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HLX > SEC Filings for HLX > Form 10-Q on 24-Apr-2013All Recent SEC Filings

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Form 10-Q for HELIX ENERGY SOLUTIONS GROUP INC


24-Apr-2013

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 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 in 2013;
statements relating to the construction or acquisition of vessels or equipment and any anticipated costs related thereto, including the construction of the Q5000 and the upgrades to and modifications of the Helix 534 (Note 14);
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 weak domestic and global economic conditions and the future impact of such conditions on the oil and gas industry and the demand for our services;
unexpected delays in the delivery to or chartering of new vessels for our well intervention and robotics fleet, including the Helix 534 (expected in the third quarter of 2013), the Q5000 (expected in 2015), the Grand Canyon II (expected in 2014) and the Grand Canyon III (expected in 2015);
delays, costs and difficulties related to the pipelay vessel sales in 2013;
unexpected future capital expenditures (including the amount and nature thereof);
the results of our continuing efforts to control costs and improve performance;
the success of our risk management activities;
the effects of competition;
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 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;


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the effectiveness of our current and future hedging activities;
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 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 2012 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 growing well intervention and robotics operations. In February 2013, we completed the sale of ERT, our former wholly-owned subsidiary that conducted our oil and gas operations in the U.S., for $624 million plus consideration in the form of overriding royalty interests in ERT's Wang well and certain other of its future exploration prospects. We used $318.4 million of the sales proceeds to reduce our indebtedness under our Credit Agreement (Note 7) and we will use the remainder to continue to support the expansion of our well intervention and robotics operations.

Our Strategy

We have improved our balance sheet and increased our liquidity since 2008 through dispositions of non-core business assets, related repayment of a significant portion of our indebtedness as well as the reduction in our capital spending through 2011. With this goal substantially accomplished with the sale of ERT in February 2013 and the expected mid-year 2013 sales of our remaining pipelay vessels and related equipment, we are now positioned to expand and grow our core operations.

Our current focus is to expand our Contracting Services capabilities by growing our well intervention and robotics operations. We believe that focusing on these services will deliver higher long-term financial returns to us than the businesses and assets that we have chosen to monetize. We are making strategic investments that expand our service capabilities or add capacity to existing services in our key operating regions. We are strengthening our well intervention fleet by constructing a newbuild semi-submersible vessel, the Q5000, acquiring the Discoverer 534 drillship (renamed the Helix 534) which is currently undergoing upgrades and modifications in Singapore to render it suitable for use as a well intervention vessel, and chartering the Skandi Constructor for use in our North Sea well intervention operations. In addition, we are expanding our robotics operations by acquiring additional remotely operated vehicles ("ROVs") and trenchers as well as taking delivery of a newbuild chartered ROV support vessel, the Grand Canyon. During the first quarter of 2013, we entered into charter agreements for two similar vessels, the Grand Canyon II and Grand Canyon III, which are expected to be delivered in 2014 and 2015, respectively. We also contracted to charter the Rem Installer, which is expected to be delivered to us by mid-2013

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. The performance of our 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 capital 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;


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the effect of regulations on offshore Gulf of Mexico oil and gas operations;
actions taken by the Organization of the Petroleum Exporting Countries ("OPEC");
the availability and discovery rate of new oil and natural gas reserves in offshore areas;
the exploration and production of shale oil and natural gas;
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.

Despite strong financial market performances in recent months, overall indicators of growth and confidence remain well below their normal levels for a recovery. The International Monetary Fund has recently lowered its forecast for global economic growth in 2013 and 2014 largely as a result of government spending cuts in the United States and continued struggles of the eurozone. Weak economic data in these advanced economies could continue to affect the global equity and commodity markets as well as effectively hampering normal business activities. The slowdown in many emerging economies is set to continue. This is evidenced by the slower than expected growth in China during the first quarter of 2013. 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.

We believe that the long-term industry fundamentals are positive based on the following factors: (1) long-term increasing world demand for oil and natural gas emphasizing the need for continual replenishment of oil and gas production;
(2) mature global production rates for offshore and subsea wells;
(3) globalization of the natural gas market; (4) increasing number of mature and small reservoirs; (5) increasing offshore activity, particularly in deepwater; and (6) increasing number of subsea developments.

Helix Fast Response System

We developed the HFRS as a culmination of our experience as a responder in the Macondo well control 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 well control 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 to certain CGA participants who have executed utilization agreements with us. In addition, we entered into separate utilization agreements with CGA members that specified the day rates to be charged should the HFRS be deployed in connection with a well control incident. When the original set of agreements expired on March 31, 2013, a new set of substantially similar agreements were entered into with the operators who formed HWCG LLC, a Delaware limited liability company comprised of some of the CGA members as well as other industry participants to perform the same functions as CGA with respect to the HFRS. These new contracts covering the HFRS were signed in the first quarter of 2013 and provide for a four-year term commencing April 1, 2013.

