Helix Energy Solutions Group Inc
NYSE:HLX
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Estee Lauder Companies Inc
NYSE:EL
|
Consumer products
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Church & Dwight Co Inc
NYSE:CHD
|
Consumer products
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
American Express Co
NYSE:AXP
|
Financial Services
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Target Corp
NYSE:TGT
|
Retail
|
| US |
|
Walt Disney Co
NYSE:DIS
|
Media
|
| US |
|
Mueller Industries Inc
NYSE:MLI
|
Machinery
|
| US |
|
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
8.82
12.82
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Estee Lauder Companies Inc
NYSE:EL
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Church & Dwight Co Inc
NYSE:CHD
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
American Express Co
NYSE:AXP
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Target Corp
NYSE:TGT
|
US |
|
|
Walt Disney Co
NYSE:DIS
|
US |
|
|
Mueller Industries Inc
NYSE:MLI
|
US |
|
|
PayPal Holdings Inc
NASDAQ:PYPL
|
US |
This alert will be permanently deleted.
Helix Energy Solutions Group Inc
You don't have any saved screeners yet
Ladies and gentlemen, thank you for standing by and welcome to Second Quarter 2018 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today Tuesday, July 24, 2018.
I would now like to turn the conference over to Erik Staffeldt, CFO. Please go ahead.
Good morning everyone and thanks for joining us today on our conference call for our Q2, 2018 earnings release. Participating on this call for Helix today is Owen Kratz, our CEO; Scotty Sparks, our COO; Alisa Johnson, our General Counsel; and Geoff Wagner, our Chief Commercial Officer; and myself.
Hopefully, you've had an opportunity to review our press release and the related slide material released last night. If you've not had a copy of these materials, both can be accessed through our Investor Relations 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, Alisa Johnson will make a statement regarding forward-looking information. Alisa.
During this conference call we anticipate making certain projections and forward-looking statements based on our current expectations. All statements in this conference call or in the associated presentation, 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 from our projections and forward-looking statements due to a number and variety of factors, including those set forth in our slide two and in our Annual Report on Form 10-K for the year ended December 31, 2017.
Also, during this call certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slides of our presentation material provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The reconciliation, along with this presentation, the earnings press release, our annual report and a replay of this broadcast are available on our website. Owen.
Good morning everyone. Thanks for joining us. I’ll start on slide five of the presentation, which is the high level summary of Q2 results.
Our second quarter 2018 results improved significantly compared to the first quarter as our North Sea assets benefited from a full quarter of activity following the normal seasonal low during Q1.
Our quarter was positively impacted by a full quarter of operations of both Well Intervention vessels in the UK and improved utilization and execution from our Robotics unit, benefiting all areas of our financial performance.
Revenues in Q2, 2018 increased to $205 million compared to $164 million in Q1. Our gross profit increased in Q2, 2018 to $43 million compared to $13 million in Q1, 2018. Our net income increased to $18 million in Q2, 2018 compared to a loss of $3 million in Q1, 2018. For the quarter we generated adjusted EBITDA of $52 million compared to $28 million in Q1, 2018 and $30 million in Q2, 2017.
Turning to slide 6, our Well Intervention utilization on our six vessels increased to 88% in Q2, from 73% in Q1. In Brazil, the Siem Helix 1 was 92% utilized for Q2 compared to 99% in Q1. During the quarter the vessel completed its planned shipyard maintenance resulting in seven days of downtime. The Siem Helix 2 was 99% utilized in Q2 compared to 88% in Q1. The performance on our vessels and cruise in Brazil has been a positive development in first half of 2018.
In the Gulf of Mexico, the utilization for the quarter was 74% compared to 93% in Q1. The Q5000 was 71% utilized for the quarter. The vessel completed its UWILD regulatory inspection with 14 days of downtime in Q2.
The Q4000 was 76% utilized in the quarter compared to 100% in Q1. The vessel was idle at the end of quarter between projects. Our North Sea vessels reutilized 95% in Q2 compared to the 31% in Q1. During the quarter the Well Enhancer completed two coil tubing projects.
Our Robotics segment also benefited from increased activity in the UK market during the quarter, ROV vessel utilization increased to 70% from 56% with 54 days of Spot Vessels in Q2. Utilization on our ROVs increased to 38% from 30% with 146 days of trenching work in Q2. Production facilities continued to be a steady performer operating at full length the entire quarter.
On to slide seven, from a balance sheet perspective, our cash levels at quarter end increased to $288 million from $274 million at the end of Q1, 2018. We generated $47 million of cash from our operations, offset by capital expenditures of $21 million and $10 million in scheduled principal payments in connection with our financing. Our net debt position decreased to $171 million from $193 million in Q1.
I'll now turn the call over to Scotty for an in-depth discussion of our operating results.
Thanks Owen. Moving on to slide nine. Q2 continues what has been a good year so far for us considering the current market conditions. We have strong utilization across all business lines in the company with very good uptime performance and all business units produced our usual high standards in regard to safety performance.
Revenue increased in the second quarter in-line with our performance to $205 million, compared with $164 million in the first quarter. Again, this was a significant increase in the same period of 2017. Gross profit margin was at 21%, resulting in a profit of $43 million, increasing from $13 million in Q1.
In the North Sea Intervention business, both vessels commenced operations in March and have high utilization throughout the quarter with very little downtime. Both the Q4000 and the Q5000 had another strong quarter with good uptime performance in the Gulf of Mexico. In Brazil, both vessels performed very well achieving high utilization. The SH1 completed its dock and maintenance period in the planned time and immediately returned to work for the client. SH2 now settled well into the fleet and has achieved an expected performance target.
Robotics increased utilization to 70% across the vessel charter fleet by completing numerous projects globally and commencing the trenching season, conducting a 141 days of trenching in the quarter. Spot work on a number of vessels in the global market contributed to the increase as well.
