Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q3 2009 Earnings Call

October 29, 2009 10:00 am ET

Executives

Cameron Wallace - Director of Marketing and IR

Owen Kratz - CEO

Tony Tripodo - CFO

Bart Heijermans - COO

Robert Murphy - EVP of Helix Oil and Gas

Alisa Johnson - General Counsel

Lloyd Hajdik - SVP of Finance

Analysts

Roger Read - Natixis Bleichroeader

Jim Rollyson - Raymond James

Stephen Gengaro - Jefferies

Terese Fabian - Sidoti & Company

Joe Gibney - Capital One Southcoast

Operator

Welcome and thank you for standing by for the third quarter earnings and investor conference call. At this time, all participants are in listen-only mode. [Operator Instructions]. Today's conference is being recorded. If you have any objections you may disconnect at this time.

Now, I will turn the call over to Mr. Cameron Wallace. You may begin.

Cameron Wallace

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

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 Johnson

This conference call and the associated presentation contain certain forward-looking statements. All statements other than statements of historical fact 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 31, 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 Tripodo will now make some opening remarks.

Tony Tripodo

All right. Good morning, everybody. I am going to turn over to slide four which summarizes this quarter's financial results. On an apples-to-apples basis, when excluding Cal Dive's revenues from that reported in Q2, our revenues decreased from $300 million in Q2 to $216 million in Q3.

The decline of revenues reflect the factors we have previously discussed, a general softening in the contracting services market, the redeployment of vessel capacity to internal use, plus production curtailments due to pipeline and mechanical issues in the Gulf of Mexico.

With respect to EPS, we reported $0.04 per share positive, but after backing out the gain on our sale of Cal Dive and the incremental write-off associated with the cat bond, a normalized EPS for Q3 would have been a loss of $0.03 a share. In addition and not reflected in our pretax earnings is $25 million of settled hedge contracts that were recognized in earnings in Q1.

Going to slide five, as previously mentioned there were two one-time items that impacted quarter three results which I'll talk about in a little bit more detail. First, the sale of $23.2 million Cal Dive shares in September resulted in a pretax gain of $18 million. After this most recent sell down of our interest in Cal Dive, our holdings amounts just 500,000 shares which we intend to sell as market conditions allow.

Secondly, we charged to earnings $10.4 million associated with the cost of our weather derivative instrument known as a cat bond, acquired to protect against hurricane losses to our oil and gas assets in the Gulf of Mexico. The cat bond was acquired in lieu of traditional insurance as we found the cost of traditional windstorm as insurance to be expensive relative to the risk coverage.

We charged a substantial portion of the cat bond cost to earnings in Q3 to coincide with our hurricane season, with $7.1 million being the amount that is over and above what would've been charged to earnings on a straight line basis had we acquired the same amount of coverage with regular insurance. I will turn the next few slides over to Owen.

Owen Kratz

Although our balance sheet position has changed dramatically for the better over the last few months, we continue to remain focused on debt reduction and liquidity. Year-to-year, our net debt balance has decreased by some $850 million with the latest sell down of Cal Dive adding to what has become a remarkable leap forward in the deleveraging of the company during a very difficult economic environment.

I wish I could paint the same pretty picture when it comes to earnings, but hopefully our prior commentary in the operational update call we conducted on August 25 adequately signaled to the market what the second half of '09 might look like.

Production declined in the third quarter to 9.8 billion cubic feet equivalent from 12.4 billion cubic feet equivalent in Q2. The 9.8 billion cfe for Q3 was slightly above our most recent guidance.

Mechanical and infrastructure issues plagued us in the third quarter and continued to do so on a number of key producing fields on the shelf. The good news is, with the hedges we have in place we were able to realize approximately $8 per M on gas and close to $70 per barrel on oil.

With respect to deepwater production, we expect Noonan gas production to finally get to peak rate sometime in this quarter as the pipeline operators told us, it's customers that it expects to complete repairs in November. At peak rates, NOONAN should add 40 million cubic feet a day to our production rates.

Robert will get into more details in our oil and gas business a bit later, but for now moving over to slide eight, we've consistently stated that we expected the second half of 2009 to soften on the services side. Unfortunately, our crystal ball has been right.

Furthermore, we diverted the utilization of the express pipelay vessel to building out the pipe-in-pipe infrastructure needed to bring our Danny oil field into production. That, along with the transit of the vessel from India for the completion of the Reliance project and the regulatory dry-dock for this vessel in Q3 were all major factors in our revenue decline. However, bringing the Danny fields into production will pay major dividends going forward in 2010.

