter from 15% to 18%. Turning to slide 5, the well intervention business was a mixed bag regionally. Although the Seawell remained idle during the entire quarter, both the Well Enhancer and the Skandi Constructor saw very high levels of utilization and drove better performance in the North Sea region. The Gulf of Mexico region was a different story. The H534 remained idle the entire quarter and actually entered drydock in September, while the Q4 realized only 67% utilization during Q3. The Q5 arrived in the Gulf of Mexico from our long transit from Singapore. She is completing her commissioning activities and we are expecting the vessel to enter service with contracted work this week. In fact, I believe she is leaving the dock this morning. Onto slide 7, from a balance sheet perspective, our cash level stood at $469 million at quarter-end. Our $600 million revolving credit facility remained undrawn, although access to the facility is restricted to $243 million at quarter-end due to our trailing 12-month EBITDA number. Net debt at quarter-end was $307 million. We paid $19 million of scheduled quarterly principal payments during the quarter. I will now turn the call over to Scotty for an in-depth discussion of our operating results.

Thanks, Owen. Moving on to slide 9, in Q3 our results improved slightly from Q2, however we do continue to see the effects of a weak oil industry on our performance. The revenue in the third quarter increased $16 million from our second quarter to $182 million. Our gross profit margin increased from 15% in Q2 to 18% in Q3 driven by the increase in revenues to $32 million gross profit. Increased activity in our UK-based well intervention robotics business unit was the primary driver for our increased revenue and gross profit. Our productions facilities business unit performed as expected again with no required downtime in the third quarter. Moving on to slide 10 for our well intervention business, in the Gulf of Mexico, the Q4000 had 67% utilization working on various projects with some idle days between projects. The H534 was idle for the entire quarter and entered its scheduled drydock during September expected to complete mid-Q4. We commenced the process of down manning the vessel for an anticipated warm stack period after drydock to reduce costs. IRS no. 1 and IRS no. 2 our rental intervention riser systems are both on hire for the entire quarter. Both units are under contract for the rest of the year. Q5000, our newest well intervention vessel, arrived in the Gulf of Mexico mid-August and as Owen mentioned, the vessel is expected to go to work any day now. In the North Sea, the Skandi Constructor was fully utilized and the Well Enhancer achieved 91% utilization. The Seawell completed the outservice period for the life extension drydock and accomplished six successful sea trials. We have down-manned the vessel to minimum Coast Guard requirements and warm-stacked the vessel [indiscernible] the UK. Moving on to slide 11 for our robotics review, the results of our robotics business increased in the third quarter over Q2 due to 87% chartered vessel utilization. During the third quarter, we experienced good utilization across our entire vessel chartered fleet. The utilization for our ROV and trencher fleets was at 59%, slightly down from 61% in Q2. The Grand Canyon T1200 trencher and i-Trencher were near full utilization for the quarter completing work on a power cable burial project offshore Qatar. The vessel is now in transit to Brazil for its next client to undertake a trenching project. The Grand Canyon II and T750 trencher performed 80-day utilization on power cable trenching work in the Baltic Sea. The Deep Cygnus and T1500 trencher performed 88-day utilization on multiple trenching projects in the North Sea, consisting of oil and gas pipeline trenching and power cable trenching projects. The REM Installer based in the Gulf of Mexico worked for 62 days on various construction support projects. The charter for this vessel rolls off mid-2016. After eight years of successful work, the Olympic Canyon departed India mid-September to transit back to the UK. On arrival, we would down man, remove our equipment, and cold stack the vessel, reducing costs until the charter ends May 2016. Over to slide 12, I will leave this slide detailing vessel utilization for your reference, turning the call over to Erik for a more in-depth balance sheet discussion.

