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HLX > SEC Filings for HLX > Form 10-Q on 24-Oct-2012All Recent SEC Filings

Show all filings for HELIX ENERGY SOLUTIONS GROUP INC

Form 10-Q for HELIX ENERGY SOLUTIONS GROUP INC


24-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS AND ASSUMPTIONS

This Quarterly Report on Form 10-Q contains various statements that contain forward-looking information regarding Helix Energy Solutions Group, Inc. and represent our expectations and beliefs concerning future events. This forward-looking information is intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995 as set forth in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements, included herein or incorporated herein by reference, that are predictive in nature, that depend upon or refer to future events or conditions, or that use terms and phrases such as "achieve," "anticipate," "believe," "estimate," "expect," "forecast," "plan," "project," "propose," "strategy," "predict," "envision," "hope," "intend," "will," "continue," "may," "potential," "should," "could" and similar terms and phrases, are forward-looking statements. Included in forward-looking statements are, among other things:

statements regarding our business strategy, including the potential sale of assets and/or other investments in our subsidiaries and facilities, or any other business plans, forecasts or objectives, any or all of which is subject to change;
the timing of the closing of our pipelay vessel sales;
statements regarding our anticipated production volumes, results of exploration, exploitation, development, acquisition or operations expenditures, and current or prospective reserve levels with respect to any oil and gas property or well;
statements related to commodity prices for oil and gas or with respect to the supply of and demand for oil and gas;
statements relating to our proposed exploration, development and/or production of oil and gas properties, prospects or other interests and any anticipated costs related thereto;
statements related to environmental risks, exploration and development risks, or drilling and operating risks;
statements relating to the construction or acquisition of vessels or equipment and any anticipated costs related hereto;
statements regarding projections of revenues, gross margin, expenses, earnings or losses, working capital or other financial items;
statements regarding any financing transactions or arrangements, or ability to enter into such transactions;
statements regarding anticipated legislative, governmental, regulatory, administrative or other public body actions, requirements, permits or decisions;
statements regarding the collectability of our trade receivables;
statements regarding anticipated developments, industry trends, performance or industry ranking;
statements regarding general economic or political conditions, whether international, national or in the regional and local market areas in which we do business;
statements related to our ability to retain key members of our senior management and key employees;
statements related to the underlying assumptions related to any projection or forward-looking statement; and
any other statements that relate to non-historical or future information.

Although we believe that the expectations reflected in these forward-looking statements are reasonable and are based on reasonable assumptions, they do involve risks, uncertainties and other factors that could cause actual results to be materially different from those in the forward-looking statements. These factors include, among other things:

impact of the weak economic conditions and the future impact of such conditions on the oil and gas industry and the demand for our services;
Delays, costs and difficulties related to the pipelay vessel sales;
uncertainties inherent in the development and production of oil and gas and in estimating reserves;
the geographic concentration of our oil and gas operations;
the effect of regulations on the offshore Gulf of Mexico oil and gas operations;
uncertainties regarding our ability to replace depletion;


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unexpected future capital expenditures (including the amount and nature thereof);
impact of oil and gas price fluctuations and the cyclical nature of the oil and gas industry;
the effects of indebtedness, which could adversely restrict our ability to operate, could make us vulnerable to general adverse economic and industry conditions, could place us at a competitive disadvantage compared to our competitors that have less debt and could have other adverse consequences to us;
the effectiveness of our hedging activities;
the results of our continuing efforts to control costs, and improve performance;
the success of our risk management activities;
the effects of competition;
the availability (or lack thereof) of capital (including any financing) to fund our business strategy and/or operations and the terms of any such financing;
the impact of current and future laws and governmental regulations, including tax and accounting developments;
the effect of adverse weather conditions and/or other risks associated with marine operations, including exposure of our oil and gas operations to tropical storm activity in the Gulf of Mexico;
the impact of operational disruptions affecting the Helix Producer I vessel which is crucial to producing oil and natural gas from our Phoenix field;
the effect of environmental liabilities that are not covered by an effective indemnity or insurance;
the potential impact of a loss of one or more key employees; and
the impact of general, market, industry or business conditions.

