Helix Energy Solutions Group, Inc. (HLX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Helix Energy Solutions Fireside Chat Call. I would now like to hand the call over to your speaker today, Ken Neikirk, Senior Vice President, General Counsel.

Thank you. During this call, we anticipate making certain projections and forward-looking statements based on our current expectations. All statements in this call, other than statements of historical facts, are forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual future results may differ materially due to a number and variety of factors, including those set forth in our most recently filed 10-K, other filings with the SEC and our recent press releases. I'll now pass it over to Ian MacPherson with Simmons.

Thanks, Ken. Good afternoon. Thanks, everyone, for joining us today for this conversation with Helix. Helix, as you know, is a global offshore services company and a market leader in deepwater well intervention and subsea robotics. These are businesses, which are fortunately not only a great distance removed from the immediate and unprecedented collapse that's unfolding across U.S. shale industry, but ultimately, one could imagine the brownfield deepwater markets emerging possibly as a net beneficiary of the impairment to U.S. onshore production. But obviously, between here and there, there's no exemption for any oil service company from the collapse in oil prices that we're seeing, and we see that in States and the Helix share price. So we are grateful to be joined today by the senior leadership team, including CEO, Owen Kratz; CFO, Erik Staffeldt; and COO, Scotty Sparks, for his timely update on their business. So Owen, before we delve into the Q&A, let me just please invite you to offer some opening remarks and provide an overview for us.

All right. Thanks, Ian. First of all, we hope everyone out there and their families are staying safe. These are certainly strange times that we're living in. I think most of us onshore have been working from home for a few weeks now, but I first wanted to thank our employees. Our onshore teams around the world are telecommuting in all of our offices, and that's got its own challenges that we, like everyone else in the industry, are managing. But a very special thanks to our offshore personnel working around the world. We're operating 13 vessels in 7 countries on 4 continents. Offshore is a challenging environment on a good day, and we recognize the extra efforts of our teams. And they're the ones that really keep us going, so sincere thanks to all of you out there. Moving on to a bigger picture though, between a global health pandemic and a crash in oil prices, it's certainly a different world than 30 days ago. Ours has always been a cyclical industry, and we've dealt with peaks and valleys before. Helix has been a company of innovation, adaptability and resourcefulness. We provide essential services to the energy sector, including enhancement, P&A and maintenance, but we're also diversified beyond pure energy plays. In terms of the big picture, we're still operating. Thus far, we've avoided major interruptions, and most of our current contracts are moving forward as planned, but nobody is immune to the pandemic. And today, we'll try and speak to some of the measures we've taken to fully cover ourselves operationally. We've run stress testing on our models. And financially, we still see we'll be free cash flow positive for 2020. And barring significant changes, we expect that to be the case for 2021 as well. Today, we'll share some thoughts on how this is all impacting our near-term operations and planning the expectations for the market, including the renewals and how specifically we're adjusting. The current environment is hitting everyone, as I said, very hard. That includes us. But we feel we're in a good place operationally and financially to meet the challenge.

Good. Thanks, Owen. So I think you just started to address this a little bit. But first -- things first. How is everyone on the team there doing? How are you all handling this new environment that we're in?

Well, at Helix, we're sort of taking the mantra that health and safety are paramount, of course. We've had a number of symptomatic occurrences. We'd put our protocols in place at the end of February. But we treat every sign of symptoms seriously and treated as if it is a COVID case. All of these tests so far turned out negative until about day before yesterday. This week, we are dealing with an issue on 1 vessel and 1 rig. And we believe that most commercial operators have the same situation or worse, and we're communicating and collaborating with the other contractors and producers to understand what they're doing and the best methods that are proven effective in dealing with it. The responses from the industry, I'd say, are pretty similar to how it's been approaching other communicable diseases in the past. For example, isolation using quarantine, keep moving individuals and using deep cleaning in order to keep operational. We've stepped up these health protocols though, adding not only to the standard best practices, but we've also been incorporating those of customers and implementing additional personnel protocols, including travel guidelines, advance mobilization, quarantine prior to boarding a vessel, longer crew rotations in the country. But I think Scotty can give you probably a little more detail on exactly what we're doing. Scotty?

Yes. We've put many protocols in place, travel restrictions, no group travel, examinations prior to travel, examinations at heliports or crew change locations. On the vessels, we're doing our best to follow similar conditions to being onshore, social distancing, reduced manning in the mess room, wearing PPE. We've closed common areas such as the gyms, the lounges and cinemas, deep cleaning of all common work and accommodation areas is frequently undertaken. As Owen mentioned, we've had a number of incidents of personnel shown symptoms, and they immediately were quarantined and taken off the vessel as soon as possible. We take any signs of any symptoms immediate action and plan to isolate and remove concerns.

