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HLX > SEC Filings for HLX > Form 10-Q on 23-Oct-2013All Recent SEC Filings




Quarterly Report

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


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 are subject to change;
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 Q7000 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 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 fourth quarter of 2013), the Q5000 (expected in 2015), the Q7000 (expected in 2016), the Grand Canyon II (expected in 2014) and the Grand Canyon III (expected in 2015);
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;
the effectiveness of our current and future hedging activities;

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the long-term 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 Strategy

We are an international offshore energy company that provides specialty services to the offshore energy industry, with a focus on our well intervention and robotics operations. Since 2008 we have focused on improving our balance sheet and increasing our liquidity through dispositions of non-core business assets and the related repayment of a significant portion of our indebtedness, as well as the reduction in our capital spending through 2011. This goal was substantially accomplished with the sale of ERT in February 2013 and the sales in June and July 2013 of our two remaining pipelay vessels and related equipment. As such, we are now positioned for growth and expansion.

Our focus is to expand our well intervention and robotics businesses. 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 two newbuild semi-submersible vessels, the Q5000 and the Q7000, and by our acquisition of the Discoverer 534 drillship (renamed the Helix 534), which is undergoing upgrades and modifications to render it suitable for use as a well intervention vessel. We have also chartered the Skandi Constructor, which has now been fully equipped and integrated into 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. In 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 chartered the Rem Installer, which was delivered to us in July 2013.

Economic Outlook and Industry Influences

Demand for our services 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 services fluctuates directly with the direction of oil and natural gas prices. The performance of our operations is also largely dependent on 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;
the effect of regulations on offshore Gulf of Mexico oil and gas operations;
actions taken by the Organization of the Petroleum Exporting Countries;
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;

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environmental and other governmental regulations; and
domestic and international tax policies.

Despite strong financial market performances in recent months, the global economy may grow at a slower rate than many economists had previously forecasted for the remainder of 2013, weighed by modest recovery in mature markets and gradual slowdown in major emerging markets. The U.S. economy showed some positive signs in the second quarter of 2013 with steady job growth, especially in the private sector, and a modest increase in consumer confidence. However, the recent shutdown of the U.S. Federal government and the resulting short-term budget and debt ceiling deals could potentially introduce additional volatility into the market that may have a negative effect not only on the U.S. economy but also on the global economy. Any impact associated with the recent events in Washington D.C. may not be known over the near term. The European economy remains weak despite stable financial market performances and some improvements in business and consumer confidence. The slowdown in many emerging economies is continuing. Weak economic data could affect the global equity and commodity markets as well as effectively hampering normal business activities. 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) an increasing number of mature and small reservoirs; (5) increasing offshore activity, particularly in deepwater; and (6) an 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 currently 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. The original set of agreements expired on March 31, 2013, and a new set of substantially similar agreements 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, became effective April 1, 2013. These new agreements are for a four-year term.


Historically, we disaggregated our well intervention, robotics, subsea construction and production facilities operations into two reportable segments:
Contracting Services and Production Facilities. However, following the recent completion of the sale of our remaining subsea construction pipelay vessels and related equipment (Note 2) and the continued emphasis on expanding and growing our well intervention and robotics operations, we have now disaggregated our former Contracting Services segment into three reportable segments: Well Intervention, Robotics and Subsea Construction. Production Facilities remains a business segment. Previously, we had an additional business segment, Oil and Gas. In December 2012, we announced a definitive agreement for the sale of ERT. The sale occurred on February 6, 2013. 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. Our services include Well Intervention, Robotics and Subsea Construction (see Note 2 regarding the dispositions of our remaining subsea construction vessels and related equipment) business segments. Our businesses operate 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 services as contracts may be added, cancelled and in many cases modified while in progress. As of September 30, 2013, our consolidated backlog totaled approximately $2.0 billion, including $166.1 million expected to be performed over the remainder of 2013. The substantial majority of our backlog is associated with our Well Intervention and Production Facilities business segments. In early April of 2013, 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 and expected to be delivered in 2015.

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, an amended 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 also will pay us a variable throughput fee. We anticipate that the total combined fees will approximate at least the previous fixed annual demand fee over the life of the contract. Currently, the fees that we are receiving exceed 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). The Wang well commenced production in April 2013.

