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Helix Energy Solutions Group, Inc. (NYSE:HLX)

Q2 2009 Earnings Call

July 30, 2009 10:00 am ET

Executives

Cameron Wallace – Director of Marketing & Investor Relations

Alisa B. Johnson – Executive Vice President, General Counsel & Corporate Secretary

Tony Tripodo – Executive Vice President & Chief Financial Officer

Owen Kratz – President & Chief Executive Officer

Robert P. Murphy – Executive Vice President – Oil & Gas

Analysts

James Rollyson – Raymond James

Roger Read – Natixis Bleichroeder

William Herbert – Simmons & Company

Joseph Gibney – Capital One Southcoast

Philip Dodge – Stanford Financial Group

Joe Agular – Johnson Rice & Company

Operator

Welcome and thank you for standing by. At this time all participants are in a listen-only-mode until the question-and-answer session of today's call. (Operator Instructions) Today's conference is being recorded and if you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Cameron Wallace, Director of Marketing and Investor Relations. You may begin.

Cameron Wallace

Good morning everyone and thanks for joining us today. Joining me today is Owen Kratz, our CEO; Tony Tripodo, our CFO; Robert Murphy, Executive Vice President of Helix Oil and Gas; Alisa Johnson, our General Counsel; and Lloyd Hajdik, our SVP of Finance; Bart Heijermans, our Chief Operating Officer is out of the country today.

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 the Investor Relations tab on our website at helixesg.com. The press release can be accessed under Recent News, 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?

Alisa B. Johnson

Thank you. This conference call and the associated presentation contain certain forward-looking statements. All statements 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 forward-looking statements due to a number and variety of factors. For a complete discussion of risk factors that could cause our results to differ, we direct your attention to our Annual Report on Form 10-K for the year ended December 31st, 2008 and subsequent reports on Form 10-Q, which are on file with the Securities and Exchange Commission and available on our website.

Also during this call certain non-GAAP financial disclosures may be made. In accordance with SEC rule, the final slides of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The presentation together with the reconciliation is available on our website. Tony?

Tony Tripodo

Yes. Thank you, Alisa. Moving on to slide four, which summarizes this quarter's financial results. On an operational basis, Q2 revenues represent a slight improvement over Q1, even though the reported results reflect a slight decrease. That is the case as Q1's revenues reflected a $74 million positive revenue adjustment for MMS royalties approved over several years that were reversed as a result of a favorable court ruling earlier this year. In addition, quarter two revenues reflect only two and one-third months of Cal Dive revenues, as we no longer consolidated financial statements of Cal Dive effective June 10, when our ownership dropped below 50% after the secondary offering and share repurchase.

With respect to earnings per share, we reported on its face $0.94 a share, but after normalizing for the non-recurring items enumerated in the press release and outlined again on slide five, the normalized EPS for Q2 would be $0.31 a share. In addition, we realized $35 million of pre-tax gains associated with hedge contracts, cash settled in quarter two, but recognized in our earnings in Q1 in a mark-to-market basis. I know that some analysts and commentators backed that out of the first quarter earnings, so I will leave it up to the investment community on how they want to treat that.

Moving over to slide five there were several one-time items that impact quarter two results. First, the sale of Cal Dive shares in June resulted in a pre-tax gain of $59 million. Secondly, the receipt of a $103 million of insurance proceeds relating to claims associated with last year's Hurricane Ike, net of cost and additional charges booked in quarter two as a result of the hurricane resulted in net gain of $43 million. In addition, we booked additional impairment charges of $11.5 million for certain of our oil and gas properties, as a result of a mid-year reserve review. Also, we recorded a $9 million gain in the sale of our reservoir consulting business, Helix RDS. I will turn the next few slides over to Owen.

Owen Kratz

Turning to slide six. We've remained focused on debt reduction and we've made considerable progress in Q2. Year-to-date our net debt balances decreased some $700 million. We were able to increase production in the second quarter to $12.4 billion cubic feet equivalent, which was up from the 11.9 Bcfe in the fourth quarter. Lingering third-party pipeline and other mechanical issues continue to plague us, however, and with respect to the Noonan gas production, most of the repair issues are behind us now, Robert will discuss a little bit of this more in detail later.

Moving over to slide eight, I will get into an overview of how we see the balance of '09 playing out. We've consistently stated that we expected the second half of '09 to soften on the server side, this will definitely be the case in terms of vessel utilization. Furthermore, we plan to divert utilization of the Express pipelay vessel to building out the pipe-in-pipe infrastructure needed to bring the Danny oil field onto production. That along with the transit of the vessel from India after the completion of the Reliance project and the regulatory dry-dock of the vessel in Q3 along with the general softening in offshore construction activities will lead to lower revenues for this segment in the second half of '09.

The much stronger balance sheet and liquidity position we find ourselves in is allowing us to accelerate plans to bring both the Danny and Phoenix oil fields into production. As such we will move some CapEx forward from 2010 into this year and therefore we have upped our CapEx forecast to $370 million from $300 million. Both of these fields already have capital investment in them and both are very oily. And we are very bullish on oil for 2010. Therefore, it makes sense for us to accelerate these projects and get them completed.

