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

Barclays CEO Energy Conference Call

September 11, 2013 12:25 ET

Executives

Anthony Tripodo - Chief Financial Officer

Terrence Jamerson - Head, Investor Relations

Unidentified Analyst

Welcome back everyone. Up next is Helix Corporation. And speaking for the company today is Anthony Tripodo. Helix provides a series of offshore services, including deepwater pipe lay and construction operations, asset recovery and commissioning work, and solutions for the development of marginal fields. Anthony has served as the company’s CFO since mid 2008, and he held the role of Director from February 2003 to June 2008. Please help me welcome him back to the CEO Energy Conference.

Anthony Tripodo - Chief Financial Officer

Good afternoon and thank you for being here or listening to what Helix is all about. Let me start out by talking about who we are? Generally speaking, we are a deepwater specialty service company focused on well intervention and robotics. The company has gone through a significant transformation over the last few years selling off non-core product lines and de-levering the balance sheet for the very purpose of focusing on these two specialty niche services which we believe has high growth potential and I will get into a background as to the market drivers for these sectors and why we are so passionate about deploying additional capital into these two sectors.

So again, well intervention and robotics, what is well intervention? Well intervention is essentially a wellbore to either enhance production or to plug and abandon the well. And robotics is essentially deployment of ROVs, remote operated vehicles or little submarines, also mandatory for anything that is done subsea. So again, I want to emphasize a couple of basic fundamentals of what drives our business and that is deepwater and subsea. We don’t do work with dry trees. We do work with wet trees, whether it’s on the robotics side or on the well intervention side.

So what is well intervention? Well intervention essentially has two major activities, production enhancement which is entering or producing well to either restore production or enhance production or ultimately when the life of a well depletes or stops producing to actually decommission that well, which is regulatory driven. Business activity or market activity for well intervention is directly attributable to the number of subsea wells and the aging of those subsea wells. We like subsea wells that are getting old. Subsea wells that are getting old ultimately have to be worked on or decommissioned. And it’s we believe that well intervention is substantially immune from the commodity price fluctuations at least in the short-term. And why is that?

Well, on the decommissioning side, decommission is driven by regulatory requirements and regulators whether the U.S. or non-U.S. don’t care if the price oil is $20 to $200, you are required to decommission the well according to a certain timetable often within six months of the well stopping production. So really, we are not impacted by commodity price fluctuations. On the production enhancement side, if the price of oil were decreased to $60 a barrel for let’s say theoretically, we still believe operators will spend incremental dollars to enhance production from an existing wellbore where the substantial amount of some costs are already in versus spending money for a new exploratory well. Again, one of the attributes of why we like the well intervention business, another factor is we have a dominant market share in this business. We pioneered rigorous well intervention and the fact that subsea wells are growing which I have a chart on that coming up.

Our current asset base consist of our flagship vessel, the Q4000 which operates in the Gulf of Mexico, the well enhancer which is a North Sea based vessel. The Skandi constructor, which just entered the fleet this quarter and is now operating in the Gulf of Mexico and the Seawell, which is our oldest well intervention vessel that operates in the North Sea. Our well intervention asset base also includes subsea intervention lubricators, intervention riser systems which we from time-to-time run out now to on vessels of opportunity.

We are about to significantly expand our capacity in a sector because we are massively under serving the market here. And then it’s a reason why our backlog is growing and we intend to essentially double our fleet and in the next couple of years with the addition the Helix 534 which is currently being refurbished in Singapore yard. This is a drill shipped that we bought from Transocean. We are in the middle of refurbishing it and we expect to go to work at the end of this year. Under construction in Singapore as well is the Q5000 which we expect to enter the fleet in early 2015. And we just announced two weeks ago another new build the Q7000, which we will also build in Singapore and that should enter the fleet late ’16.

So again with these additions we’ll essentially double our capacity and well intervention and we believe that even after we complete these additions we’ll still be under-serving the market for well intervention. What’s driving the well intervention demand, again subsea wells and as subsea wells age they need to worked-on or they need to be ultimately abandoned. If you think if this chart as a rule of thumb and of course it’s a rule of thumb only subsea wells require some intervention on average in year 5. So we are working on the subsea wells that were installed generally speaking 2008 and earlier. So this is an independent market study of the accumulative well – subsea well headcount and as you can see it’s growing. So as this wells age 5 years from now we will be working on subsea wells that were installed in 2012 and earlier .Again that’s rule of thumb. But any market study you see indicates that the number of subsea wells or the install base is growing. So, this should provide a significant fuel to drive our business, our top line business and as well as the capacity addition we’re adding.