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 by 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 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 (in thousands):

                                             Three Months Ended           Nine Months Ended
                                                September 30,               September 30,
                                             2013          2012          2013          2012

Net income from continuing operations      $  45,348     $  11,162     $  74,711     $  32,039
Income tax provision (benefit)                 7,058         1,270        16,078        (1,405 )
Net interest expense and other                 4,219         9,176        30,136        36,939
Loss on extinguishment of long-term debt       8,572             -        12,100        17,127
Depreciation and amortization                 21,850        24,797        71,542        72,185
Asset impairment charges                           -         4,594             -        19,184
EBITDA from continuing operations             87,047        50,999       204,567       176,069
Noncontrolling interest Kommandor LLC         (1,037 )      (1,037 )      (3,078 )      (3,089 )
(Gain) loss on sale of assets                (15,812 )      12,933       (14,727 )      12,933
ADJUSTED EBITDA from continuing
operations                                 $  70,198     $  62,895     $ 186,762     $ 185,913

ADJUSTED EBITDA from continuing
operations                                 $  70,198     $  62,895     $ 186,762     $ 185,913
ADJUSTED EBITDAX from discontinued
operations (1)                                     -        64,539        31,754       301,688
ADJUSTED EBITDAX                           $  70,198     $ 127,434     $ 218,516     $ 487,601

(1) Amounts relate to ERT, which was sold in February 2013 (Notes 2 and
4). Below is a reconciliation of our net income from discontinued operations to Adjusted EBITDAX from discontinued operations:

                                               Three Months Ended            Nine Months Ended
                                                 September 30,                 September 30,
                                              2013            2012          2013          2012

Net income from discontinued operations    $       44       $   4,503     $   1,073     $  95,572
Income tax provision                               24           3,697           579        52,125
Net interest expense and other                      -           6,959         2,732        21,209
Depreciation and amortization                       -          38,697         1,226       126,269
Exploration expenses                                -             623         3,514         2,469
Hedge ineffectiveness on commodity
derivative contracts                                -          10,060             -         2,330
(Gain) loss on sale of assets                     (68 )             -        22,630         1,714
ADJUSTED EBITDAX from discontinued
operations                                 $        -       $  64,539     $  31,754     $ 301,688

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Comparison of Three Months Ended September 30, 2013 and 2012

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

                                             Three Months Ended
                                               September 30,            Increase/
                                            2013           2012        (Decrease)
Revenues (in thousands) -
Well Intervention                         $ 114,238      $  88,711     $    25,527
Robotics                                     90,370         95,107          (4,737 )
Subsea Construction                           4,120         37,673         (33,553 )
Production Facilities                        24,366         20,024           4,342
Intercompany elimination                    (12,977 )      (24,405 )        11,428
                                          $ 220,117      $ 217,110     $     3,007

Gross profit (in thousands) -
Well Intervention                         $  36,406      $  22,260     $    14,146
Robotics                                     19,685         25,126          (5,441 )
Subsea Construction                            (335 )        7,108          (7,443 )
Production Facilities                        14,287         10,300           3,987
Corporate and other                            (607 )       (6,914 )         6,307
Intercompany elimination                         21             39             (18 )
                                          $  69,457      $  57,919     $    11,538

Gross Margin -
Well Intervention                                32 %           25 %
Robotics                                         22 %           26 %
Subsea Construction                              (8 )%          19 %
Production Facilities                            59 %           51 %
Total company                                    32 %           27 %

Number of vessels (1) / Utilization (2)
Contracting Services:
Well Intervention vessels                      4/84 %         3/81 %
ROVs                                          57/68 %        53/73 %
Robotics vessels                               5/98 %         7/98 %
Subsea Construction vessels                     N/A           2/93 %

(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
                             September 30,           Increase/
                           2013          2012       (Decrease)

Well Intervention       $    4,784     $  5,797     $    (1,013 )
Robotics                     8,193        7,099           1,094
Production Facilities            -       11,509         (11,509 )
                        $   12,977     $ 24,405     $   (11,428 )

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Intercompany segment profit is as follows (in thousands):

                           Three Months Ended
                              September 30,            Increase/
                          2013            2012        (Decrease)

Well Intervention       $     (45 )     $     (57 )   $        12
Robotics                       67              62               5
Production Facilities         (43 )           (44 )             1
                        $     (21 )     $     (39 )   $        18

In reviewing the discussion below of our results of operations, please refer to the tables above and Note 12 for supplemental information regarding our business segment results. This discussion specifically refers to our Well Intervention, Robotics and Production Facilities segments. We recently sold our remaining Subsea Construction vessels and related equipment (Note 2). Information regarding our former Oil and Gas segment is presented under "Discontinued . . .

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