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Executives

Cameron Wallace – Director, Marketing & IR

Alisa Johnson – EVP, General Counsel and Corporate Secretary

Tony Tripodo – EVP and CFO

Owen Kratz – President and CEO

Bart Heijermans – EVP and COO

Robert Murphy – EVP, Oil & Gas

Analysts

Jim Rollyson – Raymond James & Associates

Stephen Gengaro – Jefferies

Martin Malloy – Johnson Rice

Roger Read – Natixis Securities

Terese Fabian – Sidoti & Company

Philip Dodge – Stanford Financial Group

Nick Alfermann – Highland Capital

Helix Energy Solutions Group, Inc. (HLX) Q4 2009 Earnings Call Transcript February 25, 2010 10:00 AM ET

Operator

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

Now, I'd like to turn the meeting over to Mr. Cameron Wallace. Thank you, sir. 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, our Chief Operating Officer, Robert Murphy, Executive Vice President, 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 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 www.helixesg.com. The press release can be accessed under recent news and a slide presentation can be accessed by clicking on today's webcast icon.

Before we begin our prepared remarks, Alisa Johnson will make a statement regarding forward-looking information. Alisa?

Alisa 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, therefore made under the Safe Harbor 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 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 rules, the final slides of our presentation material 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 will now make some opening remarks.

Tony Tripodo

Okay. Good morning, everyone. I'm going to move forward to slide four, which summarizes the results for this quarter and for the full year and I will focus commentary here on quarter four's results as compared to the prior quarter.

The decline in revenues in quarter four reflect the factors we have previously discussed, continuing weakness in the contracting services market, particularly in the subsea construction market and the redeployment of vessel capacity to internal use for our oil and gas development.

Revenue declines in these areas overshadowed an increase in well intervention revenues due to the addition of our new vessel, the Well Enhancer in October as well as higher revenues for the Q4000 and a slight increase in oil and gas revenues due to higher oil prices.

Moving over to slide five, with respect to EPS, we reported a loss of $0.53 per share which included seventy million -- $79 million of impairments associated with oil and gas property reserve adjustments and oil and gas lease exploration write-offs. The effect of these items amounted to $0.49 a share.

And our fourth-quarter P&L results did not include $15 million of gains associated with our oil and gas hedge contracts settled during the quarter or were mainly recognized in our P&L in the first three quarters on a mark-to-market basis.

I will now turn the next few slides over to Owen.

Owen Kratz

Good morning, everyone. On the service side of the business, the fourth quarter was a continuation of the market weakness that we saw in Q3.

That factor, combined with relatively high utilization of key assets such as the Express, the Intrepid and even the Q4000, utilized on an infrastructure build-out on the Danny and Phoenix oilfields, contributed to poor results in the fourth quarter. That being said, the build-out of the infrastructure needed to bring Danny and Phoenix into production should be a significant increase in production for rates for 2010.

Production in the fourth quarter amounted to 9.8 billion cubic feet equivalent which was relatively flat to the quarter three. The 9.8 billion CFE for Q4 brought the total for 2009 oil and gas production to 44 billion cubic feet equivalent which is at the low end of the range that we guided to in the summer.

We exited the year at a production rate of 94 million cubic feet a day, but as of yesterday we were producing at 145 million cubic feet equivalent. The sharp increase since the year end is due to the following factors. Production from the Danny well and the Bushwood field commenced in early February which is sooner than our own internal forecasts and Danny is mostly oil.

Second, we've nearly doubled production in the Noonan gas wells as the repairs to the major pipeline servicing this field were completed in early January. That was a significant delay from all previous expectations, but it is finally done.

Furthermore, we have restarted a couple of key Gulf of Mexico shelf fields that were experiencing mechanical problems during the second half of 2009, but having said that, Robert will get into more details about all the oil and gas operations a little bit later.

Then moving over to slide seven while our earnings remained weak in the fourth quarter, our balance sheet remained strong. I'm pleased to say that our debt decreased by $713 million in 2009 while our liquidity at year-end stood at a healthy $657 million. That's illustrated on slide eight.

Furthermore in the fourth quarter, we extended the maturity of our revolving credit facility to November 2012 and just recently modified some of the financial covenants for that facility. And this will provide us more flexibility from a compliance standpoint going forward.

Moving over to slide nine, starting on this slide -- hang on one second while I get separated. Starting on slide -- on this slide and the next few slides, we'll provide an outlook for guidance for 2010. On the contracting service side of our business, we expect the first half of 2010 to continue to be weak, but with a gradually improving outlook as 2010 unfolds. Bart will get into the outlook for 2010 by business unit in more detail a little later.

