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Helix Energy Solutions Group Inc. (NYSE:HLX)

Q2 2010 Earnings Conference Call

July 29, 2010 10:00 AM ET

Executives

Cameron Wallace – Director, Marketing & IR

Alisa Johnson – EVP, General Counsel and Corporate Secretary

Tony Tripodo – EVP and CFO

Owen Kratz – Chairman, President and CEO

Johnny Edwards – EVP, Oil and Gas

Analysts

Jim Rollyson – Raymond James

Roger Read – Natexis Bleichroeader

Joe Gibney – Capital One Southcoast

Stephen Gengaro – Jefferies & Co

Philip Dodge – Tuohy Brothers

Martin Malloy – Johnson Rice & Co

Terese Fabian – Sidoti & Company

Michael Marino – Stephens Inc

Operator

Welcome to the review of the second quarter 2010 results with investors. During the presentation all participants will be in a listen-only mode. (Operator Instructions) As a reminder this conference is being recorded Thursday July 29, 2010.

It is now my pleasure to turn the conference over to Mr. Cameron Wallace, Director of Investor Relations. Please, go ahead sir.

Cameron Wallace

Good morning, everyone and thanks for joining us today. Joining me today are Owen Kratz, our CEO, Tony Tripodo, our CFO, Johnny Edwards, Executive Vice President of Oil & Gas, Alisa Johnson, General Counsel; 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

During this conference call we anticipate making certain projections and forward-looking statements based on our current expectations. All statements in this conference call or in the associated presentation other than statements of historical 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 projections in forward-looking statements due to a number and variety of factors including those set forth in our slide two, and in our Annual Report on Form 10-K for the year ended December 31, 2009.

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 reconciliation along with this presentation, the earnings press release, our Annual Report and a replay of this broadcast are available on our website.

Tony will now make some opening remarks.

Tony Tripodo

Okay. Good morning, everyone. Moving onto slide four which summarizes second quarter results and I will focus our comments on sequential quarterly results comparing quarter two of 2010 to quarter one of 2010.

While quarter two showed a nice increase in revenues from $202 million in the first quarter to $299 million in the second quarter, primarily owing to a substantial increase in well intervention activity in the UK coupled with a lot less intercompany utilization of our vessels.

Gross operating margins increased nicely as well from 18% in the first quarter to 22% in the second quarter again led by strong margins for well intervention and production facilities. Our earnings of negative $0.82 a share were impacted by two large items which I will discuss in more detail later. When stripping out the impairment charges of $160 million, we would have booked positive earnings of $0.18 a share and if booked to back out the incremental DD&A we needed to book on the Bushwood we reserved a revision quarter two earnings were a bit even higher.

Over to slide five with respect to EPS, we recorded two large items that impacted our second quarter results. First, we performed a mid-year review of oil and gas reserves and due to our updated view of field economics we revised reserves downward leading to an impairment charge of a $160 million on 15 of our Gulf of Mexico shelf properties. The impairment amount is at the low end of the range we sited with our early July press release on this subject.

Second, due mainly to production performances issues in our Bushwood deep water field, otherwise known as Danny oil and Noonan gas, we reduced the proved reserve numbers in the field which had the attended result of increase in DD&A. we recorded additional DD&A of approximately $19 million associated with the reserve reduction, over and above it would have been had at the previous DD&A rates. However this impacts us on ongoing basis as the DD&A rates for the Bushwood field are now reset at the higher rate.

I’ll now turn the next few slides over to Owen.

Owen Kratz

Also on slide six, on the service side of the business as we previously had previously forecasted quarter two results are indicative of improving market conditions as reflected by high vessel utilization particularly for our well intervention in the UK. More over as we were coming to the end of our major oil and gas infrastructure build out for Phoenix and Danny, internal utilization decreased quite a bit and conversely we’re able to book more third-party revenues associated with all of our Gulf of Mexico fleet.

We also placed both the Caesar and the Helix Producer I in service during the quarter. The Caesar contributed but only on a marginal basis. However as we previously press released the Helix Producer I was contracted by BP for the Macondo’s spill containment activities and it was diverted from the restart of production of the Phoenix field. Both the Phoenix field and the HP I have the necessary permits to start production so once the HP I comes off of Macondo, we should be able to put Phoenix into production shortly thereafter.

Oil and gas production increased slightly in the quarter to 11.9 Bcfe from 11.3 Bcfe in Q1. Again this would have been higher had we been able to start production on the Phoenix field, but it was more important from our perspective to assist an spill containment efforts of BP.

Even without Phoenix, increased production coupled with slightly higher commodity prices led to a $13 million increase in oil and gas revenues in the quarter. As we discussed in our press release of July 1, we performed a mid-year review of our oil and gas reserves. The mid-year review evaluation led to a reduction improved reserves to 400 Bcfe.