Moving onward to slide 14 for a review of our key balance sheet metrics, our funded debt at September 30 decreased to $793 million, reflecting our scheduled quarterly principal payments of $7.5 million on our term loan, $8.9 million on our Q5000 loan, and the semiannual principal payments on the MARAD debt of $2.9 million. Moving on, slide 15 provides an update on our gross and net debt levels at year-end and September 30. Our net debt position increased slightly to $307 million in the third quarter from $294 million in the second quarter. Our cash position in third quarter decreased by $31 million, primarily driven by our scheduled debt principal payments of $19 million. Our liquidity at September 30 was approximately $712 million, comprised of cash balance of $469 million and revolver availability of $243 million. Our decrease in liquidity is a product of reduced access to our revolver based on our bank leverage ratio. I will now turn over the call to Tony for a discussion on our 2015 outlook. Tony?

Thanks, Erik, and let's move over to slide 17. The better results in Quarter 3 are not expected to repeat in Quarter 4, primarily due to a sharp drop-off in expected results for the robotics business, some of which is seasonal and a lot of which is a more delayed reaction to the downdraft in activity levels for the type of project-related activities that robotics is involved in. On the well intervention side, we expect the Gulf of Mexico region to improve as the Q4000 is expected to have near-full utilization during the quarter and the Q5 is expected to enter service as early as today with newly contracted work, as well as the transfer of backlog from the H534, so we expect the Q4 and the Q5 at least from this point on to stay busy the rest of the quarter. We plan on warm stacking the H534 the remainder of the year. Furthermore, the Q5000 has incremental opportunities for work in advance of its scheduled start date with BP next April. The North Sea well intervention fleet will see a seasonal drop-off in activity, along with being impacted by the low activity levels in the North Sea. Both the Well Enhancer and Skandi Constructor are expected to work into November, but unless work develops, all three North Sea-based vessels, including the Seawell, which is warm stacked now, will be idled from about mid-November on for the rest of the year. We decided to extend the Skandi Constructor with the new rate structure effective mid-October, so we will have access to that vessel under a very cost-effective arrangement all the way through March 2017, as we have certain opportunities that only the Skandi Constructor can work on. As I said, a new charter arrangement was effective mid-October. Slide 18 provides a more detailed outlook on our well intervention assets. As Scotty mentioned, two of our intervention riser systems are under contract on a rental basis for the remainder of 2015 and our backlog as of September 30 stood at $1.8 billion. On slide 20, our forecasted 2015 CapEx spending remains the same at $365 million, with most of the spending associated with the Q5000 completion, which as of the end of the quarter was almost entirely behind us, as well as the two vessels under construction for Petrobras. As we mentioned last quarter, we have reached agreement with the shipyard to slow down construction and delay delivery of the Q7000, with delivery currently estimated for mid-to-late 2017. Owen will comment on this some more later. And this will allow us to defer over $200 million of CapEx from 2016 to 2017 and avoid bringing the vessel to market in the current environment. I will skip slides 21 through 22 and turn the call over to Owen for closing remarks.