Furthermore, our continuing utilization of vessels for in-house and oil and gas development -- you can expect quarter one to look much like quarter four on the contracting side of the business.

We forecast capital expenditures of about $200 million for the year, significantly lower than the $328 million in 2009. In fact, 2010 capital spending is still heavily weighted to the front end of the year because we are spending it on completion of the Helix Producer I, the Caesar and the Danny and Phoenix infrastructure. Capital spending in the back half of 2010, therefore, should be really light.

We have no major capital projects after the completion of the existing vessels and field developments. We have reduced capital spending and increased oil and gas production forecasted. We expect to continue to delever our balance sheet and should build liquidity again by the end of the 2010 year.

For more specific guidance, I'll turn it back over at this point to Tony.

Tony Tripodo

Okay. I'm on slide 10 now. Slide 10 gives an overall outlook for 2010. And I will -- I'm going to focus my comments on the oil and gas side of the business as we feel that the greatest variability for our overall 2010 result depends on oil and gas production and the assumptions that go into our forecast for production. As Owen mentioned earlier, Bart will take us through the outlook for the contracting services business later.

We are providing a 2010 outlook based on high and low forecasts for oil and gas production based on certain key variables for production, which I will now describe. On the high end, we assume that production will be 60 billion cubic feet for 2010. On the low end, we assume oil and gas production will be 50 billion cubic feet and that range will produce our EBITDA of between $450 million and $550 million.

That being said, the high-end production number of 60 billion cubic feet is not the best we can achieve. We can achieve better, but we're just going to give the guidance within this 50 to 60 billion range. I could paint you a set of circumstances on the other hand where production could actually fall below the low-end figure of 50 billion. Realistically, our production will probably fall somewhere within this range of 50 to 60.

At 60 billion cubic feet of production, as I said, we expect to generate EBITDA of $550 million and at 50 billion cubic feet; we expect to generate around $450 million of EBITDA. With our hedges in place, we are assuming to realize oil prices of about $75 a barrel and natural gas prices of close to $6 in M.

Over to slide 11, there are a number of oil and gas production variables that have gone into this 50 to 60 billion cubic feet range. I'll list the three key variables.

But first of all, we are now producing close to 40 million cubic feet from our Noonan gas wells which is double where we were at year-end. The low-case scenario assumes we stay at this level for most of the year while the high-case scenario assumes we can move Noonan gas production up to 60 million cubic feet fairly soon. And as of yesterday, we were actually closer to this higher-end figure. And Robert will discuss the factors that impact this range later.

Second, under the higher-case scenario we assume Phoenix production commences on May 1 at a rate of greater than 70 million cubic feet a day, whereas on a low-case scenario we assume Phoenix production doesn't commence until July 1. And Phoenix is mostly oil.

As most of you are aware, Phoenix production is dependent on the commissioning and deployment of the Helix Producer I floating production unit, which is nearing completion in Corpus Christi right now. We expect to have the Helix Producer I out for sea trials fairly soon.

Third, the high-case scenario assumes little if no hurricane disruption where the low-case scenario assumes significant hurricane disruption, specifically a major hurricane which shuts down all of our production in the Gulf of Mexico for 45 days.

Another important point, we'll be taking higher-than-expected depletion rates on our Noonan gas field in 2010 due to year-end 2009 reserve adjustment. This will impact our earnings, but of course it will not impact EBITDA.

I will turn the next few slides over to Bart to discuss contracting services.

Bart Heijermans

Thanks, Tony. The Helix-owned subsea construction vessels, the Express and the Intrepid enjoyed a high utilization in the fourth quarter.

The Express worked exclusively on the 36-mile Danny pipe-in-pipe project which it completed in January. The Intrepid also worked mainly on internal projects such as the Phoenix and Danny projects. To enhance her versatility and to manage the critical-path activities, we installed a portable saturation system on the vessel and used the Intrepid as a DSV on several platform abandonment projects and on the installation of the Dsansny rise on the East Cameron 381 platform.

The Caesar arrived in our deepwater port in Ingleside on January 31, 2010. We are currently finishing the commissioning of the pipe-lay systems and plan to test the Caesar on the installation of the seven-mile 12-inch gas pipeline on the Outer Continental shelf for the Noonan gas that will serve as a backup pipeline if the sea-roping system experiences an extensive outage again.

Early this week, we signed a contract with a major U.S. pipeline company for the installation and burial of a 46-mile, 20-inch gas pipeline in the Gulf of Mexico, scheduled for the third quarter of this year. We are bidding several other projects in 2010 and 2011 and are seeing a lot of interest in this vessel.

