Helix Energy Solutions Group, Inc. (NYSE:HLX) Q1 2024 Earnings Call Transcript

Helix Energy Solutions Group, Inc. (NYSE:HLX) Q1 2024 Earnings Call Transcript April 25, 2024

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Operator: Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2024 Helix Energy Solutions Group Incorporated Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Brent Arriaga, Chief Accounting Officer. Please go ahead.

Brent Arriaga: Thank you. Good morning, everyone. And thanks for joining us today on our conference call for our first quarter 2024 earnings release. Participating on this call for Helix today are Owen Kratz, our CEO; Scotty Sparks, our COO; Erik Staffeldt, our CFO; Ken Neikirk, our General Counsel; and myself. Hopefully you’ve had an opportunity to review our press release and the related slide presentation released last night. If you do not have a copy of these materials, both can be accessed through the Investor page on our website at www.helixesg.com. The press release can be accessed under the Press Releases tab and the slide presentation can be accessed by clicking on Today’s Webcast icon. Before we begin our prepared remarks, Ken Neikirk will make a statement regarding forward-looking information. Ken?

Ken Neikirk: During this conference call, we anticipate making certain projections and forward-looking statements, based on our current expectations and assumptions as of today. Such forward-looking statements may include projections and estimates of future events, business or industry trends, or business or financial results. All statements in this conference call or in the associated presentation, other than statements of historical fact, 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 from our projections and forward-looking statements due to a number and variety of risks, uncertainties, assumptions, and factors, including those set forth in Slide 2 of our presentation and our most recently filed annual report on Form 10-K, our quarterly reports on Form 10-Q and in our other filings with the SEC.

You should not place undue reliance on forward-looking statements and we do not undertake any duty to update any forward-looking statement. We disclaim any written or oral statements made by any third-party regarding the subject matter of this conference call. Also during this call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slides of our presentation provide reconciliation of certain non-GAAP measures to comparable GAAP financial measures. These reconciliations, along with this presentation, the earnings press release, our annual report on Form 10-K and a replay of this broadcast will be available under the For The Investor section of our website at www.helixesg.com. Please remember that this conference call speaks only as of today, April 25, 2024, and therefore, you are advised that any time-sensitive information may no longer be accurate as of any replay of this call.

Scotty?

Scotty Sparks: Thanks, Ken. Good morning, everyone. Thank you for joining our call today. We hope everybody is doing well. This morning, we will review our first quarter highlights, financial performance and operations. We’ll provide our view of the current market and an update of our guidance for 2024. Moving on to the presentation, Slide 6 and 7 provide a high-level summary of our results and key highlights for the quarter. The team’s offshore and onshore outperformed again, safely producing another very well executed quarter, considering the seasonal winter months. Revenues for the quarter were $296 million with a gross profit of $20 million compared to $15 million in Q1 of 2023. Our net loss was $26 million, primarily driven by pretax losses related to the extinguishment of the remaining convertible notes.

Adjusted EBITDA was $47 million for the quarter, and operating cash flow was $64 million, resulting in a free cash flow of $61 million, both results representing significant improvements over Q1 of 2023. During the quarter, we extinguished the remaining 2026 convertible notes, resulting in a $21 million loss. This completes the restructuring of our debts initiated in Q4 of 2023, and we are happy to have established a simplified more traditional debt structure without the impact of equity overhang. Our cash and liquidity remain strong with cash and cash equivalents of $324 million and liquidity of $419 million. Highlights for the quarter include: strong results in well intervention across all regions, commencement of Australia operations on the Q7000, restoration of production on the Thunder Hawk wells, and on the sales front, the HWCG contract auto renewed through March of 2026.

And as previously announced, we were awarded a 12 month extension with Trident in Brazil for the SH1 and secured a minimum six month contract for the Q4000 in West Africa at favorable economics. Over to Slide 9. Slide 9 provides a more detailed view of our segment results and segment utilization. In the first quarter of 2024, we continued to operate globally with minimal operational disruption with operations in Europe, Asia Pacific, Brazil, Africa, the Gulf of Mexico and the U.S. East Coast. Our first quarter results were overall inline with expectations, driven by our core Well Intervention markets globally with robotics and shallow water abandonment results impacted by seasonal winter weather. Slide 10 provides further detail of our Well Intervention segment.

