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Executives

Owen Kratz - President and Chief Executive Officer

Tony Tripodo - Chief Financial Officer

Cliff Chamblee - Executive Vice President & Chief Operating Officer

Alisa Johnson - Corporate Secretary and General Counsel

Erik Staffeldt - Finance & Treasury Director

Terrence Jamerson - Director, Finance and Investor Relations

Analysts

Jim Rollyson - Raymond James

Travis Bartlett - Simmons

Joel Luton - Westlake Securities

Michael Marino - Stephens Inc.

Martin Malloy - Johnson Rice

Helix Energy Solutions Group Inc. (HLX) Q2 2013 Earnings Conference Call July 23, 2013 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Helix Energy Solutions Group, review of the second quarter’s 2013 results.

During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Tuesday, July 23, 2013.

I would now like to turn the conference over to Director of Investor Relations, Mr. Terrence Jamerson. Please go ahead sir.

Terrence Jamerson

Good morning everyone and thanks for joining us today. Joining me today is Owen Kratz, our CEO; Tony Tripodo, our CFO; Cliff Chamblee, Executive Vice President and Chief Operating Officer; Alisa Johnson, our General Counsel; and Erik Staffeldt our Finance and Treasury Director.

Hopefully, you all have had an opportunity to review our press release and the related slide presentation released yesterday evening. If you do not have a copy of these materials, both can be accessed through our website at www.helixesg.com under the For the Investors section. The press release can be accessed under the Press Release’s 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 Johnson

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 two and in our Annual Report on Form 10-K for the year ended December 31, 2012.

Also during this call certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slides of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The reconciliation along with this presentation, the earnings press release, our Annual Report and a replay of this broadcast are available on our website. Owen.

Owen Kratz

Good morning everyone. We’ll start by going straight to slide five, which is the high level summary of first quarter results.

Quarter two’s revenues increased 18% from the first quarter at $232 million up from $197 million in Q1. Operating earnings followed suit.

EPS for quarter two amounted to $0.26, while EBITDA for the second quarter amounted to $75 million, up from the $42 million we reported in Q1 on a continuing opps basis.

Moving to slide six, our robotics business represented the single biggest contribution to our quarter-over-quarter improvement. Coming off a seasonally weak Q1, robotics revenues increased 38% in Q2 as vessel utilization improved to 98%.

The Subsea Construction business also had a nice contribution to our improved Q2 results of the Express and Caesar combined at 95% utilization during the quarter, as they work to complete their existing backlog prior to being sold.

We closed the sale of the Caesar in June and the Express just last week. While the well intervention fleet enjoyed relatively high utilization at 93%, its revenues declined slightly coming off a Q1, in which the fleet had 100% utilization. The Skandi Constuctor entered the fleet in Q2 by working ROV support mode.

On to slide seven, from a balance sheet perspective our cash and liquidity levels remain very strong. Cash stood at $514 million at quarter end after paying down $150 million of debt during the quarter with liquidity levels of approximately $1.1 billion.

We entered into a new credit facility in June, which positions us very nicely financially to continue to execute our growth plans; a bit more on this later.

I’ll now turn the call over to Cliff for an in-depth discussion of our contracting service results.

Cliff Chamblee

Okay, thanks Owen. Good morning. As you can see from the summaries and also the contracting service, we had quite a turnaround in Q2 versus last quarter, where the seasonality of the robotics business hampers. As Owen stated, this quarter our robotics business posted a strong quarter-over-quarter improvement.

We continue to have a strong utilization of well intervention vessel and our pipeline vessels remain working up until both sales were completed. More on this business unit in the following slides.

Before I move on, I want to also point out a nice gain in revenue and profit in the production facilities, which we are benefiting from a combination of; number one, an increase in revenues under the new HP I contract or processing and production for deepsea (ph) and number two, the increase in quarterly HFRS fees effective April 1 of this year as a result of our new four year agreement.

Moving on to slide 10, in the Gulf, the Q4000 utilization was down at 86%, primarily due to required schedule inspection of vessel by the U.S. Coast Guard. This ends a consecutive streak of three quarters with full utilization. Towards the end of the second quarter, IRS II went back on hire and will remain for the rest of the year.

As for the 534, we continue our conversion efforts on this vessel over in Singapore, and based on our last work scope, we now expect her to begin work in the Gulf late in Q4.