Overall, we are forecasting high utilization in the first quarter while we are using our deepwater fleet to complete our internal projects. The second quarter will be slower, with all internal work completed, but we expect that activities in the second half of the year will pick up.

Moving to slide 14. Our robotics division and Canyon offshore experienced a seasonal slow quarter that saw the transit of several vessels to other regions. In January, we returned North Canyon to her owner after a nine-year charter.

We currently have five vessels under charter, namely the Olympic Canyon, the Olympic Triton, the Island Pioneer, the Normand Fortress and the Seacor Canyon. We expect that the first two vessels will enjoy high utilization in 2010.

Overall, we are cautiously optimistic about our 2010 for our robotics division. The Q4000 started the quarter with a scheduled month of maintenance required to replace one of her thrusters with a new thruster that we ordered in 2007. This concluded all of her marine upgrades, a program that started in 2007.

The vessel is performing very well. She was used to install the Phoenix turret buoy in November of 2009 and started her 100 days of Shell well intervention, well P&A work, in the fourth quarter. In the last month, we have made significant progress in contracting work for her for 2010.

The Seawell and Well Enhancer experienced typical North Sea seasonally low utilization in the fourth quarter. The Well Enhancer worked over 40 days for Shell and Nexen with positive results. She just completed another well operations work for Shell while the Seawell earlier this week departed a shipyard in the Netherlands after completing her 30-month regulatory drydock. Both vessels will have a seasonal low utilization in the first quarter of 2010, but we expect that they will be working most of the time from March 1 onwards.

Our well ops business in the Asia-Pacific region was still negatively impacted by the refurbishment of our subsea intervention lubricator and the vessel deployment system. That work is now completed.

We announced the formation of a joint venture between Clough and Helix for the provision of subsea services in the Asia-Pacific region using the Normand Clough. We expect that this vessel will enable us to grow our well intervention business in that region together with our light construction business.

We have continued to make excellent progress on the last two major marine capital projects, the Caesar and the Helix Producer I. I've commented already on the status of the Caesar.

Slide 17 shows some notes on the Helix Producer I. We have crew living on the platform and as stated, we expect the platform to depart for sea trials in March and if successful, this vessel should arrive in the Phoenix fields in April for the recovery of the buoy into the vessel turrets. The Intrepid is currently in the field installing the flexible lazy-wave risers.

Now, over to Robert for our oil and gas business.

Robert Murphy

Please turn to slide 21. Good morning, everyone. The oil and gas operating unit recorded an adjusted gross operating profit of $2 million compared to a loss of $15 million in Q3.

In Q4, we had a pretax non-cash charge of $77 million comprised of $56 million of producing property impairment and $21 million in exploration expense related to the write-down of exploratory leases that will not be drilled. Production volumes were essentially flat in Q3 with annual volume of 44 Bcfe coming within our revised guidance.

Current daily production volumes have increased approximately 50 million cubic feet of gas equivalent today over our year-end exit rate. This daily increase results from additional production from our Noonan gas wells as the Sea Robin pipeline is now back in service and the commencement of production from our 70%-owned Danny discovery. This well is currently producing at a net rate of 3,700 barrels a day and 8 million cubic feet of gas.

With these two fields and additional volumes from two -- three shelf fields, our net daily production today is approximately 145 million cubic feet of gas equivalent which is 45% oil. In the near-term, we expect our daily rate to continue to climb as we bring on additional gas from our Noonan field and then considerable oil and gas volumes from the Phoenix field in the second quarter.

Now please turn to slide 22. DD&A expense increased in Q4, principally due to adjustments in producing reserve estimates related to our gas well at our Noonan field. I will discuss this further on the next slide. Operating costs improved modestly over Q3 as a result of reduced expense related to our catastrophic bond premium and lower workover expense.

Now turning to slide 23, at December 31, 2009, we had total proved reserves of 57 -- 578 billion cubic feet of gas equivalents with a discounted present value of approximately $1.3 billion. Now, of these 578 billion cubic feet of gas, 69% of that is gas. Now, 37% of our reserves are proved developed. We plan to convert 41 Bcfe of proved undeveloped reserves into proved developed in 2010.

The changes from 2008 proved reserves to year-end 2009 reserves included 44 Bcfe of production, 8 Bcfes of divestments, 44 Bcfe of negative revisions and 8 Bcfe of additions from the drill bit. 38 of the 44 Bcfe downward reserve revisions was from our two Noonan gas wells. These reserves were adjusted downward due to performance issues related from water encroachment in one of the three producing sands and the loss of reserves due to drainage from competitive wells on the adjacent lease due to our wells being rate-restricted throughout 2009 from the out-of-service Sea Robin Pipeline.