Slide 10 provides an overview of our Well Intervention business in the Gulf of Mexico. The Q5000 continued with BP throughout the quarter working on two well locations, utilizing the alliance jointly owned 15K IRS system to undertake production enhancement activities. At the start of the quarter the vessel completed its planned mid-period underwater hull inspection, originally planned to be undertaken entirely in Q1.
The Q4000 had a good quarter with no commercial downtime in all their programs that were undertaken. The unit did however have some non-contract base. The unit performed well doing work on a three-well P&A program and completed a four-well production enhancement program. IRS 2 works on a standalone rental unit on a P&A contract in West Africa and then commenced shipment back to our base in Huston. IRS 1 is idle at our facility in Huston.
The Helix OneSubsea alliance 15K IRS remains contracted to BP on the Q5000 throughout the quarter, conducting work on another production enhancement high pressure well. The units also completed its longest dive to-date.
Moving to slide 11. Our North Sea Well Intervention business experienced a good quarter with both vessels reactivated in March and going straight to work for numerous clients throughout the second quarter. Both vessels achieved high utilization with strong uptime work in mostly production enhancement programs.
The Well Enhancer worked 94% of the quarter, working for four clients and production enhancement projects. Two of the projects utilized our coil tubing systems successfully. The Well Enhancer is the only vessel available to the market and performed coil tubing operations and diving operations simultaneously. The Seawell worked 97% of the quarter working for three clients, entirely and diving work on a mixture of production enhancement and three P&A programs.
Moving to slide 12. In Brazil, our operations with Petrobras continued to go very well. We achieved our best quarter to date. Both vessels are performing well for Petrobras and we have received very positive feedback from the vessels. The Siem Helix 1 had a very strong quarter and was utilized 92% working on two P&A wells in the quarter. The vessel undertook it’s after service period as planned, resulting in seven days of nonpaid time.
The Siem Helix 2 settled well into the fleet and performed extremely well in the quarter with 99% utilization. The vessel completed five wells during the quarter undertaking production enhancement programs. The vessel was also ranked first place two months in a row in the Petrobras Ranking System for all rigs against safety, operations and efficiency. IRS 3 has been stored in Brazil at our facility for possible stand-alone rental opportunities.
Moving on to slide 13 for the Robotics review. Q2 was an improvement for Robotics with the vessel charter fleet utilization increasing to 70% due to the commencement of our trenching works and also included a number of projects-oriented spot market vessels undertaken back-to-back with client requirements.
The Grand Canyon works in the North Sea completing 70 days of utilization, working primarily on trenching projects and undertaking short duration IRM projects. Grand Canyon II located in the Gulf of Mexico works 31 days on ROV support projects and has now commenced the longer-term water work project. Grand Canyon III completes 64 days of utilization, performing 54 days on a trenching project and a 10 short IRM project.
We contracted three spot vessels during the quarter, working them back-to-back with the client’s project requirements, utilizing our ROVs and services on the vessels achieving 54 days of project utilization across three regions.
Over to slide 14, I will leave the slide detailing the vessels ROV and trenching utilization for your reference.
I'll now turn the call to Erik for a discussion on the balance sheet and our 2018 outlook.
Thanks Scotty. Moving to slide 16, it outlines our debt instruments and their maturity profile at June 30. The total funded debt at June 30 was $502 million, a reduction of $18 million from our year end 2017 balance, primarily reflecting our scheduled principal payments and the refinancing of the 2032 convertible senior notes in Q1.
Moving to slide 17, it provides an update on key balance sheet metrics, including growth and net debt levels as of year-end and June 30, 2018. Our net debt in Q2 decreased to $171 million from $193 million. The decrease in net debt is attributable to $47 million of cash being generated by operations, offset by $21 million of CapEx $7 million of debt repayments. Our cash position at quarter end increased slightly to $288 million; our net debt to-book capital ratio was 10%.
Moving over to slide 19 which provides our outlook on the remainder of 2018, we are maintaining our forecast for 2018 EBITDA in the range of $135 million to $165 million. This range includes some key assumptions and estimates.
Operations on the Siem Helix 1 and Siem Helix 2 have developed positively during the first half of 2018. Projects on the Seawell and Well Enhancer extend into the fourth quarter, however considering the market in the Gulf of Mexico vessel in the region – vessel utilization in that region could be a challenge. The Robotics segment should continue to benefit the reduced charter cost and increase in trenching work. Any significant variation of these key assumptions could cause our EBITDA to fall outside of the range provided.
Moving to slide 20. Our 2018 backlog remains at $1.4 billion of backlog, of which about $269 million is currently scheduled and estimated to be completed in the remainder of 2018. Our backlog continues to be heavily weighted to BP Q5000 contract, the two Petrobras contracts, and the Helix Producer One contract.
In the Gulf of Mexico, Well Intervention market, the Q4000 currently has some work in Q3 and identified opportunities into Q4. The vessel mobilized July 19 on a project and its utilization will be driven by near-term opportunities. The Q5000 has its 270-day program with BP with 95 day gap currently scheduled for October through December that’s subject to change. The IRS rental systems are currency idle.
In the North Sea Well Intervention market, we're assuming a high level of activity for our vessels into Q4. We expect continued seasonal weakness during the winter months.
Over to slide 21, after a slow start to 2018 for our Robotics segment due to the normal slowdown in the winter months, we expect the improvements seen in second quarter performance to continue through the remaining 2018. The improvement partially stand from the return of the Deep Cygnus in Q1, lower charter costs in the Grand Canyon I due to scheduled layoff and stronger wood from trenching market.
Moving to slide 22, the CapEx for the year is forecasted at $135 million with most of the capital for the continuing construction of the Q7000, including the forecasted ship payment in Q4. Our remaining debt payments for 2018 approximate $33 million with the scheduled payment on our Q5000 loan, debt and term loan.
