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Executives

Owen Kratz - President & CEO

Anthony Tripodo - EVP & CFO

Analysts

Helix Energy Solutions Group Inc. (HLX) Barclays CEO Energy/Power Conference Call September 5, 2012 11:45 AM ET

Unidentified Analyst

Okay, welcome back everyone. Up next this morning is Helix Corporation. Speaking for the company today is Owen Kratz; Helix’s CEO and Anthony Tripodo, the company’s Chief Financial Officer. Helix provides a series of offshore services including deepwater pipeline and construction operations, asset recovery and decommissioning work and solutions for development of marginal field.

Owen served as CEO from 1997 through 2006 in which time he was named Executive Chairman, so returned to the role of CEO from 2008. Anthony has served as the CFO since mid-2008. Please help me welcome back to the CEO Energy Conference, Owen and Anthony. Owen?

Owen Kratz

Thanks for being here today with us. I would like to just give you a quick update on the company. I'll start off by just saying there has been a number of years and our company have felt as positive of a vibe among the employees and buzz around the office and hopefully you will see why from our presentation.

For those that have followed us that all you’ll know that for the past few years we've been really focusing on managing the company to restore the strength in our balance sheet and have not really done a whole lot to progress growing the company forward. We're at the point of kicking off a new growth period in the company. We're going to be focusing on two areas where we occupy a dominant position in significant market niches within the Subsea sector.

First of which is the well intervention which will become the real driver of the growth of the company going forward and then followed by Robotics. These are the two areas where we feel like we have all the strongest market position, strongest growth potential in the market niches and our greatest opportunity to capitalize.

Starting off with well intervention, you can see this on page six of our presentation. You can look at it in detail if you want later on. It just give you an idea about what we do in a well bore. We are not a service; we are not well service company that would be the likes of (inaudible) Halliburton well. We focus on the deployment of the services down hole, which you are able to do down hole depends on the medium that are you using to get the tools down there either wire line or coiled tubing.

We're actually the only -- we were the first company's offer well intervention from something other than a drill rig. That's why you see the top three vessels on this slide are existing well intervention fleet. The top right one is the first non-rig intervention vessel; its sea well operates in the North Sea. This type of vessel deploys wire line through the open water column through of lubricate ahead on top of the well control system that sits on the well head. You are able to do things down hole that are limited to this wire line.

If you move up the chain a little bit too where you want to deploy coiled tubing into the well, now you are the capability of what you can do is greatly increased. The vessel in the middle is a still a mono haul. So it’s fairly low cost of operating; it does deploy coiled tubing but it does through a restricted diameter riser.

Now when you connect a riser, a rigid riser to the surface with a moving vessel that interface becomes very problematic, so most vessel motion become critical. When you get into one to work on or deploy services into all wells including horizontal, now you have to go to a seven inch diameter riser and the because of motions and handling and everything becomes even more critical. You get into what this picture on the upper left there which is the Q4000.

And we’ve opted for the semi-submersible design just because of the motion characteristics of the vessel and the available deck space. The Q4000 was the first of its kind of vessel built specifically for intervention in as deep as 10,000 feet of water. We build there in 2002 and she was the star of Macondo and has gained a lot of credibility in the marketplace.

All three of these vessels are fully utilized; the top two vessels in the North Sea are booked up through the remainder of this year and next year. The Q4000 is actually booked up well beyond the end of 2014, so we are absolutely asset constrained on the well intervention site which has led us to the most significant of our growth initiatives that were started which are the bottom three vessels.

Because of the Q4000 being booked up and the demand for her services we are building another right now it’s called the Q-Plus; we are building this in the Jurong Shipyard in Singapore. It’s a $520 million asset with the delivery date of early 2015.

Moving to the other side on the right hand side because of the constraints on our assets in the North Sea and more and more demand coming for, last year we did the first campaign to West Africa with the Enhancer, the middle vessel on top, because of that campaign the opening up of the East Coast of the U.S., Canada and the increased demand in the North Sea we needed more capacity over there as well, so we have added the Constructor which is the bottom right hand vessel. She is a chartered vessel from [docks]; we are adding the system on board for the intervention and we will have her in the service by the first quarter of this next year.

In the Gulf of Mexico there is a lot of demand being driven for P&A services right now because of the regulatory idle iron rule. The producers are in desperate need of a P&A solution. We had no capacity to spare to respond and that’s led to the middle, so we just recently announced and taken delivery of the Helix 534 from Transocean. It’s a drillship that we are currently in the process of converting to well intervention services. Again at the Jurong Shipyard in Singapore and she should be out and servicing the market by no later than mid next and she will be coming to the Gulf of Mexico.