RESULTS OF OPERATIONS

We have disaggregated our contracting services operations into two reportable segments: Contracting Services and Production Facilities. Previously, we had a third business segment, Oil and Gas. In December 2012, we announced a definitive agreement for the sale of ERT. In February 2013, the sale of ERT closed. Accordingly, the results of ERT are presented as discontinued operations for all periods presented in this Quarterly Report on Form 10-Q.

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


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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 intervention, robotics and subsea construction operations (see Note 2 regarding the planned dispositions of our remaining subsea construction vessels and related 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. In addition, our robotics operations are often contracted for the development of renewable energy projects (wind farms). Backlog contracts are cancelable without penalty in many cases. Backlog is not necessarily a reliable indicator of total annual revenue for our contracting services operations as contracts may be added, cancelled and in many cases modified while in progress. As of March 31, 2013, our Contracting Services segment had backlog of approximately $924.9 million, including $438.0 million expected to be performed over the remainder of 2013. Subsequently in early April, we entered into a five-year contract with BP to provide well intervention services with our deepwater well intervention semi-submersible vessel, the Q5000, currently being constructed in Singapore.

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). In connection with the sale of ERT, a new fee arrangement for usage of the HP I at the Phoenix field was agreed upon with the new owner of ERT. Under the terms of this arrangement, ERT will pay us a lower fixed annual demand fee; however, ERT will also pay us a variable throughput fee. We currently anticipate that the total combined fees will approximate at least the previous fixed annual demand fee. The revised terms now also provide that the HP I will continue to provide service to ERT's Phoenix field through at least December 31, 2016.

Discontinued Operations

In February 2013, we sold ERT for $624 million plus consideration in the form of overriding royalty interests in ERT's Wang well and certain other of its future exploration prospects. As a result, we have presented the assets and liabilities included in the sale of ERT and the historical operating results of our former Oil and Gas segment as discontinued operations in the accompanying condensed consolidated financial statements (Notes 2 and 4).

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 U.S. GAAP. We measure our operating performance based on EBITDA, a non-GAAP financial measure that is commonly used but is not a recognized accounting term under GAAP. We use EBITDA 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 EBITDA 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 EBITDA as income (loss) from continuing operations plus income taxes, net interest expense and other and depreciation and amortization expense. We separately disclose our non-cash asset impairment charges, which, if not material, would be reflected as a component of our depreciation and amortization expense. Loss on early extinguishment of long-term debt is considered equivalent to additional interest expense.

In the following reconciliation, 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 EBITDA from continuing operations, when applicable, we deduct the noncontrolling interests related to the adjustment components of EBITDA and if applicable, any gain or loss on the sale of assets from continuing operations.


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We also provide a measure of Adjusted EBITDAX which combines our measure of Adjusted EBITDA from continuing operations and the measure of Adjusted EBITDAX from discontinued operations. Our discontinued operations represent ERT which was sold in February 2013. We define Adjusted EBITDAX from discontinued operations as income from discontinued operations, net of tax (Note 4) plus income taxes, net interest expense and other, depreciation, depletion, amortization and accretion expense and exploration expenses.

Other companies may calculate their measures of EBITDA, Adjusted EBITDA and Adjusted EBITDAX differently than we do, which may limit their usefulness as comparative measures. Because EBITDA is not a financial measure calculated in accordance with U.S. GAAP, it should not be considered in isolation or as a substitute for net income (loss) attributable to common shareholders or cash flows from operations, but used as a supplement to these GAAP financial measures. The reconciliation of our net income from continuing operations to EBITDA from continuing operations, Adjusted EBITDA from continuing operations and Adjusted EBITDAX is as follows:

                                                      Three Months Ended
                                                           March 31,
                                                      2013          2012

Net income from continuing operations               $   1,334     $  17,663
Adjustments:
Income tax provision                                      443         1,278
Net interest expense and other                         14,007        14,407
Loss on extinguishment of long-term debt                2,882        17,127
Depreciation and amortization                          24,380        24,649
EBITDA from continuing operations                      43,046        75,124
Adjustments:
Noncontrolling interest Kommandor LLC                  (1,015 )      (1,026 )
ADJUSTED EBITDA from continuing operations          $  42,031     $  74,098

ADJUSTED EBITDA from continuing operations          $  42,031     $  74,098
ADJUSTED EBITDAX from discontinued operations (1)      31,754       134,543
ADJUSTED EBITDAX                                    $  73,785     $ 208,641

(1) Amounts relate to ERT which was sold in February 2013 (Notes 2 and 4).