Now turning to slide 24, this slide summarizes our 2010 commodity hedge position. Our average price expectations for 2010 with our hedges that are currently in place is approximately $75 for oil and around $6 for gas. We currently have hedged approximately 40 Bcfe of production and will continue to evaluate our hedge position as we get closer to first production at Phoenix, Cameron?

Cameron Wallace

Slides 26 and 27 are the non-GAAP reconciliation schedules presented for your reference. I will not go over these schedules, but if you have any questions, please call.

At this time, I'll turn this call back to Owen for his closing comments.

Owen Kratz

Well, look, I won't try and put too much perfume on a pig. But there are reasons to be relatively optimistic about where the company stands right now.

This quarter was a disappointment from an earnings standpoint. The year that started out well for services, ended a little worse than even our expectations for the slowdown. And we had production issues and delays in the pipeline. You've heard it all. While we were successful at getting beyond the worry of the survival of the company early in the year, the task became one of restructuring a turnaround during 2009. Weak financial markets combined with the declining demand in our services market made it a real challenge.

What has been accomplished is this -- we stopped the bleeding on capital project overruns. We eliminated the incurrence of unnecessary contracting risk on the international pipe lay projects. We refocused efforts and assets on our core competency deepwater markets. We overcame a liquidity crisis following Ike that created the cash flow disruptions. During hurricane recovery, cash flow was further hampered by ongoing delays in third-party pipeline repairs and we managed to -- we managed the committed capital spending throughout the year to match this cash flow.

We had a series of production issues, most of which I'm glad to report are overcome here in the Q1. We've restarted, progressed and are now near completion of all major capital projects. The Enhancer is working and we have our first contracts for the Caesar.

We've also just recently revamped our business model for Asia-Pacific going forward. And the slowdown in the market was anticipated, but I'll be honest. It was actually slower and a little more abrupt than what we expected. The difficulties in our production were not anticipated and our own expectations were for results to be better than what we actually achieved.

Now while the worst is now behind us, the turnaround is still in progress. We know what we have to do to again become a strong growth company focused on the service industry. The markets are showing signs and indications of improving, both in demand for our services as well as the financial markets. And these improve -- the rate of this improvement will lead to a degree affect, the timing to full recovery.

But from adversity comes good. The company has a renewed service focus. The employees have shared a real reality check, which motivates and aligns interests and efforts. The backlog and visibility is improving as is the tender volume.

Q1 will probably still be weak. But the second half is starting to look better than expected, just as the drop in the first half of 2009 was worse than we expected. By year -- midyear, we'll have all of our capital projects complete and we'll be producing from all of our fields that are in development or repair.

During the second half of 2010, we plan to build liquidity even further and further improve the balance sheet. We are in the planning stages for renewing growth initiatives again with prudent initiatives fully assessed and we anticipate to be able, to talk more about this by the end of the year.

Over the course of this year, we will endeavor to capture the year-over-year growth that's inherent in bringing our new vessels and fields to market. The Caesar, April 1. The Helix Producer I, July 1 or sooner. The Enhancer is working. The Q4000 with its upgrades is now working. Danny is now online and increasing, Noonan is online and increasing. And the Phoenix field should be online by July or sooner. All of these above projects involve approximately $1.5 billion of invested to date that's yielded very little return. But the good news is that all of the investments are poised to start really contributing to our success and finally to the shareholder's value.

With that, we'll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question does come from Jim Rollyson of Raymond James & Associates. Sir, your line is open.

Jim Rollyson - Raymond James& Associates

Good morning, guys.

Owen Kratz

Good morning, Jim.

Jim Rollyson - Raymond James& Associates

Owen, I guess on the production side, you're finally getting to the finish line, for the most part on all the projects. Anything that bothers you or concerns you kind of standing between you and the finish line on Phoenix or are you kind of past the point of no return at this point? As far as risks?

Owen Kratz

I think the construction has gone well. The putting together the HP I has gone remarkably well here since we revamped the project and began it again. We are potentially early versus our anticipated date of July 1. The downsides -- the vessel is going out on sea trial. And as everyone knows, you go out on sea trials for a reason and that's to find the glitches that aren't quite right at the end of your construction period. It's been engineered well and the team has done a really great job.

So we're not anticipating any issues, but again, that's what sea trials are for so you have to allow some potential time in there. Other than that, the field -- the reservoir itself was strongly producing before the TLP was lost, so we have no reason to anticipate any problems with the reservoir.

But the wells have not flowed for, what, four years now. So, you could have issues, but then again we are a well intervention company and just like we had issues here on -- with our new Noonan number three, we diverted the Q4000 and we've taken care of those issues. So we should be in good position to take care of anything that comes our way.