Considering the seasonal winter months, and regulatory document. At Well Enhancer, we achieved second half utilization in North Sea in Europe, Gulf of Mexico and Brazil, performing very well with solid overall upside efficiency of 98.8% for the quarter. Q7000 performed extremely well with 100% utilization working in Australia. The vessel is expected to continue working in Australia until the second half of this year and then commence transit to Brazil for the shell decommissioning campaign. Well Enhancer completed its scheduled regulatory drydock over 54 days in the quarter. Moving to Slide 11. Slide 11 provides further detail of our robotics business. Robotics had a good quarter considering the seasonal winter months. The business performed at high standards, operating six vessels during the quarter, working between trenching, ROV support and site survey work on renewables and oil and gas related projects globally.

All six vessels worked on renewables related projects within the quarter. The Grand Canyon II had lower utilization due to spending a good portion of the quarter, having fuel saving battery equipments permanently installed into the vessel that should lower fuel costs and emissions going forward. We have now commenced the trenching seasons globally and expect high utilization for the rest of the year across the fleet, which we anticipate will lead robotics to have another strong year. Slide 12 provides detail of our shallow water abandonment business. Q1, as expected, had low utilization, primarily due to seasonal weather patterns in the shallow water Gulf of Mexico, with several of the vessels and spreads in stack mode for the winter, as well as a general near-term softening in the shelf abandonment market.

In Q2, with the better conditions, we should activate more of the vessels and spreads from the winter stacking mode and back into operations. Also in Q2, we will recommence work back on the larger full field decommissioning projects after the winter break, with the project scheduled to utilize the Epichedran heavy lift barge, some of the dive vessels, support vessels and P&A spritz. In summary, other than the slow start to our shallow water operations, we are pleased with our start to 2024, with year-over-year improvements in our overall results. Our business segments are poised to benefit from expected increase in activity during Q2 and Q3, and I would like to thank our employees for their efforts and high level of execution. Delivering safe efficient operations for our customers has established us as a leader in our industry.

Thank you. I will now turn the call over to Brent.

Brent Arriaga: Thanks, Scotty. Moving to Slide 14. It outlines our debt instruments, key balance sheet metrics as of March 31st. During Q1, we retired our remaining convertible securities and have simplified our capital structure. Our funded debt at quarter end was $328 million. At quarter end, we also had cash of $324 million and availability under our ABL of $96 million, with resulting liquidity of $419 million. We had negative net debt of $6 million at quarter end. Following the end of the quarter, we settled the earn-out related to the Alliance acquisition, paying cash of $85 million, which reduced cash and liquidity and increased net debt by the same amount. I’ll now turn the call over to Eric for a discussion on our outlook for 2024 and beyond.

Erik Staffeldt: Thanks, Brent. Based on our first quarter performance and the continued strength of the offshore energy markets. We’re maintaining guidance of certain key financial metrics from our forecast. Revenue in the $1.2 billion to $1.4 billion range, essentially flat to slightly positive from last year EBITDA in the $270 million to $330 million range with slight improvements over ’23, specifically in our Well Intervention, partially offset by the softer shallow water band in the market. Free cash flow $65 million to $115 million, once again impacted by the earn-out payment that we made in early April of approximately $58 million. Capital spending in the $70 million to $90 million. Once again, this is a mix of regulatory maintenance on our vessels and fleet renewal for our robotics ROVs. Moving on to Slide 17.

The Well Enhancer completed its 54 day drydock in Q1. The HP-1 is currently mobilizing to its scheduled drydock. Q7000 will have a maintenance period during its move in Brazil. Our CapEx forecast continues to be weighted towards regulatory maintenance, which primarily falls into our operating cash flows. Reviewing our balance sheet, our funded debt stands at $320 million, reduced by the extinguishment of the 2026 convertible notes. Our next significant maturity is not until 2029. We are currently targeting $20 million to $30 million of share repurchases in our 2024 program with $5 million completed in Q1. Our quarterly financial performance in ’24 is expected to follow a similar cadence as our results in ’23, with the second and third quarter likely being our most active quarters and first and fourth quarters impacted by winter weather.