I'll skip slide 24 for your reference. I will now turn the call over to Geoff for our market outlook.
Thanks Erik and good morning everyone. I’ll spend the next few months walking through our present market outlook and highlight some of the key opportunities for Helix.
With regard to customer sentiment, we believe that clients continue to be encouraged by Brent prices near $70 per barrel and remain focused on delivering production enhancement and field maintenance to capitalize on efficient near term returns for their investment.
Lead times, the time from contract signing to contract commencement remains short and clients appear to be unwilling to commit to durations in excess of what is absolutely necessarily. Operators continue to work off the remaining backlog of mobile offshore drilling contracts that they committed to previously. While not all of our units compete directly with Modus, we do see the decline of this type of backlog as encouraging for our intervention business.
In the Gulf of Mexico we continue to see weakness in competition from drilling contractors who are willing to operate their vessels at or near breakeven rates in order to keep the rigs warm. However, if past cycles are any indication, we would not expect this situation to continue. But this is the reality of the market we are in and it may affect our ability to continuously contact the Q4000 and Q5000 during this industry low.
It is our belief that with our proven track record, the design capabilities of our vessel and the performance of our crews, we are able to differentiate our offerings and keep our services at the forefront of intervention and P&A operations in the Gulf of Mexico.
In the UK market there is less competition from drilling units. Right now the pricing the North Sea appears to be slightly positive. We have visibility on the Seawell and the Well Enhancer into Q4 of this year.
With oil prices remaining high, it seems that more operators are committed to performing maintenance work to enhance their production and there is continued discussion of North Sea P&A work in 2019 and beyond.
Regarding the Q7000, we are currently completing the integration of inner furnished equipment and upgrade and expect to have the vessel ready to work around Q2 of 2019. In terms of the construction of the vessel, I think it is worth pausing here to highlight that the Q7000 is uniquely designed as an efficient BP 3 Well Intervention vessel, with a high transit speed, heavy weather capabilities and a fit for purpose design that differentiates this vessel from some cookie-cutter drilling rigs that are being delivered today.
The Q7000 is the culmination of our learning in the heavy Well Intervention space and this vessel under experienced hands should serve our clients well. As stated previously, although we have the option with the shipyard to differ delivery until the end of 2019, we are working hard on identifying opportunities to bring the vessel to market earlier in that year.
Due to the competitive nature of these opportunities, I will not go into too much detail, but will say that we have expanded our marketing capabilities and continue to pursue programs in West Africa, Brazil and the North Sea with the well populations, the design capabilities of the Q7000 and Helix’s business model should offer the market significant value.
Let’s switch gears and discuss Canyon offshore for a minute. As far as our outlook is concern, we currently expect that Canyon should show market improvement year-over-year for the remainder of this year on the basis of greater utilization driven primarily by a strong trenching market. We have better visibility on backlog in Canyon this year than we did in 2017 and while the oil and gas market remains tight, our belief is that it will begin ticking up for construction work in 2019 and on-words.
Canyon is positioned as a robotics based company with ROV’s, trenchers and vessels, serving both the oil and gas IRM light construction market, as well as focusing on the renewable sector. As such, Canyon is strongly leveraged to benefit from any potential market recovery.
So to summarize our market outlook, while we continue to be in a tough market, we believe that Helix has the pre-eminent non-rig intervention fleet, investment class robotics capability. We continually look for ways to expand our service offering and contracting formats around these enabling assets, with a focus on improving our margins and utilization and increasing the value that we deliver to our clients.
At this time I will turn the call back over to Owen for closing comments. Owen.
Thank you, Geoff. Well, we are back to free cash positive position and expect to continue that on an annualized basis going forward. The cash flow should continue to improve once we make the final payment on the Q7000 and the market conditions improve at all.
We're clearly pleased with the Q2 results given the challenging market conditions, but remember we're very early in any kind of market recovery and therefore there is upside ahead that should be achievable.
Utilization of our assets improved in the quarter, but there's still room for improved utilization. In the U.K. we actually lost work due to lack of availability, which is a very positive sign of work volumes that exist in the season. In fact, we're in discussions about some work to be done in Q4, which might potentially be the beginning of the market expanding for the season beyond our current assumptions. However, there continues to be alternative supply, which could handle any efforts to achieve higher rates.
The Gulf of Mexico is a bit of a different picture. Available work to be done continues to be at a low volume and clients are abnormally slow in committing to contracts. Rig rates continue to be low as a result of oversupply and competition. Our utilization could be better or at least the visibility of what utilization lies ahead could be better. The two vessels in Brazil continue to see strong utilization other than the brief period that the SH1 was in regulatory required dry dock. We took advantage of that time to upgrade the cranes and eliminate some of the last outstanding penalties, which will help the economics going for.
Our robotics group started to show improvement in utilization, not only in trenching as was expected, but in the work class segment as well. We actually picked up some vessel of opportunities to fill work that our long term chartered vessels did not cover. That said, the market continued to be over supplied with a lot of competition for work.
On a positive note, our robotics group has asked you to fill any uptick in market conditions without adding significant costs. Therefore it has great leverage for EBITDA improvement on any market improvement.
While there are some positives on the utilization side, rates remain depressed with the weight of oversupply across the board. We see drilling contractors and financially stressed companies attempting to generate backlog by offering what can only be described as unsustainable rates offered out of desperation.
We're assuming that this oversupply condition and pressure on rates will continue into or through 2019. It’s our opinion that refinancing has reached its limit and the process of weaker players exiting the market, combined with consolidation will begin to hasten the recovery process from the current oversupply, combined with increasing demand.
We anticipate that rates will be the strongest and hold in the UK. 2018 rates in the Gulf of Mexico have not have been favorable, but in my opinion they do seem to have bottomed. Brazil margins should show some marginal improvement as a result in the elimination of the four penalties on the SH1 previously mentioned.