We've spent about $209 million in capital for the first three quarters of 2009, with our current estimate for the full year at between $340 million to $360 million. The majority of our remaining CapEx for '09 is focused on completing the Helix Producer One and the Danny and Phoenix oil field production infrastructure.

Moving to slide nine, in August, we adjusted our full year 2009 production forecast in the 43 to 47 Bcfe range. This range still looks good at this time, but assumes that Noonan gas production reaches peak levels in December with repairs to the Sea Robin pipeline completed. I should point out that Sea Robin has given us two dates prior to this.

We're in the midst of our budgeting process for 2010 and thus not in a position to offer guidance to the market quite yet. However, I do think that I can make a few general comments as to what we're seeing so far.

We've made major strides in paying down debt, building liquidity to the point where we need to turn our attention to operational execution and vessel utilization, which will lead to stronger earnings going forward. I see enough green shoots to believe that the softening in the contracting service business, as far as activity levels, will turn around some time in 2010. It may take some unquantified period beyond 2010 to return to full normalized levels.

At this stage, I expect 2010 CapEx to drop significantly and presently estimate it to be in the $200 million to $250 million range. Depending upon how many exploration wells we might drill, and how much of the exploration risk we off-load through promote deals. Once the three major new builds are completed, I see relatively low levels of capital spending for services in 2010.

While we're 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.

At this point, I'll turn the next section on liquidity and capital resources over to Tony.

Tony Tripodo

Okay. On slide 11, this illustrates the dramatic improvement in our balance sheet position since the beginning of the year. Our net debt position has decreased by some $850 million while our liquidity position at quarter end reached $780 million, liquidity being defined as revolver capacity plus cash on hand.

On to slide 12, much of the information on this slide with respect to non-core asset dispositions has already been chronicled. So I won't repeat it all but to highlight that our non-core asset dispositions have accumulated to some $600 million pretax in '09. Let me move forward to slide 14.

Slide 14 outlines our debt instruments and maturity schedule. We are presently unborrowed on our revolving credit facility and expect to remain that way through the rest of the year. During quarter three, we were able to expand our revolving credit facility to $435 million, increased potential capacity of that facility to $550 million while extending the maturity to November 2012, while at the same time relaxing certain covenants that will make it easier to sell other non-core assets. We've said in the past that we're still seeking some day to sell our shelf Gulf of Mexico production.

I will turn the next few slides over to Bart to discuss operations in new build vessel progress.

Bart Heijermans

Turning to slide 16. Helix subsea construction completed the offshore work on the Reliance KGD6 Project offshore India with the Rem Forza. This concluded 20 months of work and Helix's single largest project.

The Express returned from India to the Gulf of Mexico after spending four weeks in dry-dock in Spain. She started spooling the Danny pipe-in-pipe in late September and is currently offshore installing the first pipeline segments.

Intrepid has been busy quarter in the Gulf of Mexico and enjoyed excellent utilization. Helix's Robotics business unit came in offshore performed well in this quarter as is shown on slide 17.

Slide 18 covers our well intervention business. The financial performance was adversely impacted by two factors, namely, a., delays in prospective well intervention work resulting in the Q4000 spending almost two weeks in Galveston without work and two months accommodation vessel work at low rates; and b, continuing expenditure required for the refurbishment of damaged well intervention equivalent in our Well Ops Southeast Asia business unit.

Let me give you an update on the status of our major marine capital projects on slide 19. I am pleased to report that the Well Enhancer is now generating revenue and is working as a well intervention vessel for Nexen in the [desert] field in the North Sea.

The Caesar successfully completed a 10-day comprehensive sea trial program offshore China and is now back in China at the yard wrapping up the minor punch-list items. She is scheduled to depart China in November and we expect her arrival in the US in January. We are bidding the vessel in projects in 2010, '11 and '12.

As you can see on slides 19 and 20, the Helix Producer One has experienced a major makeover. All of the production modules and the turrets have been installed. The turret buoy will be installed by the Q4000 in the Phoenix fields in November and the vessel Helix Producer One is on schedule to depart Kiewit's yard in Ingleside in the first quarter of next year with production of the Phoenix fields expected to start up in the second quarter of next year.

Slide 21 shows the financial performance of Helix contracting services. Margins as expected were impacted by the loss of revenue of the expressed for the quarter and the lower margins of the Q4000 in the quarter.

Turning over oil and gas to Robert Murphy.