Like I already mentioned what sets apart primarily we are first in the market niche; we operate all three kinds of the vessels, so we are able to provide the producers with the solution that they need rather than the one that we are trying to push and then event going forward is to respond to the market as demand comes up.

I have some pushback on the fact that we are adding three vessels on specs and I just like to point out in 25 years as a company we have done over 60 vessels and all of them are on specs; I really believe that this is our competitive advantage in the marketplace and on spec of this number is that each of these acquisitions and commitments not done in the back end and its after long and extensive dialogue with the client base.

The other thing that’s important to understand that the vast majority of the intervention market is predominantly is dominated by companies that don’t have a sufficient well headcount to support the full time utilization contract on the vessel like this. The majority of the work is spot markers in nature and therefore doesn’t lend itself with easily to bankable contracts.

Moving on to the robotics, well, let me start of by saying the robotics market needs to be viewed in several niches. One is the drill rig support. That is not where we play at all. We don’t provide any robots to drill rigs. Beyond that, you have subsea construction which is your work class vehicles.

We're in that market where not known volume provider. We try to focus on the high end, the top quality of vehicle and personnel.

Then beyond that, we really focus again on specialty niches where others are less likely to compete. If you look at our assets, we actually have 45 world class vehicles. This ranks us fourth or fifth in the world. These are used in support of our own intervention effort. We also deployed them. You will see up on the bottom below point, four charter vessels. This class vessel we don’t own.

We charter on a staggered basis that there were always able to maintain the most modern fleet. Now this number will increase and decline. We charter on a staggered basis. So as we add new charters, we either the keep the old ones or let them roll off.

And then we also filled in from the open spot market. First quarter, we operated nine vessels which yielded as spectacular first quarter. So we very easily can be expand and contract our capacity to meet the market demand.

We also have four trenchers and you can see picture of that in the middle here. The trenchers are used both to bury our pipelines and (inaudible) but more recently and expanding market niches for us is in the renewables market for burying the power cables for the wind farms.

And on the left you see the world class vehicle. More over last year we introduced a new type of assets to the market that are all drilled, we have two of these now. This is for taking geo-technical quarrying which is a step change in the way that is done in the industry.

Last year we spent proving that the technology works. This year its client acceptance and that our client acceptance gets more seeded you’ll see expand in the number of vehicles here.

I’ve mentioned the wind farm; this is the photo of the type of vessel that we used in the wind farms. I mentioned, I've also covered with vessel part. This shows you the upper right a new trencher that we just put into service this year that’s the trencher that was specifically build for the renewals market but has application in the oil and gas side.

It was build to respond to contract with ABB and then it will be deployed off vessel you see to the left and this is an old picture the vessel is actually complete and will going into service in October.

But we've also committed to two sister ships to this vessel one each year for the following two years. So if you look at the total robotics growth it’s pretty spectacular our intentions are to be adding about six vehicles a year, at least four of those for growth and two for fleet upgrade, one new vessel each year and then country every other year and depending on market demand and acceptance ROVDrill unit each year. So that's the total about 60 million a year in capital allocated towards robotics growth.

We should yield about a 50% increase in robotics capacity over the next four years. I am afraid I missed something up here. There we go. I can’t believe I missed our IT fix.

Moving on to the subsea construction. This is a market mix that lots of people are more familiar with it’s actually our roots in our history, but this is a market segment that we are sort of deemphasizing. If you look at the trends, I think the market has come back admirably since Macondo, but if you look more at a global trend this market is moving more and more towards an [EPIC] style of contracting in which cases [scope] for worker large it’s turnkey, so little more risky to mitigate the risk you have to take on number of jobs. It starts the require balance sheet that quite honestly we don’t have.

Given our strong position in the robotics and well intervention market, better decision has been to put our capital into our stronger niches and these niches will; we are still functioning very well here. The top vessel The Express we are on track to do 15 million of EBITDA this year.

So it’s not that it’s suffering although it did for a while after Macondo. The Caesar the next vessel down is actually a large pipe layer which is more applicable for large [EPIC] type of contracting therefore, we haven’t been laying pipe with it; we have actually got it on the long-term combinations contract to the next July in Mexico.

This is a part of the company that we will deemphasize although there is probably sufficient client base in the Gulf of Mexico, the smaller independent for us to do quite well for as long as we want to stay in it, but this is not where we are not going to be allocating our capital for future growth.