Robotics rates for trenching or holding, the rates for world-class vehicles and vessels remain depressed. Looking forward, we see little changing end market conditions going into 2019 until some of the oversupply is rectified. We'll continue to improve our operational efficiency and we should see Canyon return to profitability with ongoing long term charter roll-off. In addition, we do have the Q7000 ready to come to market next year as Geoff has already covered.
The balance sheet is in good condition and having returned to free cash flow positive. Even with the final payment of the Q7000 we expect to retain a good balance sheet.
Net debt to equity is at 10% with net debt at $171 million at the end of Q2, and our focus will be on further reducing debt. However, our main objective going forward will be on finding ways to improve margin. There are a lot of opportunities for us to work on it there.
With respect to 2018, we will not be revising our guidance. Consistent with what I stated on the last call, we continue to trend in the upper half of the range previously given, but still face market uncertainties in Q4 and have less visibility for the quarter at this point in the year than we had in prior years.
Now with that, I’ll turn it back over to you Erik and we can open it up for questions.
Thanks Owen, and operator at this time we'll take questions.
Thank you. (Operator Instructions) And the first question is from the line of Jim Wicklund. Please go ahead.
Good morning, guys. You know the outlook is what we struggle with. Good quarter, I mean, there's no question you surprised everybody. I think the concern has been, you know you really haven't changed your outlook, which is conservative and that's good. But in looking at utilization, you're right. Q4 on, we don't have a really good idea of what's going to happen. In terms of trenching, how do we get some handle on the confidence or sustainability or level of future work? That seems to be a big business for Canyon and the rig part isn’t recovering, so how do we feel about trenching? We don't – how do we get a handle on that guys?
Hi Jim, Scotty here – I’ll take that. We feel very good about trenching. One of the Canyon vessels is booked up all the way through for nearly all of ’19 from now in the trenching market. And then we have backlog in ‘20 and ‘21 for trenching across two of the vessels, so all of that work secured, we feel very well. The rates are higher than they were last year and they are holding.
We are also seeing a return to some oil and gas trenching. This quarter for instance, 60% of the trenching work undertaken is actually oil and gas trenching, not just reliance on the recent upsurge in the renewables market. So we have a good backlog in trenching. We’re operating very well, our clients like us, rates are holding and I am quite confident in the trenching market going forward at this time.
Okay, that's very helpful, because that was one unknown. And then I guess it's really just the Gulf of Mexico. Brazil is doing fine. North Sea, you know it's improving. Oversupply of rigs, your completely competing against rigs. The rig stocks are up 40% year-to-date and I guess that's on expectation of the future you guys aren't seeing and improving rig market. How do we get warm and fuzzy about ‘19 for the Gulf of Mexico, or do we?
[Cross Talk]
You take it Owen, that’s good.
You know I’ll just say you know we see the same thing, but we're just trying not to get ahead of ourselves on the positive news. If you dig deeper, we're still seeing rigs going out at low rate, and until we see an inflection point in those rates. I think we're a little conservative on calling -- you know of balancing having occurred. I think we're still a little ways away from that. The reason that we tend to be conservative, it’s primarily around the Q4 and the 95 days of the Q5 in the fourth quarter. That really is the bulk of our uncertainty and why we remain a little bit cautious on our guidance.
Okay, you guys noticed that consolidation needs to take place and probably will, and in every other sector over many years when things have started to bottom, you’re no longer catching the falling knife, and you really do start to see consolidation. Tidewater and Gulf mark in the boat business. What does consolidation look like in your business? Are you a buyer, are you a seller, are you a merger? What's the consolidation look like at your end of the range and how do you guys play in that?
Well, let me jump in and take the Well Intervention consolidation first of all and then I’d like to ask Geoff to sort of give his view of where the drilling market is coming into play on the consolidation.
On the Well Intervention side, we really don't have that many non-rig competitors and we certainly don't have any competitors that have the breadth of capability that we do. So I don't see us as being a consolidator of what’s basically a very small niche. I think we are the dominant player in that niche and we’ll continue to do so even with our assets.
For me, the consolidation move for us would be to expand our business model to be more than perceived as just a vessel rental company, but to expand the service offerings around the intervention activities in a well, both upstream and downstream, so that we're offering a better value proposition to the producers and therefore able to be a little more creative on the silent contracting in part by a relatively unique niche in that part of the market. That's where I see the company going.
Okay and Canyon? Go ahead, go ahead.
Canyon, I think – well Scotty, why don’t you talk about the Robotics market since you're the most connected with that.
I think there has to be some color and consideration of the Robotics industry. There are lots of ROV companies out there that we know are suffering a lot of pain. We are uniquely positioned, because the trenching side doesn't have much competition. There’s probably one or two other players that work in the trenching market. But ROV’s have become a commodity and there's a number of ROV’s on the beach right now for these companies. With every up’s and there’s always been a bunch of small operators that small ROV companies that come to the market, we know that those guys are in pain. We know quite a few of them who have already gone under, I’d be shocked if there is lots of more consideration on others that go under.
Now we’re turning more to our trenching side of it that’s going well. We are seeing a slight uptick in the work class availability. We are seeing that some of our main contractors on the construction side of it, some of our clients are booking work out to late ‘19 and 2020 that would therefore utilize our ROV’s again. So a portion of our ROV’s are already on their vessels, so I see quite a fall out for the next couple of years of smaller ROV companies and lots of the ROV’s that are out there quite aged and will no longer be able to be utilized in the market. So it is definitely going to change, but it's going to take time. That’s my take on it.
Okay gentlemen, thank you very much. [Cross Talk] Yeah, go ahead, go ahead. Please Owen.