Thanks, Tony. The third quarter came in a bit better than we had expected a quarter ago. The fourth quarter will be softer for the reasons that both Scotty and Tony have mentioned. It is just far too early to say much about 2016, other than to say we don't expect any improvement in industry conditions going into 2016. However, the uncertainty for 2016 may be clearer once our customers go through their budgeting process. Once that occurs, we should be able to provide greater granularity on the outlook of 2016. In general, though, we expect robotics to drop off in 2016 versus their performance in 2015. This is the result of legacy work performed in 2015 to support subsea construction tailing off, combined with a slow year of trenching. We plan to react to the drop-off in robotics activity by reducing our chartered vessel fleet by not renewing charters for vessels that have expirations in 2016. Furthermore, we are in discussions with ship owners for the remainder of the fleet to lower the charter rates. Well intervention will continue to be hampered by our customers' reluctance to spend in the face of continuing low oil prices. It is difficult to say how much this will impact until we get through the budgeting process. We do know that the work is out there that needs to be done to keep wells flowing or enhance remaining production. The P&A markets will be regulatory driven, more so in the Gulf of Mexico than the North Sea. However, our customers continue to seek ways to put off expenditures. In any event, well intervention should be one of the first activities to see recovery and this could be independent of commodity pricing, as sooner or later the work just has to be done. Management's job through this down cycle is to preserve the balance sheet through ongoing efforts to reduce spending, but also seek opportunities to increase cash generation from the current asset base. We believe that our balance sheet has sufficient capacity for us to complete our capital program, meet our debt obligations, and emerge in a free cash flow positive position. While we do anticipate growth in EBITDA beyond 2016 from new assets entering service that are already under contract, we also see further opportunity to reduce our costs. I would like to address our contracts in Brazil, due to concerns regarding the general economic conditions that exist with Petrobras in Brazil. I would like to comment on Brazil in a more detailed fashion, but I’m limited on what I'm able to say about the Petrobras contract situation. First, construction of the two vessels we will be chartering from CM Offshore is going well. The vessel construction is proceeding on time and on budget. The other side of the question is our Petrobras contracts. As we mentioned on our last earnings call, as part of its cost-cutting measures Petrobras reached out to many of the service companies it does business with, including us. We are currently in good-faith discussions with Petrobras regarding these contracts, with the objective of reaching a solution that assists Petrobras and also makes sense to us, although, as we all know, the environment in Brazil is dynamic. I have been on record in the past as saying that so far we don't see any indications from Petrobras that our contracts are in jeopardy and nothing has transpired to date that alters that impression. However, we cannot be more definitive about our discussions of the outcome at this time. Let me also address the Q7000. We previously deferred delivery of the vessel from mid-2016 to mid-2017. We're also in discussions with the shipyard to provide Helix the optionality to further defer delivery until as far as the end of 2018. We would have the option of taking delivery of the vessel at any time before then, depending on its state of completion. We are negotiating this as a cautionary measure to defer capital spending and maintain liquidity through this downturn. We remain committed to the completion of the Q7 and believe the market interest for this vessel will develop over time. All in all, we plan to take a cautious approach as we manage through this challenging period of our market. We also feel that we are well positioned and on the leading edge for any recovery of the offshore market. We also feel that the need for our services will intensify over time, even in the absence of commodity price improvement. Finally, we do believe that we can be profitable and grow even in the current market as we adjust our contract, our costs and our contracting philosophy. I'm not saying things can't get worse, but I feel that we are in a relatively good position for the market going forward and for the inevitable recovery in activity. Erik?

Operator, at this time we are available to take any questions.

[Operator Instructions] And our first question comes from the line of Marshall Adkins. Please proceed with your question.

Good morning guys. Owen, good job in a tough environment this quarter. Obviously, it sounds like things will keep getting tough for some, I’m curious. How much more room do you have to move on the cost side of things? Can you continue taking more costs out of the system?

I believe we can, Marshall. When we downsized the Company from 2008 on, we were pretty aggressive on also downsizing the SG&A. Over the last year, we’ve been even more aggressive and have cut out an awful lot. There is a fair amount of SG&A reductions that were put into effect this year that we won't see the full effect on until next year, so that's one area. The other area of costs that we can work on is that over the past years as labor became very short and competition for labor became intense, there were a lot of compensation packages and structures put in place that, due to employment contracts, just take time to work their way out, but I do believe that there is going to be a resetting of the compensation structure. Maybe not the actual day rates of the employees, but the structure and bonus mechanisms and retentions and everything will be reset. And I think there is further work to do there. Then, finally, I think we’ve been fortunate over the past robust years of being able to man our vessels offshore with a lot of positions that may not absolutely be necessary, and as we look at crosstraining through our alliance with Schlumberger and just reevaluating the positions offshore on our vessels, I think there is a certain amount of re-manning that is going to take place there. So there is a number of places we have yet to work on.

Perfect. And second one for me, obviously looking out to 2016 and 2017 you made it pretty clear things don't look great and we don't have a lot of visibility yet. But specifically with the 4000 and 5000, it seems like you are rallying the troops around those two assets. Is it reasonable to think those things keep better than a 50% utilization looking out there or is it just still too early to tell?

I don't want to get too far into 2016, but I think that we are very confident on the utilization on those two assets, and then the remainder of the uncertainty of the market really falls to the 534 in the Gulf of Mexico. In the North Sea, it is very - it’s way too early in the North Sea to be making any comments about how many vessels we will be able to keep busy at what utilization rate.