Over to the North Sea, the Skandi Constructor entered the fleet in the second quarter, where we saw 95% across all three vessels during the quarter. We originally expected to mobilize the seal on the Skandi and perform the necessary modifications in June, but due to vendor delays, she is currently dockside and we are having the work performed this month. Once completed the Skandi Constructor, as well as the both the Seawell and the Well Enhancer are fully booked for the remainder of 2013.

We’ll move on to slide 11, on robotics. With vessel utilization being the primary driver of this business, our chartered vessel utilization improved to 98% in Q2, up 29% over Q1’s utilization on 69%. These figures, which as you may recall sat idle for 75 days in the first quarter. It achieved near full utilization on the ROV drill project in the North Sea during the second quarter.

The rest of our long term chartered fleet also had strong utilization, where we also managed to work five additional spot vessels rightly through the quarter. With the contract extension in India on the Olympic Canyon, that allows us to keep a long-term charter vessel in the region over the next year and a half, also not exactly a Q2 event, but in July we just take delivery of the Rem Installer, where she immediately went to work at the North Sea on a combinations project.

Moving on to slide 12, on oru sub sea construction business, with the closing of the sales of the Caesar and Express, that only leaves us with the [spoolbase] (ph) facility which we have now entered into an agreement to sell to the same buyer for these pipelay assets. The deal’s expected to close in January 2014.

Moving on to slide 13, I'll leave this slide, because of the vessel utilization for your reference, and with that I'll turn it over to Eric on our key balance sheet metrics.

Eric

Thanks Cliff. Good morning. Please turn to slide 15. Slide 15 provides an illustration of our debt maturity profile, expecting the retirement of high yield notes with the proceeds of the term loan completed yesterday.

Moving on to slide 16, slide 16 provides an update on our gross and net debt levels historically and at June 30. After the sale of the Express last week, on a current snapshot basis we are roughly in a zero net debt position.

As a frame of reference, since the end of 2008, we had reduced our gross debt levels by over 1.5 billion and our net debt position by 1.8 billion. At quarter end, our net debt to book capitalization ratio was down to a very conservative 2%. Tony.

Tony Tripodo

Thank you Eric. Slide 18 represents our updated 2013 outlook. We call it update, although the numbers are remarkably the same as last quarter. We continue to forecast total EBITDAX at approximately $300 million for 2013.

Our forecast remains intact at $300 million, despite the delay in putting the H534 into service. The H534 as Owen mentioned remains in Singapore undergoing refurbishment and modifications, taking longer than expected due to an increased amount of work to make sure the vessel is in the best possible condition.

The 534 is now set to transit to the Gulf of Mexico in late August to go to work late in Q4. Fortunately underlying strength in our well intervention business for the existing fleet is able to offset the delay in putting the 534 into work.

Backing out the stub impact of our divested operations, both oil and gas and pipelay and throwing into the equation a full years impact for the two vessels that entered the fleet in 2013, the Skandi Constructor and the Helix 534, our expected pro forma exit rate EBITDA for 2013 is more like $350 million.

Year-over-year for ongoing operations we’re forecasting a revenue growth of 27% this year.

Total CapEx spending remains the same at $365 million. Let me detail the major items for your reference. We’re going to spend $135 million this year for the Q5000, which is currently under construction in Singapore. Modifications and refurbishment of the 534, which is still in Singapore, is expected to be $80 million this year.

Building new intervention riser systems for well intervention operations in new vessels is $64 million and additional Robotics vessels and trenchers at $40 million. We still expect to spend $11 million this year for Seawell life extension and the dry-dock to the HP I, which is expected to go dry-dock October 1 is $20mm.

Backlog is up from March 31. At March 31 we announced a record backlog at $1.6 billion and 90 days later we’re up even beyond that to $1.8 billion. Most of that backlog relates to the well intervention business and we have a solid foundation to support our business for years to come.

For example the Q4000 was spoken for through 2015, with additional commitments in progress beyond. The Seawell and well enhancer now fully booked for 2013 and 2014 with backlog starting to build for 2015. The H534 is fully booked through 2014 and we’re throwing a backlog into 2016, and the Skandi Constructor is now fully committed for the remainder of 2013.

Canyon in our robotics unit is forecast a strong second half for 2013.

I’m going to skip slides 22 and 23, leave them for your reference and turn the call back over to Owen for closing remarks.

Owen Kratz

Thanks Tony. Well things are going pretty well. The transformation of the company is now complete. We’ve transitioned from a complex business model burdened with high debt into a simplified business model and then strong growth niches with well intervention and robotic with a very strong balance sheet.