Jim Rollyson - Raymond James& Associates

That's helpful. And once you get Phoenix up and running, given that Danny and Phoenix are both pretty oily weighted, what do you think the mix looks like for production post and maybe just average for the year between oil and gas?

Tony Tripodo

Jim. Post-Phoenix we'll be close or better than 50-50 oil. We're going to be weighted -- what are we right now, Robert, 40-60 gas?

Robert Murphy

We're about 45 oil with Danny on right now and it's going to be considerably higher once we go with -- when we get Phoenix on.

Jim Rollyson - Raymond James& Associates

That's helpful. And then, I guess last -- two more questions from me. Owen, a year ago this time you were spending a lot of time talking about, obviously, the value inherent in the different assets within Helix and trying to unlock the value. And obviously at the time the liquidity situation was a little different. So that's improved. Kind of want your current take on -- are you planning on monetizing stuff over time, still, on the oil and gas side or the production facility side, or has that changed somewhat since your liquidity position has gotten in better shape, or just kind of where you stay there?

Owen Kratz

As everyone knows, we have been trying to monetize the shelf production throughout the year but the markets have been too weak to support the finance requirements for getting the deal done, given the universe of buyers that had an interest.

With that being said, the markets are improving here and we are looking at our options of -- but the plan is still to de-focus our efforts on oil and gas, so we'll let you know as soon as we've figured out what real potential there is. But I do want to try and de-focus and reduce our exposure to the oil and gas side throughout the year. I'll leave it there.

Beyond that, we have at times over this last year, by necessity, marketed several of the service assets. Specifically, we had discussions with people about partial interest in the Caesar and the facility. But I think at this time we're pretty comfortable with where the company is and the outlook is pretty optimistic for us. And we're not actively marketing any of our service side of the Company.

Jim Rollyson - Raymond James& Associates

Excellent. And then, Tony, just thoughts on tax rate for '10?

Tony Tripodo

I think tax rate will look a lot like 2009, around 36%.

Jim Rollyson - Raymond James& Associates

Thank you very much, guys.

Operator

Our next question would come from Stephen Gengaro of Jefferies. Sir, your line is open.

Stephen Gengaro – Jefferies

Thank you. Good morning, gentlemen.

Tony Tripodo

Good morning, Stephen.

Stephen Gengaro – Jefferies

A couple of questions, actually. I think I'll start with -- when you look at the contracting services side of the business, you talked about a lot of internal work in the first quarter, a weaker second quarter and then hopefully improvement in the back of the year.

In the first two quarters, how did that mix of internal work versus a slower second quarter, how does that play out from a -- directionally on revenue and profits?

Tony Tripodo

I think, again, Stephen, the first quarter will look a lot like the fourth quarter in terms of contracting services. You're going to see high utilization, as Owen mentioned, but we have the Intrepid, the Express and even the Q4 working on internal projects.

I think in the second quarter, what you are going to see is a bit of a drop-off in subsea construction, but a pick-up in well intervention. And some of the pick-up in well intervention is going to be due to the fact that you're coming out of a seasonal low in the North Sea and we have two vessels there, being the Well Enhancer and the Seawell, the Seawell having its regulatory drydock this quarter.

So I do think on the services side of the business, the second-quarter revenues -- the increase in well intervention could very well offset the decline in subsea construction, okay? So, you may have lower utilization, but higher third-party revenue.

Stephen Gengaro – Jefferies

I understand. Okay. And when you look at your full-year $450 million to $550 million EBITDA guidance, are you willing to share with us what percentage of that comes from contracting services?

Tony Tripodo

Off the top of my head, I'm going to tell you that with the sharp increase in oil and gas production, we're going to see about two-thirds of it coming from oil and gas and the third coming from contracting services.

I don't think that should be a model for a go-forward. I think a model for go-forward, or our game plan, will -- we would like to see that sort of flip in a way. But that's the way it's going to be this year because we are having such a sharp increase in oil and gas production.

Stephen Gengaro – Jefferies

Okay. And then two more quick ones. The first -- interest expense guidance, you had a lot of capitalized interest in 2009. I was thinking in the $70 million to $75 million range for 2010. Is that roughly correct?

Tony Tripodo

It is.

Robert Murphy

It will be a lot less in 2010.

Tony Tripodo

The cap interest side, certainly. We had $48 million again in 2009. We'll have significantly less in 2010.

Robert Murphy

Yeah. And that's because our big projects are really over by Q1.