Right. That's helpful, guys. Thank you all.

Thank you for your question. Our next question comes from the line of Martin Malloy. Please proceed.

Congratulations on the strong third quarter. I didn't hear much about the OneSubsea alliance. Could you maybe update us on the activity levels there and what you all are working on?

The OneSubsea alliance has always been a longer-term play. We are building the 15K system. That's due for delivery in 2017. That's on time and on schedule. And what we have now is a more increased marketing and sales structure by sharing off on Schlumberger's team and our teams with a joint approach.

Okay. And I’m not sure what all you can tell us on the Siem I and II contracts and the conversations with Petrobras, but are they still on schedule for mid-next year and late next year for coming online? And I guess in terms of the structure of the contracts between Helix and Siem, it is my understanding you all have a seven-year charter with Siem and the contracts with Brazil are for four years?

Four years with options on the Petrobras contracts. Four years with three one-year options, so the charter had to mirror that obligation.

And the builds are on the program. They're on schedule. We launched the hull of the first vessel just a week or so ago, so we are predicting to be on time for the first and second vessel at this time.

Okay. The Siem I and II, the contracts that you have with Siem for the vessels, if something happens with the contracts with Petrobras, you would still be obligated for the vessels?

By the charter agreement, we would still be obligated. We have a really great relationship with Siem, so I think it's a matter of - if in the remote eventuality something happened, I would be hopeful that we could work out something with them.

Okay. Thank you.

Thank you for your question. Our next question comes from the line of Gregory Lewis. Please proceed.

Yes thank and good morning gentlemen.

Good morning Greg.

Owen, I know you don't want to get too involved in commenting about the North Sea, just in that you said there's not much visibility. But I guess I just, a little curious on the decision to extend the Skandi Constructor. I know you've mentioned in the past that this vessel can do certain work that is specific to that vessel, but just as we think about the decision to extend it another year, was that just based on a feel of the market, customer conversations? And then, just following up on that, you mentioned a lower dayrate. Is there any sort of percentage range you could give on maybe how much savings that you're getting on that chartered-in vessel over the next, what, 15 months?

Yes, I'll take it. I think our decision was based on the fact that there is opportunities out there. I am not sure they're going to be realized or not, but there are opportunities out there, and we wanted to have access to the vessel so that we could jump on those opportunities if they were to present itself to us. We are not at liberty to discuss the change in charter rates. All we can say is it's a very favorable arrangement.

Okay, so it's kind of like what we are seeing in other markets, it is just a blend and extend where maybe the NPV could be neutral-ish? Okay. And then, really, just you mentioned the IRS 1 and 2. It sounded like those are on contracts through Q4. In thinking about those two pieces of equipment, how far in advance will - what type of visibility will the Company have in terms of thinking about how the early part of next year looks? Is there - obviously, they are all in the - how easy is it to get those on and off hire?

Both are on contracts until the end of this year. Then we have to bring them back on shore for repair and maintenance. We’ve got a scheduled period that’s required in Q1 for both of those systems anyway. But we have tenders out there. We are looking at work for both systems next year. I don't think we will see the same amount of utilization as we have seen in 2015. But both are available and both are under tender [indiscernible].

Okay, sure, and just thinking about how long would we expect those to stay in the yard? How long is that maintenance?

The maintenance period on an IRS will be four to six weeks, depending what we find when it comes in.

Okay. Four to six weeks, okay perfect.

On IRS 2, we’ve got to do a full certification period, so that would be the longest one.

And is that two months?

That would be six weeks planned.

Okay. Okay perfect, all right thank you very much gentlemen.

Thank you for your question. Our next question comes from the line of George O'Leary, please proceed.

Good morning guys.

Good morning.

On the well intervention business in particular, if you look out into your crystal ball in 2016, I know you don't want to pontificate on it too much, but just given the Q5000 is contracted, you feel good about the Q4000 utilization, if nothing else year-on-year in the Gulf of Mexico would you expect utilization to be up? And then, given what you are doing in terms of stacking the H534 and on the cost side, just for the well intervention business in general, based on what you know today, does it feel like operating margins can be higher in 2016 versus 2015, even, let's just say, assuming a flat number of days worked or a flat utilization level year on year?