Well, I was just going to add a little more color. In the ROV market I sort of perceive it as tier 1 ROV providers and then there are thousands of the smaller guys. Trying to consolidate the ROV market is a little bit difficult if you're talking about the smaller guys. You know as Scotty said, they are commodities. They spring up in good times and they disappear in bad times.
The only time that you would look at consolidating a number of smaller ROV operators is if you really wanted the extra hardware for an expanding market. We're not in that position. We have plenty of hardware to cover any market expansion and that's what I alluded to and that we have leveraged there without significant costs.
The tier 1 operators though are really differentiated in the fact that they have engineering support, tooling and global support behind their operations, and I think there it does make sense to possibly look for consolidation opportunities, creating a really large sustainable operation that could help. Well, ‘help’ may be the wrong word, but to be more competitive as the smaller ROV operators depressed the market here and try and hang on longer.
Okay. Gentlemen, thank you very much. Excellent quarter! I appreciate it.
Thank you.
And our next question is from the line of Ian Macpherson. Please go ahead.
Thanks. Good morning everyone. Can you maybe help us frame the possibilities for Q4, for the Q4000, Q5000? What are you considering in terms of the range of outcomes, worst case being no work for either one of them. Is that too penal? Would you consider sacking one, so you're only having to fill up one vessel. Would you consider taking one of them out of the Gulf of Mexico and marketing it internationally? What's on the table?
I’ll take that one on. I think we shouldn’t paint too bad a picture here on Q4000. Q4000 always had high utilization and so far this year we’ve had high utilization. What we've said for a number of calls now is the market is moving more toward a spot market and we’re picking up that work as it comes along.
But going into Q4 we have visibility for a number of projects out there. We know we’re competing against some idle rigs. We know some of those rigs have actually been taken up and moving out of the region. We track the rigs that generally give us -- that bring our rates down, so we keep a good eye on that.
But there's opportunity out there. There is the obvious chance that we could get zero work; I don’t believe that will happen. And if we did, we wouldn’t take one of the rigs out of the market, we would warm stack it. There was a number of projects this year that have been put off in 2018 that will go ahead in ’19 and would best be allowed some of their operators to move the P&A works by giving them a year extension on P&A type of activity, so I expect that work to come back. But again, I expect it to be a bit bumpy. I expect that the rates will be somewhat lower than what we’ve had in the past. But then on the back step of that we have the Q5000 contract that achieves good utilization for the BP assets.
We also have some unique tooling that will enable some work to come to us, the 15K system. That's been proven now and it’s worked on a number of high pressure well and that can be used off either rig and easily mobilized. We also have the Schlumberger contract that allow for all the Blue equipment to be mobilized on the equipment and allow us to move from project to project quite smoothly without having to mobilize equipment, demobilize equipment.
So we're up against some rig competition. We are working today on both rigs, we have visibility to work, but we do not have full contracts in place at this time, but we're in discussions with many.
To summarize it a little bit, I think there’s three things that keep us conservative about the fourth quarter. We know the work that’s out there and the Q4000 has achieved utilization in the past, but there’s three things occurring. One is, we are keeping an eye on the well rigs and the rates that they are charging, that's one issue. Two, is the deferment by the BSEE, allowing P&A to slide into next year, that’s an uncertainty. And three, the clients just seem to be waiting until the last minute to make any kind of a contracting decision, which is a little abnormal for us. In the past they usually give us a lot of lead time, but that was driven by fear of not getting in our schedule and that fear has subsided somewhat for them.
Okay. Thanks Owen, I appreciate that. On Q7000 what would be your criteria in terms of profitability to bring out the vessel earlier next year as opposed to waiting for the market to firm. Do you think you could get a better price, a better day rate if you withheld the vessel longer and do you think that's not really the point and really just winding up the vessel with the right project is really the objective.
Yeah, I can take that from here; this is Geoff. You know we’re looking for projects around that will give us stability when we come out. We want to make sure again that we're not taking an unsustainable view where we’re coming out for a very short project without visibility behind that and we want to deploy the vessel to a region with a strong population of wells that were supported into the future.
Again, talking before about the design capabilities for the vessel, it does have a very high transit speed which allows it to move between regions very quickly. It also has enabling features that allow for a much higher efficiency. Usually that's worn out against a large number of wells to really see that efficiency. So again, I don't think I'll comment specifically on the profitability, but it's really more the outlook for a region, the sustainability of the business model, and the ability to get it up and running as quickly as we can there.
I would add that I think there's actually strategic value in bringing the vessel out earlier rather than waiting for pricing to move. Our producers are typically nervous about being a first-in user. By having the vessel in the market, go through its shake downs and have some successful project demonstrating its success could actually be more beneficial to longer term pricing than waiting for the market demand to increase.
Okay, got it. Thank you.
And our next question is from the line of George O'Leary, please go ahead.
Good morning guys.
Good morning George.
Good morning.
So Q3 for you guys tends to be a stronger quarter -- Q2 and Q3 generally, some of your strongest quarters in the year. It seems like there’s good visibility into the third quarter of this year, so I guess two questions. Any reason why that wouldn't be the case this year or why Q3 wouldn’t be one of your strongest quarters, if not your strongest? And then two, on the rental side, is there any other, any green shoots that are emerging on the rental side that tends to be high margin, is going to be high margin revenue dollars for you guys when those go to work? So I just want to make sure I understand how you guys are thinking about that for the third and fourth quarter of the year?
I think Erik you answer the question one and I’ll answer the question two.
Okay. As far as -- you're correct, the third quarter has historically been one of our strongest quarters and we don't expect that to be any different this year from our standpoint the contracts that we have on schedule and the lack of visibility that we have is towards the fourth quarter. So I think in general the third quarter expectations are similar to what we’ve had in previous years, it being one of our stronger quarters of the year.