Stephen Gengaro – Jefferies

Okay. So that balance -- the income statement, if the effect is in that $70 million, $75 million range, is accurate.

Tony Tripodo

Yes. It is.

Stephen Gengaro – Jefferies

Okay. And then, just a follow-on to the extent you can help us. On the oil and gas side of the business, when we look at the per-unit operating costs and per-unit DD&A obviously jumped in the fourth quarter, any guidance there, given your current production rates in what to expect?

Cameron Wallace

Robert?

Robert Murphy

Yeah. From the DD&A standpoint, that DD&A rate will continue and about the level that we saw in Q4 and the OpEx on a unit basis should decrease just due to the increasing volumes.

Stephen Gengaro – Jefferies

Okay. So that 4.25 is a pretty good number for 2010, then for DD&A?

Tony Tripodo

Yes.

Stephen Gengaro – Jefferies

Okay. That's very helpful, gentlemen. Thank you.

Tony Tripodo

Welcome, Steve.

Operator

Our next question would come from Martin Malloy of Johnson Rice. Sir, your line is open.

Martin Malloy – Johnson Rice

Good morning.

Tony Tripodo

Good morning.

Martin Malloy – Johnson Rice

On the subsea construction side, when you talked about improvement, are there areas outside the Gulf of Mexico that you are looking at for demand?

Bart Heijermans

Our subsea construction efforts are largely in -- focused on the Gulf of Mexico. We are also bidding work in Trinidad and we're looking at some opportunities in Mexico. These are for our large construction assets.

Then, if you look at our -- at the chartered vessels that are under our robotics division and their -- Canyon Offshore, that's a global business where we are seeing quite some activities in the North Sea picking up, also offshore Norway and even in areas like offshore Nova Scotia and West Africa.

And then, with this Normand Clough vessel that we've chartered through our JV with Clough, we're going to go after the opportunities in Southeast Asia. So for the smaller, relatively smaller vessels, it's a global play. For the large construction assets, like the Express and Intrepid and the Caesar, in 2010 is really focused on Mexico and Trinidad -- Gulf of Mexico and Trinidad.

Martin Malloy – Johnson Rice

Okay. And drydockings for 2010? What do you have scheduled?

Bart Heijermans

We have nothing scheduled after the Seawell completed her drydock in February.

Martin Malloy – Johnson Rice

Okay. Thank you.

Operator

Our next question will come from Roger Read of Natixis Securities. Your line is open.

Roger Read – Natixis Securities

Hey, good morning.

Bart Heijermans

Hi. Roger.

Roger Read – Natixis Securities

A lot of the stuff has been kind of hit on. I guess I just want to hit two things. On the construction side, obviously it's tough out there, utilization-wise. Can you give us an idea of what's happening in terms of pricing or if, since I know you all don't do kind of a day rate thing very much, what your margin expectations is on work outside of internal work?

Bart Heijermans

We're really focused this year on, for subsea construction, on the utilization and keeping the vessels busy. That's our main focus and we're focusing on lowering costs and by doing that, hopefully we still create or generate margins in excess of 10%, 15%. But the focus really is on utilization. The margins on the well intervention vessels is better than the margins on the subsea construction vessels.

Roger Read – Natixis Securities

Okay. So margin that we saw kind of after you moved out intercompany revenue and margin, that's 20%-ish. That sounds like higher than what we think of for full-year 2010 in terms of the aggregate numbers but if you're thinking about how you're bidding, we should be thinking 20% on the business you do get?

Bart Heijermans

Yes. If you look at the total blend of assets, the well intervention assets and the subsea construction assets, then I still think for the work we are getting and 20% utilization is achievable. But the subsea construction vessels will generate utilization that is less than the 20% but offset by the well intervention vessels.

Roger Read – Natixis Securities

Then, to walk through on the production numbers, if I look at 2010 and the 60 B, the high end of the range, I understand things can delay and you can get hurricanes and all that. But let's just take that as a starting point, anyway. In the fourth quarter, we were estimating around 16 BCF equivalent, which would put you at 64 on an annualized basis but clearly things should be running by the fourth quarter. If you do that, that's roughly 180 million cubic feet a day. If Noonan is operating close to its high range at 50 and Phoenix is operating around 70 that leaves us only 60 Bs for Danny and the shelf, which would indicate that one of the two of those wouldn't be producing very much.

Can you help me out with -- I know, Tony, you at the beginning said that we could do a lot better than 60 and I'm kind of thinking that's the case but can you help me with where you all think the shelf is going to go? Q3 was pretty tough in the shelf. Q4 looked pretty tough. I understand you turned some things back on but what all is going on with the shelf, may be where you think those numbers could be for the year?