You can take it or I will. Margins I definitely would not expect to expand in this current market. We are still seeing pricing pressure throughout the market. From a utilization standpoint, I think our expectations are that utilization will be down somewhat, but BP's contract starting in April pretty much takes care of the Q5 and the Q4 we expect strong utilization on. And then, any remaining work, which is what’s uncertain right now until we see the producers' budgeting process, that would fall to the 534 in the Gulf of Mexico and that's where we have some uncertainty. Right now, the way we are planning is to plan for a warm stack until we have better visibility, and then we’ll make the announcement going into next year what will happen with the 534.

We may elect to cold stack and reduce costs further on the 534 as we go into next year, depending on the outlook.

Or if there’s additional work, we may bring her out and work her for part of the year. She won't have a strong year, but the idea is to offset any idle costs incurred. In the North Sea, the North Sea is the hardest hit of all the regions from all this. The P&A work over there is less regulatory driven than it is in the Gulf of Mexico, which is a big factor for what sustains the Gulf. In the North Sea, though, keeping the wells going at the end of their life and avoiding cessation of production is going to become a looming issue for the producers. Plus the F&D costs of our work over methodologies on wells makes any incremental production commercial, even at these current rates. We do know that the work is out there to be done. It really boils down to what the corporate mandate will be from the producers as to how much OpEx grew, because this kind of work falls under their OpEx, not their capital budget, so we just have to wait and see how much of their OpEx budgets are allocated for doing this work and that will drive our ultimate utilization decisions on the North Sea fleet.

Okay, you answered my second question with that answer, so thanks for the time, guys.

Okay.

Thank you for your question. Our next question comes from the line of Joe Gibney, please proceed.

Thanks, good morning guys. Just a couple of questions on robotics. Specifically on fleet count securities if you could update us on out of the long-term charters, which other than the Canyon which is going to stack, now are there other assets that are up for charter renewal in 2016, just trying to understand how many of your long-term charter vessels are in that queue for this upcoming year and then maybe how we should think a little bit about kind of robotics fleet count from an ROV perspective I mean tick to down one this quarter, how many of those ROVs into next year of your fleet, maybe sort of coming up for potential retirement, just trying to get a sense of fleet size as we think about robotics would be helpful.

Okay, regarding the vessels, the Olympic Canyon should get to the U.K. in the next week and then the plan will be to cold stack it. We can give that vessel back May 2016. The REM Installer will be the next one that drops off the fleet and that will go in July 2016. We will also take delivery sometime between February and April of the Grand Canyon. That's our current plan at the moment. The Grand Canyon III, sorry. So we will be going down from five vessels to four vessels into 2016, and then as we go further out, the other vessels stagger off each year if we have to reduce further. The ROVs, we don't see any ROVs coming off charter at the moment. They are on long-term vessels with our clients. We’ve got some ROVs that we have in the shop that are ready to go, but I don't see them getting spot work like we would have done in the past. It's not going to be a spot market for ROVs next year. And the trenching works, we’ve had a very successful 2015 for trenching, but we see 2016 as a drop down in trenching.

Okay, that's helpful. Just on that line item for trenching, roughly $300 million EBITDA for - or, excuse me, revenue forecast for robotics this year. Just remind us what ballpark percentage trenching is of that number?

Trenching is approximately 30% of our robotics numbers.

Okay. All right, thank you, guys.

Joe, if I could just add something, because you highlighted one of the major headwinds that we are facing next year is that we always charter our robotics vessels and we have tried to do it on a staggered basis so that we have the ability over time to either increase or decrease the vessel fleet. What is happening here is that the market is declining at a greater pace than what our ability is to resize our fleet. Especially during the first part of the next year, we’re going to be carrying the Olympic Canyon...

REM Installer.

…the REM Installer, and then taking the new Grand Canyon vessel on, then we will be carrying all three of those vessels in the first half of the year, whereas in the second half of the year we will have the fleet downsized to four. So it's the first half of the year headwinds that are causing us some angst right now, and we are in - as we said in our opening comments, we are in discussions with the ship owners to try and mitigate some of that cost, but we're just going to have to be a little patient and see what the outcome is going to be.