Moving over to slide nine, we continue to focus production for the year in the 45 to 55 Bcfe range. This range assumes a certain level of hurricane downtime as well as ultimate completion of the Noonan pipeline repairs occurring in Q3. With the hedges in place, we've realized a commodity price deck of $7.62 per Mcfe for gas and $72.29 for oil in the second quarter. Moving over to slide 10, looking forward into 2010 we will continue to focus on our balance sheet and slimming the company down via non-core asset sales.

At this stage, we expect 2010 CapEx to drop dramatically and presently we are forecasting it to only be in the $150 million to $200 million range. While we are not ready to put out a 2010 production guidance figure, we certainly expect 2010 production to be significantly higher with the onset of production from the Danny and Phoenix oil fields as well as seeing a full year's worth of production from the Noonan gas field. This of course would be in the absence of further production asset sales.

I will turn the next section on liquidity and capital resources back over to Tony.

Tony Tripodo

Okay. I am going to move forward to slide 12. Slide 12 shows our net debt position and liquidity position on a trend basis and I think this slide illustrates the dramatic improvement in our balance sheet position since the beginning of the year and in that sense since the end of quarter one. Our net debt position has decreased by some $700 million, while our liquidity position at quarter end reached $670 million. We defined liquidity as the available revolver plus cash on hand.

Over to slide 13, much of the information on this slide with respect to non-core asset dispositions has already been mentioned or previously discussed. So, I won't repeat, but I would like to point out that we remain fairly well hedged on our remaining '09 production profile at 63% of the estimated second half of the year. I refer you to slide 27 for more details. Slide 27 also outlines the new hedges we have entered into for 2010.

Moving over to slide 14 and 15. Slide 14 outlines our key credit facility debt covenants, again our internal projection show that we expect to fit comfortably within compliance, and certainly, our lower debt levels gives us a great deal of more room in this regard. On slide 15 outlines our debt instruments and maturity schedule. We are presently unborrowed on our revolving credit facility, completely paid it down in quarter two and expect that will continue to be the case throughout the remainder of the year.

Beyond that the next scheduled debt maturities are Term B loan facility, which matures in the December of 2013. Although, the convertible notes do have a put-call feature that can be triggered in December of 2012.

I'll turn the next few slides back over to Cameron to discuss operational performance.

Cameron Wallace

Thanks Tony. Regarding operations highlights for the quarter we will begin with slide 17, and the Helix Subsea construction business unit. The Intrepid performed a variety of construction projects in the Gulf of Mexico, while the Express has departed Indian waters and is returning to the Gulf to prepare for our Danny pipeline installation project.

Slide 18 shows our new Gulf of Mexico spoolbase facility. Land structures are complete and dredging of the slip is underway. Welding and stocking of the Danny pipeline is set to begin in early August. In terms of our other business units, robotics experienced another quarter of excellent asset utilization. Olympic Triton and Olympic Canyon operated under charter agreements for Technip and Reliance Industries, while Island Pioneer and Northern Canyon were active on day rate projects offshore India and in the North Sea.

Our well operations group has been busy in the second quarter as well. Seawell operated under a dayrate contract for Shell in the North Sea, while the Q worked with various customers in the Gulf of Mexico, including a Department of Energy sponsored gas hydrate exploration project. This brings us to our assets currently under construction as highlighted on slide 21. Our newbuild well intervention vessel, Well Enhancer is being fit with its saturation diving system and is expected to start work in the North Sea late in the third quarter.

Engineering for production module installation for the Helix producer 1 FPU is underway with the vessel set to begin production on our Phoenix field in the first half of 2010. Finally, our Caesar pipelay vessel has nearly finished the conversion process and transit to the Gulf of Mexico in the fourth quarter where she will enter service in early 2010.

Moving over to slide 23 shows a gross profit margin of 17% for contracting services. Margins were lower than both the previous quarter and Q2 '08 due to a timing of project completion milestones on certain International pipelay contracts as well as the project termination costs booked in Q2 related to the late delivery of the Caesar. Increased revenues from our robotics group helped to offset this imbalance to an extent.

I'll turn the oil and gas slides over to Robert.

Robert P. Murphy

Good morning everybody. Please turn to slide 25. Increased production volumes, higher oil prices and a gain recorded from our global settlement insurance, Ike claims all contributed to profitable quarter for ERT. Setting through the numbers our oil and gas, operating units excluding the net gain from the insurance settlement achieved an operating profit of $19 million, compared to $12 million in Q1. In Q2 we recorded a $39 million gain related to the global settlement with our insurance carriers. To-date we have received $118 million in proceeds, net of deductible and have spent approximately $143 million in repairs.

