Helix Energy Solutions Group Inc

NYSE:HLX

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Third 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, today’s conference is being recorded Tuesday, October 23, 2018.

I would now like to turn the conference over to Erik Staffeldt, CFO. Please go ahead, Sir.

[Erik Staffeldt]

Good morning everyone and thanks for joining us today on our conference call for our Q3, 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 presentation released last night. If you do not have 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 Johnson]

During this conference call we anticipate making certain projections and forward-looking statements based on our current expectations. All statements in this 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.

[Owen Kratz, President and Chief Executive Officer]

Thank you Alisa. Good morning all. I will start with Slide 5, which is a high-level summary of Q3 results. Our third quarter 2018 results saw improvement as compared to the second quarter results. As improved performance from our Robotics segment was partially offset by a decline in IRS rentals and our Well Intervention segment.

During the quarter our Robotics segment benefited from 219 days of trenching operations and near full utilization of its chartered vessel fleet including 113 days of spot vessel work. Our Well Intervention segment was negatively impacted by lower IRS rentals in Q3 26 days of rentals in Q3 compared to 120 days in Q2.

This is partially offset by higher utilization of our Well Intervention fleet. Revenues in Q3 increased to 213 million from 205 million in Q2. Our gross profit increased in Q3 to 52 million from 43 million in Q2.

Our net income increased to 27 million in Q3 from 18 million in Q2. For the quarter we generated adjusted EBITDA of 59 million compared to 52 million in Q2 and 30 million in Q3 of 2017.

At quarter-end our cash position increased by 37 million to 325 million. In the third quarter we generated 63 million of cash from operations.

Turning to Slide 6, on a year-to-year basis our results have improved significantly over the same period last year. Our improved results are primarily from operating two vessels in Brazil. Only the SH1 was operational during the third quarter of 2017 and improving offshore in North Sea market and cost reductions in our Robotics segment.

On a year-to-date comparative basis, our revenue has increased to 163 million and our net income and EBITDA have each improved by 63 million with the start up operations in Brazil and the near completion of our CapEx program our free cash flow has improved by 185 million.

Turning to Slide 7, Well Intervention utilization on our six vessels increased to 91% in Q3 2018 from 88% in Q2 2018. In Brazil, our utilization averaged 95% in Q3 in line with Q2 utilization. The Siem Helix 2 experienced a few days of unplanned maintenance time during Q3. The performance of our vessels and crews in Brazil continues to be a positive development in 2018.

In the Gulf of Mexico utilization for the quarter was 69% compared to 74% in Q2. The Q5000 worked on the BP contract for the entire quarter completing its annual commitment on October 3. The Q4000 was 59% utilized in the quarter compared to 76% in Q2. The vessel was idle at the end of the quarter between projects.

Our North Sea vessels were utilized 99% in Q3 compared to 95% in Q2. During the quarter both vessels primarily operated in diving and intervention mode. Our Robotics segment also benefited from increased activity in the UK market during the quarter.

ROV vessel utilization increased to 98% from 70% with 113 days of spot vessels in Q3. Utilization on our ROV’s increased to 42% from 38% with 219 days of trenching work in Q3. Production facilities continued to be a steady performer operating at full rates for the quarter.

Now on to Slide 8, from a balance sheet perspective our cash levels at quarter-end increased to 325 million from 288 million at the end of Q2. We generated 63 million of cash from our operations offset by capital expenditures of 13 million and 13 million in scheduled principal payments in connection with our financing.

Our net debt position decreased to 123 million from 171 million in Q2. I will now turn the call over to Scotty for an in-depth discussion of our operating results.

[Scotty Sparks]

Thanks Owen. And good morning everyone. Moving on Slide 9. Q3 has been one of our best quarters in recent times at strong utilization across all of our business lines in the company with very good uptime performance.

The quarter was a recordable incident free in terms of safety performance with our TRO at lowest levels ever achieved. Across the fleet we conducted works on 27 wells globally. Revenue increased in the third quarter in line with our performance to 213 million compared to 205 million in the second quarter.

Gross profit margin increased to 24% resulting in a profit of 52 million increasing from 43 million in Q2. In the North Sea Intervention business combined vessel utilization of 99% was achieved throughout the quarter with no downtime. Both vessels are contracted at highest seasonal rates with most wells requiring diving services.