Okay, great. Thanks.

Thank you for your question. Our next question comes from the line of Chase Mulvehill. Please proceed.

Hey, good morning fellas.

Good morning.

So, I guess first question, could you help us with the magnitude of the reduction in the Skandi charter rate? Just maybe a percentage basis what the charter rate is down.

No, we're really restricted from talking about the charter rate on the Skandi Constructor for a number of reasons, but we just can't talk about the rate.

Okay, understood. All right. And then, so are you in discussions with Siem about potentially reducing the chartering rates there or are the chartering rates pretty sticky right now?

Right now, we are seeing no - we have no basis for really going to talk to Siem right now. As I said, we don't have any indications of having that need to have those discussions.

Okay.

What we do see is the cost for the people that we will be putting on the vessel will come down, compared to the original plan.

Okay. All right. And so, and you talked about potentially cold stacking the H534, which would take, I think it is like, about $40,000 per day is what the warm stacking costs are, so then it effectively goes to zero. What about the Seawell? Could you cold stack that and how should we be thinking about the Seawell as we get into 2016?

I think we’ve mentioned the Skandi Constructor, the reason we extended that is to have access to the vessel for work that is not within the capabilities of the other two vessels. The Enhancer, we're pretty confident of strong utilization. The Seawell is the one that we're going to have to be, again a little patient and see. We know the work is out there to keep the Seawell busy. It is a matter of whether or not the producers budget for it or not.

Right. And we should look at the Seawell as being mostly competitive with the Well Enhancer, right?

Yes, they are almost interchangeable except for the fact that the Well Enhancer has the capability of deploying coiled tubing whereas the Seawell does not.

Okay. All right. And what about the opportunities for any of your North Sea vessels for work outside of the North Sea?

Again, we are looking at options. There is nothing firm there at the moment but we are in discussions.

Okay, all right. And any thoughts on the leading edge dayrates in the Gulf of Mexico and then what about in the North Sea for well intervention?

I think we are at market rates and we are not really at liberty to discuss our rates at the moment.

I think it's a very dynamic situation. I think you’ve seen the recent announcement of the rig rates. The rig rates seem to still be trailing down. I think there is alternatives to just following rig rates. Our methodology in the work that we do is quite a bit different than rigs. So it's a matter of doing a proper sales and marketing job in our discussions with the producers to convince them of the time efficiencies, cost efficiencies, especially on short duration spot work where our vessels are clearly an advantage to a rig.

Okay. And so the rates that you saw - you realized in 3Q, are they mostly reflective of leading-edge rates or do we still have some backlog that you worked off in 3Q at higher dayrates?

Our rates right now are honestly, truly a mixed bag of rates. The rates are not consistent primarily because the contracting terms are also very dynamic and vary from one producer to another. It depends on what the drivers are, what the producers are looking at, and we are trying to respond on more of an individual basis.

Yes, I think the way to look at it, Chase, is that where we have backlog, those rates are determined. Where we don't, we're at market rates. So, incremental spot market work is very competitively bid rate wise, but we do have a fair basis of work for the Q5 and Q4 where the rates are determined by existing contracts I’ll say. I also would say that in the North Sea for the Well Enhancer and the Seawell, rates have not come down on a spot market basis as steeply as they have in the Gulf of Mexico. And that’s because of the unique capabilities of both the Seawell and Well Enhancer which offers a really competitive operating advantage to our customer vis-à-vis our competition.

Okay.

So it would be unfair to take current leading-edge dayrates and apply it across the board. It's just not the case for us.

Right. So what I'm hearing is that the dayrates that you earned in 3Q, that might be – that seems like a fairly good run rate as we go forward into 2016 right? You are not expecting the dayrates that you earned to step down significantly into 2016 unless the market continues to bleed right? But I'm just saying from a leading-edge basis.