We have increased our abandonment estimates by $44 million for properties that were destroyed by Ike. We expect to complete all of our hurricane repairs and most of the abandonments in the second half of 2009. We had an additional impairment of $12 million related to four shelf properties due to lower reserve estimates. Under successful efforts accounting we review all properties on an individual basis throughout the year for their economic liability. We saw volume improvement over Q1 and anticipate further improvement in the near future with the expected increase rate from our Bushwood development. Repairs are nearing completion on the hurricane-damaged third-party-owned gas export pipeline. We estimate the Bushwood field being brought up to the anticipated growth rate of 100 million cubic feet of gas equivalents per day, sometimes near the end of August. We are currently producing the field at a lower growth rate at 32 million cubic feet of gas for that.

Turning to slide 26, we see our overall operating costs have declined when compared to Q1, principally due to DD&A, reduced DD&A, as a result of a full quarter of production from the Bushwood field. We expect further DD&A reduction as additional volumes from Bushwood come online later on. On a cash basis operating expense of $2.11 was relatively flat to Q1. We continue to streamline our offshore operations and expect further reductions as cost for boats and related services decline.

The slide 27 summarizes our 2009 2010 commodity hedge position. Our average realized price expectations for the remainder of 2009 with our hedges that are currently in place, is $70.54 for oil and $5.7 for gas. Additionally, we entered into hedge contracts for 2010 and have hedged approximately 32 Bcfe of production. We continually evaluate our hedging strategy and as we get closer to first production at Danny and Phoenix we may pursue additional oil hedges for 2010. Cameron?

Cameron Wallace

Slide 29 and 30 are the non-GAAP reconciliation schedules presented for your reference. I will not go over these schedules, but if you have any questions please give me a call. At this time I'll turn this call back to Owen for his closing comments.

Owen Kratz

Let me first apologize for the messy Q2 financial reporting results. This is occurring because of the proactive management that's been occurring here getting us through this hurricane and economic crisis. There may be more I'll be honest there be more to come as we continue to transition the company to a simpler more physically sound business model. These in my opinion are very positive occurrences. We are coming out of crisis management mode and we are returning our focus to operating what could be a very soft market for the foreseeable future on the service side. Our financial situation is vastly improved and we have plenty of potential for continuing improvement.

Efforts will continue to be given to further monetization of non-core assets of values that makes sense for shareholder values. These assets include the shelf oil and gas production. In the absence of fair value sales however the intent would be to ring-fence this production and minimize capital allocation to just regulatory and leasehold-required levels; and then, basically, assume a blowdown strategy generating the cash. The second set of assets would be the deep-water oil and gas production. We are open to selling down interest in fields and production when a fair value can be achieved.

We will also seek promote partners for existing prospects and other than completing Danny and Phoenix, capital spending will be rather restrained for 2010. The third category here is the production facilities, they will remain on the market and we are open to fair value offers. Then finally is Cal Dive, which I think its pretty apparent to everyone that we will divest our remaining 26% interest as the market allows, but only at a fair market value. Our strategy will be to continue to lower debt preferably to a 20% to 30% debt-to-book cap level. I will also be identifying areas when this balance sheet stream can best be employed with the assumption that a soft market generates opportunities. Near-term focus will be on lowering operating cost and improving operational efficiencies especially in our Subsea business unit.

Concurrently, we're working to increase our marketing and sales efforts for all of our services. In general, we have fewer assets in most of our major peers and our strategy has always been to target specialty niches, which means that we have the potential to outperform our peers in the softer market. In addition, we do have our oil and gas production, which provides better visibility and stronger cash flow than our peers in the softer market. As a result of this relative strength, we do expect to benefit and outperform our peers through what we believe is likely to be a soft market ahead. So, with that I'll open the phone lines up for questions.

Question-and–Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Jim Rollyson. Your line is now open.

James Rollyson – Raymond James

Good morning guys.

Tony Tripodo

Good morning Jim.

James Rollyson – Raymond James

Nice improvement on the balance sheet. Owen, you talked about the, some of the issues that hit 2Q margins or actually Cameron did and you obviously also have a softer second half outlook on the revenue side, when you kind of balance those things out, how do you feel about margins during the second half for marine contracting?

Tony Tripodo

Yeah, Jim I’ll take it. I think margins are going to decline and they are going to decline because of lower asset utilization. I think start it off with the Express. The Express is going through regulatory dry-dock and is transiting all the way from India to ultimately the Gulf of Mexico. Right now, I believe she is in Spain for dry-dock. So you are going to have that vessel essentially not earning any revenues and then when she arrives in the Gulf of Mexico she is going to be doing internal work, laying the Danny pipeline. And I think we been pretty consistent in saying, our visibility was the second half of the year was going to be softer and I think across the board, that's going to be the case as well and I thought when you have lower vessel utilization, it's going to lead to lower margins. There is no other way around it.

James Rollyson – Raymond James

Sure. And are you guys starting to see anything in terms of bids for going into next year at all yet?