Thanks, Scotty. When we were chatting ahead of this, I was curious how the concept of social distancing could functionally happen on an offshore vessel and it strained my imagination that it could. But as you've laid it out, it sounds like you are indeed practicing social distancing while maintaining full operational capability, which I think -- to me, that was a positive revelation and something that I've been struggling with. So I know that's not easy to cope with. They're also additional logistical challenges, your transports on an offshore, and the quarantine processes, there's a cost to all that. Have you -- can you share with us some perspective on the sharing of those costs between Helix and your customers and how you think that might unfold over time?

Yes. I have been thinking that's quite a nice rounded question. It depends which client we're working for. Some clients are being very pragmatic and working with us and we're following their protocols and they're paying for some of the crews to do some of the quarantines. In other places where we've decided to quarantine, those costs are landing on us. But again, our durations offshore are much longer now. We've extended durations for the offshore staff, and that means our travel costs have come down, so there's a bit of an offset there also.

And what about your supply chains? Have you experienced any debilitating bottlenecks there? Are you still able to get materials and people that you need to in a timely fashion or has that been a frustration?

No. Our supply chain has been very good. Obviously, any of the guys that go offshore are following all the protocols that we have put in place. They're tested as well, if we can. They have medical exams before they come on. So everything we're doing for our offshore guys happens to our supply chain and subcontractors. And so far, our vessels are very well stacked with spare parts and each vessel has 2 ROVs, that sort of thing, so we're managing through it quite well.

Ian, I might just add, just like everyone else in the world right now, we're getting our hands on test kits. Rapid test kits would be a real game changer for absolutely keeping the vessels clean. That's been a real challenge. But I think Scotty and our supply chain, I just want to tip my hat to them because they have been able to start locating tests, and that's something that we are going to be implementing going forward.

Good. Well, so in addition to the health pandemic that we're all coping with, you're seeing, you have this double whammy, because you have the collapse in your oil market. What are you seeing so far with respect to your clients' reactions to the new oil price? And what that means for current contracts? And what that means for the contract environment looking forward?

Well, as I said earlier, the -- in terms of the contract -- the current contracted work, it's continuing, right now. We do expect the market for the remainder of the year to be significantly weaker than the previous forecast that we put out. And right now, we're expecting that weak spot market to continue into 2021. We haven't had any outright cancellations of contracted work, but some of the work that was planned to be done has now been deferred. Some of it to Q4 and some of them into 2021. And I'm sure we're going to experience requests for rate reductions from some, if not most operators. And we've been strategizing about how to respond with maybe creative terms that work for both parties as well as hopefully promoting their decisions to seek approvals on projects ahead.

While we've seen prior downturns, your utilization across the assets that are in your fleet today, it's been a lot more resilient than that of, say, an offshore driller, for example. So you've experienced the cyclicality of pricing, but you've not dropped to the depths of hell with utilization. Do you think that the prior downturns that we witnessed are a reasonable template for how your utilization could net out over the next couple of years? Or is it too early to comment on that?

Well, I think it's too early to comment on exactly in detail what it will look like, but I think there's some generalizations you can draw. As I mentioned before, the spot market, of course, is expected to be weak for the foreseeable future. But we -- the last time we -- and throughout this downturn, we've been competing with rig overhang. Producers with commitments to rigs, and they view that as a sunk cost, which is impossible for us to compete with. But the rig pools and long-term contracts that hurt us in 2016, we expect to see less of that this time. So diminished rig capacity and impending debt issues for the drillers could provide some rate support for us this time around versus the last time. Our expectation is that without the rig overhang and clients' abilities to not be constrained by these sunk costs, that I think we're going to be a little more attractive this time around. But -- and remember, intervention is not -- it's not CapEx. We fall under the OpEx budgets. So we're a little less sensitive to the CapEx cuts being announced. Also intervention is the lowest cost incremental per barrel that a producer can reach out for. And it's also, most importantly, essential to the maintenance of existing wells. You just have to do a certain amount of intervention. So that's on the current producing well side. On the -- but lower commodity prices also mean that these fields are going to start reaching their noncommercial status sooner. Now that -- you would think that, that would advance the P&A work potentially, although I'd expect to see leniency from the regulatory bodies on P&A. But if producers start to fail, then I think you do see an uptick in the P&A work. We are differentiated from rigs by our efficiency, so I think that's a value proposition that won't be ignored. And I think that the diminishing rig overhanging capacity plus the likelihood that rigs will be cold stacked this time versus warm stacked and marketed makes a big difference. No one can predict when this will end, but we've really tried to take a long hard look at stress testing the models and with the assumption that oil supply could see excess continues all the way through 2021.