Overall, we expect the second half to be stronger than the first half. We generated relatively strong first quarter free cash flow and we expect a weaker free cash flow in Q2 with the Alliance earn out payment. With the seasonal quarterly impact and the impact of the earn-out payment, the timing of our free cash flow likely to skew to the second half of the year. Providing complete assumptions by segment and region starting on Slide 18, Well Intervention, the Gulf of Mexico continues to be a very strong market supported by the improving rates and expected strong utilization on the Q4000 and Q5000. Q5000 has contracted to work in every quarter of this year with limited white space to fill in that schedule. The Q4000 is contracted to work into Q2 for Gulf of Maxico, the Vessel is scheduled to transit to West Africa for a minimum 6-month contract in Nigeria with a paid mobilization and demobilization in the UK North Sea.

We expect good utilization for most of the year. The Well Enhancer has contracted work through Q3. The seawall is currently working in the Mediterranean before being scheduled to return to the North Sea for contracted work. We are anticipating a return to seasonally adjusted utilization in the winter months in the North Sea. Q7000 is working in Australia with projects scheduled for three different operators. The projects are expected to continue to mid-year, followed by scheduled transit to Brazil and mobilization first contracted work in Brazil. In Brazil, the Siem Helix 2 is contracted into mid-December of 24 with Petrobras. The Siem Helix 1 is contracted and performing well and will work for Trident into Q4 of 2025. We do expect to benefit from the Trident contract extension at market rate starting in 2025.

Moving to robotics. Segment continues to benefit from tight markets, where oil and gas and renewables markets are extremely active competing for assets. APAC region, we have both the Grand Canyon and CN Topaz supporting renewables projects in Taiwan into the second half of 2024 the CN Topaz, along with our T-1400 Trencher are contracted and expected to remain in Taiwan through mid Q4 of this year. In the North Sea, the Grand Canyon III commenced trenching after completing its battery pack installation in mid-April. It’s expected to have strong utilization into Q4. The North Sea neighbor has contracted trenching projects Q3 and Q4. Glomar Wave is forecasted to have good seasonal utilization performing site clearance operations. The U.S, the Shelia Bordelon, working in the Gulf of Mexico and expected to transit for projects on the U.S. East Coast to provide wind farm support.

Moving to production facilities. HP-1 is our contract with no expected change. We do have variability in production as the Droshky field continues to deplete. The Thunder Hawk field is producing after completion of the well clean out in January. Moving on to Shallow Water Abandonment. After the robust 18-to-24-month period of activity, we’re seeing operators scale back activities to mitigate the impact of winter weather. Following the slower Q1, we do expect the second and third quarters to be very active with potential for competition for assets if and as schedules fill out. We do anticipate this to be a seasonal business with variability in results, depending in part on operator spending, but we remain confident in the long-term outlook for the business, as we believe demand is likely to increase.

At this time, I will turn the call back to Owen for a discussion on our outlook beyond ’24 and for closing comments. Owen?

Owen Kratz: Thanks, Eric. Good morning. Our performance for the first quarter was marginally better-than-planned. Well Intervention and Robotics provided solid year-over-year improvements with production facilities impacted by the workover expense on the Thunder Hawk field. As expected, Shallow Water Abandonment declined, driven by winter weather and customers reassessing the pace of their abandonments. Overall, we’re pleased with our performance and happy to deliver good results. With the solid start to 2024, we’re maintaining our guidance. The overall strength and activity in the energy market continues to support the premise of a multiyear investment cycle in the offshore market. The Well Intervention market continues to show strength, as evidenced by rig activity and rates.

The demand in our Robotics segment benefiting from our geographic expansion in the renewables markets continues to tighten with additional market support from the oil and gas services. The dynamics of supply and demand are working in our favor. The near-term pullback in Shallow Water Abandonment segments are more than offset by the regulatory drivers and current abandonment needs that support the longer-term drivers of market activity. We believe we’re in the right place, the right markets for both the near and long-term. We’d like to think that we’re the best at what we do and we’re looking to capitalize on this overall strong offshore energy market. To provide additional color on our markets and segments, in the North Sea UK sector Well Intervention market, the demand for our services is holding consistent with incremental improvements expected on rates, with the work pretty evenly split between decommissioning and production enhancement.

The variable for us is seasonality of winter work. If work continues in the winter, then there’s potential upside for us. The West Africa Well Intervention market is becoming more significant for us. We’ll be sending the Q4000 to Nigeria, but expected to return to the Gulf for the 2025 season. We’re seeing meaningful demand in West Africa, have only worked in Nigeria, there are significant market expansion opportunities as well for us including in Angola and other countries. We are experiencing year-over-year increasing demand from ’24 to ’25 for the deepwater intervention in the U.S. Gulf of Mexico. We’ll also be looking for improving rates. The Brazilian market for Well Intervention is also very active with demand increasing not only from Petrobras, but from other operators.

The Q7000 is scheduled to be relocating from Australia to Brazil for Shell and we’re in discussions with Petrobras for a multiyear contract on the SH2. All new rates would be at meaningful increases with further potential increases, driven by our efficiencies and a continuation of a tight rig market. Australia and APAC is also another market where we’re seeing increasing demand. All to say that, markets are strong globally and we don’t anticipate having enough supply with our current fleet to meet all the demand. As always, we’re assessing our options to best capture this market. Moving to Robotics, demand is strong and expected to continue for multiple years. We are operating at near full capacity and are looking at our options for increasing capacity marginally.

We are proud of the work we’re doing on the renewables front and our presence in the wind farm market is growing. We now have two vessels working in the wind farm market in Taiwan. We have three vessels working in the EU, including two vessels trenching and one performing site clearance with more demand on the horizon. We’re finalizing a new deal that would add further trenching capacity in the EU as well as potentially deploying another trencher to Taiwan. We’re currently working on the wind farms off the East Coast of the U.S. and we believe we’re just beginning to see the ramp up demand from this market. Our Robotics segment is strong and expect it to continue improving with further upside and potential to deploy capital accretively. It’s an exciting time for that business.

As we’ve communicated, 2023 was a banner year for the shelf and we’re expecting the contribution from shallow water Gulf of Mexico decommissioning market to pull back in 2024. We do expect a robust decommissioning market in the U.S. GoM for years to come with Helix maintaining a significant market share. Our initial expectations for this business was $30 million to $40 million of EBITDA. We believe this business with the current assets could have an approximate $60 million EBITDA full cycle run rate. Our 2023 results may have been an indication that my previous expectations for earnings potential at $70 million was perhaps conservative. Few things are occurring in this market. Our 2023 results significantly benefited from work associated with the Fieldwood bankruptcy, both Apache and Exxon, leading to the extraordinary $86 million of EBITDA in 2023.

This year Apache has indicated their halting work as they reassess their plans. Cox declared bankruptcy in 2023 and we expect that the reverting work will begin towards the end of 2024, adding to demand. Similar to the Fieldwood bankruptcy, we expect a lag period for this new work to come to the market. These developments mean 2024 will be a slower year on the shelf. However, work is expected to recommence in the near future and provide significant opportunities. We still would expect this to be a full cycle $60 million EBITDA business with our current assets with spikes up as in 2023 and down, as we expect in 2024. In addition to the work flowing from bankruptcies, we expect regulatory pressure to drive decommissioning work on fields held by ongoing shelf producers.

This is what led to TELUS awarding us their decommissioning work for the next five years. Big picture, while we’re looking at a pullback for 2024, we remain confident in our outlook and our positioning for this market for the long-term. Helix is well-positioned to deliver in 2024 and beyond. Our markets have sustainable growth opportunities in each segment without the need to search for growth beyond our core competencies. We’ve successfully simplified our balance sheet and the company is financially strong. After the final earn-out payment for the Alliance acquisition, we have $240 million of cash on the balance sheet and with relatively low growth debt and net debt. We are now generating strong free cash flow with potential to generate double-digit yield on free cash flow going forward.

With the cash, we’ll look for and be open to deploying cash for growth in the areas mentioned, where we can utilize adding capacity. We’ll deploy for growth when the value is accretive to share price and we’ll seek to do so on a sustained full cycle long-term basis. If the opportunities don’t present for growth, then we can deploy the cash to share repurchase as marketing pricing permits, taking advantage of the $200 million buyback facility approved by the board. We’ll also prioritize growing and maintaining a strong cash balance on the balance sheet. With that, I’ll turn it back to Eric for Q&A.

Erik Staffeldt: Thanks, Owen. Operator, at this time we’re ready for questions.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of James Schumm with TD Cowen.

James Schumm: Good morning. A lot going on with the shallow water business. I just want to make sure I understand. Are we, are you sticking by the expectation of $30 million to $40 million of EBITDA this year? That’s I guess the first part of the question. It looks like you have revised the revenues lower. Just curious what your updated thoughts are on that?

Owen Kratz: The $30 million to $40 million of EBITDA that I mentioned was the initial guidance that we gave at the time of the acquisition. I believe for this year, we will more than exceed that.

James Schumm: Just trying to understand, you talked about the seasonality in this business. It’s going to be a seasonal business. It’s in the Gulf of Mexico. Your deepwater Well Intervention in the Gulf of Mexico is not seasonal. Other than the heavy lift barge, why is the shallow water business seasonal?

Scotty Sparks: I’ll take that. It’s Scotty here. It’s basically just down to the weather patterns. You’re working in shallower waters, the seas are rougher in those shallower waters. You’ve got the diving facilities, not just the heavy lift barge. You have got the lift boats that are all affected by shallow water, heavy weather. Obviously, in the deeper water, we have a bit more room to play around with the vessels. It’s literally just a weather pattern.

James Schumm: That makes sense. Just maybe on well intervention, Owen, I think you sort of broadly touched on rate increases, but if you could give any color there, like, are you pushing up leading edge rates in Well Intervention globally? And then specifically on the Gulf of Mexico, what does that look like? You’ve taken the Q4000 out of that market, and I think you mentioned it’s very tight. I think we’ve seen some rig rates moving a little bit up after being sort of stuck in a low for, I don’t know, 12 to 18 months. If you could talk about rates, I’d appreciate it.

Owen Kratz: It’s a mixed bag. We are pushing rates up. We are pushing rates up. The rig rates are moving up, leading edge for us, constitutes a slight discount to rig rates. The rig rates that we compete against are the harsh environment rates and not the UDW floaters. There’s a step down from the UDW rates to the harsh environment rates and then there’s a slight discount down to our rates. That would be what we would consider leading market. We are pushing leading market rates, but that’s compounded a little bit by the producers now seeking multi — there’s more producers seeking multi-year commitments and of course they want a rate cut for giving you that kind of utilization. We’re in negotiations on a number of these, trying to balance how far out we’re willing to commit and what kind of discount are we willing to take for a multiyear commitment versus the strength of our view that, the market is going to remain strong and we’re very tight.

It’s a little bit of a mixed bag. We are working off of the last of our legacy rates, I would say that, we gave during the down period. I think by the end of this year, those will be gone and will be on the new rate. We do expect a pretty significant increase in our EBITDA contribution in ’25 just from a rollover of these legacy rates.

James Schumm: Owen, maybe just to follow-up on that. I know that there’s so many moving pieces, there’s different geographies. You’ve got legacy rates on a lot of these vessels. I mean, would you think about leading edge rates generally on average? Would they be like 10% higher this year versus last year? Or, is that a decent way to think about it? Or how would you think about that?

Owen Kratz: Let’s see. I haven’t tried to look at it from a percentage basis. But I would say, we’re looking at rates, leading edge rates are roughly 15% higher.

Operator: Your next question comes from the line of Don Crist with Johnson Rice.

Don Crist: Good morning, gentlemen. I wanted to start, Owen, with the Cox bankruptcy and the significant amount of wells that are being put back to the original operators. Where are we in kind of discussions to put contracts in place to start doing that work? Is that — do you think any of that kind of hits in the fourth quarter or do you think that’s still a ’25 issue?

Owen Kratz: Again, it goes by operator-by-operator. I think it’s been fairly obvious for quite a while. I mean, bankruptcy occurred last year, but it wasn’t finalized until just this past month. That was a big delay. Everyone thought it was going to be finalized at the end of last year with the work beginning this year. That’s been a little bit of a surprise. The process, like I said, varies from operator-to-operator. Some of them have been anticipating it and pretty much know what they want to do. They have not yet to my knowledge, received mandates from the government and a notification of precisely which fields they’re getting back. But like I said, they have a pretty good idea, some of them have been planning. I think you could see some of that work potentially, to give you some context, the Fieldwood bankruptcy occurred in August of 2020 and we really didn’t see the work until July, August of ’22.