Okay. And then regarding the rental systems, IRS 2 has just completed a project that commenced realistically in November of 2017 and it got back to the base there about a week ago. We do see sporadic opportunities that come up. They are more sort of on a global basis. We are in talks with a numbers of clients for rental opportunities, but nothing’s really materializing. It’s not something that we're holding our hats on with those systems.
We noticed we have to undertake some maintenance period her on IRS 2 before it's ready to go again. We are seeing quite a bit of activity regarding the 15K system that I think mostly that work could enable us for Q4000 and the off period for Q5000 to put those vessels to work in the Gulf of Mexico in the high pressure wells.
So it’s quite sporadic the opportunities for the rental systems. I would say there's been a few more tenders come in recently compare to recent years and I believe that's probably because more drilling rigs have been stacked. Would you agree with that Geoff?
Yeah, I’d say you’re seeing more fixtures out there and there is an enhanced activity based on the operators to go out and look for production enhancement capabilities and that’s usually the fastest way to bring something back online, is to work it over and find a well that’s already there. So we are seeing enhanced interested because of that and because of that these unit, these rental units can be used from rigs that are still in the backlog overhang for an operator and can help these vessels operate more efficiently. So yeah, I think that's a fair statement.
Great, I rolled both my questions into one and Wicklund stole most of my thunder, so I'll let you guys keep moving.
Okay, thank you.
And the next question is from the line of Marshall Adkins. Please go ahead.
Good morning guys. So last couple of quarters we talked about green shoots in offshore. It seems like you're in a full blown cyclical recovery, at least in the North Sea. Your operations in Brazil are killing it. Those operations of yours, you're doing phenomenal there, and you beat all of our expectations.
Your guidance staying the same appears to me to be the Gulf of Mexico. So I know you've talked about the Gulf a little bit and I want to drill down a little bit more on that.
And the last question. It sounded like you are seeing at least interest in things in the Gulf pick up, but there is still an overhang of assets. So I'm more curious, is it a problem with just operators deciding to get busy with work or is it more the overhang of assets that’s causing to be a little more cautious on the Gulf?
Well, from my perspective I mean the [Cross Talk].
Go ahead Owen. Let’s start with you and then we’ll go to Scotty.
Okay, alright. From my perspective I think the commodity price moved here in ’18, you know the ‘18 budgets were cut last year. So I think there is a little bit of hesitancy in getting rent back up, but I do think that you are seeing the volume of work in all the markets increase.
The only difficulty for us is that there is just so much oversupply and that's going to have to get worked out -- worked off before you can really say that the service industry has been a full blown cyclical upturn. We are in the very early stages of that but I think utilization, I think you're seeing our utilization increase, but we're not seeing it yet on the rate side.
So let me just make sure I heard that right. So it sounds like you are seeing activity pick up, not just in the North Sea where clearly that tightening. Activity is also picking up on the Gulf, but there is just more capacity in the Gulf is what I just heard you say.
Alright, I think that’s accurate. But I think you have to also say in the Gulf of Mexico, for the activity increase on the production enhancements sides you've also seen a proclivity of the vessel [ph] to differ P&A work that we would have thought would have did in 2018 and now that’s fallen to the following year.
The question is going to be, are they going to allow multi-year deferments or is that a one-time shot?
Right. Scott, anything to add to that?
Yeah, I think Owen hit the nail on the head earlier when he mentioned about the Gulf of Mexico summary. But there is a lot of visibility for the Gulf of Mexico certainly, but it’s rather not the worst thing to take place this year in ’19 or ’20. There is projects out there. Like I said earlier, Q4000 has good utilization this year. Its working today, it has a project on the back of this project. So there is work out there. A lot of this will come down to how the operators put it in the budget for 2019 and whether or not we best utilized any favorable extensions.
The best seasonality allowed extensions, so it would be hard for us to keep, just moving P&A and allow them to kick the cans on the road, especially with the cost of oil increasing, when oil prices were trying to push P&A activity out, so they are calming they can afford it, that the market has dropped, the price of oil recovery I would say is changed based on this position on that.
[Inaudible] also visits most of our rigs almost on a weekly basis, so they must be looking at our assets from a P&A standpoint. There is also the rig overhang and I’ll pass that over to Geoff because he is more tuned to that market.
You know I think what Scotty and Owen said was both good, but you know there is plenty of conversations going on right and how much of those conversations turn into action that’s the question. We usually see the activity picking up, the number of bids and fixtures climbing, utilization getting stronger and then that's when you get your margin improvement. But right now, again we are having a lot of conversations and the timing is still flexible on some of the projects.
With regard to the rig overhang, I mean we think that from the rig side there has been a lot of focus on efficiency and trying to bring some rationalization of the fleets. But without continued consolidation, with continued rationalization, you're still going to fight this overhang until that backlog is worn off.
But even with the backlog that operators do have, they are reaching out like I said for the IRS. Rentals and really we do still have a lot of interest in doing production enhancement and looking for efficient tools to do. So it’s encouraging but you know the timing is still to be determined.
I'll just make a – have a point. This is only really affecting the Q4000. The Q5000 has good backlog for the next few years coming up with BP. So there is Q4000 that’s in the mix and again we’ve had high utilization historically and this year. It’s just maybe a bit more lumpy as we go forward.
Right, last one from me. There's a clear change of tone on the Q7000 that I'm hearing on this call that I haven't heard on the past call. So, it seems like you're more confident that that makes sense to bring out early and you talked a little bit about this, but just expand upon that a little. What's giving you more confidence or am I just reading your change of tone incorrectly?
Yeah I guess this is – this is Geoff. I’ll just say we continue to look for all available opportunities for the vessel. I don't think there's a significant change of tone in the Q7000 at this point, but I can tell you that we're working every opportunity through in all the regions that we focus on and we've expanded our marketing capabilities to cover some of the areas that weren’t may be our core areas previously. So I think those are some of the things that have changed, but Owen or Scotty, if you have any other comments.