On the production facility side this is a market niche that we entered back when there was a raise to establish ultra deep water infrastructure. We partnered with enterprise on Marco Polo TLT and the [I-Hub] and the Independence Hub that’s probably an opportunistic play that doesn’t have a future role for us while we did with that knowledge that we gained though was we build what you see here the Helix producer wants.

This is oil processing vessel, it is not an FBSO, there is no storage on board. We take these through our product from the [subsidy] well process it and then put it into export line. It’s all DP it is only vessel of its kind and its very useful for development and production of small fields in fact it is on our Phoenix field right now, and I would imagine that it is going to stay there at least through 2015 with the way the Phoenix field is producing.

But this is an area of the market that has some interest but again its probably not our highest priority for capital allocation although there is a lot of interest in this kind of vessel, between this vessel and the Q4 1000 that what where it constitutes the Helix best response system in the Gulf which underpins a significant number of the drilling permits, therefore those two vessels must remain in the Gulf of Mexico and they are on long term retainer contract to do so for response in the event of another Macondo.

The Independence and Marco Polo, they have now gone beyond the lease component that were originally offered to the clients on a lease and interfaces and then they are both functioning on a pure tariff basis. Independence in the gas area. So therefore the revenues are somewhat in decline from the independence. But for right now there are nice annuity payments in the company and we anticipate, just think that will grow with this part of this business.

Having covered those, I'll turn it over to Tony to go over the oil and gas and the financial.

Anthony Tripodo

Thanks Owen and good afternoon. I think what distinguishes Helix from most other oil field service companies is the fact that we have a major component of our business being the oil and gas business. And just a short profile of the oil and gas business, approximately 60% of our 39 million barrels of oil reserves at yearend 2011 were oil and about 60% were prove developed and further more 75% of our production today is oil.

So we’re an oily, oil and gas producer and not only that is we benefit from selling most of our oil at Louisiana light sweet grade prices which is substantially higher than West Texas (inaudible).

I think more important than just a profile of our oil and gas business is how we as a company strategically view our oil and gas business. We view our oil and gas business as a facilitator and a free cash flow generator to help grow our service business.

So we’re not a typical oil and gas producer. This business has substantially added free cash flow to our financial profile and we’ll continue to do so. We're not heavy in to exploration. We’ll drill a well or two every year, but they are more developmental oriented, but we really are in that and what I would call a harvest mode in our E&P business.

As long this business, we will manage this business to generate free cash flow and help support the growth in the service business and if we have an opportunity to accelerate some of that cash flow through a monetization or so it has to be an attractive price.

So again we want to leave the impression that we're not a traditionally E&P company, we are in a harvesting mode and this is a business that continues to perform very well for us. And we expect to do so in the future as well.

Now, just to talk a little bit about our balance sheet. When Owen came back into the company as CEO in 2008, our primary and almost sole focus was on delevering the balance sheet and enhancing the financial strength of the company.

If you look back at the end of 2008, the company had a net debt to book cap ratio of 60%. We admittedly we over levered, needed to cure that and then when the financial meltdown occurred in the fall of 2008, it made that even more important. Our goal at the time was to reduce our net debt to book cap ratio down in 20% to 30% quarter and we achieved that goal by the end of 2011 and at the end of June of this year our net debt to book cap ratio was 25%.

We'll never keep our eye off the balance sheet, but we have built a fairly good war chest of liquidity 1.1 billion at [63012] and given the very promising opportunities we have, in both well intervention and robotics, we are now pivoting and netting a growth strategy to our corporate strategy. So you know for our size company having 1.1 billion of liquidity is pretty substantial in our mind and we want to put some of that liquidity to work.

If you look at the debt capital structure, one of our goals too back in 2008 was to push out the maturities of our debt and also to lower the costs of that debt. We paid off half of our high yield issue by the end of June; it was 550, now it’s 275. We have also pushed out the maturities of our bank facility, so effectively we have reduced the cost of our debt capital quite substantially from where it was in 2008.

Taking a look at the outlook for 2012, our outlook for 2012 assumes 7 million barrels of oil equivalent in production and with that, we expect to generate more than $600 million of EBITDA. This was the outlook we presented with our quarter two earnings release, that is up from our original outlook of 600 million of EBITDA approximately. So now we are saying, we are going to do better than 600 million.