Tony Tripodo

Roger. I don't expect us to show increases in shelf production. And with the shelf, of course, you've got natural decline rates at play as well. That being said, really the major dynamic in our production this year is the deepwater increases that you mentioned, Noonan, Danny, Phoenix. And as I said, if everything goes well, you certainly can scratch out on a piece of paper production that's in excess of 60 billion cubic feet. Why we want to temper everybody's expectation is this is a business where things don't always go right. Things happen. But, certainly, we do have the potential of beating the 60 billion cubic feet. We just don't think it's wise to be there.

Robert Murphy

Just to add to that, I think the flexibility here or the variability, is really with Phoenix because that is a considerable amount of net production on a daily basis. But remember, this is the first floating production unit in the Gulf of Mexico as a ship

Owen Kratz

If I can jump in, Roger, one of the things that we're really aware of and focused on is the -- is improving the accuracy of the projections that we give to the investment community on what our production is likely to be. While it is true we have the potential of doing more with just what we've got, you've also got a huge amount of value in the portfolio that, with a significant capital spend, you could even do more. The fact is that we're still trying to manage the Company back to a stronger healthy state with a service focus, so the capital allocations are, like Tony said, we're not anticipating increases in production on the shelf, although it's possible out of our portfolio.

And we've had a series of issues here in the second half of the year that just shows us that you can't always count on the timing. But, hopefully, we've got everything on stream. There is upside. But we just want to be prudent.

Roger Read – Natixis Securities

Okay. And may be a little more. Let me ask one more just sort of detailed question on shelf production. If we look at what happened in the second half of 2009, is that the right starting point for declines into 2010 or were some of the infrastructure issues that occurred, did they get reversed and maybe that moderates the actual decline rates in at least the first part of 2010?

Robert Murphy

We did experience some problems that we discussed in an August operations update. But we have resumed production on the ones that were affected by that. So I wouldn't moderate the decline; it's pretty consistent. But we did remediate some of those problems. If that helps you.

Roger Read – Natixis Securities

Okay. And final question. Any exploration wells planned for 2010?

Robert Murphy

No.

Roger Read – Natixis Securities

All right. Thank you.

Operator

Our next question will come from Terese Fabian. Ma’am, your line is open.

Terese Fabian – Sidoti & Company

To pursue the decline rates for one minute. I think you've given guidance before but can you again review what to expect for the Phoenix, the Danny and the Noonan.

Cameron Wallace

Because there are PUD volumes involved that will be brought on specifically at the Phoenix field -- the Phoenix field, remember, had produced as the old -- it was called Typhoon and it has made over 50 million barrels equivalent. When we bring it back on, it will continue on its decline rate, which was a pretty rapid decline rate and through our production of the proved developed reserves and bringing on some of the other up dip sidetracks, it will appear flat but it actually will decline rapidly in excess of 30% if you didn't add any of those proved undeveloped reserves.

Terese Fabian – Sidoti & Company

Thank you. And the Danny?

Cameron Wallace

Danny, we have a pretty high rate well out here. It's in excess of 6,000 barrels a day and we look at Danny right now at about 25%, 25 to 30.

Terese Fabian – Sidoti & Company

Okay. And that leaves, then, the Noonan.

Cameron Wallace

Noonan, we have it about the same. Yes.

Terese Fabian – Sidoti & Company

Okay. Thank you. And then, a question on your expense line. You had an amount of bad debt. Can you identify without specifics as to where that's coming from?

Tony Tripodo

I would say Terese, Owen mentioned that we have been trying to reduce our exposure to international pipe-lay work and we had some legacy receivables that we felt it was prudent to take a reserve on at year-end and I'll leave it at that.

Terese Fabian – Sidoti & Company

Okay. And then, just one more broad question, you talk about the second half of 2010 looking better and I know many in the field expect this to be the same. Can you talk about some of the specifics you are seeing here?

Tony Tripodo

As far as the improvement in contracting services in the back half of the year Bart, do you want to take that on?

Bart Heijermans

Yes. That comment is really related to our subsea construction assets. Because I think on the well upside, especially on the North Sea, I mean we already see an improvement starting March 1st. On the subsea construction, it's like an example with the Caesar. We're bringing that vessel to the market and our first major contract is going to start July 1, which is the start of the second half of the year and so that's a good example of improvement second half of the year versus first half of the year. Also, if you look at the work we have contracted for the Express, we see -- in external work, we see a significant increase starting mid-June-ish for the rest of the year and also the bidding activity is pretty significant for the rest of the year. So, that's --

Owen Kratz

If I could also add, I think it's important to note the difference between well office and construction. Construction is a lot more cyclical. It's a front-end activity and therefore, when the commodity prices and the work stopped last September, we lag that and that's why we were able to anticipate a slowdown. And that's also why Bart mentioned that the margins for this year in the near term were probably better on well ops than construction because well ops is more of a life-of-field service and therefore less cyclical. But as the market rebounds here, we would expect to see the construction margins ramp up again to equal or exceed the well intervention markets.