Our financial reporting this quarter is starting to reflect this simplification. By Q4 the financials should easily reflect the business we have now. That’s why we’ve included guidance to the exit EBITDA rate of $350 million in order to provide some visibility beyond the last of the noise.

From here on we expect to report clear growth. The Skandi Constructor receives its intervention system this quarter and starts its roll in intervention; the H 534 will go into service in Q4. Next year we’ll also see our next new Trenchers, and the new build Grand Canyon 2 go into service. The Q5 will be delivered in early 2015 and it’s our intentions to begin the construction of the next Q class somewhere in the near future.

Additional assets for growth will be added as the market dictates and our balance sheet allows. Our focus is on building our capabilities for delivering high quality, technically sound assets at commercial costs, so stay tuned, there’s a lot to come.

At this time we’ll end the call and we’ll open it up for questions.

Questions-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.

Jim Rollyson - Raymond James

Good morning guys.

Owen Kratz

Good morning Jim.

Jim Rollyson - Raymond James

Owen, you guys mentioned your bid in the Q4000 all the way into ’18. Can you maybe talk about a couple things on that front, one being just how pricing looks out that far, relative to what you are getting today. And maybe stepping back from that, your thoughts as you look forward, there is a lot of discussion about all the new gen semi submersible coming into the market over the next few years, and maybe some of the pressure that puts on the older semis, and just the thoughts on those possibly coming into the market and competing with you down the road?

Owen Kratz

That’s a lot of questions. Let me tackle the first one the rates, in fact Cliff can probably speak to the rates first, but we do expect rates to go up in the future as bill costs for any new assets continues to rise.

Cliff Chamblee

Yes, some of this backlog we’ve had is older contract master agreements. So we are increasing the rates as those expire. We are increasing the rates gently I guess, so the market will accept them, and because its further out in time, it well obviously increases on cost and the market dictates us to do.

I think your question was, are we seeing any pressure from the older rigs coming in, in the well intervention market and at this point, we are seeing the clients wanting the use of rigs to do drilling, do productive drilling, and expand their portfolio and use it in the well intervention assets strictly for what they are designed for.

Jim Rollyson - Raymond James

Right. And I was thinking more down the road, just do you think that becomes a concern at some point. It seems like you are locking things up always out now and that keeps getting deeper, so…

Owen Kratz

Yes, I’ll jump back in Jim. Everything’s a concern to me. But to be practical about it, I think some of the people might have seen what we are doing with the 534, and therefore you start thinking, well maybe other older rigs can now be put into the same service.

We’ve looked for a long, long time and looked at the concept of using older rigs. Our decision was to go with new-builds, rather than the old rigs, and the primary reason is we picked up the 534 because of the ability to get it to market faster than a new rig, but our preference by far is for a newer rig due to the efficiencies involved.

Even though you take an older rig, it’s still a drilling rig, and there are a lot of dissimilarities between a drilling rig and what we build as a new generation intervention vessel, and you don’t get the same efficiencies out of an old drill ship, but I think the 534 is going to serve its – it has a good market niche facing it, primarily well P&A and that’s where we intend to use it.

Jim Rollyson - Raymond James

Okay and then just one final for Tony maybe. SG&A came down nicely Tony in the second quarter, maybe what your thoughts are on a run rate going forward post all the pipelay asset sales?

Tony Tripodo

I expect Q2, the future quarters to look similar to Q2, absent any extraordinary items and trend downward.

Jim Rollyson - Raymond James

Okay. Thank you, guys.

Operator

The next question comes from the line of Travis Bartlett with Simmons. Please go ahead.

Travis Bartlett - Simmons

Hi guys. Good morning.

Owen Kratz

Good morning Travis.

Travis Bartlett - Simmons

I’ll start by saying congratulations on the quarter and completing the sale of the pipelay vessels. Speaking with the Subsea construction here, just thinking about the business excluding these vessels. Can you talk about what we should be expecting in terms of margin impact, looking at the pro forma business? I’m assuming these vessels were dilutive to margins, so maybe if you could help us in terms of the margin benefits going forward, that would be helpful.

Owen Kratz

You are talking about overall margins for Helix absent Subsea construction?

Travis Bartlett - Simmons

Correct.

Owen Kratz

Okay Travis, I’ll just give a pretty generic longer-term answer to your question. Generally speaking, our margins should lift as a total company without Subsea Construction. So just generally speaking, Subsea Construction over the years has had lower margins in both robotics and well intervention.