In the Gulf of Mexico to Q5000 had another strong quarter with zero downtime. The Q4000 had some gaps between projects and achieved 59% utilization undertaking preventative maintenance while between projects. Performance in Brazil was strong. Both vessels performed very well achieving high utilization.

The SH1 achieved 100% utilization and the SH2 achieved 90% utilization. Helix ranks number two out of ten contractors in the Petrobras Ranking System for safety, efficiency and performance. Robotics achieved very good utilization of near 100% for all three Grand Canyon vessels, since the vessels working full time on trenching projects on a mix of oil and gas trenching and renewables trenching in the North Sea. We also enabled 113 days of project works globally on spot vessels.

Slide 11, provides a more detailed review of our operations for our Well Intervention business in the Gulf of Mexico. The Q5000 was 100% utilized for BP throughout the quarter with zero downtime working on three well locations to undertake production enhancement activities.

In early October the vessel concluded its yearly campaign with BP. The Q4000 achieved only 59% utilization. The vessel performed well with no commercial downtime working on an abandoned program for one client and a production enhancement project for another client. IRS 1 and 2 was stored at our facility in Houston with IRS 2 undertaking preventative maintenance following the completion of the campaigning in Africa earlier this year. The Helix OneSubsea 15K IRS remained contracted to BP on the Q5000 for the first part of the quarter and was then demobilized to the OneSubsea facility for maintenance.

Moving to Slide 12, our North Sea Well Intervention business experienced a good quarter with both vessels working virtually the entire quarter with almost zero commercial downtime. Both vessels worked at stronger seasonal rates during the quarter working 93% in diving mode. The vessels worked on 13 wells during the quarter conducting a mix of abandonment work and production enhancement programs.

The Well Enhancer worked a 100% in the quarter working primarily for one client on well maintenance and production enhancement projects. The Seawell worked 98% of the quarter working for two clients on pre-P&A programs.

Moving to Slide 13. In Brazil our operations with Petrobras continue to go very well. And we achieved another strong quarter. Both vessels continued to perform well for Petrobras. We are extremely pleased to be ranked in second place in the Petrobras ranking system of ten drilling contractors based on safety efficiency and performance.

The Siem Helix 1 achieved 100% utilization working on three wells in the quarter. And the Siem Helix 2 was utilized 90% working on six wells. Unfortunately, the vessel had two downtime events during the quarter due to testing of a topside manifold system and an unplanned change out of the main tower wire. IRS 3 continues to be stored at our facility in Brazil for possible standalone rental opportunities.

Moving on to Slide 14 for our Robotics review. Q3 was a good quarter for Robotics. It was one of their best in recent times with vessel charter fleet utilization at almost 100%. With two vessels 100% utilized on trenching projects in the North Sea and one vessel contracted on a walk to work project in the Gulf of Mexico.

We also contracted 113 days globally on a five project-oriented spot market vessels taken on back-to-back with client requirements. One of the contracts increased utilization for the [indiscernible] unit and has continued into the fourth quarter.

Grand Canyon worked in the North Sea completing 92 days of utilization work and on trenching projects. Grand Canyon sea located in the Gulf of Mexico worked 90 days concluding the short construction scope and then completed the waterflow project for the remainder of the quarter. Grand Canyon III had 92 days utilization performing works on trenching projects. Under alliance we also contracted two ROV units to Schlumberger from the first time in the APAC region to undertake support on the pumping project. Over to Slide 15, I'll leave this slide detail in the vessels ROV and trenching utilization for your reference.

I will now turn the call over to Eric for a discussion on the balance sheet and our 2018 outlook.

[Erik Staffeldt]

Thanks, Scotty. Moving to Slide 17, it outlines our debt instruments and the maturity profile September 30, 2018. Our total funded debt at September 30th was $489 million with a reduction of $13 million from our June 30 balance for scheduled principal payments during the quarter. Slide 18 provides an update of key balance sheet metrics including growth and net debt levels at year-end and September 30, 2018. Our net debt in Q3 decreased to $123 million from $171 million in Q2. The decrease in the net debt is being attributable primarily to $63 million of cash generated by operations offset by $13 million of CapEx. Our cash position at quarter-end increased to $325 million, our net debt to book capitalization was 7%.