Then, there's also the Caesar. The Caesar was greatly delayed and therefore there was no -- producers are very sensitive to the scheduling of their projects and therefore without a clear visibility and delivery of the Caesar, it wasn't possible to book contracts for it and to initiate its presence in the market. We've always been a little conservative about how fast that would happen. Optimistic is the word that I would use right now because we do have our first contracts and the first ones are the toughest ones.

Terese Fabian – Sidoti & Company

Thank you.

Operator

Our next question will come from Philip Dodge. Sir your line is open.

Philip Dodge – Stanford Financial Group

Good morning. And thanks for all the comments. A couple of questions. First, on the 4000, I remember one time or may be still, you were interested in bidding that for a term contract. I'm just wondering if you could give us an update on that.

Owen Kratz

The tenders that we were pursuing in Brazil, we were not successful on. We were -- semi-submersible but they mixed the bid, the assets they were requesting pricing on and they decided to go with a lower cost unit. That's not to say that there's not future potential for us and dialogue continues.

Tony Tripodo

Phil. That being said, we expect fairly high utilization on the Q4000 in 2010.

Owen Kratz

Yes. We're reaching a point where the demand for the Q4000 that's contracted backlog is going to preclude anything than longer-term opportunities.

Philip Dodge – Stanford Financial Group

And then, on the Caesar, may be you said it but how much of the year, that initial contract, will it give you utilization?

Bart Heijermans

The initial contract, we are talking about approximately six weeks of work and also that contract has a burial scope included. We're going to use one of our Canyon vessels with one of our trenchers to bury that line and then also we are hopeful that we're going to get some other utilization, maybe for the Intrepid with the saturation system, out of it. And I mean, what Owen mentioned, this is the first project. Nobody wants to be first, although I mean this vessel is a great vessel so I don't think it's a problem to be first. But there's a real potential to put that campaign together starting with this project and then keep the vessel busy for a significant period in the second half of the year.

Philip Dodge – Stanford Financial Group

Okay. Yeah. Sounds good on that. Then just finally, procedural on the Clough joint venture financial reporting, will that be a one-line item or will you consolidate that for your interest?

Tony Tripodo

Phil. We haven't completed all of our technical analysis in the accounting but we are anticipating that it would be an equity-method investment and exactly a one-line accounting on the balance sheet and the P&L.

Philip Dodge – Stanford Financial Group

Okay. Thanks very much.

Operator

(Operator Instructions) Nick Alfermann of Highland Capital. Sir your line is open.

Nick Alfermann – Highland Capital

Hi, guys. On slide seven, you mentioned some amendments to the credit agreement. Could you describe exactly what those changes were? If they may have widened out the covenants and possibly increased the borrowing costs on your term loan?

Tony Tripodo

Yes. The total leverage ratio for 2010 got moved up to 5 to 1, kind of ending at 450 to 1, going forward at the end of the year and forward. The -- then, a new senior secured leverage ratio was added at about 2 to 1. Both of these ratios, we feel throughout the year we will be very comfortably fit within. The borrowing costs on the term loan B was increased by 25 basis points.

Cameron Wallace

There was also a new pricing level put in on the revolver pricing. But we estimate it to be undrawn, so that really has no impact on interest for 2010.

Tony Tripodo

I think, Nick, based on our own forecasts, we won't be borrowing against the revolver throughout 2010. And really, this just gives us a lot more breathing room.

Nick Alfermann – Highland Capital

Okay. Thank you.

Owen Kratz

Just as an aside, our term loan B, even with the increase to 25 basis points, with the interest rate hedges we put in place, our all-in is about 3% on the term loan B.

Nick Alfermann – Highland Capital

Okay.

Operator

At this time, gentlemen, I show no further questions on the phones.

Robert Murphy

I would just like to -- before we sign off, I'd like to circle back to the rather abrupt 'no' that I gave on exploration drilling. We don't anticipate drilling exploration wells as Helix. But we do have a significant portfolio that we are going to be marketing on a -- I just wanted to make that clear.

Cameron Wallace

Okay. With that, thank you very much for participating. We look forward to talking to you at the end of the Quarter One.

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Source: Helix Energy Solutions Group, Inc. Q4 2009 Earnings Call Transcript
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