The majority of the reserve reduction relates to the Bushwood field, both Noonan gas and Danny oil and primarily the result of production performance issues encountered since the beginning of the year. I’m pleased to report that our balance sheet remains strong with liquidity levels of $647 million at June 30, which is up from $598 million at March 31st.

Now moving over to slide eight, the good news is that activity levels have rebounded and we should see a continuation of the trend in the third quarter. The well intervention business looks particularly strong with backlog building into 2011. We’re likely to under spend our prior capital spending forecast for 2010 from the previously announced $220 million to a current forecast of about $190 million.

We impaired down some of our oil and gas development spending for the rest of the year and year-to-date we’ve incurred a $112 million of capital spending therefore the back of the year be at somewhat of lower rates. Before getting into the contracting services business in more detail, I’ll turn the call back over to Tony now, who will update our 2010 outlook and guidance.

Tony Tripodo

Okay, if we turn to slide nine, we have updated our guidance from the last call. First of all based on the push back of Phoenix production due to the HP I being diverted to spill containment for BP, we have lowered our oil and gas production range to 40 Bcfe to 45 Bcfe for the full-year. The big variable new ranges represented by weather, significant disruption with hurricanes in the Gulf of Mexico and a little bit with the uncertainty regarding the start of date based on when the HP I frees up.

Our EBITDA guidance is now tightened up to $400 million to $450 million compared to our previous guidance of $400 million to $500 million. As Owen mentioned, we are now projecting 2010 CapEx of $190 million. We have cut out some CapEx for development of the gas field that now deemed to be uneconomic that led to some of our second quarter impairment charge.

With our hedges in place, we’re forecasting realization on commodity prices to be approximately $75 for oil and a little bit under $6 for natural gas. Now turning back to contracting services, I’ll turn it back over to Owen.

Owen Kratz

Thanks Tony. Pickup on slide 11, our contracting services produced gross profit of 20 – $63 million for the quarter which represents a two-thirds percent increase compared with the previous quarter. Margins improved to 28%. Should note this quarter gross profit is one of our highest ever.

Equity and earnings from our share of Marco Polo and Independence Hub stay constant but we’re impacted by our share of losses associated with the start of our CloughHelix joint venture in South East Asia as noted on slide 11. We expect the JV to generate a profit in the third quarter of 2010.

Moving to slide 12, Q2 utilization, the utilization of the subsea construction vessels decreased because of the introduction of the Caesar in last May and in fact the vessel didn’t mobilize until late June. The utilization of the Canyon chartered ROV vessels was adversely impacted by the Seacor Canyon being inactive in Singapore and the transit of the Normand Fortress from India to the Gulf of Mexico.

We’ve now released the Seacor Canyon after a couple of years of charter. Our three owned well intervention vessels enjoyed 98% utilization in the Gulf of Mexico and the North Sea.

Turning over to slide 14, we’re proud of our involvement in the Macondo spill containment. The MODU Q4000, FPU, Helix Producer I and the MSV Express work for BP on this project and have proven to be ideally suited for this type of oil spill response. Our employees performed extremely well under difficult circumstances. Slide 14 shows the Q4000 and Helix Producer I at work. The versatility of the Q4000 was put to use on the top tail, the containment using the EverGreen Burners and soon will be used for the static kill.

The Helix producer I commenced production operations within one month from our departure from Phoenix and a new 270 ton buoy was constructed in record time for the pull in of the flexible riser coming off the free standing riser tower in MC252. The topside facilities of the Helix Producer I will have to be returned to their Phoenix configuration before the vessel will connect to the buoy of Phoenix, at which time the BP charter will end.

On slide 15, we covered the activities on our subsea construction and robotics business. The Caesar commenced the installation of the 46 mile, 20-inch gas pipeline in the central Gulf of Mexico, which is expected to be completed in August in which time the vessel is scheduled to transit to Trinidad for another pipelay job. The Canyon chartered ROV and trenchers support vessels delivered a decent contribution in the quarter and I am pleased to report that our trenching performance exceeded our own expectations.

Turning to slide 16, I’ve covered the Q4000 already; we expect that this vessel will remain active on the Macondo project for the majority of the third quarter. Her backlog looks strong into the first half of 2011 and both the Seawell and Well Enhancer operated successfully in the North Sea and we feel confident about the remainder of 2010.

The Well Enhancer will be taken out of service in August to complete the coiled tubing upgrade before we redeploy on our first deployment of coiled tubing from the vessel for Hess in the North Sea in September. The Normand Clough is currently offshore China in the South China Sea on well ops Asia Pacific contract for CNOOC for the P&A of five subsea wells in the Lufeng field. This is the first riser less deep water P&A job offshore China.

And now for our oil and gas business, I’ll turn it over to Johnny Edwards.