Our actual results could differ materially from those anticipated in any forward-looking statements as a result of a variety of factors, including those described in Item 1A. "Risk Factors" in our 2011 Form 10-K. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. Forward-looking statements are only as of the date they are made, and other than as required under the securities laws, we assume no obligation to update or revise these forward-looking statements or provide reasons why actual results may differ.

EXECUTIVE SUMMARY

Our Business

We are an international offshore energy company that provides specialty services to the offshore energy industry, with a focus on our growing well intervention and robotics businesses. We also own an oil and gas business that is a prospect generation, exploration, development and production company. We utilize cash flow generated from our oil and gas production to support expansion of our well intervention and robotics businesses.

Our Strategy

Over the past few years, we have focused on improving our balance sheet by increasing our liquidity through disposition of non-core business assets and reductions in our planned capital spending. At September 30, 2012, our cash on hand totaled $583.8 million and our liquidity was $1.0 billion. Our capital expenditures for full year 2012 are expected to total approximately $545 million, primarily reflecting construction costs associated with our new semi-submersible well intervention vessel, the Q5000, costs related to the purchase and conversion of the Discoverer 534 drillship, which we subsequently renamed the Helix 534, into a well intervention vessel, and the exploration and development costs for certain of our oil and gas properties (excluding costs related to our asset retirement obligations). We believe that we have sufficient liquidity to successfully implement our near term business plan without incurring additional indebtedness beyond the existing capacity under the Revolving Credit Facility.

Announced Sale of Pipelay Vessels

On October 15, 2012, we entered into an agreement to sell our two remaining pipelay vessels, the Express and the Caesar and other related equipment to Coastal Trade Limited. The total sales price is $238.3 million, of which we have received a $50 million deposit that is only refundable in limited circumstances. The final sale of these vessels will close and fund in two stages in 2013 following the completion of each vessel's existing backlog of work. Currently, we anticipate the Express sale will close in February 2013 and we expect the Caesar sale will close in July 2013. In the fourth quarter of 2012, we expect to record an impairment charge of approximately $160 million (approximately $100 million after tax) to


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reduce the carrying cost of the Caesar and other related pipelay equipment to their respective fair value. In the first quarter of 2013, we expect to record a pre-tax gain of approximately $14 million (approximately $9 million after tax) related to the sale of the Express. We will be required to use a portion of the proceeds from the sale of these vessels to reduce our Term Loan debt pursuant to the terms of our Credit Agreement and for reinvestment into our well intervention and robotics businesses.

Economic Outlook and Industry Influences

Demand for our contracting services operations is primarily influenced by the condition of the oil and gas industry, and in particular, the willingness of oil and gas companies to make capital expenditures for offshore exploration, drilling and production operations. Generally, spending for our contracting services fluctuates directly with the direction of oil and natural gas prices. However, some of our contracting services will often lag drilling operations by a period of 6 to 18 months, meaning that even if there were a sudden increase in deepwater permitting and subsequent drilling in the Gulf of Mexico, it probably would still be some time before we would start securing any awarded projects in this region. The performance of our oil and gas operations is also largely dependent on the prevailing market prices for oil and natural gas, which are impacted by global economic conditions, hydrocarbon production and capacity, geopolitical issues, weather, and several other factors, including but not limited to:

worldwide economic activity, including available access to global capital and equity markets;
demand for oil and natural gas, especially in the United States, Europe, China and India;
economic and political conditions in the Middle East and other oil-producing regions;
the effect of regulations on offshore Gulf of Mexico oil and gas operations;
actions taken by OPEC;
the availability and discovery rate of new oil and natural gas reserves in offshore areas;
the cost of offshore exploration for and production and transportation of oil and gas;
the ability of oil and natural gas companies to generate funds or otherwise obtain external capital for exploration, development and production operations;
the sale and expiration dates of offshore leases in the United States and overseas;
technological advances affecting energy exploration production transportation and consumption;
weather conditions;
environmental and other governmental regulations; and
tax policies.