Owen Kratz

Yes, Jim it's not as dire as what we might have first predicted, but we're not sitting here saying that it's going to be robust either, it's going to be a tough market. I’ll just, a little further comment on what Tony said it's partly the soft market, but the margin impact from the Express is a result of our change in strategy of returning our assets to the Gulf of Mexico and focusing on our Gulf of Mexico market in support of our long-term stronger clients. So during this transition period of getting the Express back to the Gulf of Mexico, that’s going to have some near-term margin impact that should rebound later on.

James Rollyson – Raymond James

As you look at production, second quarter can you give us what the oil/gas mix was in 2Q and maybe when you start bringing in Danny and Phoenix, you had mentioned to being oilier, maybe what the oil/gas mix might look like for next year?

Tony Tripodo

I'll just say. I am sorry, go ahead Robert.

Robert P. Murphy

Q2 was about 40% oil and when we will get both Danny and our Phoenix project on and they will be staggered, we're going to be probably, 50:50 at that point.

James Rollyson – Raymond James

Okay.

Robert P. Murphy

Little higher than 50, but that's both of them being on.

James Rollyson – Raymond James

Perfect. And then last question maybe Owen or Tony, right now you're pretty much bare-bones CapEx for next year. I guess what would drive that up and maybe further down the road when you get the balance sheet where you want, what are your current thoughts or where you would target the next time you start spending money again?

Owen Kratz

Jim, the $140 million to $200 million that we are talking about next year really isn’t based on specific allocation of capital that we've made at this time. There is actually a lot of discretionary capital in there, we are arriving at that number basically by starting with our cash flow. With the understanding that we have to fund maintenance CapEx, debt reduction, longer-term maturities, and our thoughts are to be conservative in being able to do that out of cash flow without relying on asset sales or rollovers. So, when you deduct those it leaves roughly $200 million for available growth CapEx, which at this time has not been definitively allocated for 2010.

James Rollyson – Raymond James

Okay, thank you.

Tony Tripodo

And Jim, let me follow-up also on the point about our reallocation of the vessels to our own fields. The Danny and Phoenix fields have significant earnings potential for 2010. So, we are consciously and knowing that we are going to take a near term hit, but the benefits of bringing that production online is very significant.

James Rollyson – Raymond James

Especially with oil prices where they are?

Tony Tripodo

Yes.

Owen Kratz

Also to answer what we would spend it on, I think it's also we’ve made it clear in the past that going forward; we are going to be very service oriented led by our intentions to expand our dominance of the well intervention market.

James Rollyson – Raymond James

Thank you very much.

Operator

Our next question comes from Roger Read. Your line is now open.

Roger Read – Natixis Bleichroeder

Yeah, good morning guys. Well, can you hear me?

Tony Tripodo

Yeah. We can hear you Roger.

Roger Read – Natixis Bleichroeder

Okay. I guess kind of maybe taking on a little bit more with some of Jim’s questions there. Margins in the deepwater, if I did it correctly in my model, about 17% in the second quarter…

Tony Tripodo

Yes.

Roger Read – Natixis Bleichroeder

Including robotics and everything. As you look at margins in the second half versus margins in the first half are we comparing that to Q2 or we comparing that to first half margins, just, Q1 was a better quarter overall?

Tony Tripodo

I’m going to just say Roger that I would expect margins for contracting services, which is our Subsea Construction and our well operations will be lower than the first half as well as lower than the second quarter.

Roger Read – Natixis Bleichroeder

Okay. That’s helpful. And then would well intervention be included in that thought process in the North Sea?

Tony Tripodo

Yes.

Roger Read – Natixis Bleichroeder

Okay. The Caesar vessel you indicated on the last quarter call I think even in the presentation that sale if necessary or I say if necessary, if you'd find a reasonable offer you would sell the vessel it sounds like probably hasn't been anything terribly reasonable out there, so at this point we expect this vessel comes in and is actively bid in the Gulf of Mexico in 2010 or the maybe just not throw a whole crew on it at this point. How do you look at that?

Owen Kratz

We are accepting interested party dialog, but we are not actively marketing the vessel. The proper assumption to make would be that we will be bidding the vessel, not only in the Gulf of Mexico, but Trinidad, Mexico, South America. I just want to clarify, we'd like the niche of the vessel, I am actually less concerned about the utilization on the Caesar than I'm real pipe layers and that's just because of the supply in the marketplace. But if you look at the strategic rationale for having the Caesar it’s a good niche, it's also a good enabler on larger projects that involve both the rigid lines and the reeled lines for giving larger scopes of work. To that end, we don’t need to own all of the Caesar in order to capture the enabling benefit. So therefore we would be opened to especially working with strategic partners that could enhance the marketability of the vessel.

Roger Read – Natixis Bleichroeder

It maybe more true deepwater focused heavy-lift kind of company, I guess, as opposed to your fleet for the most part?

Owen Kratz

It's wide-ranging.

Roger Read – Natixis Bleichroeder

Yeah.

