Earnings Call Transcript - HLX Q4 2022

Operator, Operator

Greetings and welcome to the Fourth Quarter Helix Energy Solutions 2022 Earnings Conference Call. As a reminder, this conference is being recorded, Tuesday, February 21, 2023. I would now like to turn the conference over to Brent Arriaga, Chief Accounting Officer. Please go ahead.

Brent Arriaga, Chief Accounting Officer

Hi, good morning. Good morning, everyone, and thanks for joining us today on our conference call for our fourth quarter and full year 2022 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 earnings 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?

Kenneth Neikirk, General Counsel

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 are 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 and in 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 statements. 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 slide of our presentation provides reconciliations of certain non-GAAP measures to comparable GAAP financial measures. These reconciliations along with this presentation, the earnings press release, our annual report and a replay of this broadcast are available under the Investors section of our website at www.helixesg.com. Please remember that information on this conference call speaks only as of today, February 21st, 2023, and therefore, you are advised that any time-sensitive information may no longer be accurate as of any replay of this call. Owen?

Owen Kratz, CEO

Thanks, Ken. And good morning, everyone. And we hope everyone out there and their families are doing well. This morning, we'll review our Q4 and full year results, performance and operations. We'll provide our outlook for the market, both what we currently are experiencing, as well as our expectations beyond that, and we'll provide our guidance for 2023. Moving to the presentation, Slides 6 through 9 provide a high-level summary of our results and key highlights for the fourth quarter and full year 2022. During the fourth quarter, activity levels across all segments were high with the increased activity from the strong global offshore energy market driving improved rates. Highlights for the quarter include the completion of our West Africa Well Intervention campaign, strong activity and utilization in the Gulf of Mexico, the SH1 commenced its well decommissioning project for Trident in Brazil, a resilient North Sea Well Intervention market driving utilization, Robotics and Helix Alliance both providing solid seasonally adjusted contributions, our production facility segment continues to be a steady performer, our acquisition of three trenching systems and our interest in two IRS systems to strategically deploy in the emerging markets. And on the sales front, we were awarded a minimum 12-month well decommissioning contract for the Q7000 offshore Brazil with Shell, and we secured an extension of the HP1 through at least mid-2024. Revenues for the quarter were $288 million, an increase of $15 million over our third quarter results. Our net income was $3 million, a $22 million improvement over Q3. Adjusted EBITDA for the quarter was $49 million. Our fourth quarter results were stronger than forecast, driven by the Q7000 working into December in West Africa and the robust North Sea Well Intervention market activity. For the full year 2022, revenues improved by $198 million to $873 million. Our gross profit improved by $36 million to $51 million, and net loss increased by $26 million to $88 million, impacted by $23 million of FX loss from the devaluation of the British pound. Our EBITDA increased to $121 million in 2022 from $96 million in 2021. Operating cash flow for the year was $51 million, resulting in free cash flow of $18 million. We cautioned at the beginning of the year that 2022 would be a transition year for Helix. Our expectation was that the challenges of a multiyear weak market would transition into a much improved market for the second half of 2022. As we currently see it, fundamental improvements in the offshore market, both domestically and internationally, have established the foundation for a multi-year recovery of activity. With the market recovery taking shape, we acquired Alliance last summer to position Helix as a full-field abandonment service provider, expanding our offerings in the market and diversifying our revenue stream. This acquisition added shallow water marine services, surface well P&A and intervention services, diving and facility and pipeline removal capabilities to our existing services. With this acquisition and the offshore market improvements, we continue to execute our strategy of becoming the preeminent offshore energy transition company. I'd like to thank our employees, including the new team members at Helix Alliance for their efforts and high level of execution in 2022. Executing safe and efficient operations for our customers has always been our hallmark, and our goal is to remain an established leader in our industry. On to Slide 10, from a balance sheet perspective, our cash balance at the end of the quarter was $187 million. During the quarter, our operating cash flow was $50 million, including $5 million of dry dock and recertification costs. In Q4, we spent $29 million on CapEx, resulting in $21 million in free cash flow. At year end, we were in a net debt position of $75 million. During the quarter, we opportunistically acquired two additional IRS systems and three trenching assets. As the global offshore wind market continues to grow and expand its footprint, we strategically acquired the trenches to address the developing markets in the APAC and the U.S. East Coast. The additional IRS systems are intended to allow us to target strategic opportunities globally. I'd like to highlight yesterday's announcement that our Board of Directors authorized a share buyback program for the repurchase of up to $200 million of our outstanding shares. We've long communicated our desire to return capital to our shareholders and feel the strength of the offshore market, the company outlook for 2023 and beyond and a solid balance sheet has put us in a position to announce this program. As always, we will balance the need to manage and fund our operations. Capital spending, including Alliance, are now maturing the strategic investment opportunities along with the share repurchase program. We plan to generally align this program with our cash flow generation and initially target deploying 25% of our free cash flow, noting the seasonality of our business. We are proud to be in a position to announce this repurchase program, which we view as an excellent opportunity to return value to our shareholders. I'll now turn the call over to Scotty for an in-depth discussion of our operations.