That being said, there have been a few quarters here and there where Subsea Constructions put out pretty nice margins. For example, in Q2 Subsea Construction actually contributed very nice margins, but if you just look at it over the long term, our margins as a total company will lift up without Subsea Construction.

Travis Bartlett - Simmons

Right, okay.

Tony Tripodo

I might add a little to that answer, because I think its not all about margins when you are looking at eliminating, shifting the business model. The business model now is great. The reason Subsea Construction is so lumpy is you can see what’s happening with some of our competitors, is that its – that market is highly dependent on performance, and by the elimination of Subsea Construction which is focusing on well ops and Canyon, we greatly de-risk the business model from that kind of lumpiness.

Travis Bartlett - Simmons

Right. Understood and that’s helpful. And secondly, just shifting gears here towards robotics, it looks like you guys modestly increased the robotics revenue guidance and it seems like your guidance implies a pretty significant ramp in the second half of 2013 revenue generation. So my question is, how should we think about this revenue being split between Q3, Q4 and then in terms of the drivers. I mean, what are the big of the guidance revision there?

Owen Kratz

Okay. Well, we have another vessel in the fleet, the Rem Installer, so that in itself increases our ability to put out top line revenues. But we expect in a much stronger second half Travis for robotics over the first quarter. In fact we expect a gradual increase in revenues as the year rolls out.

So we don’t have the kind of visibility in robotics that we have for well intervention, but just based on what’s the opportunities are out there, our expectation is that the third quarter will be somewhat better than the second quarter, and fourth quarter will be somewhat better than the third quarter.

Tony Tripodo

Yes, typically the first quarter is always our slowest quarter for utilization of vessels, because it’s bad weather in the North Sea, its bad weather in the Gulf of Mexico and so to speak, and people don’t want to start the projects till April/May timeframe, and so second and third quarter, typically are the busiest seasons. That being said, also a lot of the stuff that was planned for the third quarter gets pushed back into the fourth quarter. So the second and third are the busiest, fourth is next busiest, first is historically our slowest quarter.

Travis Bartlett - Simmons

Right, okay. Fair enough and then last one I had here just on the production facilities. It looks like you guys actually had a pretty nice improvement sequentially during the quarter in what has otherwise been a fairly static business. Can you just elaborate a bit on what drove the sequential improvement there and then is that maybe something we should expect going forward?

Owen Kratz

Yes Travis, sure. First of all, as Cliff mentioned in his commentary, we re-upped the Helix Fast Response System contract with the Consortium of Operators and it was re-upped at a higher rate, so that was one item.

The second item, when we sold our E&P business, the buyer entered into a somewhat different arrangement with the Helix Producer I, that was based in part of a fixed fee and a part on volume and the volume flown through the HP 1 is exceeding what our expectations were. So it’s just as simple as those two reasons.

Travis Bartlett - Simmons

Right, okay. That’s a great answer and I’ll turn it back.

Operator

Next question comes from the line of Joel Luton with Westlake Securities. Please go ahead.

Joel Luton - Westlake Securities

Good morning. More of a bigger picture question and longer-term question. Where do you see the company in five to ten years, and with the cleaned-up balance sheet and a focused business plan now, do you think that may be down the road that you’ll potentially could become a takeover candidate?

Owen Kratz

Well, I’ll take the last part first. As part of the takeover candidate, I really don’t worry about the things that we can’t control, so I don’t really think a whole lot about that.

The other part, I’ll live in the future, I lived about five years out. I can’t say that I’ll actually live ten years out, but five years from now I see continued adding to our Q fleet of intervention vessels. I see continuing that robotics, basically it’s just a repetition of what we are starting here, and I can see easily doubling in the next five years.

Joel Luton - Westlake Securities

Okay. Thank you.

Operator

And the next question comes from the line of Michael Marino with Stephens Incorporated. Please go ahead.

Michael Marino - Stephens Inc.

Good morning.

Owen Kratz

Good morning.

Michael Marino - Stephens Inc.

Tony, I was wondering if you could help me, just to make sure I’m understanding the guidance correctly, but you are guiding to $300 million of EBITDA this year. You’ve done roughly half of that to date, but you lose the Subsea for the construction vessels; the HP I goes into dry-dock.

Is the difference or you’re making that up in the back half with the Skandi and continued improvement in the robotics business? Am I thinking about that right?