Moving over to Slide 20, which provides an outlook on 2018. We are adjusting our forecast for 2018 EBITDA to a range of $148 million to $160 million. This adjustment is based on a year-to-date results in our estimate for the fourth quarter. This range includes some key assumptions and estimates. During the fourth quarter, we expect our operations in the North Sea to be impacted by the normal slowdown in activity during the winter months. This will impact both our well intervention and robotics operations in the North Sea. Projects on the Seawell are expected to run into mid December and the Well Enhancer into early December. In Brazil, operations on Siem Helix 1 and 2 continue at a high level and we're assuming the same in the fourth quarter. Activity levels in the Gulf of Mexico Well intervention market continue to be weak with most opportunities falling into 2019. Any significant variation for these assumptions could cause our EBITDA to fall outside of the range provided.

Moving to Slide 21, our 2018 backlog would remains at $1.2 million of which $121 million is currently scheduled and estimated to be completed in the remainder of 2018. Our backlog is heavily weighted to the BP Q5000 contract and the two Petrobras contracts and the Helix Producer 1 contract. In the Gulf of Mexico Well Intervention market, the Q4000 currently has some work in Q4 with limited opportunities. The vessel entered the quarter isle and they are scheduled to mobilize for five well project in December.

The Q5000 completed its 270 day program with BP that will have some work in Q4 and identified opportunities. We have in our forecast approximately 50% utilization across both vessels in the region. The IRS rental systems are currently idle with potential work on 15K system late in the quarter. In the North Sea Well Intervention market, we're assuming the high level of activity for our vessels into December and we expect continued seasonal weakness during the winter months.

Over to Slide 22, robotics, we expect a slowdown in activity with the onset of the winter months in the North Sea. Over to Slide 23, the CapEx for the year forecasted approximately $135 million subject to timing of deliveries with mostly the capital for the continuing construction on the Q7000 including the forecasted shipyard payment in Q4. Our remaining debt payment for 2018 approximate $10 million is scheduled payments on Q5000 and term loan. I'll skip Slide 25 and leave it for your reference.

I'll now turn the call over to Geoff for market outlook.

[Geoff Wagner]

Thanks, Eric. Good morning everyone. I'll spend the next few minutes describing our present market outlook and highlight some of the developments for Helix. Regarding customer sentiment, front month contract prices have increased recently and speaking with our customers it appears they are interested in bringing loan production back online and we’re having made discussions about opportunities for our services as the industry is entering the budgeting season.

While there is still plenty of sensitivity to price and increasing the volume of serious conversations has been witnessed. In the North Sea in Brazil, we are also encouraged by the current trend of increasing divestment of assets from the majors to operators to place the higher priority on enhanced recovery thereby requiring more production enhancement and well invention services. For the Q7000, we continue to pursue programs in West Africa, Brazil and the North Sea with the design capabilities of the Q7000 should offer the market significant efficiency gains over our competitors.

Although still a rough market in the Gulf of Mexico, we are hopeful that our assets and our industry experience will stand us out from the crowd. We are very operating on a spot market basis and our ability to turn around our assets in a relatively short time between campaigns can bring good value to our customers. On the downside consolidation of oil companies increased client financial discipline and competition from drilling contractors continues to negatively influence our ability to build significant additional backlog on the Gulf of Mexico assets.

In the UK North Sea, there is less competition from drilling units due to the unique capabilities for services we provide in the region. We currently have visibility on both the Seawell and Well Enhancer into December and we are starting to build our 2019 schedules. We see customer demand continuing to increase and pricing trends remain positive. Regarding Canyon, activity is trending similar from 2018 to 2019 with a potential upside bias due to higher commodity prices and increased confidence in project economics. Trenching remains strong and we have engaged several vessels on opportunity – we have engaged several vessels of opportunity on a pay us to go basis in trenching and IRM work to meet period of demand in excess of our base contracted fleet.

We have good visibility of our Canyon feature work when entering the present budgeting season and our cost basis for 2019 will be improved due to the expiry of the Grand Canyon 2 hedge and the lack of carrying the Deep Cygnus during the year. To summarize our overall market outlook, we are seeing pockets of improvement. Well, we are not yet at a point to see all those thriving with the tide. We continue to evaluate ways to leverage our assets to improve our margins and increase the value we deliver to our clients.

