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HLX > SEC Filings for HLX > Form 10-Q on 23-Apr-2014All Recent SEC Filings

Show all filings for HELIX ENERGY SOLUTIONS GROUP INC

Form 10-Q for HELIX ENERGY SOLUTIONS GROUP INC


23-Apr-2014

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 are subject to change;
statements relating to the construction, upgrades or acquisition of vessels or equipment and any anticipated costs related thereto, including the construction of the Q5000 and the Q7000 and the construction of two chartered vessels, which are expected to be delivered in 2016 and used in connection with our contracts to provide well intervention services offshore Brazil (Note 12);
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:


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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 or chartering of new vessels for our well intervention and robotics fleet, including the Q5000 (expected in 2015), the Q7000 (expected in 2016), the Grand Canyon II and the Grand Canyon III (both expected in 2015);
unexpected delays in the delivery of the chartered vessels to be used to perform recently contracted work in Brazil;
unexpected future capital expenditures (including the amount and nature thereof);
the effectiveness and timing of completion of our vessel upgrades and major maintenance items;
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;
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 2013 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

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. We have substantially finalized this process with the sale of ERT in February 2013, the sale of our two remaining pipelay vessels in mid-2013 and the sale of our Ingleside spoolbase in January 2014 (Note 2). As such, we believe that we are now positioned for growth and expansion in our well intervention and robotics operations.

Our focus is on expanding 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. Our well intervention fleet has expanded with the newly converted well intervention vessel, the Helix 534, which was placed in service in February 2014. Our well intervention fleet will further expand following the completion of the two newbuild semi-submersible vessels currently under construction, the Q5000 and the Q7000, and the delivery of two newbuild chartered monohull vessels in connection with the well intervention service agreements which we entered into with Petrobras in February 2014. In addition, we are expanding our robotics operations by acquiring additional ROVs and trenchers as well as chartering two newbuild ROV support vessels, the Grand Canyon II and the Grand Canyon III, both of which are expected to be delivered in 2015.


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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. The performance of our business 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;
the effect of regulations on offshore Gulf of Mexico oil and gas operations;
actions taken by the Organization of 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;
environmental and other governmental regulations; and
domestic and international tax policies.

The world economy appears to be continuing at a generally slow but steady pace of growth. The economic news out of Europe has been generally favorable over the past six months, which should be a positive development for us given our substantial Well Intervention and Robotics operations in the North Sea region. However, any future news suggesting weak or declining economic data could affect global equity and commodity markets, which could affect normal business activities. Weaker global equity and commodity markets could potentially reduce investment in offshore oil and gas capital projects, which may affect rates that drilling rig contractors can charge for their services. However, whereas rig rate reductions have been widely forecasted within the industry over the past two quarters, we believe that our existing backlog of work and the type of services we perform should make us less susceptible to these potential developments regarding rig contractors. We believe that capital would be less likely to be expended on the beginning of offshore projects, for example for exploration drilling projects, rather than those that span the life of an oil and gas field's production. Our Well Intervention and Robotics operations are intended to service the life span of an oil and gas field as well as to provide abandonment services at the end of the life of a field as required by governmental regulations. Over the longer term, fundamentals for our business remain favorable as the need for 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 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 we entered into a new set of substantially similar agreements with the operators who formed HWCG LLC, a Delaware limited


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liability company comprised of some of the original CGA members as well as other industry participants to perform the same functions as CGA with respect to the HFRS. These new agreements became effective April 1, 2013, and have a four-year term.

RESULTS OF OPERATIONS

We have four business segments: Well Intervention, Robotics, Subsea Construction and Production Facilities. Our Subsea Construction activities have significantly diminished following the sale of substantially all of our remaining assets related to this reportable segment, including the sale of our Ingleside spoolbase in January 2014. 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 the three-month period ended March 31, 2013 in this Quarterly Report on Form 10-Q.

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

Continuing Operations

We seek to provide services and methodologies that we believe are critical to developing offshore reservoirs and maximizing production economics. We operate primarily in deepwater 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). As of March 31, 2014, our services had backlog of $2.9 billion, including $646.8 million expected to be performed over the remainder of 2014. The substantial majority of our backlog is associated with our Well Intervention and Production Facilities business segments. As of March 31, 2014, our well intervention backlog was $2.5 billion, including $433.3 million expected to be performed over the remainder of 2014. This includes a five-year contract with BP to provide well intervention services with our Q5000 semi-submersible vessel once its construction is completed (expected in 2015) and four-year agreements with Petrobras to provide well intervention services offshore Brazil with two chartered newbuild monohull vessels (both expected to be placed in service in 2016). Our Production Facilities segment reflects the results associated with the HP I as well as our equity investments in two Gulf of Mexico production facilities (Note 5). Backlog for the HP I totaled approximately $164.7 million at March 31, 2014. In connection with the sale of ERT, a revised fee arrangement for usage of the HP I at the Phoenix field was agreed upon with the acquirer of ERT. Under the terms of this arrangement, ERT pays us a lower fixed annual demand fee; however, ERT also pays 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 also provide that the HP I will continue to provide service to ERT's Phoenix field through at least December 31, 2016. 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.

Discontinued Operations

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

Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined by the SEC as a numerical measure of a company's historical or future performance, financial position, or cash flows that includes or excludes amounts from the most directly comparable measure 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


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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 net income (loss) from continuing operations plus income taxes, depreciation and amortization expense, and net interest expense and other. 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 and thus is added back to net income (loss) from continuing operations.

In the following reconciliation, we provide amounts as reflected in our accompanying condensed consolidated financial statements unless otherwise footnoted. This means that these 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 the gain or loss on the sale of assets from continuing operations.