What sets Helix apart in well intervention? Number one, we pioneered and introduced to rigless well intervention. So that’s a segue I say rigless well intervention - that most well intervention for historically for subsea wells has been done by a drilling rig. So we introduced with the Q4000 with the Seawell an alternative to a drilling rig which is often very expensive for an operator to redeploy that vessel or rig to do well intervention. And we provide an alternative and we established the capability of doing well intervention off of a non-drilling rig. We have the longest dossier of well intervention wells worked on. We are – we have a dominant share in this business, really are biggest competitor is today exist is drilling rigs, but really are our competitive edge is our long and established experience doing well intervention of these vessels and the fact that we can do it faster and cheaper than a drilling rig.

So with that, I’m going to turn to our second favorite product line which is robotics and I will let Terrence Jamerson who came out of our robotics business and now Head of our Investor Relations to talk robotics.

Terrence Jamerson - Head, Investor Relations

Thanks, Tony. Okay, robotics as Tony said is another business that we really like. One of the good things about robotics is that we are not just lever to oil and gas industry with robotics, we also do a little bit of work in renewables and certain another markets that I will get into to later in the slide. But one of the things I’d just want to point out for us in robotics, we think robotics divided up into four different areas. The first being drill ship support and that’s an area that we don’t play in at all. The second one is inspection, repair and maintenance and light construction support. The third being trenching, and then the fourth being specialty to specialty niches that I’ll get into a little bit later as well. But one of the things I want to point out here is the last bullet that talks about, if you believe the graph that Tony put up earlier, and we believe that graph then kind it goes hand-in-hand that as operations move into deeper water, more powerful specialized ROVs will be required to perform these tasks. I also want to point that for every well intervention vessel that we have, we have two ROVs on those vessel. So, the two do go hand-in-hand.

Now, here is a list of – this is four – three of the four different types of robotic assets that we do have, the fourth being vessels that I’m going to get into in the next slide, but these three types of assets here are the assets that we own. That’s another big differentiator between our robotic business and our well intervention business. We do not own the vessels in robotics and we currently have 50 work-class ROVs, we have four trenchers. And trenching is one of the markets where we do feel that we actually dominate the market. What we like about trenching is that the same trenchers that we’ve used in the past to trench and bury flow lines, we can use – take that same assets in the same skill set to put up a same vessel and trench and bury high voltage cables. So, we’re using these assets in both the oil and gas and the renewable markets. One of the specialty niches that we’ve been in for the last four to five years of the ROVDrills We first got into this business in the subsea mining space, taking core samples for a subsea mining company off the coast of Papua New Guinea.

We went back and reengineered the ROVDrills to take a deeper core sample, which is what was needed in the oil and gas space. So for any type of structure that you want to anchor to the bottom of the seabed, pipeline right-of-ways, even your wind farms and any type of facility or anything that needs to be anchored to the bottom of the seabed, you need to know the composition of the soil. And so that’s where we come in. Currently, you can do this one or two ways you can either deploy an asset off the side of a drill ship, which in doing that, you’re going to have high mobilization cost and it’s also going to be a much higher day rate if you’re tying up a drill ship or you can use our ROVDrill technology, and basically, we can deploy this off of any vessel of opportunity and do the same type of work and it’s a much lower daily cost to the client.

Here is an overview of our current chartered vessel fleet. We currently have five vessels under long-term charter. Again I guess we choose to lease these vessels rather than own the vessels. There is really, in our mind, there is nothing special about the vessel. It’s just a regular work class vessel it has a heavy duty crane for the type of work that we need. Now in doing that obviously we are going to have higher fixed cost meaning we are going to have slightly lower margins in robotic versus what we have in well intervention. But on the flip side, your return on capital for your assets that you do own is enhanced due to the fact that these vessels are leased.

The two pictures at the bottom are two latest vessels. The Grand Canyon entered the fleet in Q3 of last year, and the Rem Installer just entered the fleet in Q3 of this year. And we do have a two more vessels coming online in 2014 and 2015, the Grand Canyon II and III. This is a style of boat that we have been able to collaborate with the vessel manufacturer. We really like the deck layout of the Grand Canyon. So by us getting in the front-end we are able to sort of design and help design the vessel so it can be more effective for our ROVs and trenchers and what-not.

Now this doesn’t necessarily mean that because we have five vessels now we are going to ramp-up to a seven vessels because what we also like to do is we like to charter our vessels on a staggered basis. So at the same time that the Grand Canyon II is coming and we’re taking delivery of that, around that same time there will be a vessel up for renewal. At that time, based on the visibility that we have in robotics, that will determine whether the next vessel in the fleet is an addition or replacement.

And in terms of our future robotics growth what we’ve said probably for the past year and half is that we’d like to add anywhere from four to six ROVs a year, two being fleet replacement. We also – we feel very strongly about trencher market especially the renewable space. I believe in 2012, 15% of all robotics revenues came from the renewable energy space. So with that, we are in the construction phase of a new trencher right now that will be delivered second quarter of 2014 and hopefully to deploy in the renewables markets. And our ROVDrill technology once we’ve reengineered the ROVDrills they gained a quite bit of acceptance late last year. As a result they have been pretty successful I mean fully utilized this year as well and we can see adding additional ROVDrills every other year as long as we continue to gain critical mass.