Johnny Edwards

Good morning. Please turn over to slide 17. The second quarter financials were negatively impacted by a reduction in our reserves on our 2010 mid-year reserve report. The mid-year reserve report contains 400 Bcfe which reflects a reduction of approximately 143 Bcfe from our December 31, 2009 report. The majority of the reserve reductions were in the Bushwood field with the remaining reductions spread over some shelf properties.

The reductions in the Bushwood field reserves were primarily due to less than expected production performance of the wells. First the Garden Banks 506 number 3, our Noonan well began producing – one of our Noonan wells began producing water in May and remains shut in. The water production along with the reservoir pressure information reduces the size of the remaining reserves for the Noonan reservoir. Also with shutting in the Garden Banks 506 number 3, a larger part of the remaining Noonan reserves are being drained by the offset operator.

Our Garden Banks 506 number 1, our other Noonan well continues to produce net $29 million a day to ERT. Our second well performance issued in Garden Banks is 502, the Danny oil reservoir. The reservoir pressures continue to decline faster than we expected. The Danny well started producing in February of this year at 3600 barrels net rate to ERT. The well continues to produce at approximately the same rate today but the declining reservoir pressure indicates the remaining reserves are less than predicted by the volumetric analysis from our December 31, 2009 reserve report.

With the less than expected performance from our two producing reservoirs, the remaining reserves of the Bushwood field were reduced. The reserve reductions in the Bushwood field added about $19 million to our oil and gas DD&A in the second quarter incremental. As Tony stated earlier, this will have impact on future quarters DD&A. Also there were downward reserve revisions on the shelf at the mid-year reserve report. Many of these reserve revisions were result of management’s decision not to pursue drillings in small pools of remaining reserves requiring significant capital expenditures.

The $165 million of oil and gas impairments are primarily associated with the reduction in carrying values of the Gulf of Mexico properties due to the reserve revision in our mid-year reserves. On a positive note, we are looking forward to the Phoenix field startup later this year, once BP releases the HP I. The HP I received the required regulatory approvals in June prior to starting work for BP. And we do not anticipate the current events in the Gulf related to the Macondo incident will prevent the Phoenix field from restarting production.

Once the HP I is back in the Phoenix field, we’ll begin the process of starting up four wells, these four wells have been shut in since the Chevron operated Typhoon platform was destroyed in Hurricane Rita in 2005. An additional well was drilled in case by BHP prior to Hurricane Rita and this well will be completed by Helix at a later date. ERT on 70% working interest in the Phoenix field and depending on operational performance the Phoenix field should add between 8,000 and 10,000 barrels of oil a day equivalent to our net production.

Turning over to slide 19. Slide 19 summarizes our 2010 commodity hedge positions for the remainder of the year. Our average price expectations for 2010 with our hedges that are currently in place is approximately $75 for oil and just over $5.80 for gas. We currently have hedged approximately 22.1 Bs of productions for the remainder of 2010 which covers a significant portion of our forecasted production for the remainder of the year.

We have also begun to layer in some hedges for 2011 as this slide reflects. We have hedged a total of 7.2 Bcfe of both oil and gas for 2011. Although our objective is to exit the oil and gas business given the current environment in the Gulf of Mexico, we feel the process may take longer thus we felt it prudent to layer in some hedges for 2011.

I’ll turn it back over to Cameron.

Cameron Wallace

Slide 20 reflects the synopsis of our debt and liquidity positions. We project 2010 to be another year in which we expect to bring down our debt levels plus to continue to maintain relatively high liquidity levels which stand right now at $647 million.

Slides 22 and 23 are the Non-GAAP reconciliation schedules given for your reference. I won’t go into these tables. At this time, I’ll turn this call back to Owen for his closing comments.

Owen Kratz

Well we’re at still in what I’d characterize as a week global market cycle. It’s improving but it’s burdened by over supply. Helix performance in the cycle is improving and I think it should continue to improve. There is two significant areas of uncertainty, I think that maybe of interest to investors in Helix. First is what is the future of Gulf of Mexico production look like and second, what is the future of Gulf of Mexico services look like and how is Helix is impacted in the post Macondo world here.

On the service side, this should be pointed out that over 50% of our service revenues are derived from outside of the US. In well ops including the Q4000, we don’t expect negative impact and backlog is strong as well as our performance. On the ROV Canyon side, we have approximately 12 ROVs in the Gulf of Mexico. One area that I am a little, that I could see potentially impacting us is as the Gulf slows and vessels relocated out of the Gulf of Mexico, it could impact margins on a global basis but it would be small.

In general on the Robotics side, we view ourselves as a quality provider versus a volume provider. So if there is any impact I think it should be relatively minor to our business. In the facilities business, which includes our interesting in Marco Polo and the Independence Hub and extended more to our income potentially impact future production developments and therefore float through tariffs but there is really no expectation of any kind of near-term negative impact of that business. On the pipelay side, this is where our greatest exposure is to the Gulf of Mexico. We made the strategic decision to relocate our three pipelay vessels back and concentrate on the Gulf of Mexico.