Thanks, Owen. I wanted to ask, Scotty, just with regard to regional operational vagaries. I mean you have operations all over the planet and your business model might be consistent, but different jurisdictions are being presented with different challenges at different points in time on the calendar. So can you talk to us about what you're seeing with regard to different reactions in different geographic markets and maybe across different sections of the customers between IOCs and NOCs or Petrobras specifically and independents? Just any particular differences that stand out across regions and across customer mix?

I think what I should do is just give you an overall operational update and that will show you where the vessels are and which regions we're working and how we're getting on here. So currently, as Owen said, we're operational with all vessels that include 7 well intervention vessels, 6 ROV and support vessels, plus the HP1. We're currently working in 6 countries on 4 continents. And I have to say in this climate, I'm quite proud that we've managed to do that. So in the Gulf of Mexico, the Q4000 is currently on higher and expected to remain on higher for the first quarter. The Q5000 has just finished up 2 projects with 2 clients. Both of those were intervention jobs, and it's now contracted from April through to the end of the year with BP. We're currently mobilizing the rig to start work for BP. The HP1 is operational under its long-term contracts. And the charted Ross Candies is currently on a 120-day projects, that's holding. In Brazil, the Siem Helix 1 are operating at their usual high standard. We continue to be ranked as the #1 drilling contractor in Brazil. And the majority of the work that they're undertaken there is intervention work to get barrels out of the ground. In West Africa, the current work for the Q7000 is going to continue into mid-April. The follow-on campaigns are currently on hold and being discussed to reenergize those campaigns in Q3 or Q4. And we're planning to potential work in Australia in 2021. In the U.K. North Sea, the Well Enhancer is currently working for a major, and then it's contracted into Q3. The Seawell is currently working for another major and then has a gap in May. We've got the potential from a couple of clients to fill that gap when it is contracted into Q3. The GC III is currently on hire and commences its mobilization for the trenching works that we have planned for the year. The vessel's contracted through November working on renewable energy projects. The chartered GloMar WAVE is contracted since December, and we're working in renewable energy projects until July. Similarly, the Kristiansand is contracted since December, and we're working in renewable energy projects through to November. In the Asia Pacific region, the GC II is contracted all year. And the Ebb Tide project is contracted for an approximate 60-day salvage project in Australia. It goes without saying that our operations have been disrupted. And offshore, few changes or challenges have been magnified. But so far, we're really proud that we've risen to the occasion.

That's great. Thank you, Scotty. I wanted to bring Erik into the conversation. Erik, just with regard to the financial outlook. You did reasonably withdraw your 2020 guidance recently. Can you just talk us through that process and what it means for expectations for this year to the extent that you're willing to quantify?

Yes, that's correct, Ian. We withdrew our guidance for 2020, I think, at the end of March. We were in a position where the impact of COVID-19 on the demand side of the oil market, compounded by the price war or market share war on the supply side, that completely eroded the foundation of the spot market that we saw developing for 2020. Since then, we've been attempting to estimate the full impact of these events, and we'll continue to work to gather intelligence on a continued basis, but we felt it was the right time for us to withdraw our guidance for 2020.

It sounds like, thus far, what we've seen is a change in the outlook for the spot market, perhaps we might look one chess move forward and expect that there could be some revision to day rates on your term contracts, although that's probably not established yet. I don't mean to put words in your mouth, but I think that's what I've inferred from your prior comments. But you had -- you did earlier profess to expect to maintain positive free cash flow for this year and, hopefully, for next year as well. Are you adjusting your CapEx lower as an agreed that or otherwise, what supports your confidence for positive free cash flow?

Yes. From a free cash flow, we did state in our press release that we expected to be free cash flow positive in 2020. I think to try to clearly express the level of activity that we expect in this market, I think we have a combination of work under contract and really the nature of the services that we provide, we expect to be free cash flow positive in 2020 and in 2021, too. We really focused on positioning the company to generate cash flow. We've generated free cash flow since 2018, while in the midst of a capital program. But we really work to position the company to have a much lower capital requirement starting now in 2020 with the ability to generate significant free cash flow going forward. So the market is throwing us a curveball, but I think you can say that we expect to generate free cash flow.

Erik, I'll jump in and just mention also on the CapEx side, we have reduced our capital spending even further. As you know, Ian, we finished our build program. So we were expecting a tremendous decline in CapEx spending. We have further cut CapEx spending for this year by about 25%. Next year, it will be even lower. With regard to cost cutting, we were pretty lean coming out of the last downturn. And as we've mentioned, we're still operational around the world, and we suffer a little inefficiency by working from home. So right now, we're still at full strength, but we do have contingency plans in place for reducing our cost structure as and when the work volume drops off.

And so to clarify the numbers there, CapEx which had been at $135 million, $140 million per year with the build program in place, the past couple of years, had previously been guided to $50 million-ish for this year. So we take that 25% lower to around 40%, and then we expect that 40% to decline next year. That's the right math?