Robert Murphy

Good morning, everyone. Please turn to slide 24. The oil and gas operating unit recorded a loss of $22 million in Q3 compared to $44 million in profit in Q2. Decreased production volumes lower average commodity prices, the expense recorded for our catastrophic bond, work over expenses and hurricane repairs were the primary drivers for the operating loss we incurred.

In addition, we realized approximately $25 million of hedging gains in Q3 that were recognized on a mark-to-market basis through P&L in prior quarters.

We did record a charge of $10.4 million associated with the $13.1 million premium paid for our catastrophic bond for windstorm coverage against potential hurricane events affecting our Gulf of Mexico producing properties.

Accounting rules required us to expense the bonds based on its intrinsic value essentially over the hurricane season. Most of the remaining $2.7 million in premium will be expensed in Q4.

We also recorded hurricane-related repair expense of $5 million. We've completed the majority of our hurricane-related repairs, but are still incurring hurricane-related abandonment costs that were previously accrued for in the second quarter of 2009.

Oil and gas production was lower due to prolonged shut-in of the Eugene Island oil pipeline system and mechanical problems experienced with two key shelf wells that we previously discussed in August. As we discussed in our August operations update, we continued to experience delayed production volumes from our Bushwood field due to damage to the Sea Robin gas export line.

Sea Robin now estimates this line to return to service in late November. We estimate the Bushwood field being brought up to an anticipated growth rate of 100 million cubic feet of gas equivalent per day, sometime near the end of November.

With this line back in service and resolution of the above mentioned mechanical issues, we expect our 2009 exit rate to range between 150 million and 160 million cubic feet of gas equivalents per day.

Moving to slide 25, overall, operating costs were negatively impacted by the previously mentioned expensing of the cat bond and further from $6 million charge in work over expense related to repair of a damaged subsea flow line and a cleanout of one of our key producing wells. Transportation costs were slightly higher than quarter due to an out of period adjustments from prior quarters.

Slide 27 summarizes our 2009/2010 commodity hedge position. Our average realized price expectations for the remainder of 2009 with the hedges that are currently in place is $70.91 for oil and $7.45 for gas. Additionally, we've entered into hedge contracts for 2010 and we have hedged approximately 40 Bcfe of our 2010 production. We will continue to evaluate and augment our hedge position as we get closer to first production at Danny and Phoenix.

Tony?

Tony Tripodo

Okay. Thanks, Robert. We've got some non-GAAP schedules in here which I won't go over. They are there for your reference so I will turn back over to Owen now for closing remarks.

Owen Kratz

Well, as expected, the third quarter was not a very good one for us operationally. There were a number of extraordinary events adversely affecting production rates that we just have to get behind us. An offshore fire on another producer's field which shed in some of our wells, a third-party pipeline leak that shed in two of our fields, a mechanical problem in the well of our largest oil producing field and then continuing delays on the Sea Robin pipeline that has our Noonan production restricted.

Unfortunately, there were also a number of issues on the service side as well. The Express transit from India back to the Gulf of Mexico was done with very little revenue. We mentioned dry-dock, but the good news is that the India project is completed and behind us.

Low margin utilization for the Q4000 as it was deployed on an accommodation contract. Our project incident in Australia, causing $4 million of repair costs that Bart alluded to. Delays in the Enhancer getting back to work.

We believe we can achieve better operational efficiencies in both the services as well as the production side of the businesses. We're focused on getting these extraordinary events behind us and very focused on achieving operational efficiency gains.

Looking forward, we have major production coming online. Noonan in Q4 heard the latest update from the Sea Robin. But I might also mention that we also have our own 12-inch line now purchased and ready to lay should Sea Robin fail in this repair attempt.

We have Phoenix coming online in Q2, Danny in Q1, and other currently shed in fields being restored. We have the Enhancer in service now. The Caesar successfully completed sea trials. It went very well. The HP1 is progressing well towards its deployment to the Phoenix field by the second quarter.

We have a building backlog. Bidding activity is robust. We've also strengthened our sales staff and our sales efforts. We should improve operationally in Q4, but it will probably look similar to Q3 as we had already forecasted a weak second half for 2009.

In 2010, we're more optimistic than we have been in general. But I should say that the Caesar utilization remains a concern for us. We'll be bringing it to market in a weak part of the cycle. Long-term, we liked the asset and we really like the market niche that it's placed in. But the type of work that it does is bid well in advance of the actual work. So it will take a period of time to actually bid, win and then await the beginning of the work. But I will say that there is an awful lot of interest in the vessel.