If the moratorium continues beyond the six months, one way of looking at it is the other assets will probably leave which means supply will drop and that would be okay for us. We will be looking to work being trepid in alternative roles to pipelay including construction as a multi service vessel like well intervention and P&A. The Caesar will probably take a bit more of an aggressive look at international work as she is always been anticipated to be a global asset. And that leaves our remaining asset, the Express is our primary lay asset which we should be able to keep busy in the Gulf of Mexico.

We were expecting a modest recovery through the second half of 2010 and throughout 2011. The moratorium does place some uncertainty on the 2011 work in the Gulf of Mexico as 2000 drilling is what creates 2011 work. Helix is in my opinion better place to cope with the slower Gulf of Mexico than most might assume. On the oil and gas production side, we had no wells planned for the second half of 2010. So the moratorium will have no affect on us.

Our intent to sell oil and gas has certainly been impacted as capital markets and buyers are a bit uncertain at the current time. Nonetheless, there is interest in our oil and gas assets. The process has been delayed and the pace maybe a little slower but we are following through with the discussions with parties that continue to show strong interests. The Q2 impairments are indicative of the fact that reservoirs can disappoint after being placed in production relative to expectations.

But there is an awful lot of value in our oil and gas assets and prospects. However we’re first and foremost a service focused company. The amount of capital investment and risk inherent with E&P does not fit with our service ambitions and the assets are probably better in the hands of producers that are engaged in E&P. Our intent is to redeploy the value that we do have in our production assets into further debt reduction and service growth. The market conditions will be the determining factor on when we can get this divestiture done.

And with that I’ll just open things up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Jim Rollyson. Please proceed with your question.

Jim Rollyson – Raymond James

Good morning guys.

Owen Kratz

Good morning Jim.

Jim Rollyson – Raymond James

Owen, any thoughts on maybe how you think of Helix’s position in the long-term as far as maybe long term benefiting from this kind of a push towards an emergency spill response given the role you guys have played in dealing with the Macondo situation?

Owen Kratz

Jim, I really think the industry pays a lot of attention to prevention and post Macondo I think that’s going to be first and foremost on everyone’s mind. So I don’t see this as an event that you would create a business around. I do think that it’s been demonstrated that our assets are very conducive to responding here especially if the hardware was preexisting I think you’re looking at containment within weeks. I don’t see there being a financial benefit to Helix, but I do see benefit from the Helix assets to the general industry in its efforts to get the moratorium lifted.

Jim Rollyson – Raymond James

Okay, Q4000 if I recall correctly was fairly well booked maybe even into, through the end of this year and the next year before the BP situation, obviously working for BP now for a while. Can you maybe share the status of some of the other work you were supposed to be working on right now? Or are people, you’re going to get some cancellations there or do you think that some of that continues to get extended?

Tony Tripodo

Jim, let me take that. Yes, the Q4000 was fully booked for BP Macondo throughout 2010 and somewhat into 2011. And for the most part its involvement in the Macondo situation is only extending that backlog and increasing the backlog. There has been a job, a small job that was cancelled but aside from that mainly the work that she had in backlog has just been pushed to the right. So it’s been a fairly positive for us in terms of actually building backlog.

Jim Rollyson – Raymond James

Okay and then last question from me, Tony, maybe the drop in EBITDA guidance from the 400 to 500 down to a tighter range of 400 to 450. Do you think the majority of that delta relates to the production decline?

Tony Tripodo

I’d say somewhat related to lower production from Noonan and really Jim, I have to admit we’re just being conservative here.

Jim Rollyson – Raymond James

Okay, thanks guys.

Tony Tripodo

Okay.

Operator

Our next question comes from the line of Roger Read. Please proceed with your question.

Roger Read – Natexis Bleichroeader

Yes, good morning.

Owen Kratz

Hi Roger.

Roger Read – Natexis Bleichroeader

I guess maybe Owen, everybody is, nobody knows how the moratorium is going to end or exactly when it will end. But if you just sort of talk with your customers, their views hey, if the moratorium ends on November 30th, we would expect to need X in 2011 or, are people still just maybe a little too discombobulated from all this to really think that far ahead yet?

Owen Kratz

I’m sorry, I’m not sure I understood the question Roger.

Roger Read – Natexis Bleichroeader

Well just your customers, are they thinking about 2011? Are you talking with them about pipelay vessel needs in 2011, or was your commentary on the vessels that you expect to see within your own fleet, repositioning potentially, is that just – that’s how you’re interpreting the market today. I’m trying to understand, what are the moving parts that you see?