So what sets Helix apart in robotics, well it’s the specialty part of it. Like I said before, we don’t the one area that we do not compete right now is the rig support. We are a specialty player. Unlike well intervention, we’re not the market leader in robotics. However, we can argue that when it comes to trenching we are the market leader. And we like the fact that we have the specialty niches that don’t just tie up to the oil and gas market. If you sort of look at the bottom, I would say that probably 75% of our work in robotics is oil and gas and that includes both ROV and trenching, another 15% of the renewables and then the other 10% is going be Subsea mining, which is ROVDrill and specialty services that could be – it could be taking core samples or it could be fact finding missions for government.

Now, moving on to our production facilities business, this is one that I would characterize as a legacy business its non-core. Especially the two hubs that we have a minority interest and we first got into this business when we started going into deepwater. And basically these two hubs are – were in strategic locations where we felt that there would be a lot of production coming online and the deepwater reservoirs may not necessarily to be able to – their economics may not support a facility, so therefore partnered with El Paso which became enterprise here in order to offer a tariff or if leased base solution. Right now this is basically a passive investment for us I mean I think we guys, I think what Owen like to say is we are guy that sits there to open up the checks and hopefully when he is not doing that he is helping out in well intervention or robotic space. But taking that knowledge that we learned we are retrofitted an older ship ferry into what is now be Helix Producer I, which is on location on the phoenix field, which is actually our field until we sold our oil and gas back in the February. This isn’t over fielded some of you may recall was in the old Typhoon field from Chevron, back when they hit the hurricane the TLP that tipped over and we took over this field and produced oil and gas using our Helix Producer I. Then we sold our oil and gas business in Talos, we have retained the Helix Producer I, which we expect to remain on location until 2019.

One of things I do want to point out is that the HPI as well as the well containment cap and the Q4000 are part of our Helix Fast Response System. So in the event of a spill in the Gulf of Mexico, this is one of the assets it would be deployed on slide. Just moving along to the outlook, I think really the two numbers that I really want to focus on. Number one, the guidance of EBITDA of $300 million, that’s the guidance we gave at the beginning of the year and we still feel that roughly $300 million of EBITDA is what we were going to come out. But more importantly, because that number has a lot of noise in it that the exit rate of $350 million and how we got there as we back out the contribution from oil and gas, which was about 35 days this year and we back out the contribution from pipe play vessels that we have closed on in the second quarter. And we layered in a full year contribution of the Skandi constructor, which we took delivery of in April and Helix 534 which we should take delivery of at the end of sometime late fourth quarter. If you layer that in, then it would look like on an annualized basis about $350 million of EBITDA.

As of June 30, we have $1.8 million in backlog. I think that’s up 200,000 from the first quarter, but more significantly at the end of the year I believe our backlog was about $600 million. So, we have effectively – we have more than doubled the backlog in less than a year and the majority of this is going to be from our well intervention business unit. In terms of robotics, your visibility is a more short-term probably more of a 3 to 6 month outlook. However, we do feel that in the robotics space the opportunities are still robust and we feel confident about the business as well. But just had a high level all of our well intervention assets are pretty booked through the rest of this year as well as 2014.

In terms of CapEx I believe our initial guidance for CapEx roughly $350 million we increased that in the second quarter to $15 million and that was all due to we had some higher than expected costs for the H534. Again, we continue to invest in our robotics. We plan to invest roughly anywhere from $40 million to $50 million in robotics each year. And we also have maintenance capital for our drydocks and our HP, especially our HP1, which is going into drydock October 1st for roughly 45 to 50 days.

Okay. Move it on to the debt and liquidity, this is a slide that I know Tony's pretty proud of. We all should be and just want to point out, where we were in 2008 versus where we are now and especially the net debt, which is essentially zero. Now obviously with the sale of our oil and gas business in the sale of our sale of our pipe lay assets, that's really what accelerated this net debt zero position. And we are now in a position, where, obviously, we announced the Q5000 last year, which is our newest semi-submersible. We just announced the build of the Q7000.

So basically I will take we expect to run it at net debt zero forever, but we are using the balance sheet right now to grow organically. In the long-term I mean we do realized that we are under-levered, and at a long-term we would like to be around 25% to 30% net debt to book cap. And then basically, as of July 22, these are the only outstanding debt that we have. We have a brand-new $300 million term loan and we have $200 million of convertible notes and we have the MARAD debt that's not due until 2027.

And with that, I'll open it up for questions.

Question-and-Answer Session

Unidentified Analyst

Yeah, hi. I was wondering if you can talk about the long-term backlog in to 17, 18 is pricing fixed and scope of the work all fixed or as you get closer time there is still items that you need to be renegotiated one.