We also expect to spend 635 million of CapEx and I will get into that a bit in the next couple of slides. Our 2012 outlook assumes that we would realize a $103 a barrel for oil, we are realizing actually a bit more than that today as of [less] prices today are in $113, $114 range and we expect it to realize gas of 530 which is substantially higher than spot prices and that’s the result of really two key items. One, hedges in place that we put into place a year or two years ago and two, we do have a substantial amount of NGL production and NGL production averages for us today about $45 a barrel of oil equivalent.

Now with hurricane Isaac here, we like everybody else had some disruptions in production. I don’t know yet how much that’s going to affect our oil and gas outlook. In terms of production, however as I said earlier our pricing is a bit higher than we put out at the end of July. We do like to hedge, our corporate goal is to enter a year being 75% hedged. As you can see here, we have -- we are going to be about 75% hedged for all of 2012. We are starting to layer in hedges for 2013 and again we like to enter the year -- any given year being 75% hedged and really that's to give us assurance of our cash flow.

And as you can see here, we are actually layered in some hedges for gas at above $4 and we like to do [colors] for oil and we do know hedge at a Brent level and because Brent approximates the LLS pricing that we realized for oil and gas production in the Gulf of Mexico.

Our outlook for 2012. Well first of all let me say that with the exception of the well enhancer which is the dry dock now, we expect a 100% utilization for our fleet for the rest of 2012. We are fully booked on the well intervention side, we are fully booked on the pipe play side, if you discount the fact that the intrepid has been cold stacked and we have very, very robust activity levels in our robotics business.

So our outlook for our contracting service business is very strong. As though I mentioned going forward, we are fully booked with the Q4 1000 through 2014, almost fully booked for our well interventions vessels in the North Sea through 2013 and the market continues to look very promising.

Our oil and gas production estimate for this year is 7 million barrels equivalent. That assumes the successful exploration well we drilled in our Danny II prospect, comes on around October 1st, which continues to be our expectation. We are drilling another exploration well, which really again a development well called Wang in our Phoenix field.

We expect to spud that well in early October. That is not in our forecast for production in 2012; it will be in our forecast for 2013. Approximately, 90% of our revenues in our oil and gas business comes from liquids, either oil or NGL and that’s important. So, even though gas is depressed or really doesn’t move the needle for us and again we’re about 75% hedged for the rest of the year for our oil and gas production.

At the time we did this forecast, we said, we assume no significant storm disruptions, of course, Isaac came through couple of weeks ago and we like everybody else was down for about a week.

CapEx; where we’re spending our money. Again, with a significant war-chest of liquidity, we managed to build up again promising outlook for our service business. We expect to spend $435 million this year in our contracted service business, all directly oriented toward growth, most of it in the well intervention side.

We’re going to spend $130 million this year for the construction of the Q-Plus vessel in Singapore; we announced two weeks ago the acquisition of the D534 drill ship from Transocean and we're converting that in Singapore today into a well intervention vessel that will approximate $130 million of capital this year and we’re going to wind up and quietly spend about $50 million going up capacity, adding ROVs and trencher, trencher in our Robotics business.

And in oil and gas business, our CapEx this year is estimated $200 million a substantial majority of that CapEx is directed toward drilling any two wells which is already drilled and completed and also drilling at Wang well in the fourth quarter of this year.

So with that we're happy to take any questions.

Question-and-Answer Session

Unidentified Analyst

So Anthony maybe you could speak a little bit about some of the markets or you seeing this particular strength in the well invention arena?

Anthony Tripodo

As far as I think without doubt we have the longest track record, we are the most active, we're the clear leader and I really like the invention market because of the not only position we occupied currently, but its the sensible [nature] there are a multiple various entry, there is a capital cost, there is a credibility and more and more right now there is just simply availability which is why its so important for us to increase the capacity that we're offering to the market here.

Some of you know, down that last slide may be, you were to look at the five year plan of the company. Right now, we're mix, we probably are discounted because of the predominate portion of EBITDA generated from the production. But if you look out at whatever we are trying to do, we are free cash flow flowing significantly from the production, balance sheet is under control.

We are reallocating the cash flow from the production into aggressive service growth, so that by the beginning of the 2016, the company will be a pure play of intervention robotics and whereas to date service EBITDA contribution is now 40%. If you look out at that point the service EBITDA becomes 90 with a higher total EBITDA and considering free cash flow along the way to restore the balance sheet even further.

So that’s the direction that we are moving in with the company and right now it looks that all signs are positive.

Unidentified Analyst

Great. Owen and Tony will be available in the Liberty 1 and 2 breakout room. Thank you.

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Source: Helix Energy Solutions Group's CEO Presents at Barclays CEO Energy/Power Conference (Transcript)
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