At this time I will turn the call back over to Owen for closing remarks.

[Owen Kratz, President and Chief Executive Officer]

Thanks, Geoff. 2018 has gone pretty much as we expected. Operationally, Helix is performing well, controlling costs, achieving utilization for the year that we expected to see and reducing downtime. The results are improving margins and cash flow. We're focusing on finding contract terms that should motivate our clients to budget more work. The work is there to be done and we're hopeful that it should pick up. Q3 results exceeded expectations primarily as a result of BP work originally expected to be done in Q4 that was rescheduled into Q3. That's improving utilization on the Q5000 for the third quarter.

All year we've been pointing to uncertainty we had for the Q4 in the Gulf of Mexico during the second half of the year. We've done well to book work for the fourth quarter but this shift and scheduled work resulting in a stronger Q3 will now show up in Q4. However, my feeling is that it would be a mistake to read too much into a weaker Q4, based on discussions with customers, our feel for the work in 2019 at this time is stronger than the visibility of work for 2018 that we had at this time a year ago.

Helix, as well as our clients are in the early phases of our budgeting process and therefore it's probably too early to provide the details. Nonetheless based on a number of factors including an overall improving macroeconomic backdrop, it's our expectation at this time the 2019 will continue the trend for year-over-year improving results.

Every one of our business operations is up from 2017 with the sole exception of the well intervention results in the Gulf of Mexico. However, we do expect the Q4000 and Q5000 results in 2019 to be improved over this year. Just to give a bit of color by region and business segment, we expect that the UK will continue to be strong for well intervention. In the Gulf of Mexico, the market continues to bounce along the bottom. Commodity prices have recovered but this has not yet translated into demand sufficient to absorb supply overhang, capital allocation by our client is improving but not yet impacting the offshore conventional market to the degree that it will in the future, utilization and pricing is still challenging.

As mentioned we currently anticipate improved results from the Q4000 and the Q5000 in the Gulf of Mexico. In Brazil, both the two chartered vessels there and our operations had performed very well in 2018. We did have a period of maintenance on the SH1 and that should repeat in 2019 on the SH2. We also expect our robotic trenching to realize another strong year, this strengthening of our robotics will be further improved with the roll-off of another charter hedge mid-year, as well as a high cost charter due to roll over in Q4. We expect the softening in our 2019 results from our production facilities business due to the end of the term of our existing HFRS contract in March and increased competition for that work.

We have previously stated our intentions to bring the Q7000 to market ahead of our option to defer delivery until 2020. While we don't have a contract to announce at this time we're continuing discussions that would make an early entry to the market possible. We hope to be able to include additional details in the guidance that we normally provide on the Q4 earnings call in the first quarter of 2019. We do see improving sentiment towards the traction of funds to offshore. We also see well work that's not been addressed for some time now that really needs to be done.

We think acquisition activity of producer seeking to buy reserves and this is typical historically near the end of a down cycle where there's been a lack of drilling for reserves. I'd stop sort of predicting an up cycle for 2019 but it certainly feels to me that we're much nearer to that than we were a year ago.

Our balance sheet is in good shape and we're cash flow positive. We have just the final payments to make on the Q7000. After that we should be strongly cash positive. It continues to be our plan to further reduce debt while being watchful for opportunities ahead of the cycle that will be beneficial to our shareholders. From my perspective in general we're feeling good about 2019 and more optimistic than we were going into 2018.

And with that, I'll turn it back over to you, Eric.

[Erik Staffeldt]

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

[Operator]

Certainly, thank you very much. [Operator Instructions] And we do have a few questions queued up. We’ll proceed with our first one, from the line of Marshall Adkins [Raymond James]. Please go ahead.

[Marshall Adkins, Raymond James]

Good morning, guys. Thank you for the detailed commentary. I want to get drill down into the cadence of the next few quarters. Your guidance suggests a pretty meaningful reduction in Q4 from this quarter going from roughly $60 million EBITDA down to more or less $15 million at the midpoint. So number one, I just want to make sure I'm doing my math right. Number two, I'm guessing we should assume going into Q1 some type of recovery then obviously for the full year, it sounds like things were modestly better than 2018 at this stage. Certainly with oil prices where they are that makes a lot of sense to me but for the next couple of quarters, could you help us with the cadence of what we should think about in our modeling process?