We've significantly improved liquidity and forecast positive free cash flow in 2010. We have no debt coverage or issues or concerns about meeting debt repayments going forward. It looks like it's our sectors turn to feel the impact of the down cycle, but we're well-positioned financially now and we'll be looking towards what our position in the market might be coming out of this cycle with the advantage that our business model brings in the form of cash production from the cash flows from production.

At this time, we'll be happy to take any questions and enclosing thanks for joining us today and we very much appreciate your interest and participation.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Mr. Roger Read. Your line is open.

Roger Read - Natixis Bleichroeader

I guess my questions, you talk about the Danny and Phoenix fields both bringing on significant production in 2010. Are you still cautious about providing what you think the right volume expectations would be for those fields? At least if not a particular date for them what your target would be once they are up and running at full levels?

Robert Murphy

Well, we did mention in our August update that the combination of both fields were approximately 100 million cubic feet of gas equivalents per day.

Roger Read - Natixis Bleichroeader

Right, I guess...

Robert Murphy

For both of them. And it breaks out to be about 10 and six. 10 for Phoenix and six for Danny on a barrel of oil equivalent.

Roger Read - Natixis Bleichroeader

Okay.

Robert Murphy

We have stated that before also.

Tony Tripodo

There is no change in that forecast, right, Robert? And...

Robert Murphy

No. No, we don't have...

Tony Tripodo

It's important to point out that this is mainly oil production as well.

Robert Murphy

Yes, yes, that's why I went to the 10 and six . That's 80% oil, Roger.

Roger Read - Natixis Bleichroeader

I mean, I think about your historical sort of hedging approach, which would be approximately half of your production. Obviously, if you already hedged 40 Bcfe equivalents for 2010 and I look at this year's production, it's not going to be much over that 40. It's reasonable to assume there is a pretty good step-up here. Danny and, obviously, by the first quarter and Phoenix, let's say, by midyear.

Robert Murphy

Yes.

Owen Kratz

Roger, we're allowed to hedge up to 75% by internal policy not to 50%. So there is an awful lot of room to add additional hedging, but we're cautious. We also have restrictions on how far in advance of first production we are allowed to hedge. So that's why we need to get closer to the Danny and Phoenix start-up dates before we start considering layering in an additional layer.

Roger Read - Natixis Bleichroeader

At least the first part of the year, the expectation has got to be the Bushwood fields coming fully online through that Sea Robin line. Correct?

Robert Murphy

Yes and Danny coming on.

Roger Read - Natixis Bleichroeader

Now this Danny, since it's an oil field the pipeline issues there would be different than what we're seeing on Noonan?

Robert Murphy

Yes. It goes into the Eugene Island system. After we lay our 35 mile pipe-in-pipe system, it goes to a host facility to be processed and then goes into the Eugene Island system.

Roger Read - Natixis Bleichroeader

Then 2010 expectations for the vessel fleet. Last time we spoke, Brazil, Mexico were kind of the highlighted international areas. I guess we could throw in Trinidad, but let's just call it greater Gulf of Mexico and Brazil. Anything specific you can help us with on those?

Owen Kratz

Not at this time. I think it's a little too early. We're right in the midst of our budgeting process and I think we'll have more color at a later date. I would like to just mention just to regress a second. The Express is actually out right now laying the pipe-in-pipe for Danny, which is one of the reasons why Q4 will look somewhat similar to Q3 is because the Express is going to be pretty much dedicated on internal work to get that prospect in production.

Bart Heijermans

In 2010, I mean our main markets are going to be the Gulf of Mexico and the North Sea. I mean, that's where our vessels are working and that's where we expect them to work in 2010. And then maybe we'll have some trips to regions outside those two areas, that I mean Gulf of Mexico and the North Sea, they are our main markets.

Roger Read - Natixis Bleichroeader

Well, then, maybe just one final question. The Q4000, what's sort of the near term prospects for that vessel?

Bart Heijermans

I mean we'll have work for Shell that will bring us into Q1 after that. I mean, we've got quite some work lined up, a couple of LOIs in place. I mean we expect for her to have some good utilization in 2010.

Operator

Our next question comes from Mr. Jim Rollyson. Your line is open.

Jim Rollyson - Raymond James

Owen, you talked about the bidding side of things for the marine contracting business kind of looking up. Can you maybe put some brackets around? I think you said earlier that you weren't expecting things to quite get back to where they were at the peak until maybe sometime in '11. But if you look at bids whether it's in dollars or maybe as a percentage of what it was at the peak kind of how strong is bidding going into the second half of '10 and '11?