No, other than to say Geoff I think we see the opportunity. It’s just a matter of getting the client to comment, but that just seems to be a persistent nagging issue for us. They are not quick to move as they were in the past, but the work is there. So I guess that's where you're reading our confidence from.
Perfect! Thanks guys.
Thanks Marshall.
And our next question is from the line of Joe Gibney. Please go ahead.
Thanks, good morning guys. Just had a question on the key vessels; just want to get a little more granular. You referenced you know a contract starting here, mid-July and then some follow-on work it sounds like right on the backs of it. I mean it stands today, notwithstanding the conversations of what you are trying to target for the rest of 3Q, but I mean is -- how much of 3Q is currently contracted now and spoken for, for the Q4. Is 50% of the quarter tied up at this point; just curious?
And then on the Q5, with the shift in all hire time with BP, did some of the conversations you were having on filling some of that gap on the spot side fall away or are they shifting in the fourth quarter too in terms of timing and they are still there. Just kind of curious on that perspective.
I mean I think we’ve answered this already, but Q4000, that high utilization place on the year is contracted right now has follow-on work and we have visibility into the projects. And we face competition with Q4000 against some rig dropout. That being said, we’ve achieved high utilization through this year, so we’ll keep fighting to get those as well.
I mentioned earlier, it could be zero, it could be full, you know utilization from there, but it’s a lumpy market out there for Q4000. Q5000 and the reason we continued on into this quarter with BP is the use of the 15K system and we are still out chasing work for Q5000. It’s our contractor period that’s more consistent with our premium clients.
I mentioned earlier that we were seeing some of the competition on the drilling side that’s been against us leaving out and has secured some workers. So that might help us, but it might not materialize. It's spot work for the foreseeable future this year.
So Joe, just trying to answer your question a little directly, I think we said earlier that the third quarter looks like we, is looking okay for the Q4000 and that we don’t anticipate the third quarter not being stronger than the second quarter, which is historically accurate.
Really it’s just the fourth quarter at this point and you are right, the Q5000 idle time typically falls in the middle of the year and it has shifted to the fourth quarter in this year, which just sort of adds the uncertainty to the volume of utilization that we can generate in Q4, given the lack of full contracting utilization on the Q4000 plus the 95 days at the Q5000.
Now having said that, we do the see the work. We know the work is there and we are chasing it, but whether or not we can get it to fall in Q4 and make the quarter fill in are not just remains to be seen and that's the basis for our uncertainty.
Understood, that’s helpful. Just a question on spot rates and the North Sea you referenced a little bit more upper momentum there. Just trying to get a little bit here of the revenues given utilization was actually lower than we would have thought, just with some of the down time in the Gulf of Mexico.
So are rates moving higher in the North Sea than you’ve previously intimated? I think you talked about low single digit kind of moves that are still pretty suppressed and they are still over capacity, which I understand. But are you seeing a little bit more rate movement of late here in the North Sea? Just curious on some perspective there?
I’ll take it. I think the right move. I think for the summer season, you know from April throughout to October where we have seen year-on-year increase in the rates and we’ve had those rates and when we continue to secure working to the fourth quarter in the North Sea. So our rights have helped. But you have to remember some of that is an uptick in coherent activities and there is an uptick in diving activities. We are seeing a bit more diving activity this summer.
So the rights are there. There is an awful lot more maintenance work going on in the North Sea. The well population is older and therefore requires the divers to go in and access the wells for us. So back in 2016 we can see any work and a lot of work got held off and that was when the work comes to life and therefore the rates increasing.
We will see the rates as we go back into the winter periods, periods sees of again. We’ll try and get work for the boats and to do that we’ll have to either take some weather risk or lower the rates and if we can’t achieve a good portion of work for the winter months, maybe what was done in the last two years and once that the vessels ready to go post our compliant and keep the vessels in a warm position.
Okay, helpful. Erik, just a minor lateral question for you. I know it dances with stock based compensation, but it's had a fair amount of variability over the last couple of quarters. Could you help us a little bit with thinking about G&A in the back half of the year?
Yeah, hear in the second quarter we did have an increase in G&A and that was driven by our equity based compensation plans, the increase in our stock price from $5.73 to $8.30 or so caused a significant increase here in Q2.
I think going forward, I think that it’s probably going to be a little bit lower from that depending on the variability obviously of the equity compensation plans, that's really been the variable – certain variable.
Got it. I appreciate it guys. I’ll turn it back
And our next question is from the line of Vaibhav Vaishnav. Please go ahead.
Hey, thank you for taking my question. I guess a question for Owen. When do you talk about the upper end of the guidance? What is the embedded utilization levels for, call it Q4 and Q5. I guess you guys talk about Q3 being same or better for Q4000 and I guess last year you were able to fill out 70 days of non-BP work. Is that a good assumption to think about second half?
Erik, why don’t you help me out here with the exact numbers that are in the forecast.
Yes, I think that in general, in our assumptions. I think overall in the first half of the year the Q4000 had strong utilization. I think it was about 88% or so. I think in our general guidance going forward to Q3 and Q4 we have assumed certain levels of utilization that’s implied in our guidance. We do not see it being as strong as the first half of the year, but we do have obviously utilization assumptions in there in the third and fourth quarter.
Okay. And on Q5, is that like 70 days a good ball park?
Yeah, last year we were able to secure about 70 days on the Q5000. I think in our assumptions that we have this year we actually probably have a little bit lower, based on the fact that the schedule has moved now to the fourth quarter and the uncertainties associated with having both vessels in the spot market at that time.
Got it. And I guys Erik are there questions that 3Q should be better than 2Q. I just want to make sure like that should be the case for both the segment. Is that fair like both intervention and ..?