That's right.

Okay. Good. Let's briefly touch on the balance sheet, Erik. So you had at year-end, net debt of around $140 million. You had the $200 million plus of unrestricted cash and then $263 million total cash. Can you talk to us about how you view the status of the balance sheet for now and whether you believe you need or desire access to capital markets and if that access exists?

Okay. I think -- Ian, I think, we have been very vocal for some time now that we can desire to delever the company and maintain a high level of liquidity and really position the company to manage the cyclical nature of our business. With the completion of our capital expansion program, we feel that we positioned the company to generate free cash flow. The challenges that we're currently facing will impact the level of free cash flow we generate, but should not impact whether we generate free cash flow. With lower interest expense and lower capital spend requirements, we expect to be free cash flow positive going forward. We do have debt maturities over the next couple of years, $140 million. With the cash that we generate and our cash on hand, we fully expect to manage these maturities. And as we look to '22 and '23, with our expected free cash flow generation and cash on hand, we expect to manage these maturities with the ability to either pay off and refinance all or a portion of those maturities. Now you did mention the capital markets. And I think it's -- energy in general has been a tough sell here in the relatively near term. We've had several disruptions over the last 10 to 15 years. In addition to the current environment we're in, we've had the financial crash of '08 and then the oil crash of '14. And in both those previous instances, the capital markets did eventually open up to energy companies like ours. It took a while, but the markets came back. However, in addition to the, could say, capital markets, there are other options, including bank debt or private debt and others. But I think it's important to understand we're positioning the company to -- with lower debt, and we'll continue to do so over the next couple of years. And as long as we continue to generate free cash flow, we believe we'll have access to the liquidity to manage our business. We do have world-class assets that generate free cash flow.

Thanks, Erik. Owen, do you think that this crisis in the market will stimulate consolidation or acquire perhaps M&A that's a little bit farther afield within the offshore services industry. And do you think that makes sense? How do you view the M&A landscape in this new world that we're in?

Well, things have definitely changed in the last 30 days. The immediate landscape for M&A is, I'd say, on hold. There's obviously value in M&A, but there's a lot of distressed companies out there and some analysts predict as many -- as much as 40% of the OFS industry providers may go bankrupt. On the brighter side, I think this creates a much leaner industry, but I think things have to stabilize a bit and see what happens on the OFS companies' ability to meet their debt obligations. There'll definitely be winners and losers here. Our focus right now is to take steps to make sure that we emerge out of this period as one of the strong winners. And focusing on getting through this, I think, is the first priority. And then once we're -- we see light at the end of the tunnel here, that I think then there'll be opportunity to assess the M&A market, but not now.

Okay. That's perfectly clear. Just to wrap up the conversation. Owen, you've been through a lot of these cycles, you've seen the extreme ups and downs as many as anyone. Can you just provide your historical perspective on where we are today relative to what you've seen before and how you think Helix is positioned to weather the storm?

Well, you're right. I've been around for quite a while now and been through a lot of the cycles here, and it's a very cyclical industry. But not only have I been here a number of times before, we also have a seasoned management team right now that just came through this last downturn together, and I think we managed it fairly well. Our business model intentionally focuses on life field services, which are sort of downstream. As I mentioned earlier, it's under OpEx. So that was by design because it is a little less impacted by downturns. We've made the CapEx cuts and all of this was a considered decision in building our business model. I think it's fair to point out also that our services are really unique. We really don't have any peers. We're in subsea production enhancement, while maintenance P&A -- remember, we're one of only two providers of the containment solution for the Gulf of Mexico for the offshore drillers and producers. And we've also made some pretty significant steps in diversifying into non-oilfield and diversifying our robotics group. So I think most producers would want us to be around for a while. We've got a proven track record. And we're -- we've shown in the past that we're pretty innovative. I mean we haven't talked today about DAA and what we -- the potential of what we could do on the production side. But that's a perfect example of how we were able to be creative coming out of the last downturn. And I think there's ways of generating value for our customers along those lines. I expect we will emerge on the other side of the cycle into a leaner industry. Well, we have the cash flow and the balance sheet, and we're looking closely at our modeling. I think that's about what we can say for today. But just to say, we do have an earnings call coming up in a couple of weeks. And this is a fast-changing environment, and we're looking very closely at it, and we should be able to provide some greater detail in a couple of weeks.

Well, with that, thank you very much, Owen. Thank you, Erik, and Scotty as well for illuminating these points today. It's good to hear that you're coping personally and as a business, and we do look forward to hearing more from you as we all continue to learn day-by-day and week-by-week, how things are evolving. So with that, we'll wrap the call. Thank you again, and we'll talk to you soon.

Thank you, Ian.

Thanks, Ian.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.