Owen Kratz

I might let Bart address that because he is more intimately involved in it.

Bart Heijermans

Yeah, I'm on the well intervention side. I mean we really haven't seen a drop in bidding activities in the Gulf of Mexico and in the North Sea. On the subsea construction side, work to first half of 2010 is very slow. But we really have, in the last couple of months, have seen an increase in bidding, in tendering activity and bidding activity starting mid next year.

I think the third quarter and the fourth quarter of next year, I mean I expect our vessels to be busy and then it's more an issue of pricing than utilization, starting the middle of next year. We should not forget that we have two vessels on the subsea construction side that are contractors for next year.

The Olympic Canyon has a contract, a long-term contract, an inspection repair maintenance contract. Then also the Olympic Triton has been contracted by Technip, to support Technip in West Africa. So we have two of our vessels are fully contracted for next year.

Owen Kratz

I might just add a little color. I think the well intervention is pretty robust. The Q4000 is actually looking at a very robust year next year from early indications and this is just giving you a little insight as to some of the dialog we have in our budgeting process. We were planning to contract the ROV fleet and reduce it, hunkering down as it were and the bidding activity is to the point now we're actually contemplating retaining a vessel rather than letting two go. So that's a positive.

The pipeline has always been where we were bringing our assets back to the Gulf of Mexico and re-focusing our business here. And so, therefore, it was a bit of uncertainty, but I think what I'm referring to is we actually have sufficient bids in house like Bart says. I don't know that utilization is going to be the issue. It's really pricing and we're actually having our estimating staff taxed with the volume of bids that we're seeing.

Bart Heijermans

Then in keeping utilization at decent levels, I mean for example the Intrepid, she is working I mean almost nonstop as in deepwater Reliance pipeline installation vessel. Now we have installed in Portugal saturation system. So we are doing some diving work from that vessel to increase, I mean to keep the utilization at decent levels. So that's our focus really through the middle of next year is to keep these vessels busy. In the second half of next year, pricing hopefully will pick up.

Jim Rollyson - Raymond James

Owen, just to maybe follow-up on that. You talked in the past about new build level on kind of the generic wealth intervention DP-type vessels that you didn't necessary compete with that much, but certainly could have an impact on your market. Kind of what's the status there? Are those guys starting to try to get into your business, some of the ship owners or is there a lot of idle capacity? Kind of what's the opportunity or the issue there?

Owen Kratz

On the well intervention site? Or...

Jim Rollyson - Raymond James

Yeah, I think that's where you've been most concerned historically about some of the level of new builds.

Owen Kratz

Yeah, in general, Jim, you are still seeing capacity increase in the DP2 vessel range. That market continues to soften. We typically, except for specialty vessels, we just charter in that market. So it's actually a positive for us going forward. But I'll tell you I just see no end of in the near term for the weakening in hat DP2 vessel market. There is just too many of them still coming out of the shipyards. Some of them are starting to have financing collapse and the constructions failing. But, in general, as you do in every cycle, you'll see ship owners trying to become contractors because they are going to be struggling to get utilization.

I think in some areas that's a concern. But we're trying to revamp or continue to focus our business model on being the specialty niche provider and staying away from the more commoditized kind of vessels. So we feel like we're a little bit insulated from it and we're just looking at ways to take advantage of the situation.

Jim Rollyson - Raymond James

You mentioned the short-term revenue obviously coming down a bit or staying somewhat steady with third quarter. Margins, you think stayed relatively steady with third quarter as well on the marine side?

Robert Murphy

I think margins will get better in the fourth quarter simply because the rates we're looking for getting on the Q4000 will be better in Q4 than Q3, Jim. Even though, we have the Express working on internal work...

Jim Rollyson - Raymond James

It's working.

Robert Murphy

It's working and not only is it working, but there is partners in those fields. So to a certain limited extent, we will be booking revenues that will fall to the bottomline in Q4 associated with the Express. The Intrepid is remaining busy. The Enhancer is out there working. So operationally, on a gross margin side, I expect a better quarter, but we're still early in the quarter.

Operator

Our next question comes from Mr. Stephen Gengaro. You line is open.

Stephen Gengaro - Jefferies

I guess you've answered a lot but when you look at the sort of ongoing strategy on the non-core asset side, how should we think about it going? I mean, obviously, there is shallow water, Gulf of Mexico stuff is apparently thinks you are willing to sell, but how about more of the deepwater production and/or the production facilities. Can you kind of give us your thoughts there?