Owen Kratz

I’m taking a worse case view forward and assuming that with six months – so no drilling here that’s going to have some impact on the volume of development work that occurs in 2011. It may or may not be that severe. We haven’t had a lot of feedback from our clients. A lot of the development work that was going to occur during this period actually the permitting process slowed down even for pipeline. So a certain amount of that has moved to the right. So I’m not confident that we’re going to see much of a slowdown really, but I’m just anticipating the worse than we’re looking for alternative uses of the assets.

Roger Read – Natexis Bleichroeader

Okay.

Johnny Edwards

Roger, it’s really on a high place side not on the well intervention side. I think on the well intervention side, I think it’s fair to say that we’ll probably benefit Roger, in long-term from what’s happened here.

Owen Kratz

Yes, like I said in my color commentary there, the only area of our Helix that’s all exposed to the Macondo inserted into my mind is our three pipelay assets in the Gulf and that’s – we don’t have anything definitive to say that they’re going to be negatively impacted we’re just being prudent and cautious.

Roger Read – Natexis Bleichroeader

Okay and then help me to understand a little bit the expectation that this could be a beneficial, I don’t know beneficial, but the fact that the well intervention vessels could see a better overall setup from this because, I’ve always historically thought of the sort of rate that a well intervention vessel could get was somewhat determined by the day rates on a deep-water rig. That’s your well intervention competitor, if we got an oversupply even if temporary of deep-water rigs, they can’t operate in a drilling mode and clearly we’ve seen some deterioration in day rates for those units. How does that, help me understand how it works out as beneficial for the well intervention fleet?

Owen Kratz

Well so far the Q4000 for the work that it does is the lot more efficient than the drill rate. We’ve seen that just on our own number 3 well on Noonan, we were looking around for rigs just recently to go out and do the water shut off work since the Q4000 booked up and it’s just not commercial to do so without the Q4000, because of the efficiency gains. The clients have expressed us so far that they’re just holding their programs and they’re going to wait for us which is a very positive sign and I think the MMS the – I just got a work today that it looks the ruling is going to come down to lease extensions are going to be extended for a duration equal to this moratorium which would be a positive for everybody.

Roger Read – Natexis Bleichroeader

Okay, but I guess, so you haven’t necessarily seen more demand for the vessel. It’s just you’ve had an opportunity to prove the vessel out, the value of the Q4000 here on this Macondo well.

Owen Kratz

Well I think the clients are understanding that value of the Q4000 like we said we were booked before pretty, with a great backlog. We’ve just seeing no deterioration of that and therefore this period of Macondo is just been sort of adding backlog. So we’re looking really strong going forward, I might add, if the moratorium – it depends what happens with the rigs if the rigs start leaving the Gulf of Mexico then when the moratorium is lifted there is going to be a rather than an oversupply there is going to be an undersupply of rigs which would benefit us greatly.

Johnny Edwards

And another Roger, assuming the government tightens up regulatory requirements on P&As and decommissioning, that’s where we see the potential upside here in well intervention as well.

Roger Read – Natexis Bleichroeader

Okay, and then a final question, the HP I expectation you get that back on the Phoenix field starting up, I guess September, do you have, I mean that’s kind of the hurricane season obviously, September in terms of disrupting operations. Is that factored into it or is this timeline you’re considering right now basically consistent with release from Macondo unit and the shipyard and then that’s when it would be available, I mean can you get it on sooner, would be I guess the short question there.

Johnny Edwards

Our outlook is strictly based on our guess on when the vessel will be released from the Macondo efforts. So we’re assuming late Q3, but it could be sooner or it could be later, we just don’t know. We’re out there to help the situation as long as BP needs to, the vessel we’re going to her out there.

Roger Read – Natexis Bleichroeader

Okay, well that clears it all up for me.

Johnny Edwards

Okay.

Roger Read – Natexis Bleichroeader

Thanks.

Operator

Our next question comes from the line of Joe Gibney. Please proceed with your question.

Joe Gibney – Capital One Southcoast

Thanks, good morning. Tony tightened up on CapEx a little bit here, $270 million in cash and improved liquidity. Just, could you help us a little bit with net debt expectations in the second half and how we should be thinking about interest expense into the next year?

Tony Tripodo

Yes, I think that we expect net debt to go down marginally in the second half of the year. I don’t think you’re going to see a number like a $100 million lower, but you’ll see some marginal improvement based on our own internal forecast. I think in terms of interest expense, assuming no sale of E&P assets, I think you’re going to see interest expense somewhat consistent with quarter two from this point on.

Owen Kratz

With less capitalized interest.

Tony Tripodo

Yes, because of less capitalized interest. Joe, I think you’re going to see pretty consistent numbers from this point on.