Scott Sparks, COO

Thanks, Owen. And good morning, everyone. Moving on to Slide 12. Firstly, I would like to thank our teams, offshore and onshore, for another well-executed quarter and finishing the year with their continued exceptionally high standards. Market conditions continue to improve, and we concluded 2022 better than forecasted with high utilization across the fleet. Going forward, we have a much stronger backlog than we've had in recent years and very good visibility for the next few years. Our outlook for 2023 is significantly improved year-over-year with some long-term contracts in place with a high number of contracted days of work for our spot market assets. All of our businesses are well positioned for 2023 and beyond. In the fourth quarter of 2022, we continued to operate globally with minimal operational disruption with operations in Europe, West Africa, Asia, Brazil, The Gulf of Mexico and off the U.S. East Coast. We continue to operate at high standards with strong uptime efficiency for the quarter. During the fourth quarter, we produced revenues of $288 million, resulting in a gross profit margin of 11%, generating a gross profit of $31 million, producing EBITDA for the quarter of $49 million, a significant improvement against the fourth quarter of 2021 and the year ended with EBITDA of $121 million compared to $96 million of 2021. During the fourth quarter, the Well Intervention fleets achieved utilization of 97% globally, with 97% utilization in the Gulf of Mexico, 92% in Brazil, 99% in the North Sea and 100% utilization in West Africa, including Q7000 completing works in Nigeria and commencing its paid transit to the APAC region. The Robotics division, chartered vessel fleet achieved high utilization of 96% in the quarter, operating four vessels working 332 days between ROV support, trenching, renewable works globally and working on multiple renewables projects in Europe and the U.S. East Coast. Helix Alliance fleet of vessels achieved 69% utilization for the liftboats and the Alliance P&A Systems achieved 8% utilization with 1,106 operational days working for numerous clients in the Gulf of Mexico. The free diving support assets achieved 63% utilization and the heavy lift barge was seasonally warm stacked as expected. Slide 13 provides a more detailed review of our Well Intervention business in the Gulf of Mexico. The Q5000 again had strong utilization of 100% in the fourth quarter performing production enhancement work on four wells in ultra-deepwater, working under a multiyear campaign for Shell. The Q4000 had increased utilization of 94% in the fourth quarter compared to utilization of 81% in the third quarter. The vessel completed two well production enhancement scopes for one customer, followed by a single well abandonment for another customer and then commenced a two well production enhancement campaign for another client in ultra-deepwater. Positively, we expect both vessels will have high utilization with the high number of contracted days in 2023 and good visibility of potential further activity with steadily increasing rates. Both key vessels continue to operate under the integrated Helix SLB Subsea Services Alliance package. Moving on to Slide 14, our North Sea Well Intervention business had a very strong quarter considering the seasonal winter months. With solid utilization for both vessels in the U.K, the Q7000 concluded another campaign in West Africa prior to commencing its paid transit to the APAC region. The Well Enhancer performed very well and achieved 100% utilization in Q4 compared to 80% utilization in Q3. The vessel performed production enhancement works on five wells for two customers. The Sea Well had a good quarter with 97% utilization. The vessel performed decommissioning works on numerous wells for several customers also utilizing our diving services. The North Sea market continues to improve and our business is seeing much improved utilization and achieving higher rates. The Sea Well has a full year and has recently contracted a 180-day decommissioning project in the Mediterranean expected to commence at the end of Q3, likely until the end of Q1 of 2024 and the Well Enhancer is contracted for nearly all of 2023. Typically, we would seasonally spec the vessels in the winter months in the North Sea; however, this winter, we are planning to continue working through the current winter months and at this time, plan to be working through the next winter, with a short planned maintenance period for each vessel. The Q7000 was 100% utilized in Q4, working in Nigeria, undertaking production enhancement works for an existing client until December. The vessel then commenced a paid transit to the APAC region to undertake a drydock that commenced in early February. Upon completion, the vessel is planned to transit to New Zealand to commence a contracted well abandonment campaign. The vessel is then scheduled to carry out a paid transit to Australia to undertake work in the second half of 2023 for seven well abandonment campaigns for Cooper Energy and then a further two wells for another client covering most of 2023. The Q7000 is now contracted until early 2025, and we already have visibility on following work in 2025. Also in Australia, one of our recently acquired 10K IRS systems has been booked on an 18-month contract commenced in February of 2023. Moving on to Slide 15. In Brazil, we had good utilization of 92% in the fourth quarter. The Siem Helix 1 was 87% utilized in Q4, undertaking ROV survey work for Trident and then commenced the two-year decommissioning project also for Trident, performing work on three wells in the quarter. The Siem Helix 3 had a strong quarter with 98% utilization, completing production enhancement work on three wells and decommissioning activity on three wells. The two-year contract extension for Petrobras for the Siem Helix 2 commenced in December with a substantial rate increase. In the fourth quarter, Helix again won the Petrobras Rig Contract of the Year Award. We have now won this award three times and won it each year that we've been eligible for the award. We are very pleased to have won this award based on our safety and performance. Congratulations and a big thanks to our Brazil team and the crew of SH2. We expect 2023 to be a far better year for us in Brazil with both vessels being back to Well Intervention rates. We are pleased to have both vessels once again secured into long-term contracts. I'm pleased that we are scheduled to have three vessels contracted into the Brazil region in 2024 with the addition of the Q7000 Shell contracts. Slide 17 details our robotics review. Robotics continued their strong performance and had another good quarter, concluding a very good year, performing at high standards with strong utilization, operating four vessels globally during the quarter, primarily working between trenching, ROV support, site survey work and oil and gas and renewables related projects. In the APAC region, the Grand Canyon II had 100% utilization in Q4. The vessel performed well on a long-term decommissioning project in Thailand. In February of 2023, one of the newly acquired T1400 trenching systems commenced paid ship into Singapore to mobilize for an awarded renewables project in Taiwan, set to continue the global expansion of our renewables trenching services. In the North Sea, the Grand Canyon III was utilized 100% undertaking renewables trenching operations for three clients, performing extremely well and performed an oil and gas trenching project for two clients. The Horizon Enabler had 68 days of spot vessel utilization, completing renewables trenching works for one customer in the North Sea and then completed an oil and gas trenching scope for another customer. Both of the trenching vessels in the North Sea had strong backlog for 2023's trenching season with a mix of renewable and oil and gas trenching works. In the USA, this year, the Shelia Bordelon, a Jones Act compliant vessel was utilized 91% in Q4. The vessel performed the site clearance project utilizing our own in-house-built boulder grab supporting wind farm operations off the U.S. East Coast. The vessel then performed further works in the Gulf of Mexico to support the seismic node installation projects. On the U.S. East Coast, the recently acquired iCloud trenching system has been contracted and mobilized on a client provided vessel to undertake site clearance preparation for wind farm support, again expanding our services that we offer to the renewables sector. Helix Robotics has performed well this year, and we have a good backlog and visibility globally in tightening markets in both the oil and gas and the global renewables, and we're expecting strong performance in 2023 and beyond.