Tony Tripodo

Absolutely right, that’s it in a nutshell Michael. Again, Subsea contributed kind of nicely to Q2, we lose that, but we picked up incremental capacity with the Skandi and robotics is forecasted to have a much stronger second half than first half, so…

Yes, and the 534 now is not expected to come and contribute till late in Q4. So there is a little bit of contribution with that, but not much.

Michael Marino - Stephens Inc.

So then the delta between the exit rate is really the 534 and maybe a little bit from the Skandi?

Tony Tripodo

Yes, full year of the Skandi, a full year of the 534. Additional capacity with robotics and then if you subtract Subsea Construction contributed this year and a little stub we had for ERT, but those two well intervention assets are significant contributors in terms of EBITDA, so…

Michael Marino - Stephens Inc.

Okay and how much or how long is the HP I in dry dock? I’m just trying to understand.

Tony Tripodo

Our current schedule is anywhere between 45 and 60 days. It all depends on when she gets lifted up out of the water, and what we see, but our current schedule has her out for 45 to 60.

Michael Marino - Stephens Inc.

Okay, starting in October, is that what you said?

Tony Tripodo

Starting on October 1.

Owen Kratz

What’s not in that rate though is the new Trenchers and the Grand Canyon 2.

Tony Tripodo

Yes.

Michael Marino - Stephens Inc.

Okay, so that’s – kind of, there’s a follow-up question.

Tony Tripodo

Just to clarify, because I think Owen brings up a very good point. This is not a 2014 forecast. What it is, is what 2013 would have looked like if we weren’t in Subsea Construction, we weren’t in oil and gas and we had the 534, and the Skandi in for a full year.

Michael Marino - Stephens Inc.

Okay and looking out into ‘14, it’s growth in the robotics business that we should think about and with that in mind, the five spot vessels that you guys are running right now, I think its towards the high end of what you’ve done historically. Maybe could you talk about what you see for that business, looking out past six months? I mean, I know visibility is a little bit limited generally speaking, but if you could just kind of, since Owen you live out in the future, you could maybe help us with that.

Owen Kratz

We have the long-term vessels and we know what those are, spot vessels or vessel of opportunities or just that and they come along as we can, but that’s a pretty average year. I mean it depend on the market a little bit. We expect the gulf to be bigger next year, as well as the North Sea, so we expect that or more from the vessels of opportunities.

As Tony mentioned or we mentioned, we also added the Rem Installer, the payment issues, so we’ll have that whole of next year. So we’ll have all those vessels next year, as well as we’ll have a partial year on the Trencher and late in the year we get the Grand Canyon 2 that will come into play as well. But I’m not sure if that’s the linkage aimed at October or so next year.

Michael Marino - Stephens Inc.

Okay, great. Thanks.

Operator

(Operator Instructions) The next question comes from the line of Martin Malloy with Johnson Rice. Please go ahead.

Martin Malloy - Johnson Rice

Good morning. Congratulations on the quarter.

Owen Kratz

Thanks Marty.

Martin Malloy - Johnson Rice

Could you maybe talk about the opportunity for long-term contracts for well intervention vessels and similar to the BP type contract. What that potential looks like out there as you look out to next year or two?

Owen Kratz

Yes, this is Owen. It’s sort of a complicated question, but if you go to the bottom line, I think there is probably one, two, three, four – four or five operators who are not in the position right now of offering that kind of a contract, but will in the not too distant future. And vessel-wise, there’s the market enquiry out from Petrobras right now looking for multiple vessels. There is probably multiple vessel opportunities in West Africa. So I think the market is more than ripe for multiple additions.

Martin Malloy - Johnson Rice

Okay. And then I don’t know if it’s too early for you to give us this information, but in terms of 2014, could you help us with any dry dockings that you expect next year?

Owen Kratz

Yes, we’ve got a few dry-docking next. We got the sea well going and at the end of the year they will be in through back end ‘14 and ’15 as well beyond the 100 or 120 days or so. Let me see what else we’ve got there. Well, got one for the road and to enter for ‘14 as well and I believe that’s it.

Martin Malloy - Johnson Rice

Okay. You said the sea well was 120 days?

Owen Kratz

Yes, right now it’s scheduled to start in December ‘14, so I mean part for ‘14 and ‘15.

Martin Malloy - Johnson Rice

Okay, great. Thank you very much.

Operator

Mr. Jamerson, there are no further questions at this time. I will turn the call back over to you.

Terrance Jamerson

Okay. Thank you. Thanks for joining us today. I very much appreciate your interest and participation, and look forward to having you participate on our third quarter 2013 call in October. Thank you.

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