Joe Gibney – Capital One Southcoast

Okay that’s helpful. Just shifting back to the marine side, just a couple vessel specific questions, and then a higher-level view, but for the Caesar shifting to Trinidad. Can you give a little more color on the duration of the work that it’s going to have down there and if there’s other follow-on opportunities that could keep it there? And then just curious on the broader marine I understand, sort of the pressure on the pipelay side and what could transpire coming off the moratorium. Owen, you’ve previously talked about your revenue potential on your existing marine asset base being about $1 billion, obviously giving consideration to a sluggish Gulf and maybe to Intrepid doing P&A light well intervention work, but is that still a reasonable opportunity set given what you see in your prospect queue obviously taking into consideration the potential for a little sluggishness there on the pipelay side?

Owen Kratz

Okay, a lot of issues there but yes, I don’t think that our outlook is materially changed from anything that we said before. I’m pretty confident about the, I guess the Intrepid being our third pipelay vessel is the one that I would have the most concerned with but she is on her way down to Trinidad. I believe she is down there for at least two months and there is additional work that clients in Trinidad are talking to us about that could extend to stay. So that’s a very positive move.

The Caesar is out on its first pipelay job right now and like with all vessels, the work is going pretty slow as we train the crews and get the equipment functioning properly and everything so I don’t expect a great contribution from her. But then she right after this, she also heads to Trinidad. So Trinidad is becoming a very good market for us and an alternative to the US, Gulf of Mexico. We’re also bidding work in Mexico and Brazil for primarily the Caesar. And that would open up the Intrepid to return sometime in the fourth quarter to pursue both pipelay but we really have been very successful with her this year, working her as a multi service vessel in the construction mode.

And I see that kind of a mix continuing. I think actually the construction mode is – given the performance of pipelay and the margins available in the current market I actually see the alternative uses of the Intrepid probably being a little strong margin than if we left her solely in the pipelay mode for next year.

Johnny Edwards

And to follow-up the Express has pretty decent backlog here for the rest of the year in the Gulf of Mexico and the reason why we are – it’s difficult to predict how the moratorium affects our subsea construction businesses because again our assets are floating assets and they could float anywhere to any location in the world and perform work anywhere in world. So as the Intrepid and the Caesar are going to do in quarter three and historically two-thirds of our ROV construction chartered vessels operate outside the Gulf of Mexico. So I mean, we’re certainly a bit concerned about the moratorium how it might impact activity in the Gulf of Mexico but as Owen said we’re better suited to cope in a lot of people might otherwise think.

Owen Kratz

And I would like to point out also we’re not currently with the Q4000, we’re in the upper end of the heavy intervention market here, but we’re not in the light well intervention markets. We are in the North Sea, we’re the dominant player over there but we just not had an asset here. By using the Intrepid, I mean with what we’re seeing this year in her work on P&A work, by adding light well intervention on board and the government’s refocus on getting more stringent on P&A, I really do see a solid role for her in that market.

Joe Gibney – Capital One Southcoast

Okay, that’s helpful I appreciate it. One last one and I’ll turn it back, just curious you mentioned heavy well intervention North Sea. Just, any update on the Statoil FEED for the well intervention asset there?

Owen Kratz

We’ve – we’re at the point, we’ve completed our shipped our packages and we’re working with the shipyards to develop the concept further. The initial technical submission is September 15 with the commercial submission due October 15 and an award by the end of the year. So we’re pressing hard on all fronts there, and we have a pretty large team working on it.

Joe Gibney – Capital One Southcoast

All right. Thanks guys. I’ll turn it back.

Operator

Our next question comes from the line of Stephen Gengaro. Please proceed with your question.

Stephen Gengaro – Jefferies & Co

Thank you, good morning gentlemen. I guess, the first thing I would ask you is, if you look at the quarter and you look at the gross margins were real solid on the contracting services side, is there anything abnormal. Obviously there is a workload which is abnormal but from a profitability perspective is there anything sort of abnormal in there, that would make this sort of an unsustainably high level?

Johnny Edwards

Steve, you’re referring the contracting services?

Stephen Gengaro – Jefferies & Co

Yes.

Johnny Edwards

Okay.

Tony Tripodo

Well, I think first and foremost contracting services high margins you saw are influenced great deal by high utilization of well intervention. That was a primary factor each time we have 98% utilization of well intervention you’re going to drive high margins. On the other hand our margins in subsea construction were relatively on the low side, I mean it’s mixed up in there, they’re relatively on low side, because the Caesar performed a low margin flotel job during the third quarter and as Owen mentioned earlier, it’s just kind of two of its first pipelay job.

I’d say that certainly HP was a helpful factor to our margins because the work she is doing for BP its sort of the margins it was keeping margins out of oil and gas, as it would have been contributing on the oil and gas side by having Phoenix production. So yes I would say net-net, Steve the margins for contracting services were positively influenced because of utilization in the HP I contribution, at the same time like I said it stole some margins out of oil and gas.