Owen Kratz

Right now, I don't think it's a question of value. The vessel has a very reasonable cost basis I think the issues in the market right now just are the uncertainty as to what the likely utilization would be in the near term going forward and that takes a lot of time for people to try to properly assess.

Roger Read – Natixis Bleichroeder

Okay. And then my final question as you look at selling the shallow water oil and gas production in the Gulf, is it given where you are now in terms of progress made on debt payments comfortable kind of increasing your CapEx on these deepwater projects. Would you be comfortable at this point Owen saying, I'll wait till prices are better, as opposed to kind of fire sailing into what is clearly a tough natural gas market?

Owen Kratz

It depends on the definition of firesale. We are obviously not pressed by the balance sheet considerations any longer to be forced into any kind of a sale. I think there is a lot of issues that go into the rationale of whether or not the sale of the shelf makes sense at current prices and part of that is, ongoing hurricane exposure, problems with reservoirs, as we took an impairment this quarter of the mid-term review. The shelf is not strategically core to where we're trying to take the company. So pulling out for the last dollar may not be that important, but then again we are not going to give it away.

Roger Read – Natixis Bleichroeder

Okay. Well that doesn’t put a whole lot more timing on it, but I appreciate your walking through it?

Owen Kratz

When is gas going to recover, Jim, I mean, Roger? I'm sorry, Roger. You tell me when gas will recover? I'll tell you when the sales going to recover.

Roger Read – Natixis Bleichroeder

We stuck our neck out of the prices getting better in the fourth quarter. So, that's my prediction?

Owen Kratz

We are going to continue softly probe the interest that's being shown in the shelf. And if we can find the right deal, especially if it has some kind of an outlying upside for us that we would be interested.

Tony Tripodo

And again Roger, I will just emphasize, I think what Owen says is very important, we're not interested in fire selling in it, on the other hand pulling out for the last dollar isn't where we're at either, because of the non-strategic nature of the asset.

Roger Read – Natixis Bleichroeder

Okay, that’s helpful. Thanks guys.

Operator

Our next question comes from Bill Herbert. Your line is now open.

William Herbert – Simmons & Company

Thanks. Good morning.

Owen Kratz

Good morning Bill.

William Herbert – Simmons & Company

Hey, Owen. Owen and Tony, well I guess I'll start with you Owen. You made a couple of comments with regard to your expectation of a relatively soft service market not being as dire as you once thought, but being realistic with regard to 2010 likely to be a tough market. So convey to us a dialog that you're having with your customers, the response that you are getting back from them and really what is necessarily soft or challenging mean as it relates to offshore construction, utilization, and pricing softer on both fronts any particular asset classes, which are going to be especially anemic, any regions that look more promising but not? That kind of commentary, I think would be helpful with regard to framing the overall offshore construction sort of opportunity and threats?

Owen Kratz

Well, it’s a loss. Let me give sort of a rambling response. Let me start with well intervention.

William Herbert – Simmons & Company

Okay.

Owen Kratz

Well intervention market has two segments basically the lighter through water wireline intervention market, which is predominantly North Sea based and lesser so in the Gulf of Mexico. I believe that that market as, it depends on how many of the vessel is currently under construction actually make it to the market and the financial condition of the competitors its not so much the feedback we're getting from the clients, that’s driving my opinion of a softer side. For a long-time, I've been talking about a supply driven softening in the market with $200 oil, we may not have seen it, but we certainly are going to see an oversupply I think in the light intervention market.

William Herbert – Simmons & Company

Okay.

Owen Kratz

So utilization could be a struggle to achieve there.

William Herbert – Simmons & Company

Okay.

Owen Kratz

And of course, if the competitors are financially distressed, they're going to be willing to compete on margin. So, you could see a margin erosion.

William Herbert – Simmons & Company

Okay.

Owen Kratz

In that market we have had some work cancellations from our clients, including majors that are postponing well, work that they otherwise would have done earlier, that’s probably offset by an increase in P&A activity.

William Herbert – Simmons & Company

Okay.

Owen Kratz

And I would say the P&A activity especially in the North Sea going forward is one of the bright spots?

William Herbert – Simmons & Company

Okay.

Owen Kratz

Moving on to the pipelay or the subsea market, I think the real pipe vessels have been overbuilt.

William Herbert – Simmons & Company

Okay.

Owen Kratz

For the amount of work in the market especially if you start and this isn't coming from any one specific client, but if you start charting the projects that are planned for next two years and then count the number of vessels. There simply are not enough projects to support all of the real pipelay vessels in the world.

William Herbert – Simmons & Company

Okay.

Owen Kratz

Now in the past, that's led to geographic redistribution of assets. The problem is right now we are pretty universally oversupplied worldwide.

William Herbert – Simmons & Company

Yeah.

Owen Kratz

Moving onto the ROV market, the bright side for us is that the ROV class support vessels the DP-2 80 to 110-meter vessels are grossly overbuilt. The rates there are coming down very rapidly and more and more vessels are coming on the market everyday. So that’s a good thing for us because we charter our vessels on a staggered basis, and are able to drop higher cost vessels off and pick-up newer tonnage at lower cost.