During the third quarter of 2012, oil prices slightly decreased from levels realized in the previous three months. The average NYMEX West Texas Intermediate ("WTI") crude oil price was $92.22 per barrel in the third quarter of 2012 compared to $93.49 per barrel in the second quarter of 2012 and $102.93 per barrel in the first quarter of 2012. In 2011, the price that we received for the majority of our crude oil sales volumes started to increase significantly over the WTI market price. Historically the price we received for most of our crude oil, as priced using a number of Gulf Coast crude oil price indexes, closely correlated with the then-current market prices of WTI crude oil; however, because of a substantial increase in crude oil inventories at Cushing, Oklahoma the price of Gulf Coast crude has been substantially higher than WTI. Currently the price we receive for our crude oil more closely correlates with the Brent crude oil price in the North Sea. The premium we received for our oil sales was anywhere from $8 - $27 per barrel greater than the given WTI price during the past twelve months and was approximately $13 per barrel greater than the WTI price in the first nine months of 2012. We do not know how long the price variance of our crude oil and the WTI will continue but most analysts believe this premium will continue at least through the remainder of 2012.

Although the market environment for natural gas improved in the third quarter of 2012, in general natural gas prices remain weak, reflecting the unusually mild conditions during the past winter season over the majority of the United States and the continued increase in supply of natural gas derived primarily from non-traditional sources of natural gas such as production from shale formations and tight sands located throughout the United States. A combination of these factors has decreased the NYMEX Henry Hub price of natural gas to below $2.00 per Mcf during April 2012, reflecting the lowest prices for natural gas in approximately 10 years. At September 30, 2012, the NYMEX Henry Hub price of natural gas was $3.08 per Mcf.


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Worries about the "fiscal cliff" have taken center stage in recent months. The "fiscal cliff" as a result of the end of tax breaks and the steep federal spending cuts set to take effect at the start of 2013 is believed to pose a serious risk to the economy. Long-term uncertainties surrounding the European sovereign debt crisis are expected to continue despite the European Central Bank's recent announcement of the unlimited bond purchase program aimed at bringing stability to financial markets. This could continue to affect the global equity and commodity markets as well as effectively hampering normal business activities. For the seventh consecutive quarter, growth slowed in China, which may also signal a global economic slowdown. A series of recently released key economic data suggest that the economic recovery in the United States continues to be slow-paced. The oil and natural gas industry has been adversely affected by the uncertainty of the general timing and level of the economic recovery as well the uncertainties concerning increased government regulation of the industry in the United States. Over the longer-term, the fundamentals for our business remain generally favorable as the need for the continual replenishment of oil and gas production is the primary driver of demand for our services.

Helix Fast Response System

We developed the Helix Fast Response System ("HFRS") as a culmination of our experience as a responder in the Macondo oil spill response and containment efforts. The HFRS centers on two vessels, the HP I and the Q4000, both of which played a key role in the Macondo oil spill response and containment efforts and are presently operating in the Gulf of Mexico. In 2011, we signed an agreement with Clean Gulf Associates ("CGA"), a non-profit industry group, allowing, in exchange for a retainer fee, the HFRS to be named as a response resource in permit applications to federal and state agencies and making the HFRS available for a two-year term to certain CGA participants who have executed utilization agreements with us. In addition to the agreement with CGA, we currently have signed separate utilization agreements with 24 CGA participant member companies specifying the day rates to be charged should the HFRS solution be deployed in connection with a well control incident. The retainer fee associated with HFRS was effective April 1, 2011 and is a component of our Production Facilities business segment.

RESULTS OF OPERATIONS

Our operations are conducted through two lines of business: contracting services and oil and gas. We have disaggregated our contracting services operations into two continuing reportable segments Contracting Services and Production Facilities. Our third business segment is Oil and Gas.