Stephen Gengaro – Jefferies & Co

So as we think about the third quarter, and then I kind of come up with, and you can correct me if I’m wrong, but as far as the tax impact on the D&A hits on Bushwood that comes out to like another $0.12, so we kind of get operating earnings of like $0.30 in the quarter. Is this – am I thinking about this properly to think that third quarter could look a lot like the second quarter and the fourth quarter is where some of these fundamental issues would come into play more from an earnings perspective?

Tony Tripodo

I think the third quarter right now will absent to hurricane will look like second quarter. in terms of topline I am a little concerned that we’ll be able to repeat margins as high as we did in the second quarter, that’s only began because we had very, very high utilization in the second quarter. But still I think margins will still be good with the topline – because it is Caesar now coming in for a full quarter, we might even see higher revenues in the third quarter. fourth quarter, you got some seasonal factors particularly in order to see that might drive the revenues coming down on contracting services Steve and then you’ll have the HP I likely having come off work for BP in the third quarter as well, but then you just see oil and gas come up in the fourth quarter.

Owen Kratz

I might add, we’re also planning to take the Caesar out of service late in the fourth quarter to install the thrusters that we’ve been waiting on. They were long lead items that did not arrive in time before the vessel went into service but they were in the design to be added and we’re going to be dry-docking her probably around the November timeframe.

Stephen Gengaro – Jefferies & Co

Okay, that’s helpful and then I guess just the other thing, other important dry-docks I think you mentioned, you mentioned one from August to September. I think it was one of the well intervention assets in the North Sea, the Enhancer I think.

Johnny Edwards

Yes, that’s for a short period of time, that’s probably less than two weeks, right Owen?

Owen Kratz

Probably little over two weeks, but it – that’s to install the coiled tubing equipment that is required to go onto the Hess contract.

Stephen Gengaro – Jefferies & Co

Great and then just one final one and that is the transit times to Trinidad, is that anything we should worry about from a modeling perspective, are you getting paid for that. Is that a long time out of service from a utilization perspective?

Owen Kratz

No the payment for that is factored into the rates that we’re charging for the work in Trinidad. So it should be a revenue recognition event.

Tony Tripodo

We’re getting paid – we’re getting paid for the transit.

Stephen Gengaro – Jefferies & Co

Okay, great. Thank you.

Operator

Our next question comes from the line of Philip Dodge. Please proceed with your question.

Philip Dodge – Tuohy Brothers

Yes, good morning everybody, two questions, first as I understand it on the HP I at Macondo, you’re getting compensated to be financially equivalent to if it were producing at Phoenix. Can you just elaborate a little bit on how that calculation is made?

Tony Tripodo

Phil, we have decided that we’re not going to talk about the rates with BP. They’ve asked us to keep that confidential, but you’re –

Philip Dodge – Tuohy Brothers

Yes, was my assumption correct?

Tony Tripodo

But your assumption is correct. The rates were set to keep us financial whole.

Owen Kratz

But I think it’s fair to say that in the future if this were to happen again and somebody wanted the HP I and she were required to disrupt her service where on the field she’s on and anyone wanting her to come would have to compensate the partners.

Tony Tripodo

Yes.

Philip Dodge – Tuohy Brothers

Yes, okay and also, can you foreshadow at all 2011 CapEx, how they might compare with 2007, whether the cash flows – estimated cash flow is a important metric and also what the priorities might be?

Owen Kratz

We’re working very hard right now on looking at our capital requirements for 2011, of course they vary greatly depending on what happens with the outcome of the production assets. The way we’re looking at it though is assuming that again assuming the worse in that we aren’t able to divest the production assets, what would the capital requirements on the production side be. We’ve been pairing back capital investment in production as part of this whole process and going forward I think it’s fair to say that that’s sort of built up a capital requirement that if we are to be operating the properties next year the capital investment on production would be greater than 2010.

On the service side, we have nothing planned right now as far as growth capital. We do anticipate, I’d say our maintenance capital on our fleet is roughly $50 million a year, but then beyond that we are looking at various M&A opportunities and we’re looking at some small organic additions, but nothing is planned yet.

Philip Dodge – Tuohy Brothers

All right, thanks Owen.

Owen Kratz

And I will add though Phil that we’re going – our goal is going to be to definitely contain our capital spending well within our cash flow generation.

Philip Dodge – Tuohy Brothers

Okay, understood. Thanks.

Operator

Our next question comes from the line of Martin Malloy. Please proceed with your question.

Martin Malloy – Johnson Rice & Co

Good morning.

Owen Kratz

Good morning Martin.

Martin Malloy – Johnson Rice & Co

On the Noonan field, is it possible that after you do some of the well intervention activities and that you might be able to add back some of the proved reserves you’ve taken off?

Johnny Edwards

I think we would possibly add back production. The reserve reductions were actually based on the reservoir performance and we are taking a slight production right now, due to the number 3 being offline and the only reserves we possibly could add back there would be the reserves that we’re getting drained by offset operators if we had that production on, we could add those reserves back.