Robert Murphy

Yes, Steve, I think what we've accomplished so far, the real significant non-core asset that we have identified that remains to be disposed of is the shelf. It has been a very, very difficult environment here in '09 to sell the shelf. We believe the environment in 2010 will get better. Obviously, with our balance sheet position and liquidity, we can be a patient seller on the shelf. At the same time, our attitude hasn't changed. It's still an asset that we seek to sell eventually.

In terms of selling down interest in deepwater that will only occur as part of an exploration strategy, I think. I mean, we like our deepwater portfolio of assets on the E&P side, we don't think the value of that portfolio is fully reflected in our stock price and, therefore, we think we would diminish shareholder value by trying to sell deepwater now. So we'll only sell off deepwater interest as part of an exploration strategy.

Your last item was production facilities. You know it is an encore asset, but it is also a non-core asset that generates a fair amount of cash flow and earnings and the price has to be right. It's as simple as that. It's also a great passive asset in that there is no maintenance, no capital required on it. We don't lose any sleep over the production facility. So if somebody came and offered us a good price and it made sense from a discounted cash flow standpoint, we'd sell it. If not, we'll continue to clip the coupons.

Stephen Gengaro - Jefferies

Then from the production side, it sounds like you're more optimistic that things are going to get cranking along here by the middle of next year. I mean, what can we look for sort of as benchmarks or what are you guys looking at as benchmarks that show you internally or possibly us externally that you're on the right track and things are probably going to remain pretty close to your current expectations?

Owen Kratz

The first one obviously is the Sea Robin pipeline repair. That, if we get into December and have not gotten that repaired, the Sea Robin has not completed that repair then that's a red flag. Because it's going to take us a while. Our recourse then is that we will lay our own line and we will take it to a different system. But that's going to take us some time and money to accomplish.

The second one is looking for first production from Danny in the first quarter, and then following that the completion of the HP1 and deployment of it to the Phoenix field in the second quarter. At that point our major capital spending is complete. We're ready to sit back and reap the dividends of the investment made to that date.

Stephen Gengaro - Jefferies

And just from where you are sitting, I mean there is nothing that's changing your sort of thought process on what you will actually look like three years down the road?

Owen Kratz

No. To put it in perspective, if you realize that we're going into a down cycle here, we are in a down cycle. This is where the hybrid model release shines. To me, it's a matter we first focused on getting our capital spending under control, then we focused on getting the liquidity of the balance sheet restored.

Now our focus is on improving our operational efficiency and getting these production fields into service. That gives us the visibility of the cash flow through a weak part of the cycle which is always where the best opportunities for capital reallocation rest. So while we're focusing on our operational efficiencies, we're also sort of casting the net about for the best methods for reallocating capital.

Operator

Our next question come from Ms. Terese Fabian.

Terese Fabian - Sidoti & Company

I have a question on the Express. You said it would be working on the Danny pipeline work there. Is that going to be for the full quarter? Can you talk a little bit about what's involved mechanically in that work and the possibility that there could be delays referring to that past question?

Bart Heijermans

We are installing the first segment of the Danny pipeline while we speak. I mean, we are welding that pipe at our new spoolbase and Ingleside and then so every time we lay the section then we go back to at the spoolbase we spool some more pipe and then we go offshore and lay that section. So I mean we control our own destiny there.

For the riser installation some of the diving work, we'll be doing that with Intrepid. That vessel we control. So the umbilical, the control umbilical for Danny already has been installed. So I mean what I said early, we control our destiny and I think the only thing that can impact progress is offshore weather. But I mean, we feel pretty comfortable that we can complete that system and start production from the Danny well as stated in the first quarter of next year.

Terese Fabian - Sidoti & Company

Will the Express be working full quarter on that and going into the first quarter? That leads into my next question on intercompany elimination. Are those going to be rather level in Q4 with Q3?

Robert Murphy

I think intercompany eliminations for the Express will obviously go up in Q4 because of the Danny pipeline work. I will say it actually has done some third-party work, but it's very minor, very small jobs in between working on the Danny pipeline job, Terese. But for the most part you can look at the vessel as being almost internally focused in Q4.

Bart Heijermans

Yeah and, of course, in Q3, I mean she was transiting from India back to the Gulf of Mexico and with a dry-dock in Spain. So I mean the vessel didn't generate any revenue and incurred the transit costs. So I mean although, we'll have some eliminations in the fourth quarter, I mean quarter-over-quarter is going to be insignificant improvements and we will book the interest that is owned by a third-party or the revenue we generate from the third-party interest in the Danny field.