Other companies may calculate their measures of EBITDA and Adjusted EBITDA 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 (loss) from continuing operations to EBITDA from continuing operations and Adjusted EBITDA from continuing operations is as follows (in thousands):

                                                   Three Months Ended
                                                        March 31,
                                                    2014          2013

Net income from continuing operations            $   54,222     $  1,334
Adjustments:
Income tax provision                                 20,417          443
Net interest expense and other                        5,293       14,007
Loss on early extinguishment of long-term debt            -        2,882
Depreciation and amortization                        24,726       24,380
EBITDA from continuing operations                   104,658       43,046
Adjustments:
Noncontrolling interests                               (661 )     (1,015 )
Gain on sale of assets                              (11,496 )          -
ADJUSTED EBITDA from continuing operations       $   92,501     $ 42,031

Comparison of Three Months Ended March 31, 2014 and 2013

The following table details various financial and operational highlights for the
periods presented (dollars in thousands):

                             Three Months Ended
                                  March 31,             Increase/
                             2014          2013        (Decrease)
Net revenues -
Well Intervention          $ 159,700     $ 106,332     $    53,368
Robotics                      87,890        64,196          23,694
Subsea Construction              358        27,526         (27,168 )
Production Facilities         23,140        20,393           2,747
Intercompany elimination     (17,516 )     (21,018 )         3,502
                           $ 253,572     $ 197,429     $    56,143


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                                            Three Months Ended
                                                 March 31,             Increase/
                                             2014          2013       (Decrease)
Gross profit -
Well Intervention                         $   52,789     $ 39,280     $    13,509
Robotics                                      13,345        2,116          11,229
Subsea Construction                              207        3,891          (3,684 )
Production Facilities                         11,536       11,349             187
Corporate and other                             (833 )     (2,349 )         1,516
Intercompany elimination                      (1,198 )     (1,720 )           522
                                          $   75,846     $ 52,567     $    23,279

Gross margin -
Well Intervention                                 33 %         37 %
Robotics                                          15 %          3 %
Subsea Construction                               58 %         14 %
Production Facilities                             50 %         56 %
Total company                                     30 %         27 %

Number of vessels (1) / Utilization (2)
Well Intervention vessels                       5/91 %      3/100 %
ROVs                                           58/73 %      55/55 %
Robotics vessels                                5/80 %       5/69 %
Subsea Construction vessels                      0/0 %       2/90 %

(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/
                           2014          2013       (Decrease)

Well Intervention       $    5,461     $  3,829     $     1,632
Robotics                    12,055       12,199            (144 )
Subsea Construction              -          317            (317 )
Production Facilities            -        4,673          (4,673 )
                        $   17,516     $ 21,018     $    (3,502 )

Intercompany segment profit is as follows (in thousands):

                          Three Months Ended
                               March 31,             Increase/
                           2014          2013       (Decrease)

Well Intervention       $      (62 )    $   (19 )   $       (43 )
Robotics                     1,304        1,625            (321 )
Subsea Construction              -          158            (158 )
Production Facilities          (44 )        (44 )             -
                        $    1,198      $ 1,720     $      (522 )


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In reviewing the discussion below of our results of operations, please refer to the tables above and Note 11 for supplemental information regarding our business segment results. This discussion specifically refers to our Well Intervention, Robotics and Production Facilities segments. We sold our remaining Subsea Construction vessels in mid-2013 (Note 2).

Net Revenues. Our total net revenues increased by 28% for the three-month period ended March 31, 2014 as compared to the same period in 2013. Net revenues for our business segments increased in the comparable year over year periods, reflecting the addition of vessels in our Well Intervention business, the increased number of assets and asset utilization within our Robotics segment, and the higher revenues associated with the revised fee arrangment for the HP I in the Phoenix field. Our Subsea Construction revenues decreased reflecting the sale of our pipelay vessels in mid-year 2013.

Our Well Intervention revenues increased by 50% for the three-month period ended March 31, 2014 as compared to the same period in 2013 reflecting the addition of a chartered vessel, the Skandi Constructor, in April 2013 and the Helix 534 being placed in service in the Gulf of Mexico in February 2014. Our vessels had substantially full utilization during the first quarter with the exception being the Well Enhancer that went into regulatory dry dock in mid-December 2013 and returned to service in late January 2014. We expect that our Well Intervention vessels will continue to experience high utilization over the remainder of 2014. Two of our well intervention vessels are currently scheduled for dry dock in the fourth quarter of 2014. The Skandi Constructor is scheduled for its normal regulatory dry dock, which should take approximately 30 days. The Seawell is scheduled for both normal regulatory dry dock and certain capital upgrades during its dry dock, which is expected to last approximately 120 days. Upgrades to the Seawell are intended to extend the vessel's useful economic life.

Robotics revenues increased by 37% during the three-month period ended March 31, 2014 as compared to the same period in 2013. The increase primarily reflects the addition of three ROVs to our fleet and the significantly higher utilization of our ROVs and trenchers. Our trenching activities, primarily conducted in the North Sea region, are expected to increase during 2014 as compared to the extraordinarily weak market that was experienced in 2013.

Our Production Facilities revenues increased by 13% for the three-month period ended March 31, 2014 as compared to the same period in 2013, which reflects an increase in our total revenues under the new fee arrangement for the HP I. The quarterly HFRS retainer fees also increased effective April 1, 2013 as a result of new four-year agreements.

Gross Profit. Our total gross profit increased by 44% for the three-month period ended March 31, 2014 as compared to the same period in 2013. The gross profit associated with our Well Intervention segment increased by 34% for the three-month period ended March 31, 2014 as compared to the same period in 2013 . . .

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