[Erik Staffeldt]

Yes, Marshall, this is Erik, I'll start with the 2018 and then I'll pass it to Owen for high level on 2019. But your numbers are directionally correct. I think what we're seeing here in the fourth quarter is where the slowdown in the North Sea is going to affect our operations in well intervention as well as robotics. So we expect to see a decrease in that area.

And then the second area where we expect to see a downturn is really in the Gulf of Mexico with both vessels working the spot market but the Q4000 and the Q5000. In addition to that with activity levels being low in the fourth quarter, the visibility being low that's going to be an area that's challenged. So those are really the two main, you could say areas that are driving a reduction from quarter to quarter here in the fourth quarter of 2018. I don't know, Owen, if you want to add color to that and then as we look towards 2019.

[Owen Kratz, President and Chief Executive Officer]

Yes, I think we've always been concerned about the lack of visibility of work for the Q4000 in the second of the year. That's really the big variable, of 59% utilization in Q3 shows that the work is spotting out there. I think it was – we were doing really well in contracting work for the fourth quarter but then BP shifted their work into the Q3 which took the fourth quarter back down.

But I think that's just the third fourth quarter, a lot of this is seasonal and what I've seen this year but an improvement on our expectations is that we thought that the market was going to go back to a much more seasonal basis. And I think what we've seen this year is that the season is expanding again both vessels in the North Sea are working into December and we didn't expect that to happen. And I think right now it looks like the early visibility shows that they're going to be doing the work earlier next year than they did this year. So the season is expanding again.

So that's why I think next year visibility is much stronger than and we don't have the same concerns about the weakness that we had this year. You have anything to add to that, Geoff?

[Geoff Wagner]

Yes, I think – that’s going into Q1 next year January 1, we’re going back on higher with BP, we’re going higher the 15K systems contracted to go back out with BP as well. So Q1, we have visibility for Q4000 into Q1 we have BP back on contracts. And like you've said, we have a visibility towards an earlier start in an upstream. So I've expecting it in 2019.

[Marshall Adkins, Raymond James]

That's great color guys. That's what I needed. As a follow-up there, Owen, the offshore rig business now seems to be rearing its head very slightly. Directionally, I think things seem to be improving there. Just give me your sense of how that might impact your business. Are you seeing any impact at all from the modest step up in the offshore drilling side?

[Owen Kratz, President and Chief Executive Officer]

Well, I think you're starting to hear a lot of producers talking about going back to drilling. And I think that's promoted by the low rig rates, the rig rates definitely have a cap on our pricing as they do. They've got a cap on everybody's pricing but our only exposure to rigs from a competitive standpoint is in the Gulf of Mexico with the Q4000 that had not been a contributing factor to the utilization issues on the Q4000 because they simply just didn't work. We're not losing any work to rigs. I think going forward, I think the focus on the drillers is going to be getting their rigs back to work which I think is good for us. Let's focus on what we do. The emphasis is going to be on adding incremental reserves which historically coming out of a down cycle where the first to benefit from that.

In the North Sea, we don't compete against rigs so we have a better pricing leverage there. I don't know if it's a little early to talk, if you look at our results our utilization is not bad outside of the Q4000. It's just the rates are depressed. So when we're able to start getting the pricing leverage back is probably a little early to call, but I think there's some pricing leverage for 2019 we can see.

[Owen Kratz, President and Chief Executive Officer]

Great, thank you. [Indiscernible] is once the utilization really starts to climb the rates – like we have said, we’re continuing the Gulf of Mexico against the marginal rate. And if the marginal rate is always held out, right if you are not going to reactivate, or really doing much, you have the front contract, that’s a different market too that we play in. We’re very good at the spot market and turning around small projects that are very short duration that most drilling units wouldn’t reactive for. So do you think that a differentiation in what we have in the market that we needed?

[Marshall Adkins, Raymond James]

Right. That's very helpful guys. Thank you all.

[Operator]

Thank you very much. We'll get to our next question on the line from Ian Macpherson [Piper Jaffray]. Please go ahead with your question.