Brent Arriaga, Chief Accounting Officer

Thanks, Scotty. Moving to Slide 22, it outlines our debt instruments and their maturity profile as of December 31. Our total funded debt was $271 million at the end of the year. During 2023, we have semi-annual installments on the MARAD debt, in addition to the maturity of the remaining $30 million of our 2023 convertible.

Erik Staffeldt, CFO

Thanks, Brent. As you've heard, we expect to continue the momentum from the second half of 2022 into 2023. Based on the strength of the offshore market and our contracted work, we are providing the following 2023 guidance and certain key financial metrics from our forecast. We expect revenue to be between $1.0 billion and $1.2 billion for '23 with EBITDA in the range of $210 million to $250 million. We expect to generate free cash flow between $110 million and $150 million, and our capital spend to be between $50 million to $70 million. These ranges include some key assumptions and estimates. Any significant variation from these assumptions and estimates could cause our results to fall outside the ranges provided. Our quarterly results are likely to continue to be impacted by seasonal weather in the North Sea and Gulf of Mexico shelf, primarily in the first quarter and fourth quarter. In addition, the timing of our vessel maintenance periods and project mobilization will cause variances between quarters. Overall, we expect the second half of '23 to be stronger than the first half with the third quarter likely to be our strongest quarter. Providing our key assumptions by segment and region starting on Slide 28. First with our Well Intervention segment.