All material intercompany transactions between the segments have been eliminated in our consolidated financial statements, including our consolidated results of operations.

Contracting Services Operations

We seek to provide services and methodologies that we believe are critical to developing offshore reservoirs and maximizing production economics. The Contracting Services segment includes well operations, robotics and subsea construction services (see Note 17 for disclosures regarding the announced sale of a large portion of our subsea construction assets). Our Contracting Services business operates primarily in the Gulf of Mexico, North Sea, Asia Pacific and West Africa regions, with services that cover the lifecycle of an offshore oil or gas field. As of September 30, 2012, our Contracting Services segment had backlog of approximately $697.7 million, including $177.2 million expected to be performed over the remainder of 2012. Our Production Facilities segment reflects the results associated with the operations of the HP I as well as our equity investments in two Gulf of Mexico production facilities (Note 6). Backlog for the HP I totaled approximately $24.4 million at September 30, 2012, including $8.4 million expected to be serviced over the remainder of 2012. At December 31, 2011, our combined backlog for both Contracting Services and the HP I totaled $539.7 million, including $505.1 million for 2012. These backlog contracts are cancelable without penalty in many cases. Backlog is not a reliable indicator of total annual revenue for our Contracting Services businesses as contracts may be added, cancelled and in many cases modified while in progress.

Oil and Gas Operations

We began our oil and gas operations to achieve incremental returns, to expand off-season utilization of our Contracting Services assets, and to provide a more efficient solution to offshore abandonment for industry participants. We have evolved this business model to include not only mature oil and gas properties but also


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proved and unproved reserves yet to be developed and explored. By owning oil and gas reservoirs and prospects, we are able to utilize the services we otherwise provide to third parties to create value at key points in the life of our own reservoirs including during the exploration and development stages, the field management stage, and the abandonment stage. It is also a feature of our business model to opportunistically monetize part of the created reservoir value, through sales of working interests, in order to help fund field development and reduce gross profit deferrals from our Contracting Services operations. Therefore the reservoir value we create is realized through oil and gas production and/or monetization of working interest stakes.

Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future performance, financial position, or cash flows, but excludes amounts that would not be so adjusted in the most comparable measures under generally accepted accounting principles ("GAAP"). We measure our operating performance based on EBITDAX, a non-GAAP financial measure that is commonly used in the oil and natural gas industry but is not a recognized accounting term under GAAP. We use EBITDAX to monitor and facilitate the internal evaluation of the performance of our business operations, to facilitate external comparison of our business results to those of others in our industry, to analyze and evaluate financial and strategic planning decisions regarding future investments and acquisitions, to plan and evaluate operating budgets, and in certain cases, to report our results to the holders of our debt as required under our debt covenants. We believe our measure of EBITDAX provides useful information to the public regarding our ability to service debt and fund capital expenditures and may help our investors understand our operating performance and compare our results to other companies that have different financing, capital and tax structures.

We define EBITDAX as income (loss) from continuing operations plus income taxes, net interest expense and other, depreciation, depletion and amortization expense and exploration expenses. We separately disclose our non-cash asset impairment charges, which, if not material, would be reflected as a component of our depreciation, depletion and amortization expense. Loss on early extinguishment of long-term debt is considered equivalent to additional interest expense.

In our reconciliation of income, including noncontrolling interests, we provide amounts as reflected in our accompanying condensed consolidated financial statements unless otherwise footnoted. This means that such amounts are recorded at 100% even if we do not own 100% of all of our subsidiaries. Accordingly, to arrive at our measure of Adjusted EBITDAX, when applicable, we deduct the noncontrolling interests related to the adjustment components of EBITDAX, the gain or loss on the sale of assets, the hedge ineffectiveness on commodity derivative contracts.