Terese Fabian - Sidoti & Company

Then on the cost side of your P&L. I think you said that there was $4 million cost on damaged well ops equipment in Southeast Asia. Can you talk a little bit about this? Is this something that recurs or that occurs on a regular basis in other regions? Is it something to look for as far as expenses go?

Bart Heijermans

No, this was an incident we had earlier in the year and we have been repairing the system and also it would be subject of an insurance claim. So, we are incurring the cost now and then hopefully, later this year, we can offset some of this cost by a proof of loss claim.

Owen Kratz

I might add the incident was a loss of control of the equipment being set or handled by the handling system. The root cause analysis pointed out that it was operator error based on the configuration of the system and since then, in the repairs we've also reconfigured the system to incorporate fail safes against operator error going forward. So it was a very unusual incident for us.

Bart Heijermans

This really impacted us in two different ways. I mean first, we incurred this cost of the refurbishment but then also the system is not available to generate any revenue until we have repaired it. I mean this is in well ops Southeast Asia business. Last year, it had a very profitable year. This year it was impacted by the incident. I mean, this repair should be finished by the end of this year and then early next year, we should have well intervention work again for this system.

Terese Fabian - Sidoti & Company

When did it go off-line?

Bart Heijermans

This incident happened in February off in the first quarter and we have been incurring costs for the refurbishment starting like halfway the second quarter. But it really impacts the third quarter because, as Owen said, we've spent around $4 million in the fourth quarter. It's covered by insurance. But we have to finish our claim. Then hopefully, as I mentioned, we can record a proof of loss and then, in the fourth quarter and get insurance proceeds in the first quarter of next year.

Terese Fabian - Sidoti & Company

I have just one last question on activity in the North Sea. Do you see any pickup there?

Bart Heijermans

Yeah, I mean our folks in the North Sea is really with the Seawell and the Well Enhancer are two well intervention vessels. I mean traditionally the wind amounts are slow. We have work in the fourth quarter both for the Seawell and for the Well Enhancer. I mean we see quite some bidding activity for 2010 and we still have the 185 days of firm shell work in 2010 that they have committed to the vessel even if they don't use it, they have to pay for it.

We see some interesting decommissioning projects, decommissioning of subsea wells. So we are, our visibility for 2010 is pretty decent and somebody before asked about the competition, there were like 10 vessels couple of years ago that were announced as well intervention vessels. We have only seen really one of these older vessels coming on the market. The other ones are still in the shipyard. They are owned by companies that have financial difficulties and some of these vessels are going to drop down as ROV support vessels. So we like our position with the Well Enhancer and the Seawell. I think 2010 is going to be a pretty decent year.

Owen Kratz

Correct me if I'm wrong, Bart, but the outlook for the North Sea well intervention is more positive now than it was six months ago.

Bart Heijermans

Yes. Absolutely, absolutely. I mean the recovery of the oil price definitely has helped.

Terese Fabian - Sidoti & Company

If I may just slip one more in there. You said the Caesar is still looking for bookings at this time. How long a lag time is there for the type of work that vessel would be doing?

Bart Heijermans

Normally on her projects, it's the type of project that she is doing. It's a year plus lag time. But having said that, I mean we have submitted bids for work in 2010 and we are working on preparation of bids for 2010. But 2010 as Owen said, it's going to be a slow year for that vessel. We will capture work in 2010, but it's going to be slow. 2011, I mean, we are bidding on some very interesting projects where I think we are positioned for these projects pretty well in 2011 and we are bidding on work for 2012. We like the assets and so 2010 is going to be slow, but then it's going to pick up pretty quickly.

Owen Kratz

I think it's fair to say that the first half of the year will be a negative drain and the second half will pick up, but I wouldn't look for full year, I wouldn't look for significant contributions from the Caesar.

Operator

Our next question comes from Mr. Joe Gibney.

Joe Gibney - Capital One Southcoast

Covered most of the ground here just want to circle around on the HP1, and some of your comments there. Appreciate the detail. Relative to the turret being in and the vessel being on schedule to sell, leaving Kiewit here in the first quarter, it seems like things are on track, maybe even ahead of expectations. Just curious as to your thoughts on progress there installing the modules and if things are humming along pretty well as it appears they are?