Yes. It’s hard to say, Chase. The Q5 worked on a lot of opportunistic spot market work in Q3, so its margins weren't great but don't forget when the Q5 goes to work, we have a rate regime there that’s already set and the Q4 has a couple of anchor clients where the rates are set for next year too. And as Owen has mentioned, the North Sea is more uncertain, but the rate compression we’ve seen there, again hasn't been as steep as what you see because you're not competing against floaters per se.

Right. Okay. All right, last question, because I know I’ve asked a lot. So on your covenant calculations, what debt are you able to exclude? And then what is the associated EBITDA right? So I guess you excluded debt I think for the Q5000 and then do you exclude the debt – the EBITDA from the Q5000 as well?

Chase, it would take almost a five-day seminar to go through the complications of the calculation. However, just to generalize, the Q5 subsidiary debt does not count against our leverage ratio as you suggested, because it's at a sub level and it’s nonrecourse to the parent. And as long as we, quote, I'll use this term, repatriate funds from our foreign subsidiaries, we get to count that EBITDA. So, it is not – the EBITDA that counts for the Credit Suisse [ph] doesn't match up exactly with our financial reporting EBITDA, but we have ways.

Okay. That's all I have. I will turn it back over. Thanks.

Thank you for your question. Our next question comes from the line of Bill Dezellem. Please proceed.

Thank you. I want to circle back to the Q5000 and share with us, if you would please, the work prospects that you are seeing between now and when that vessel more permanently goes to work next spring.

Okay, the vessel should be sailing today and she will go on contract for a scope of work with a client in the Gulf of Mexico and then she goes straight onto a longer scope with a legacy client. And then we are bidding work in Q1 and expect around mid-March to start the testing program for BP and then we're off on the BP contract for the five years.

So basically, you just have January, February, and the first half of March which are available to put new work in place.

Correct, they are available and we are tendering at market rates in that space.

Great, thank you.

Thank you for your question. [Operator Instructions] Our next question comes from the line of Trey Stolz. Please proceed.

All right. I think a lot of this was covered ad nauseam. My only question was just to verify on the Q5000 that some of that work moving from the H534, the backlog to the Q5 that wasn't necessarily done with a rate concession, so we should assume it is cash flow positive for the time being, whereas looking into early 2016 before the BP contract starts, it might be a little different for the Q5 there.

Yes. So, Trey, on the Q5, the work it will immediately go to, let's say it was contracted at market rates.

Correct.

And the backlog that was transferred off the H534 is really at the legacy rates.

Correct.

Right?

Correct, yes.

So…

Versus a shakedown period, a lower rate shakedown period, which you might see with a new build in this situation.

We're going to go there and execute for our client just like it has been working for years and years, that's our plan, regardless of the rates and regardless of the fact that it's a first job. We can go into how experienced the crew is that is going on the Q5. It is a fairly experienced crew that we have been training personnel and shifting among vessels and some of the H534 crew is going on the Q5. So, yes, you could call it a shakedown, but we plan on hitting the pavement right away and working efficiently for this client.

All right, and then the intervention risers, just touching those real quick, is it okay or safe to think that there is almost a substitution effect going on. While your client base has drilling rigs potentially under contract, they are stuck with the drilling rigs. You have the intervention riser system to address that market in the meantime and that some of that demand may be shifting back to well intervention fleet, more specific vessels that say in 2016 or as those drilling rigs continue to come off contract?

This is a hard question really. It's unknown at this time. They are locked up until the end of the year. It is a difficult one to answer. I don't know if you want to add to that.

I don't know the answer. I don't see an overwhelming demand from producers to rent systems to put on rigs. Why, I don't know. It could be that we are in a transition here, as you mentioned that our rigs are rolling off contract. From what I’ve seen on the market rates on rigs, I think rigs are very competitive when there is a substantial long-term contract, but most of the work that we do is spot market and short duration in nature and that's hard to rig up a rig for. So, I'm not seeing any long-term rigs being allocated to this kind of work where they are seeking – actively seeking an intervention riser to go on board.

All right and then the H534, you briefly mentioned the potential to cold stack that vessel. Is there a lot of work out there that the Q5 can handle or can address that maybe the H534 wouldn't be able to or what may also play into that decision looking into 2016? Is it pure demand function at this point?