Other companies may calculate their measures of EBITDAX and Adjusted EBITDAX differently than we do, which may limit its usefulness as a comparative measure. Because EBITDAX is not a financial measure calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for net income attributable to common shareholders, but used as a supplement to that GAAP financial measure. A reconciliation of our net income, including noncontrolling interests to EBITDAX and Adjusted EBITDAX is as follows (in thousands):

                                             Three Months Ended           Nine Months Ended
                                                September 30,               September 30,
                                             2012          2011          2012          2011

Net income, including noncontrolling
interests                                  $  15,675     $  46,826     $ 127,641     $ 115,570
Adjustments:
Income tax provision                           4,967        23,465        50,720        49,186
Net interest expense and other                16,125        32,474        58,118        78,075
Loss on extinguishment of long-term debt           -         2,354        17,127         2,354
Depreciation and amortization                 63,666        72,370       198,626       239,540
Asset impairment charges                       4,422             -        19,012        11,573
Exploration expenses                             623         1,549         2,469         9,833
EBITDAX                                      105,478       179,038       473,713       506,131
Adjustments:
Non-controlling interest Kommandor LLC        (1,037 )      (1,036 )      (3,089 )      (3,076 )
Hedge ineffectiveness on commodity
derivative contracts                          10,060             -         2,330             -
Loss on sale of assets                        12,933             -        14,647             6
ADJUSTED EBITDAX                           $ 127,434     $ 178,002     $ 487,601     $ 503,061


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Comparison of Three Months Ended September 30, 2012 and 2011

The following table details various financial and operational highlights for the
periods presented:

                                            Three Months Ended
                                               September 30,           Increase/
                                            2012          2011        (Decrease)
Revenues (in thousands) -
Contracting Services                      $ 221,491     $ 229,967     $    (8,476 )
Production Facilities                        20,024        19,986              38
Oil and Gas                                 119,124       159,218         (40,094 )
Intercompany elimination                    (24,405 )     (36,675 )        12,270
                                          $ 336,234     $ 372,496     $   (36,262 )

Gross profit (in thousands) -
Contracting Services                      $  54,494     $  55,799     $    (1,305 )
Production Facilities                        10,300        11,072            (772 )
Oil and Gas                                  21,800        56,631         (34,831 )
Corporate                                      (876 )        (679 )          (197 )
Intercompany elimination                         39          (528 )           567
                                          $  85,757     $ 122,295     $   (36,538 )

Gross Margin -
Contracting Services                             25 %          24 %
Production Facilities                            51 %          55 %
Oil and Gas                                      18 %          36 %
Total company                                    26 %          33 %

Number of vessels (1) / Utilization (2)
Contracting Services:
Construction vessels                           9/97 %        8/86 %
Well operations                                3/81 %        3/99 %
ROVs                                          53/73 %       46/67 %

(1) Represents number of vessels as of the end of the period excluding acquired vessels prior to their in-service dates, vessels taken out of service prior to their disposition and vessels jointly owned with a third party.

(2) Average vessel utilization rate is calculated by dividing the total number of days the vessels in this category generated revenues by the total number of calendar days in the applicable period. Utilization statistics for construction vessels excluded the Intrepid in the third quarter of 2012 as this asset had been in cold-stack mode during the quarter and was sold in September 2012.

Intercompany segment revenues during the three-month periods ended September 30, 2012 and 2011 were as follows (in thousands):

                          Three Months Ended
                             September 30,           Increase/
                           2012          2011       (Decrease)

Contracting Services    $   12,896     $ 25,410     $   (12,514 )
Production Facilities       11,509       11,265             244
                        $   24,405     $ 36,675     $   (12,270 )


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Intercompany segment profit during the three-month periods ended September 30, 2012 and 2011 was as follows (in thousands):

                           Three Months Ended
                              September 30,            Increase/
                          2012            2011        (Decrease)

Contracting Services    $       5       $     606     $      (601 )
Production Facilities         (44 )           (78 )            34
                        $     (39 )     $     528     $      (567 )

. . .

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