So just to clarity, we said that historically Q3 has been one of our strongest quarters. I think last year third, second, third and fourth quarter were all roughly in the same range. Historically the third quarter has been one of our stronger quarters and we expect that to be one of our stronger quarters of this year. We haven’t – specifically whether this can be stronger than the second quarter or not.
Okay, okay. And just I guess from talking about Robotics, it sounds like there is a better market in the second half ‘18 year-over-year. You would get obviously cost improvement in second half ‘18 versus second half ‘17. Is it fair to think that EBITDA should be better in second half ’18 versus during second half ’17 for Robotics specifically?
Yeah, I think we have said previously that our cost basis for the Robotics business is going to be better in the latter part of this year. We dropped off the Deep Cygnus area, we dropped off one of the hedges against the one of the Grand Canyon, so our cost base has come down. We are seeing good utilization against two of the vessels. We still have to fill out work for one of the vessels, but that’s more towards the end of Q4.
So I would think year-on-year Robotics would be equal if not better depending on how we fit out the final pieces of utilization. We certainly have a lot more contracted work in ’17 but we still have some utilization to fill out some of the vessels.
That's all for me, Thank you so much.
And our next question is from the line of David Smith. Please go ahead.
Hi, good morning and thank you. I had assumed that any high priced legacy backlog on the Q4000 was pretty much gone by the end of ’17. But I just wanted to double check if that was the case, if there was any higher price legacy backlog on the Q4000 going into this year?
That there was one contract left over, the well utilization contract that was high up, but it’s not highest by any means, but high to market and that was basically for one well of work.
Did that happen in the third quarter?
Now that work has already taken place in the second quarter.
I wanted to check, because the Well Intervention revenues were a little higher than I expected given the utilization breakout. It seems like pricing on the spot vessel either took a step up or the nature of the work improved and I know you mentioned more diving on the North Sea vessels, but utilization aside is there anything specific in the quarter that benefited revenues that maybe wasn't present last quarter might not repeat in the second half?
I think the biggest variables, as Scotty said the coil tubing and the diving in the North Sea; those definitely help the rate significant. I think from the Gulf of Mexico, I think overall it’s a spot market. We did have a small legacy contract in the second quarter. I think there is probably improvements in there from Brazil with the utilization of our vessels. So I think there is a lot of different components that are aggregating to a strong revenue quarter.
Okay, I appreciate it, and a quick follow-up. We are seeing day rates for third gen rigs in UK around 130,000 a day for term P&A work. It looks 30% better than what sixth-gen semis are getting in the U.S. Gulf. I know in the Gulf of Mexico spot market, it looks like you are getting double the rate that sixth-gen semis get for similar work. Is there any reason that ratio wouldn't be as good or better you know if the Q7000 goes head to head against the rigs for UK P&A work?
Yeah I think, this is Geoff. I just think in the Gulf of Mexico I would say it's a significant difference – significantly a differentiated rate between our vessel and the rigs available, especially if it’s a sixth gen floater in the – even in the Gulf of Mexico. Where we differentiate ourselves is on our services and are efficiencies. So again, you know taking a base vessel price, plus all the other services and equipment and things that we deliver, you know that’s what we differentiate ourselves. It’s the whole package to the client, not just the vessel.
I think, there is another metric you need to think of here. When you see these rig rates, that’s just pure rig rates and our revenues are incorporating the services, the subsea system, the ROVs and the people associated with that. So there is a bit of a difference, but than just comparing directly rig-on-rig.
And in the North Sea against the third gen moored rigs, we don’t compete against those rigs, if Q7 was to go the North Sea. It’s got a huge amount of advantages against the moored rig. For instance, in heavier weather, just to set the anchors on a moored rig can take five days per location and then to unset the anchor, two or three days. So totally a different dynamic in the North Sea and then our [Monocle] vessels in the North Sea have different services including the diving that no rig would have either.
Sure, great thank you very much.
Thank you.
[Operator Instructions] Our next question is from the line Bill Bissell. Please go ahead.
Hi, thank you. I had a couple of questions. The first one was relative to the third quarter, compared to the second quarter, would you please discuss the swing factors that you see. And then secondarily, what’s the prognosis for improved utilization on the 10-K IRS for the remainder of the year?
As far as you know, Bill we don’t necessarily give quarterly guidance. I think in generally what we tried to paint the picture here in the second half of the year, is that our third quarter with our backlog contracts, we do expect it to be a strong -- one of our stronger quarters of the year. I think in general the real swing factor between Q2 and Q3 would probably be the outcome of the Gulf of Mexico, how that turns out on the Q4000. The Q5 is pretty set. The Well Intervention vessels in the North Sea have strong backlog and Brazil operation is going well.
So from that standpoint, the contract risk for the third quarter is low and its more of an operational performance and so that will be a driver as we can compare quarters here, 90 days from now so. As far as the IRS, Scotty?
We said earlier, the IRS, the one that we did put out for rent, mainly it’s just coming back from a long campaign, so there is a significant maintenance period. So at this time, we are not forecasting any utilization against 10K IRS systems for the rest of this year.
And that’s primarily due to the work that needs to be done on the equipment?
Well, that’s some basic logistics and time and after we let the guys have some time off, then we start the maintenance period. You are going to be well into the fourth quarter and then contracting the unit and getting utilization for it would be problematic. We do have IRS 1…
But Scotty, it is up for a long maintenance period. It’s a five year COC maintenance regulatory driven that you have to do and that’s to incorporate months of work.
Yeah, that’s what I mean. By the time we have the system ready, you are going to well into the back end of Q4000 before we could back out for any rental opportunities this year. So it is a significant period of maintenance.
Thank you all for the insights.
Thank you.
There are no further questions at this time.
Okay, thank you very much for joining us today. We very much appreciate your interest and participation and look forward to having you on our third quarter 2018 call in October.
Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you to please disconnect your lines.