Anthony Tripodo

Basically the day rates in our backlog are pretty well fixed and under contract. There are some inflation clauses in the numbers, but essentially they are fixed. I will just say this, the rates in our backlog are, on average 21% higher than we have seen for the last three or four years.

Unidentified Analyst

And then on the expense side, any risk as far as since it's so far out, how you're managing, making sure that the margins that you think are written in place now will be realized once the work is done.

Anthony Tripodo

Yeah. Well, we are in a very competitive space. Essentially in our vessels we are competing with the rig contractors for people. So, having qualified skilled personnel is very important to cost efficient operations. We try to stay ahead of the compensation curve. Nevertheless we are under the same cost pressure as everybody else is having in this industry for experienced offshore workers.

Unidentified Analyst

Gentlemen, how do you see the robotics industry changing and if you think about cost inflation, offshore drilling what's the value proposition of you versus your peers in regards to your robotics offerings.

Anthony Tripodo

Well, as Terrance mentioned, we have chosen to focus on the specialty services, not on the commodity ROV services. That being said there is a drive by the customer community to newer higher horse power ROVs particularly with every year it goes by our customers are operating in deeper and deeper waters. I will just stay this, the same secular trends that are favorable for well intervention impact the robotics business and that is subsea wells are more cost effective for our customers than fixed platforms therefore the trend will continue in our opinion for production through subsea levels and you can’t do anything in deepwater without an ROV. So, if you like deepwater and you like subsea you got to like the ROV business. So, we like the ROV business as well.

Unidentified Analyst

On the ROV business, can you talk about what the, I understand you don’t manufacture the ROVs yourself so if other players can buy say the same, the same product are there any barriers to entry there to defend your business and also what’s the lead time for you to take delivery on these ROVs?

Anthony Tripodo

Very good question barriers to entry on the ROV business. Well markedly different in the ROV business to well intervention business, when you look at an assets in a well intervention business costing anywhere from $300 million to $500 million per unit so high barrier to entry in its own right just a mere capital costs. On the ROV business, you are looking at single ROVs I’m not talking about trenchers costing anywhere from $5 million to $6 million.

So, the capital cost isn’t a significant, there is more the competitive landscape therefore it’s broader. But I would say the main barrier to entry is operating know-how. I don’t think you can discount the importance of operating know-how. It takes a long time to build a qualified and skilled ROV pilot and to train qualified skilled ROV pilot and have enough around to operate during the 28-20 on or off cycles required in this industry.

Unidentified Analyst

You mentioned that the specialized well intervention vessels are you able to drill faster than the traditional drill rigs. Could you talk about the day rate comparison versus drill rigs and how big the market potentially could be for these specialized well intervention vessels?

Anthony Tripodo

Okay. Our rates are I would say commensurate with our capital cost. Our capital cost for brand new semi-submersible well, purpose built well intervention vessel is about two-thirds the cost of what a new build Gen 6 drilling rig would cost today. Therefore our rates are about two-thirds as well.

Unidentified Analyst

You mentioned the on going, I guess transformation is the transformation complete or would you characterize maybe the production facilities as non-core or is it just small enough that you can keep it’s not an issue?

Anthony Tripodo

Well, we’re not actively trying to dispose of the production facilities business. It is a non-core business. We don’t intend to add any capital to it. The nice thing the business as Terrence mentioned it is sort of mailbox money. We are going to generate about $60 million of cash, operating cash flow in our business this year with virtually no management effort. However somebody came along and offered us a decent price we would sell it because anything we can do to accelerate our capacity additions for the growth in well interventions, where we are and we would be interested in doing.

Unidentified Analyst

Taking a step back here and look at the robotics market maybe say three, five years out or so what you are looking at big picture in terms of growth rates and market opportunity?

Anthony Tripodo

I think the two items we’re keeping an eye on is how sustainable is it a renewable energy business. So right now as Terrence mentioned the renewable energy business represents about 15% of our robotics revenues. There is a massive effort in Northwest Europe by governmental agencies and private industry to build renewable energy infrastructure offshore that is offshore wind farms. If that continues at the pace its going, we are likely to add trenchers over time because just having a wind turbine offshore spinning around doesn’t do you any good unless you can bring the power offshore. And if you think about high voltage power lines all those high voltage power lines have to be trenched and buried offshore. The other emerging technology for us is the road drill technology. If we are able to prove up with enough confidence to the customer community that we can take core samples on the ocean bottom a lot more cost efficiently then a jack-up rig and I think that’s another specialty space we’re going to add ROV capital to.

Unidentified Analyst

Any additional questions? Thank you gentlemen.

Anthony Tripodo - Chief Financial Officer

Thank you.

Terrence Jamerson - Head, Investor Relations

Thank you.

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