Martin Malloy – Johnson Rice & Co

Okay, and Owen you mentioned M&A opportunities, could you talk about what types of opportunities you might be looking for or types of vessels?

Owen Kratz

Well I’d rather not because lots of people that are out there looking at probably the same opportunities but I will say that we’re not looking at anything major, what we’re looking at are small near-term accretive bolt on kind of acquisitions.

Martin Malloy – Johnson Rice & Co

Okay, thank you.

Operator

Our next question comes from the line of Terese Fabian. Please proceed with your question

Terese Fabian – Sidoti & Company

Hello, I have a question on the work in the North Sea that you are doing, it’s gone up nicely. What are the macro factors accounting for that?

Owen Kratz

I think in general over the last few years there has been sort of an increase in interest in what is potential with well intervention with regard to production enhancement. P&A is always been a driver, and historically has been the strongest driver and I think now actually production enhancement is starting to gain more and more popularity and therefore demand is growing. We have seen competition in the North Sea, but so far the demand is outpacing the new addition of supply, that’s basically plus our credibility in the North Sea in our leadership role makes us a – there was a period when the clients were looking around a little bit stronger at some of our competitors and I think there has been a revived and renewed interest in our well ops facility.

Terese Fabian – Sidoti & Company

And you said that you have a contract with Shell I think?

Owen Kratz

Yes we do. Shell was a very good client of ours, it’s a partial utilization contract. They guarantee so many days each year and then at the beginning of the year they designate what they’re plans for the year will be and that could be greater or less than.

Terese Fabian – Sidoti & Company

Would you consider moving the Caesar to that location?

Owen Kratz

No, the Caesar is not a well intervention vessel.

Terese Fabian – Sidoti & Company

I understand but for pipelay work?

Owen Kratz

We did just did a job in the Mediterranean that we run successful on, so yes we are going to be looking at more global opportunities for the Caesar where we – I have to say that we are not an epic contractor so I think the way that we’re – our intent would be to work with the other contractors in making our assets available where they could fill in voids in their fleet and I think to that extent we could be, gain some valuable contribution to the utilization.

Terese Fabian – Sidoti & Company

Okay and just one last word on the Normand Clough. Is that going to be a significant revenue generator for you, or is that sort of a fitting the door into that region?

Owen Kratz

I think its wait and see right now. The difficulties of the Asia Pacific market is the geographic expanse. One vessel can’t cover everything so you have to sort of pick a place where you’re going to operate. There has been tonnage added to the region over the past years so it’s in a bit of an oversupply situation right now. So initially here it is establishing a presence but our forecast does – the vessel is probably more capable than anything else down there and we do have a multiple service lines that can be deployed off the vessel. So we’re hoping that we can overcome the difficulties, the geographic expanse by having multiple sources of utilization. I am hopeful that by the end of next year we’re returning that region to its profitable stands.

Terese Fabian – Sidoti & Company

Great, thank you.

Operator

(Operator Instructions) And our next question comes from the line of Michael Marino. Please proceed with your question

Michael Marino – Stephens Inc

Good morning.

Owen Kratz

Good morning.

Michael Marino – Stephens Inc

Owen I was wondering if you could give a little color on kind of your commitment to selling the E&P assets, and have you thought more about splitting the assets or maybe selling them more on a piecemeal basis given I guess that the deep-water kind of valuation assumptions have changed so dramatically over the last two months?

Owen Kratz

I am absolutely committed to the vesting the assets and yes to all of the options you just mentioned. I think given the uncertainty of this market, you have to be a realistic about what you can get accomplished at what value, for instance our capital spend, if you look at the six year, the next six years you’re looking and the total value of our portfolio, you’ve got something like a $3.5 billion capital requirements to generate 2.5 Tcf out and that’s over and above our 400 current PDP. That obviously is a big number for us and it’s not where we’d like to focus our capital. The options are sell it now and redeploy the value into the service side of the company, barring the ability to execute a 100% sale I think you do look at other options of brining in partners to provide the capital required and that preserves a lot of value going forward, but eventually we are absolutely committed to a divestment.

Michael Marino – Stephens Inc

I guess you mentioned that there was some interest, is that in the whole package or parts of it?

Owen Kratz

Its right, but we are in the middle of the process, so we really can’t talk about specifically.

Michael Marino – Stephens Inc

Okay, fair enough.

Owen Kratz

Sorry.

Michael Marino – Stephens Inc

Thank you.

Operator

And there appear to be further questions at this time please continue with your presentation or closing remarks.

Cameron Wallace

Okay, in closing thanks for joining us today. We appreciate your interest and participation and we look forward to talking to you again in 90 days. Bye, bye.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and I’d like you please disconnect you line. Have a great day everyone.

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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.

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Source: Helix Energy Solutions Group Inc. Q2 2010 Earnings Call Transcript
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