William Herbert – Simmons & Company

Okay.

Owen Kratz

But the downside though is that there are a lot of ROV providers. There are a lot of these vessels. There is not that great a barrier to entry to that market and on the more commoditized side of the ROV market, I think you're going to also see some pressure from oversupply. One of the reasons for our talking about our results dropping is that out of a fleet of five or six vessels, we have three coming off charter. We may or may not replace those. Therefore, in order to protect our margin we may actually windup with less revenue because of a smaller operating fleet.

William Herbert – Simmons & Company

And we’re talking about Canyon?

Owen Kratz

Right.

William Herbert – Simmons & Company

Okay, got it.

Owen Kratz

I think that’s pretty much.

William Herbert – Simmons & Company

Okay.

Owen Kratz

Through our major business segments.

William Herbert – Simmons & Company

All right. So moving the horizon closer to us Tony, you expressed forthrightly that margins in the third quarter for offshore construction were going to be weaker, you mentioned the Express is being one of the primary culprits because of a combination of dry-dock and doing internal work with regard to laying the pipeline, but apart from the Express what are the negative quarter-on-quarter deltas in the offshore construction fleet that lead to a contraction in the profitability?

Tony Tripodo

Well, I think the Express is a leading culprit.

William Herbert – Simmons & Company

Okay.

Tony Tripodo

As a fact, but also, we are expecting lower utilization on the Q4000.

William Herbert – Simmons & Company

Okay and define lower, it worked pretty much full out in the second quarter?

Tony Tripodo

Yeah. We are full out in the second quarter and I'll leave the response generous, we just expect that is and we are not staying throughout the balance of the year.

William Herbert – Simmons & Company

Okay. So are we looking at something, because I think the Q4000 is actually more important than the Express in terms of profitability. So, are we talking two-thirds employment in the third quarter? I mean just help us bracket this, so we can come up with a sensible and fair range for earnings. How much weaker? Sorry to keep pressing, but it's important?

Tony Tripodo

The Q4000 does have some backlog.

William Herbert – Simmons & Company

Okay.

Tony Tripodo

But its not fully booked to the rest of the year.

William Herbert – Simmons & Company

Okay.

Tony Tripodo

The work scope of the Q4000 tends to be very short-term oriented. So, work comes up, and goes away, work comes up and goes away. So, that has to been taken into consideration as well. I mean I'm giving you a long-winded answer to your question, but I'd say for the back half of the year in total and this is a very soft estimate.

William Herbert – Simmons & Company

That’s fine.

Tony Tripodo

Two-thirds may not be off.

William Herbert – Simmons & Company

Okay, two-thirds, thank you sir. So, we got the Express, which is off-line completely Q4000 and then what else?

Owen Kratz

Bill let me just add to that that we are not trying to be cagey. The reason for the uncertainty on our part is that we do have backlogs.

William Herbert – Simmons & Company

Yeah.

Owen Kratz

But the scheduling of the Q4000 work is one of those areas where clients have been shifting their schedules around that we are seeing deferments and that's making it difficult for us to nail the near-term utilization.

William Herbert – Simmons & Company

I understand. So we got the Express and the Q4000 and then what's happening with the Seawell and the Intrepid?

Owen Kratz

The Seawell is booked up and working well, we don’t see any issues there. When the Enhancer comes into market we do have sufficient backlog from both of the vessels for a large remainder of the year I think the oversupply situation there that may or may not happen would be a 2010 occurrence and you may actually see us consider a redeployment of one of the vessels.

William Herbert – Simmons & Company

Okay. And with regard to the Intrepid what’s going on there?

Owen Kratz

The Intrepid is sort of a, well, as everyone knows, it's sort of land-locked in the Gulf of Mexico, because of its transit speed, it is the workhorse in the Gulf of Mexico and stays pretty booked up. We are not concerned with it on its own, our strategy though in consolidating our assets back to the Gulf of Mexico is to provide multiple assets to better serve the shifting schedule nature of the clients projects right now and guarantee availability. As a result we may wind up with some idle asset time that would then fall to the Intrepid, which we would then use in construction support mode and to do some of our internal work.

William Herbert – Simmons & Company

Okay.

Owen Kratz

And because of that it would soften the margins for us.

William Herbert – Simmons & Company

Okay. So when Tony, we are looking at, actually a fairly commendable gross profit margins for the second quarter for offshore construction, are we looking at absolute profitability in the third quarter for contracting services being what, two-thirds of what it was in the second quarter and I know it's hard to pen down but just roughly?

Tony Tripodo

Well. I think at this stage any forward guidance I would give you is subject to so much variability I would prefer not to just sight it with any granularity. I will just say at the second half of the year from a P&L standpoint for this segment will be challenging.

William Herbert – Simmons & Company

Okay

Tony Tripodo

A least impact.