[Ian Macpherson, Piper Jaffray]

Yes, thanks. Good morning everybody. Very nice results. You gave us a sense as to what the Q4 utilization looks like for the North Sea. But given the sharp seasonality for fourth quarter while you were mentioning revenues I was wondering if you could also fill in the blanks for that with what the utilization book-ins could be for the Q4000 and the Q5000 this quarter?

[Owen Kratz, President and Chief Executive Officer]

I think we spoke to that. And right now, I think, the way that we see utilization for both vessels combined to be in the 50% range in the Gulf of Mexico for the fourth quarter.

[Ian Macpherson, Piper Jaffray]

Okay. And how booked would you – I mean how confident is that right now?

[Owen Kratz, President and Chief Executive Officer]

That’s confident work.

[Ian Macpherson, Piper Jaffray]

Okay, understood. And then I wanted to also follow-up. Owen you mentioned that you have a bit of a roll-off in profitability from your production facilities’ revenue next year as your well response retain their contract rolls. That's the wrong term I'm sorry. But could you call that for us little bit more the magnitude of that as that is retendered or re-priced?

[Owen Kratz, President and Chief Executive Officer]

We are restricted by CA with the HFRS from discussing the terms of it. I do expect – I mean, we're at the end of the contract. We had some capital investment at the beginning, which is been repaid and a good return on it. The producers are looking for systems on how to go forward, and we're in discussions with them and that's about the most I can say about it.

[Ian Macpherson, Piper Jaffray]

Fair enough, okay. In that case I'll ask for another follow-up since it was an empty shot. Maybe, if you could talk about the just the durability of the recovery that you're seeing for Canyon? Obviously, Q4 seasonality notwithstanding, I think that you all spoke to improving demand visibility both for trenching and for IRM. Can you describe what – how much pricing and utilization factor into the outlook for 2019? And how much of a improvement, compared to Well Intervention, sort of where we are in the cycle there, just to get a little more context?

[Erik Staffeldt]

Ian I’ll take that one. I think from 2018 to 2019 we will see very similar utilization across the Canyon fleets. I think pricing and certainly the IRM portion of that will be stable. We have a very good backlog of trenching work going into next year and a lot of that work's contracted at similar if not slightly better trenching rates going into 2019. I think, the lightest of difference we're going to see for Canyon getting to next year is we have the drop off going into 2019, but not carrying the Deep Cygnus. The Deep Cygnus had zero work in Q1 of 2018.

And then, we drop off one of the hedges against the Grand Canyon and we also drop of the Grand Canyon 1 in Q4 of next year. So our cost base realigns to where we see canyons recovering. We won't be handling these vessel cost with no work or less hand than vessel cost with no work.

[Ian Macpherson, Piper Jaffray]

I just addressed the sustainability, I think we're looking at a multi-year outlook of strong trenching, IRM, more uncertain. The cost reductions are going to continue. And of course, they are permanent.

[Scotty Sparks]

Yeah. I mean we have – we have trench in back into 2022. So this is a good backlog and a stronger visibility towards trench, a niche play for us. Our costs can further reduce that as we get further out past night, so...

[Owen Kratz, President and Chief Executive Officer]

So that we’ve only had one bad debt, our occurrence in the company going through this downtime, which is pretty remarkable and that did impact Canyon negatively this year.

[Ian Macpherson, Piper Jaffray]

Correct.

[Owen Kratz, President and Chief Executive Officer]

So that should not repeat.

[Ian Macpherson, Piper Jaffray]

Got it. Thank you both. I appreciate it.

[Owen Kratz, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you very much. We’ll get to our next question from the line of George O'Leary [Tudor Pickering]. Please go ahead with your question.

[George O'Leary, Tudor Pickering]

Good morning, Owen. Good morning, guys.

[Owen Kratz, President and Chief Executive Officer]

Good morning.

[George O'Leary, Tudor Pickering]

Just given you guys provided a little color around 2019, I want to prod a little bit further if I could. I’m just curious given you guys have the $20 million in reduction to EBITDA from low costs this year, should we think of a starting point to think about 2019 as excluding those costs or are there some incremental costs that are amortized over the life of that contract that will still be reflected in 2019.

[Owen Kratz, President and Chief Executive Officer]

Yes. George, the mobilization costs associated with the Petrobras contract that we talked about earlier this year. that will recur through the years of the contract, the original term of the contract, so that $20 million that you referenced is, will be occurring in 2019.