Comparison of Three Months Ended March 31, 2013 and 2012

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

                                  Three Months Ended
                                       March 31,             Increase/
                                  2013          2012        (Decrease)
Revenues (in thousands) -
Contracting Services            $ 198,054     $ 244,544     $   (46,490 )
Production Facilities              20,393        20,022             371
Intercompany elimination          (21,018 )     (34,724 )        13,706
                                $ 197,429     $ 229,842     $   (32,413 )

Gross profit (in thousands) -
Contracting Services            $  45,287     $  66,512     $   (21,225 )
Production Facilities              11,349        10,190           1,159
Corporate and other                (2,349 )      (1,199 )        (1,150 )
Intercompany elimination           (1,720 )      (3,020 )         1,300
                                $  52,567     $  72,483     $   (19,916 )


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                                            Three Months Ended
                                                March 31,
                                            2013         2012
Gross Margin -
Contracting Services                            23%          27%
Production Facilities                           56%          51%
Total company                                   27%          32%

Number of vessels (1) / Utilization (2)
Contracting Services:
Construction vessels                          7/75%        9/93%
Well intervention                            3/100%        3/84%
ROVs                                         55/55%       47/68%

(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 each category generated revenues by the total number of calendar days in the applicable period.

Intercompany segment revenues are as follows (in thousands):

                          Three Months Ended
                               March 31,             Increase/
                           2013          2012       (Decrease)

Contracting Services    $   16,345     $ 23,201     $    (6,856 )
Production Facilities        4,673       11,523          (6,850 )
                        $   21,018     $ 34,724     $   (13,706 )

Intercompany segment profit is as follows (in thousands):

                          Three Months Ended
                               March 31,             Increase/
                           2013          2012       (Decrease)

Contracting Services    $    1,764      $ 3,064     $    (1,300 )
Production Facilities          (44 )        (44 )             -
                        $    1,720      $ 3,020     $    (1,300 )

In the following disclosures regarding our results of operations, please refer to the tables above and Note 12 for supplemental information regarding our business segment results. Our disclosures specifically refer to our Contracting Services and Production Facilities segments. Disclosures regarding our former Oil and Gas segment are presented under "Discontinued Operations - Oil and Gas" below and in Note 4.

Revenues. Our Contracting Services revenues decreased by 19% for the three-month period ended March 31, 2013 as compared to the same period in 2012 reflecting significantly lower revenues associated with our subsea construction vessels, which were adversely affected by permitting delays related to the two remaining projects to be serviced by the Express prior to its planned sale and significant reductions in the utilization for our robotics vessels and ROVs. Typically the first quarter is affected by seasonal weather patterns in the North Sea and thus robotics activities generally decrease in the winter months. However, over the past few years we benefitted from robotics activities in the first quarter, including a number of North Sea trenching projects in early 2012. These decreases were partially offset by full utilization of our three well intervention vessels during the first quarter of 2013 as compared to 84% utilization in the first quarter of 2012. In 2012, the Q4000 underwent required regulatory dry dock, which resulted in the vessel being out of service for 28 days during the first quarter of 2012.


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Our Production Facilities revenues increased by 2% for the three-month period ended March 31, 2013 as compared to the same period in 2012, which reflects a slight increase in our total revenues under the new HP I contract for processing of production from the Phoenix field (see "Contracting Services Operations" above). The quarterly HFRS retainer fees will increase effective April 1, 2013 as a result of new contracts covering the HFRS which were signed in the first quarter of 2013 and provide for a four-year term (see "Helix Fast Response System" above).

Gross Profit. Our Contracting Services gross profit decreased by 32% for the three-month period ended March 31, 2013 as compared to the same period in 2012. This decrease was primarily attributed to both our robotics and subsea construction vessels seeking lower margin work to reduce vessel idle time during first quarter of 2013. Gross profit benefitted from full utilization of all three well intervention vessels during the first quarter of 2013 as compared to 84% utilization in same period last year. However, some of the Q4000 work was at low margins because of problems with its well control system. These problems, which have been remediated, resulted in an aggregate reduction of $1.8 million of day rate revenues associated with the vessel.

Loss on Commodity Derivative Contracts. In December 2012, following the announcement of the sale of ERT, we de-designated our oil and gas commodity derivative contracts and interest rate swap contracts as hedging instruments (Note 16). The $14.1 million loss on commodity derivative contracts reflects the net loss on our oil and gas commodity derivative contracts during the first quarter of 2013. In February 2013, we paid approximately $22.5 million to cash . . .

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