William Herbert – Simmons & Company

Fair point. And on the good news front and not that that was bad news because I think it was realistic, production, oil and gas should be higher in the third quarter, right?

Tony Tripodo

It should be higher dependent upon the start-up date for Noonan at fall rates and may be Robert can comment on that.

William Herbert – Simmons & Company

Okay.

Robert P. Murphy

Right. We, it should be higher that is, no storms and that the third party gets this pipeline going here pretty quick. So, we have been down almost for a year with the pipeline a lot of repairs, a lot of surprises when they think they get it repaired. They are close, but they are not there yet. So we need to exceed Q2, we need that pipeline on here by the end of the month.

William Herbert – Simmons & Company

Okay. Thank you very much guys.

Operator

Our next question comes from Joe Gibney. Your line is now open.

Joseph Gibney – Capital One Southcoast

Thanks. Good morning guys. Most of my questions are already asked and answered. Tony, just wanted to touch based on a debt pay-down side. Owen, you had referenced the endgame scenario kind of reaching this 20% to 30% debt-to-cap, how should we view further debt paydowns this year, you guys have made a lot of progress in the first half, Tony will you still be attacking Term B just trying to get a sense of what we should be factoring in here for back half of the year on this front?

Tony Tripodo

All right. It's a good question, Joe. I think in terms of our interest in paying down the Term B right now given the low cost nature of the Term B, we're probably not going to be aggressive at paying it down. In other words, we will hang on the cash as opposed to paying down the Term B. Okay? I think, absent any asset sales, Q2 may very well have been a peak in terms of liquidity, but I don’t expect our net debt position to change all that much by the end of year. We will be utilizing cash from the insurance proceeds to do the repair work. And I think that naturally will cost us some cash over the back half of the year. We put out a CapEx guidance of the 370 now, we only spent a third of that through the first half of the year. I do think we will be challenged to spend the difference by the end of the year, but we are working hard at it because we want to bring Danny and Phoenix on line. So that being said, I would expect that our net debt levels by the end of the year may be slightly higher because of spending for CapEx to bring Danny and Noonan online as well as spending some of the insurance proceeds for the repair work from the hurricane.

Owen Kratz

I think it's all with the assumption that there is no further monetization of assets though, which its hard and as I mentioned with Roger, its hard to point to a point in time because its just a matter of continually probing and looking for the fair market value.

Tony Tripodo

Should we find an opportune, another opportune market window and are able to monetize more of Cal Dive than I think that changes all of the previous comments we made.

Joseph Gibney – Capital One Southcoast

Okay. I understood that. That’s helpful. Circling back on the other asset sale potential Owen, you said as the market allows relative to Cal Dive timing would you still be hopeful that you would want to get this done by year end, is that still a fair characterization?

Owen Kratz

Yeah. My preference would be to have throughout, I would love to see if the shelf and Cal Dive done by year-end.

Joseph Gibney – Capital One Southcoast

Okay. And Tony just as we look at the de-consolidated entity going forward G&A run rate are we pretty right in this sort of ballpark where we exited out of 2Q as a reasonable fair way or any changes there as we look forward?

Tony Tripodo

I think its about the same, obviously we won’t be picking up any part of Cal Dive’s SG&A, but we lose their revenues as well. But I think overall the percentages are pretty going to be pretty much the same.

Joseph Gibney – Capital One Southcoast

Okay. And lastly for me, Owen, I know, with a relatively ridiculous insurance environment in the Gulf of Mexico you talked about may be having to get a little creative here depending on the shelf timing and asset sale, but any update there on any initiatives you guys undertook on the insurance front I know it’s a fairly ugly environment in general.

Owen Kratz

Yeah. We saw it coming though, and back in November we started to do the extensive amount of work that’s required the model to be able to go to the equity markets for catastrophe bonds. The same instruments that that insurers used to cover California earthquakes. Its sort of a novelty for producers to go straight to the equity markets for the cat bonds, but we were not alone in that pursuit. If a producer started early and if it became a viable option to the insurance market the outcome was that the windstorm coverage from being offered from Lloyds was, let's just say less than optimal and actually the coverage that you derive from the cat bonds was actually more beneficial to a protection of cash flow, which if you look back at Ike, the single most damaging thing about Ike to us was the disruption of the cash flow. We were able to get the production backup in everything, but that’s what put us into the liquidity crunch that we were in, was using cash that we had on hand is excess liquidity. We have got more than double that liquidity amount going into this hurricane season plus we have the advantage of the cat bonds covering our exposures, which would be an early, its an upfront pay out of cash versus insurance, which is an after the fact payout.

Joseph Gibney – Capital One Southcoast

Okay. I appreciate it. Very helpful. I will turn it back.

Operator

Our next question comes from Phil Dodge. Your line is now open.

Philip Dodge – Stanford Financial Group

Yeah. Thanks. Good morning everybody. Could you discuss the work outlook for the new vessels, the Caesar and the Enhancer as far as there is visibility now.