Owen Kratz, CEO

All right, thanks, Erik, and what a difference a year makes. Last year at this time, we did not have the visibility into the market uncertainties that would allow us to provide an informed guidance. Today, we now have the best visibility for the foreseeable future that we've had in years. Demand began to increase following the Ukraine invasion and realization that energy security was an essential component of the energy transition. We did face challenges going into 2022 with uncertain demand, long-term contracts rolling off in a lower rate environment. The SH1 and SH2 negatively impacted EBITDA contributions in our 2022 results. These 2022 headwinds were offset in part by growth from Robotics and the rest of our Well Intervention business, where the Q5000 achieved over 90% utilization for 2022, without being available for a single day of VP work under the new three-year call-off contracts. For 2023, rates have increased and are expected to increase further. We expect the SH1 and SH2 impact to reverse by approximately $50 million. In addition, going into 2022, we tendered rates now considered below market rates, and as these commitments roll off, it sets up for further upside in '24 and '25. Beyond these, there are a few representative positive market trends worth mentioning that bode well for Helix. The UK North Sea has returned to being a full-year market in 2023 versus the seasonality of recent years that led to our practice of staffing the vessels located in that region for two to four months during the winter. This is a large gain in utilization on top of escalating rates. The APAC market continues to grow. Some outlooks call for it to eventually surpass even the EU market for offshore wind development, and we now have a trencher along with our vessels and ROVs to address that market.

Operator, Operator

Thank you. Our first question comes from Sherif Elmaghrabi with BTIG. You may proceed with your question.

Sherif Elmaghrabi, Analyst

Good morning, thanks for taking my questions. I wanted to ask about, excuse me, what opportunities exist for the 15K Well Intervention stacks? And how do you see demand trending for them this year?

Scott Sparks, COO

So good morning, I'll take that. Scotty here. We do see demand for the 15K system, it will primarily be deployed off the Q4000, this works for at least two clients and obviously, we're also bidding some other work towards the end of the year. So, I would expect the 15K systems to have similar utilization in '23 as it had in '22.

James Schumm, Analyst

Thanks, and good morning, everyone. If I look at the guidance, just looking at the revenue guidance for the shallow water abandonment and then I just take the midpoint, it looks like you're expecting revenues to be lower in '23 versus 2022. What's driving that?

Erik Staffeldt, CFO

Yes, Jim, as we develop our outlook, we really focus on our revenue generating margin generating capabilities. There is variability with some of the pass-through items in that either no margin or very low margin and because of the variability of that, we don't really forecast those or budget those. So overall, to the extent they come in similar to the rate of '22, our revenues and our costs would probably be higher in that segment.

Owen Kratz, CEO

Let me shift to Australia. Australia is a mature market with many fields that are approaching the end of their commercial life. Recently, there were two bankruptcies in Australia where properties reverted back to the government. We are currently working with the New Zealand government to remove one of those fields. As a result, I believe the regulatory bodies in Australia are becoming much more proactive in addressing the backlog of abandonment work. Therefore, I anticipate that Australia will be a strong and growing market for decommissioning over the next few years.

Don Crist, Analyst

Morning, gentlemen. Owen, I had a question on the '26 notes. I know they're coming close to potential conversion price there. And historically, you have talked about trying to settle those in cash and keeping enough cash on the balance sheet to do that. Is that still the plan? Number one. And number two, how does the share buyback play into that? Would you use the share buyback to combat any potential dilution from the '26 notes conversion?

Owen Kratz, CEO

So I think overall, our general plan is to obviously execute the share buyback. The convertible notes in '26, they do mature in February '26. The earliest that call provision that we would have would be later on this year. I think, overall, Don, you're right, the general thought process is that we would settle these in cash. I think we're going to keep our options open depending on what the overall debt markets look like.

Brent Arriaga, Chief Accounting Officer

Okay. Thanks for joining us today. We very much appreciate your interest and participation and look forward to having you on our first quarter 2023 call in April. Thank you.