I think it is pure demand. I think the – certainly the Q5 is a far more capable vessel than the 534, but for the work that we see out there, the 534 is sufficient. So I think it's purely a demand question.

All right, that does it for me. Thanks.

Thank you for your question. Our next question comes from the line of Ole Slorer. Please proceed.

Yes, thanks. So Owen, Schlumberger were grilled quite a bit on the robustness of the joint venture that they have with you at their latest analyst presentation up in New York and they’ve asked about the idleness of deepwater rigs and seems to be a lot of the call is centered around that. But they were quite dismissive of the competitiveness of large drilling rigs in the context of well intervention. So, could you give us some sense of the cost differences, even if rig rates were to come down – they are down, so even with rig rates being maybe down to cash operating costs, how competitive is your cost structure?

Ole, I don't know that the competitive nature of our vessels reside solely in the cost structure. We may have a marginal advantage there. The big difference though is in the efficiency in doing the work and there – and I am taking numbers that I have seen producers cite to us in the past. These are not my numbers, but it is anywhere from 20% to 40% more efficient than a rig depending on the scope of work that it's being applied to and that's on a time basis. Now, that varies a little bit regionally. As Tony alluded to, in the North Sea, our rigs compete more against moored rigs, and as such we enjoy a far greater time efficiency over a moored rig than we would a floater. But even in the Gulf of Mexico, especially on short-duration work, we have a significant advantage on a time basis than a rig.

You have to remember in the North Sea a lot of the wells that are there need diver intervention, so even if a rig comes in, the client would still have to bring a dive boat, a DSV and satellite vessel. So they would have two vessels to undertake the scope.

I think there is another thing that play also and it is not all the producers but at least some of the majors are taking a longer-term view of how to maintain the life of their deepwater subsea wells. And it would be counterproductive to base a long-term strategic decision on how you're going to do well intervention in the deepwater on what is hopefully a short term dip in rig rates, because eventually the rig rates are going to return and then they're back to the same place.

I wasn't thinking about cost structure of the vessels, so thanks a lot for clarifying that. As you highlighted, there is a regulatory framework around abandonment of wells in the Gulf of Mexico. In the North Sea, it looks as if a lot of the oil companies, including Statoil, have flat out deferred any kind of maintenance at all. I think we saw that in the production numbers in September and August with very little downtime for platforms. So do you have a view of the volume over the magnitude of the work which is just now being pushed ahead like a snowball and eventually it will have to be done?

We do have specific well counts that we’ve looked at for the North Sea. Without getting into the specificity of it, there is a substantial, I mean very substantial, amount of decommissioning work to be done in the North Sea. The problem with the North Sea is that it is not as regulatory driven as the Gulf of Mexico. In fact, with the current tax – with its current structure over there, basically the government is on the hook for paying for 60% of it, so there is absolutely no incentive on the parts of government to force the abandonment situation in the North Sea and of course there is no incentive for the producers to accelerate spending the money on it. What we are seeing though is sort of a Catch-22 for the producers though that the one mark that definitely triggers abandonment is cessation of production and with the age of the North Sea, a lot of the fields are nearing their cessation of production. So unless you go out there and enhance the wells and keep the production going, you are going to see an acceleration of the regulatory-driven abandonment work. How, how much and when that might happen, that is a total uncertainty.

Interesting. In this down cycle, your balance sheet is, thank God, in a very, very different position to what it was in a prior down cycle, so you have a different degree of flexibility this time around. While you do have assets coming in and certainly those lack of spare capacity for the up cycle, have you got any higher-level thoughts about any kind of strategic move that you could make at this down cycle given your greater financial flexibility?

I think our focus is totally on preserving the balance sheet at this point to make it more certain that we get through with strength. But it's too early in the down cycle to be looking at the potential opportunities were we coming out of it, but you are right. If we preserve the balance sheet right now then as we come out of it, we should be better positioned than many.

Okay, thanks for that, Owen.

Thank you for your question. Mr. Staffeldt, there are no further questions at this time. I will turn the call back to you.

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

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