Owen Kratz

The enhancer was built to a partially utilization contract in the North Sea. So we do have existing backlogs actually a multi-year backlog for it in the North Sea, like I said it’s a partially utilization contract, which means the producers book up a certain number of days each year and then we fill in the rest from the spot market.

Philip Dodge – Stanford Financial Group

And will that start right up in the third quarter?

Owen Kratz

Yes.

Philip Dodge – Stanford Financial Group

Would it arise?

Owen Kratz

Yeah. We have worked for it, in fact we have work that we are covering with the Seawell as we complete the [access] system on the Enhancer. So we do have work for it coming out of the shoe. The Caesar because of the delays and our inability to meet contractual commitments that we have previously bid it wasn't likely that anyone was going to give us our contract for the Caesar until she actually reached completion. Right now she is mechanically complete we are doing the commissioning should be ready to work or should be ready to transit probably late October. We are having clients actually visiting the vessel now so that they can kick the tires and we are at a delay bidding it we've had some favorable responses, but as yet we don’t have any booked backlog for it.

Philip Dodge – Stanford Financial Group

How much utilization do you think would be realistic to anticipate for 2010 for the Caesar?

Owen Kratz

Well, I’m just going to have to differ on that and where we have not started our budgeting process and its in the early stages of really getting our teeth into the project that are available out there and what the likelihood is of our success.

Philip Dodge – Stanford Financial Group

Okay, fair enough. Thanks.

Operator

Our next question comes for Joe Agular. Your line is now open.

Joe Agular – Johnson Rice & Company

Thanks. I just want to clarify some thing you had $370 million CapEx number for 2009 is ex-Cal Dive correct?

Tony Tripodo

Yes. Correct.

Joe Agular – Johnson Rice & Company

Okay. So you have 260 million left to spend in the second half of the year?

Tony Tripodo

Yes.

Joe Agular – Johnson Rice & Company

And –

Tony Tripodo

That's our forecast in there, again Joe I made a comment earlier, I think we are going to be challenged to spend all that money.

Joe Agular – Johnson Rice & Company

Tony the intention was to spend though incrementally more money this year versus next year in terms of accelerating I guess Danny and Phoenix.

Tony Tripodo

That’s right.

Joe Agular – Johnson Rice & Company

And I was just curious as to what type of things you could do this year that you are planning on doing next year?

Tony Tripodo

Well, really the change from 300 to 370 is really directly associated with accelerating spending to bring the infrastructure online for Danny and Phoenix. And that’s money we pulled out of our 2010 outlook for spending. So we are not in cumulatively adding any CapEx we are just changing the timing.

Joe Agular – Johnson Rice & Company

Okay. But I mean is it like vessel work onsite or is this relate to maybe the producer in the yard or….

Tony Tripodo

The biggest item is the Helix Producer I and that is the Helix Producer I haul conversion occurred back in April. She sailed over here, she is at moored offshore Corpus Christi and we are engineering for the integration of production modules on the vessel that is the single biggest item, concurrent with that you are also going to see the Express, once she comes out of dry-dock, sail over here and start laying the pipe-in-pipe for Danny oil. So those are the two biggest items that we have left the balance of 2009 plus the remaining CapEx to be spent on completing the Well Enhancer and the Caesar. Those are minor compared to the Danny pipe-in-pipe and the HP I build-out.

Joe Agular – Johnson Rice & Company

And with respect to timing for Phoenix, I guess specifically and the producer coming out of the yard you all, I mean I know you mentioned there early 2010 in terms of starting up Danny and Phoenix and then, the producer in the first half of 2010 is just, is the timeline still as it was say last quarter's update or has it been changed at all?

Tony Tripodo

I can't recall exactly what we said last quarter, but I will just give you a current outlook, Joe. The Danny we are expecting mid-first quarter right now for bringing on oil, oil from Danny, well that’s going to be completed first. It's the easier one to bring on because all we have to do is build-out the pipe-in-pipe. Phoenix requires, Helix Producer I to be finished, it also requires some infield infrastructure to be built out so that’s a longer lead-time, we will just say some time in the first half of the year probably in the second quarter.

Joe Agular – Johnson Rice & Company

Okay. If I could ask a different question I was curios, Owen with your comments earlier regarding just the general state of the deep water construction industry supply and demand of vessels, do you think that there will be any M&A activity any consolidation in this segment over the next year or two or and is it needed in your opinion?

Owen Kratz

I think there will be and yes I do think its needed, but right now just in the process of trying to do asset sales we have seen a real hurdle of the credit markets being sufficient to support even just selling assets. So I think there probably needs to be a little more help regained in the credit markets before you see serious M&A considerations beginning.

Joe Agular – Johnson Rice & Company

Okay. That was it for me. Thank you.

Operator

(Operator Instructions). At this time I show no further questions.

Owen Kratz

All right. Well thanks everyone for joining us today. And thanks for sticking with us through interesting times and good things ahead.

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Source: Helix Energy Solutions Group, Inc. Q2 2009 Earnings Call Transcript
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