Owen Kratz

I don't disagree with your outlook, but please don't say that again. When we got the vessel here we formed a very strong project team and we took the extra time to reengineer the project before really kicking it off. I think that has paid dividends. The work has gone extremely well and it has been very challenging. Having said that, I think that most of the spectacular lifting is probably done and now we're getting into the more tedious cable running, mechanical completion and commissioning phase of the project. So we're a long ways from the finish line, but the performance level of the project team down there has been very, very good.

Joe Gibney - Capital One Southcoast

Lastly just circling back on the Caesar very briefly in reference to bringing this vessel in at an odd point of the cycle here, is it still possible that you guys would consider sale/leaseback of this vessel? Is that still on the table, under consideration from a strategic standpoint?

Owen Kratz

I don't think a sale/leaseback is in the cards. I mean that's really just a liquidity mechanism financing and that doesn't really interest us. We would like to remain in the market. I think it's a great market niche and we'd like to remain in it.

To the extent that we could take some of the capital investment off of the table, given the lag of the returns that we see coming. We'll get there eventually, but given the lag and the capital reallocation potentials that we've got, we would be interested in especially taking on a 50% strategic partner that would both accelerate the build of the utilization and reduce the capital investment without reducing our exposure to the market.

Joe Gibney - Capital One Southcoast

Tony, just one modeling housekeeping question. SG&A run rates still here hovering in this low 20s. Is that fair?

Tony Tripodo

Yeah, I don't see any change in it in absolute dollar terms. I think what you see in Q3 is what you'll see in Q4.

Joe Gibney - Capital One Southcoast

Tax in the high 30s still?

Tony Tripodo

I think tax rate will be go-forward. I mean, low levels in pretax profit could exaggerate the tax rate, but on a go-forward basis you're looking 35% to 37%.

Operator

Our last question comes from Mr. [Kelly Krenger].

Unidentified Analyst

Just a question on your liquidity, kind of how would you move forward and get the most of the spending done on the new build program and the new project program? Can you kind of give us a sense for what kind of liquidity you want to have on an ongoing basis and if you'll keep that cash or if you're comfortable just keeping undrawn credit facility?

Robert Murphy

Kelly, that's a good question. I mean the set answer is we'd like to have as much liquidity as we can, but frankly speaking I think $850 million plus of liquidity or $780 million of liquidity is relatively high for our size company. Not that we would be unhappy with $1 billion of liquidity. We see no reason why we will draw into the credit facility anytime in the near future. But our goal right now is still to reduce net debt. Our goal is to generate positive free cash flow that is after CapEx.

So if you think about that, we ought to be building a liquidity rather vice versa. I think in the short-term, we may actually we're trying to get the HP1 done and Danny and Phoenix oil fields done. Our liquidity position at year end might be slightly lower, but that's temporary. Our goal is to manage this company to generate positive free cash flow.

Owen Kratz

It's fair to say also that some of our decisions about the cash that we're holding is driven by our restrictive covenants. The sale of the Cal Dive's big proceeds are virtually ours whereas to the extent that we execute our strategy of divesting the shelf there, they are dedicated to debt repayment, 60%.

So to that effect, we're sort of holding some dry powder here, looking at the outcome of the shelf divestment strategy. Then from there, we then look at the debt levels which, long-term, we're targeting about the 30% debt-to-book cap range. We'd like to get some more relief from the restrictive covenants and then balance the use of the cash that we're having now following a divestment of the shelf and a further reduction in our debt balance the options between capital redeployment and further debt reduction.

Unidentified Analyst

What are the restrictive covenants at this stage that you'd like to see either removed or relaxed?

Owen Kratz

Well, I think we've accomplished that somewhat and I'll turn it over to Lloyd because he was instrumental in getting the recently announced extension of our facilities which the banks worked really well with us on.

Lloyd Hajdik

On the bank credit facility, we were able to get some relief on sales of non-core assets which we've talked about the shelf holding gas properties and finish line vessels. In compromising with that, proceeds generated from those assets sales, 60% would go to pay down senior debt; 40% would be reinvested for up to a year; and then excess proceeds after a year would then also go to repay debt.

We had certain basket limitations under the credit agreement for oil and gas assets sales and potentially for vessel sales that any of the transactions that we're talking about, besides the magnitude would be above those basket limitations. So we, obviously, now have the room to do that.

Operator

We have no further questions.

Cameron Wallace

Well, in closing, thanks for joining us today. We very much appreciate your interest and participation and look forward to talking to you for our year end call. Thanks.

Operator

Thank you for everyone's participation today. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Helix Energy Solutions Group, Inc. Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts