Helix Energy Solutions Group Q2 2024 Earnings Call Transcript

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July 25, 2024

There are 8 speakers on the call.

Operator

Thank you for standing by. My name is John, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Second Quarter 2024 Felix Energy Solutions Group, Inc. Earnings Conference Call. Thank you.

Operator

I would now like to turn the call over to Brent Arriaga, Chief Accounting Officer. Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us today on our conference call for our Q2 2024 earnings release. Participating on this call for Helix today are Owen Kratz, our CEO Scotty Sparks, our COO Eric Staffeld, 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 for the investor page on our website at www.helixesg.com. The press release can be accessed under Press Release tab and a slide presentation can be accessed by clicking on today's webcast icon.

Speaker 1

Before we begin our prepared remarks, Ken Neikirk will make a statement regarding forward looking information. Ken?

Speaker 2

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, 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 ks, our quarterly reports on Form 10 Q and on 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.

Speaker 2

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 reconciliations 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 ks and a replay of this broadcast will be available under the For the Investors section of our website at www.helixesg.com. Please remember that information on this conference call speaks only as of today, July 25, 2024, and therefore, you are advised that any time sensitive information may no longer be accurate as of any replay of this call.

Speaker 2

Scotty?

Speaker 3

Thanks, Ken, and good morning, everyone. Thank you for joining our call today. We hope everybody is doing well and those in Houston are recovering from the storm. We thank our Houston staff for their efforts during the recent week long power outages. This morning, we will review our Q2 highlights, financial performance and operations.

Speaker 3

We'll provide our view of our current market and update our guidance for 2024. The teams offshore and onshore outperformed again, safely producing another well quarter. Our Q2 results improved both significantly and year over year. Revenues for the quarter were 365,000,000 dollars with a gross profit of $75,000,000 and net income of $32,000,000 compared to $296,000,000 in revenue, dollars 20,000,000 in gross profit and a net loss of $26,000,000 in Q1 of 2024 and $309,000,000 in revenue and $55,000,000 of gross profit and a net income of $7,000,000 in Q2 of 2023. Adjusted EBITDA was $97,000,000 for the quarter, and we had negative operating cash flow of $12,000,000 resulting in negative free cash flow of $16,000,000 dollars Both results include $58,000,000 of the $85,000,000 Alliance earn out paid out in cash during the quarter.

Speaker 3

Excluding the impact of the earn out, our operating cash flow would have been $46,000,000 and our free cash flow would have been $42,000,000 in Q2. Likewise, our year to date results show significant improvements over 2023. We generated revenues of 661,000,000 dollars gross profits of $95,000,000 and a net income of $6,000,000 with adjusted EBITDA of 144,000,000 Our year to date net income includes $21,000,000 in pretax losses related to the redemption of our remaining 2026 convertibles during the Q1. Our cash and liquidity remains strong with cash and cash equivalents of $275,000,000 and liquidity of $370,000,000 at quarterend. Highlights for the quarter include strong results in well intervention across all regions, strong results in robotics, including some well executed trenching projects, the successful initial deployment of the rizeless open water abandonment module in Australia from operations from the Q7000 and strong results from production facilities.

Speaker 3

Slide 9 provides a more detailed review of our segment results and segment utilization. In the Q2 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 overall second quarter results were in line with expectations, driven by strong performance from our core well intervention markets and robotics groups.

Speaker 3

Our shallow water abandonment results were impacted by a later start to the season due to the weather and timing of operating spending. Moving to slide 10. Slide 10 provides further detail of our Well Intervention segment. We achieved strong utilization in the Gulf of Mexico, the North Sea in Europe, Brazil and Australia, performing very well with solid overall uptime efficiency of 98.9 percent for the quarter. The Q7000 performed extremely well with 100% utilization working in Australia with the successful deployment of the Roam.

Speaker 3

The vessel is expected to continue working in Australia for the second half of this year then commence transit to Brazil for the Shell decommissioning campaign. We had solid utilization for both key units in the Gulf of Mexico with the Q4000 now due to complete works in Q3 and then scheduled to commence paid transit to Nigeria for the SLO minimum 6 month well campaign due to commence in the Q4. Moving to slide 11. Slide 11 provides further detail of our Robotics business. Robotics had an exceptional quarter.

Speaker 3

The business performed at high standards, operating 6 vessels during the quarter, working between trenching, ROV support, site survey and clearance work on renewables and oil and gas projects globally. All 6 vessels worked on renewables related projects within the quarter. All vessels had strong utilization with 3 vessels working on renewable trenching projects, 2 of those vessels trenching in Europe and 1 trenching in Taiwan. We are now well into the trenching season globally and expect high utilization for the rest of the year across the fleet, which we anticipate will lead to robotics having another strong year. Slide 12 provides detail of our Shallow Water abandonment business.

Speaker 3

In Q2, the Shallow Water team had a later start to the season than expected due to unexpected weather conditions in the shallow water Gulf of Mexico, as well as the general near term softening in the shelf abandonment markets. This resulted in less than expected utilization for the dive boats, the heavy lift barge and P and A spritz. Also in Q2, we recommenced work back on the larger Fourfield decommissioning project after the winter break, with the project scheduled to utilize the Epihedron heavy lift barge along with some of the dive vessels, support vessels and P and A spritz. In summary, other than the slow start to shallow water operations, we are pleased with 2024 with year over year improvements in our overall results. Our business segments are positioned to benefit from the expected increase in activity during Q3 and into Q4.

Speaker 3

As we look forward to 2025, we expect to benefit from some of our larger well intervention assets coming off legacy contracts and pricing at market rates. We believe we are well positioned to benefit from market improvements and our customers' continued belief in the value we deliver. I would like to thank our employees for their efforts and high level of execution. Delivering safe and efficient operations for our customers has established us as a leader in our industry. I will now turn the call over to Brent.

Speaker 1

Thanks, Scotty. Moving to Slide 14, it outlines our debt instruments and key balance sheet metrics as of June 30. Funded debt at quarter end was $328,000,000 At quarter end, we had cash of $275,000,000 During Q2, we settled the earn out related to the Alliance acquisition paying cash of $85,000,000 with $58,000,000 of that flowing through our operating cash flow. I'll now turn the call over to Eric for a discussion on our outlook for 2024 and beyond.

Speaker 4

Thanks, Brent. Based on our Q2 and year to date performance and our expectations of the strength of the offshore energy market, we're updating our guidance of certain financial metrics from our forecast. Revenue. Our revenue guidance is $1,250,000,000 to 1,400,000,000 dollars EBITDA $270,000,000 to $330,000,000 We have maintained our EBITDA guidance with the improvement in our legacy business units offsetting our lower near term outlook in the shallow water segment. The concentration of our remaining variability exists during the Q4 with the uncertainty in the winter season.

Speaker 4

Free cash flow, we're increasing our guidance to $90,000,000 to $125,000,000 This includes $58,000,000 impact from the earn out made in early April. Excluding the impact of the earn out, our Q2 free cash flow would have been $42,000,000 and accordingly, our 2024 free cash flow guidance range would have been $148,000,000 to $183,000,000 benefiting from working capital inflows. We are reducing our CapEx forecast to $60,000,000 to $80,000,000 Lower guidance is based on pushing approved amounts into 12.5. Our spend continues to be a mix of regulatory maintenance on our vessels and the fleet renewal of robotics. Moving to Slide 17, the Well Enhancer completed its scheduled drydock in Q1 and the HP-one completed its drydock in Q2.

Speaker 4

The Q7000 will have a maintenance period during its mobilization in Brazil, possibly spanning parts of Q4 and Q1 2025. Our full year CapEx forecast continues to be weighted towards regulatory maintenance, which primarily falls into the operating cash flow. Reviewing our balance sheet, our funded debt stands at $328,000,000 Our next significant maturities not until 2029. We are still targeting $20,000,000 to $30,000,000 of share repurchases in our 2024 program with $5,000,000 completed in Q2 $10,000,000 year to date. Our quarterly financial performance in 2024 is expected to follow similar cadence as our 2023 results with the 2nd and third quarters likely being our most active quarters and 1st and 4th quarters impacted by winter weather.

Speaker 4

Overall, with anticipated impacts of the Q4000 transit in Q3 and the Q7000 transit in Q4, we expect the second half of twenty twenty four to be on par or slightly stronger than the first half. Our year to date free cash flows of positive $45,000,000 and would have been significantly higher if not impacted by the $58,000,000 Alliant turnout payment in April. Providing some key assumptions by segment and regions for the balance of the year starting on Slide 18. First, our Well Intervention segment. The Gulf of Mexico continues to be strong market, supporting improving rates and expected strong utilization on the Q4000 and Q5000.

Speaker 4

The Q5000 has contracted work in every quarter this year with limited white space to fill its schedule. The Q4000 is contracted to work into Q3, the Gulf of Mexico. The vessel is scheduled for an estimated 60 day transit and mobilization to West Africa for a minimum 6 month contract in Nigeria with paid MOLVE and DEMOP. In the UK North Sea, we expect good utilization for most of the year. The Well Enhancer Seawell have contracted work through Q3.

Speaker 4

We are anticipating a return to seasonally adjusted utilization in the winter months in the North Sea. The possibility of winter season utilization provides support for the upper range of our guidance. The Q7000 is currently working in Australia with projects scheduled for 3 different operators. The projects are expected to continue into late Q3 followed by a scheduled transit to Brazil and mobilization for its contracted work in Brazil expected to commence early 2025. In Brazil, the Siem Helix 2 is contracted into mid December of 2024 with Petrobras.

Speaker 4

The Centimeters Helix I is contracted performing well abandonment work for Trident into Q4 of 2025. We expect to benefit from the Trident contract extension at market rates in 2025. Moving to Robotics. The robotics segment continues to benefit from the tight market, both oil and gas market and renewables market extremely active competing for assets. APAC region has both the Grand Canyon 2 and Centimeters Topaz supporting renewables projects in Taiwan scheduled to last into the second half of twenty twenty four.

Speaker 4

Centimeters Topaz and the T-fourteen oh one trencher are contracted and expected to remain in Taiwan through mid Q4 of 2024. The North Sea, the Grand Canyon 3 is performing trenching projects and expected to have strong utilization into Q4. The North Sea Enabler has contracted trenching operations in Q3 and Q4. The Wilimar Wave is forecasted to have good seasonal utilization performing site clearance operations. In the U.

Speaker 4

S, the Shalea borlan is in the U. S. East Coast providing wind farm support. Moving to production facilities, the HP-one is on contract for the balance of 24 with no expected changes. We have expected variability with production as the Droshky field continues to be late.

Speaker 4

Continuing to shallow water abandonment, we continue to anticipate this to be a seasonal business with higher Q2 and Q3 activity and we're currently seeing more than expected variability in operator spending. Shelf decommissioning is a call off business, but given customers' needs and continues reversion of properties through bankruptcies, long term we still believe in the solid foundation for this market. At this time, I will turn the call back to Owen for a discussion on our outlook beyond 2024 and for closing comments. Owen?

Speaker 5

Thanks, Eric. Good morning, all. We've provided you a lot of insight into our outlook for 2024. Our team has performed well delivering solid financial performance in most of our segments. As we begin the Q3, we do have some noise impacting our outlook for the second half of twenty twenty four.

Speaker 5

First, we're expecting to incur more than 150 days of mobilization as we deploy the Q4000 to Nigeria and the Q7000 to Brazil. Even though these projects have paid mobilizations, accounting treatment requires us to defer the mobilization fee and costs during the mobilization periods and recognize it over the life of the project. This is expected to shift approximately $20,000,000 of EBITDA into 2025. 2nd, the soft shallow water decommissioning market in the Gulf of Mexico. That segment is underperformed to date this year, but as mentioned with customers' needs and reversion of shelf properties, we still believe in the foundation for the market long term.

Speaker 5

Based on the strength of the overall global OFS market, we're not altering our existing guidance other than sharpening our projected free cash flow and capital spend. Looking ahead for the balance of 'twenty four and into 'twenty five, we're near the point for the legacy rates that were secured during the downturn to begin to roll off and be replaced with current market rates. As previously announced, we're in advanced discussions with multiple customers with expectations of market rate contracts on several of our well intervention assets, which would achieve meaningful growth to our EBITDA for 2025 and secure utilization for multiple years ahead. More specifically, in Brazil, we expect to see a 40% increase in rates year over year going into 25 with utilization out into 2028. The Q7000 is expected to work in Australia through Q3 and then transit to Brazil beginning early Q4.

Speaker 5

Once it begins its Brazil operations, we expect to generate an EBITDA contribution per utilized day, some $50,000 to $70,000 a day greater than what we expect to achieve in 2024, subject to the actual timing of the transit from Australia to Brazil. Go forward rates have escalators for the term through 2026 with options beyond. In addition, with legacy contracts rolling off in the Gulf of Mexico, we expect an approximate 20 percent rate increase on the Q5000 starting in 2025. Q4000 is scheduled to transit to Nigeria starting early August with the contract there beginning in late September, early October. The term of the work is 6 months with mutual options to extend.

Speaker 5

There's further demand for work in West Africa and depending on the demand in the Gulf of Mexico and rates achievable, we'll make the area of deployment decision next year or otherwise may seek added capacity. These are examples of the tailwinds we're seeing. It's too early to be precise, but based on what we know now, we would expect well intervention on its own to add in the range of $60,000,000 to $100,000,000 of EBITDA for 2025 over 2024. In our robotics business, we're seeing a robust market in general with supply tightening further. Trenching the cables in the wind farms is currently the most significant driver in our profitability.

Speaker 5

There's good visibility on the pipeline of projects out through 20 28 with year over year growth in the market each year. We've already contracted some work as far out as 2027 and are in discussions about awards for 2028. For 2025, we expect continued strong performance from our robotics group with the potential to deploy our last available trencher, which was idled during all of 2024. We've already secured a second vessel for site clearance starting in 2025 and based on the work that we're seeing coming in the pace of our awards, we'll likely look to add a third boulder grab for site clearance work in the wind farm market. Adding UXO clearances enhanced our offering to the market for site preparation.

Speaker 5

Overall, we continue to be excited about the robotics segment, leveraging our expertise within the larger renewables market and potential for further growth there. The status of the shallow water Gulf of Mexico abandoned market is hard to forecast at this time. The work is certainly there to support a strong market for a long time to come. Following the bankruptcies of Fieldwood, the market got off to a rapid start. Producers have pulled back in 2024 to reassess the pace of the work going forward.

Speaker 5

The Cox bankruptcy is added significantly to the work that needs to be done, but delays over settling the bankruptcy has delayed the majority of the start into 2025. As a result, 2020 4 will be an off year compared to 2023 and likely more in line with our original guidance for that business given at the time of the acquisition. Work on both Fieldwood and Cox properties are expected to come to market in 2025. We would not expect the frantic pace of 2023 to be repeated by any one producer, but a greater number of producers are likely to put work to the market each at a slower pace. Compared to the first half of twenty twenty four, we do expect to see a rebound in demand on a more sustainable basis, even if it's not at the 2023 level.

Speaker 5

The EBITDA contribution from our production facilities may drop in 2025 consistent with the decline in the production rates from our 2 fields. We do remain in constant dialogue with producers about adding additional wells to our production backlog as more fields approach the end of their life. This is purely an opportunistic alternative for producers as a means of dealing with their abandonment liabilities and as such we don't model the potential upside into our forecast. On a final note, if the market behaves as we think and our assumptions based on current information hold, Helix should end 20 24 with approximately $300,000,000 in cash on the balance sheet and beginning in 2025, our free cash flow generation could be well over $200,000,000 for the year. This provides meaningful dry powder.

Speaker 5

Barring a major event, we'll consider deploying cash to A, bolt on type of acquisitions in our existing business units where we see it to be accretive and sustainable and B, continue to repurchase our shares under our approved share repurchase plan. As always, we'll remain open to and explore all opportunities to further value creation for our shareholders. We're looking forward to a strong 2025. Eric?

Speaker 4

Thanks, Owen. Operator, at this time, we'll take questions.

Operator

Thank The first question comes from the line of Sheriff Almagarabi from BTIG. Please go ahead.

Speaker 6

Thanks for taking my questions. Starting with well intervention, given some drilling rigs are dealing with white space in their schedules, are you seeing some rig operators start to bid on well intervention contracts? And is that something that's more prevalent in some basins versus others?

Speaker 3

I'll take that. Good morning. We are seeing some longer term contracts for rigs and operators using their white space to undertake some intervention. But as we've said on the call, we're expecting high utilization for the coming years at better rates, better market rates as we come off these legacy contracts, And we're seeing high utilization. You also have to remember in the North Sea, we're not really competing against drilling white space.

Speaker 3

It's all different diver based operations.

Speaker 6

Thanks. And on the robotics side, it posted its strongest quarterly revenue in about 10 years. Some of that is due to seasonality. Can you remind us of the typical single cycle for robotics? And is that changing as you start to do more offshore related work?

Speaker 3

So with robotics, it can be seasonal. This year, we have a very good backlog of trenching works going into 2025 and through the winter season. But it's basically where we're working in wind farms that are generally in shallow water that can lead to seasonality and winter breaks on the trenching side of the business. Much of the ROVs are on longer term contracts and continue through the winter works. So it's mainly the trenching side that can be affected through seasonality.

Speaker 3

But this winter going up into the Q4, we expect a very strong season. And we have a very good pipeline of growth for the trenching. I mean the trenching business, it used to be short contracts. We're now looking at some contracts that are numbers of years and looking well out to the future. We have a very good pipeline of opportunities for the trenching business.

Speaker 6

Okay. I appreciate that color. Thanks for taking my questions.

Speaker 3

You're welcome.

Operator

The next question comes from the line of Josh Jain from Daniel Energy Partners. Please go ahead.

Speaker 7

Thanks. Good morning. First question that I wanted to ask, just when I look at the last couple of weeks, notable offshore drillers have announced contracts that show not only continued day rate improvement, but also in some cases some willingness on the part of operators to term out assets into 20272028 even with today's day rates. You've talked on the last couple of calls about how we'll see higher rates for well intervention and Owen just alluded to it as well with the $60,000,000 to $100,000,000 increase in EBITDA. I'm just curious, could you talk about if discussions for further work have accelerated here in the last 3 to 6 months for your fleet with respect to term for operators and how comfortable they are going forward contracting your fleet out sort of beyond 2026 and 2027?

Speaker 7

Maybe you could just expand on that a little bit would be helpful.

Speaker 3

Yes. Good morning. As Owen said, we're in some good negotiations with solid clients for some of the larger well intervention assets. Those assets are at much higher rates. Those negotiations are much better rates.

Speaker 3

And they are longer term contracts. Some of those contracts are 2 to 3 years in duration with, like I say, very good clients of ours and good negotiations. We expect to be announcing before the end of the year where those assets are going

Speaker 7

to end up. Okay. And on the just touch on the shallow water abandonment business. You've been pretty transparent over the course of this year that this is going to be weak. And yet there seems to be a significant amount of long term runway in this business in 2025, 2026 beyond from what we've heard.

Speaker 7

So could you just talk us through how you're managing that business today, assuming there's going to be a turnaround coming in the next couple of years?

Speaker 5

Yes, right now it's a balancing act. The biggest bottleneck in that segment are people. And so far, we knew that this was going to be a soft year with a potential rebound in 2025. So we've been trying to while we've been incurring additional costs in order to maintain our capacity to be able to respond to that rebound. The market this year has probably been softer than we anticipated and we're trying to assess the actual pace of the work that's going to be coming next year and adjusting our resources to be appropriate.

Speaker 5

But what that means is that it's probably an inordinate high negative impact for 'twenty four as we maintain that capacity going into 'twenty five, but we should reap the benefits of that in 'twenty five and beyond.

Speaker 7

Okay, thanks. And then just one last follow-up, if I may. You highlighted the potential for some of the variance in your EBITDA guidance for the rest of 2024 could be surrounding the seasonality of the well enhancer and the seawell and normally there is seasonality. But in the last 2 years, so in Q4 of 'twenty two and 'twenty three, you've been close to 100% utilized on those assets. I just want to understand, maybe going back to those years, why the utilization in Q4 of those years was so strong?

Speaker 7

Was it all weather driven? Or what the opportunity is? And if the business has potentially structurally changed a little bit where you could see less seasonality going forward for those assets? And that's all I have. Thanks.

Speaker 3

I think at the moment we're being conservative and referring back that business unit has always had seasonal downturns in the winter because of the weather. Clients don't want to pay for us just to go out and work on their wells and sit on weather. Last year, we had a very good contract where one of the vessels went to the Mediterranean. So it was working whole season. This year, we do see opportunity.

Speaker 3

That's why we're saying there could be some upside. We're in discussion with clients that are looking at work through this winter. And as we go into next year, one of the vessels will have a dry dock as well. But there's opportunity out there. It's not signed up yet.

Speaker 3

So we're just being a little bit conservative as we look at the historical view of how the well intervention in the winter months in the U. K. Works.

Speaker 5

I'd like to just add another factor of the variability in Q4 has to do with I believe Eric mentioned we have something like over 140 days of transit time and then the cost and the revenue that is deferred and amortized over the term of the contract. So the impact to the Q4 depends largely on the timing of how many days fall in 24 versus 25. And there's no way for us to assess what that is right now until we see when the mobilization actually begins and that depends on how long the current contracted work continues.

Speaker 7

Understood. Thanks guys. I'll turn it back.

Operator

As there are no further questions at this time, I would like to turn the call over back to Mr. Eric Staphold, Chief Financial Officer for closing remarks.

Speaker 4

Thanks for joining us today. We very much appreciate your interest and participation and look forward to having you on our Q3 2024 call in October. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Felix reported Q2 2024 revenues of $365 M, gross profit of $75 M and net income of $32 M versus a Q1 net loss of $26 M, delivering adjusted EBITDA of $97 M.
  • Operating cash flow was negative $12 M (free cash flow -$16 M) due to a $58 M Alliance earn-out, but excluding this, Q2 operating cash flow was +$46 M (free cash flow +$42 M).
  • Operationally, Well Intervention achieved 98.9% uptime, Robotics had an exceptional trenching quarter across six vessels, and Shallow Water abandonment resumed after seasonal delays.
  • 2024 guidance was updated to $1.25–1.4 B revenue, $270–330 M EBITDA, free cash flow of $90–125 M and CapEx reduced to $60–80 M.
  • Looking to 2025, legacy contracts rolling off are expected to add $60–100 M of EBITDA, Robotics has multi-year renewables awards, and the company forecasts >$200 M free cash flow with ~$300 M year-end cash.
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Earnings Conference Call
Helix Energy Solutions Group Q2 2024
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