[George O'Leary, Tudor Pickering]

Got it. That’s very helpful. and then I thought the commentary around four-month contract prices, was interesting it’s the first time in a while you’ve heard much about pricing and potential pricing increases from you guys. Just curious if you could speak to maybe the regions of strength and maybe reasons of weakness, and any color on maybe magnitude of day rates, I realize you’ll have to be general, but just any incremental color there would be helpful.

[Owen Kratz, President and Chief Executive Officer]

I’ll start and Scotty can shift in, because I don’t know what more I can say beyond we said that the North Sea is where we have our most pricing leverage. We’ve seen two incremental years of modest price increase there. There may be another year a little bit more, but the pricing is becoming pretty normalized in the North Sea. Gulf of Mexico pricing is still very depressed and that’s the result of the rig overhangs. I think there is room this year for us to start exercising some upward movements there, but it’s early in the budgeting process and how much we would – how much stock we would put into that. I don’t think we’ve determined yet.

In Brazil pricing, our third market is – the pricing is already set. So, there are results are more operationally focused. On the robotic side, I wouldn’t expect to see much movement on the IRM side. There’s still a gross oversupply in that market. I think we’re doing fairly well just because of the quality of our service, not how cheap we are, because everybody’s cheap there. trenching we’re still the leader, pricing is strong there. I don’t see incremental additional increase in the pricing in the trenching, but I do see maintenance of the current levels.

[Scotty Sparks]

Not much I can add to that, correct.

[Owen Kratz, President and Chief Executive Officer]

Do you agree with me one in a row?

[George O'Leary, Tudor Pickering]

I appreciate the color there. And I just want to make something about the Robotics business correctly moving forward and the pricing color is helpful. but it’s taking a lot of cost out of the system there, taking out hedges, taking out contracts on vessels. So, you can play more in the spot market, should Q4 2018 plush and given the fact you guys have a lot of trenching work in hand. Just think about a continued trajectory upward for that business maybe as we move beyond Q4 2018, it really will be some seasonality in Q4 2018, but just Robotics generally now, sitting in positive territory, should I be modeling that growing throughout 2019?

[Owen Kratz, President and Chief Executive Officer]

Yes. So, I think you – from a bottom line, you’ll see growth in Canyon, but we said our costs come down significantly year-over-year, our utilization should be – always is looking to be in line with this year. So, there’s going to be an increase as I said, we had a bad debt provision with Canyon machines. So that’s not there. So, we certainly see Canyon, if you go back a couple of years, it’s been quite a big increase from where they’ve come – this is their best quarter since 2015 and we expect improvement in 2019. I wouldn’t expect that improvement to be vast, because the IRM side of the business is still subdued significantly and people have put investors out as well as possible plus operators haven’t really started undertaking maintenance work in the field yet from a subsidies perspective.

[Owen Kratz, President and Chief Executive Officer]

I'd like to add [indiscernible] because I think since we’re talking about prices a little misnomer, it’s not all about price, during downturns you really start margin is the first thing we go, but then you start competing on contract terms. The trick for us in achieving utilization and we’re doing very well at it is to put out contracting terms that incentivize the clients to use us. Now the double edged sword there is that you are in effect taking on extra risk and it’s very important to exercise those contracting terms without diminishing your margin.

And I think if you look at our month – our quarter-over-quarter, our margins are trending up as along with our utilizations on sort of I take heart in the fact that I think the way that we’re creatively contracting with our clients outside of cost and the way that we’re managing those risks is been done very well. And they really expand on that concept is one of the primary focuses of Jeff Wagner here, which is to expand the creative contracting possibilities that we can put into the market. The problem in the market is just not enough work. But we know the work is there. It’s just how do we incentivize the clients to do it and you do that through the contracting.

[George O'Leary, Tudor Pickering]

Great color. Thanks guys.

[Operator]

Thank you very much. We’ll get our next question on the line from James Wicklund [Credit Suisse]. Please go ahead with your question.

[James Wicklund, Credit Suisse]

Good morning guys. You talk about you know you’ll bring down your net debt, you’re generating a lot of free cash flow, you kind of mentioned dry powder, clearly we’re coming out of one of the worst downturns in the history of mankind. Your stock, your currency is doing exceptionally well this year. So it just seems that you’re my wife with an open credit card and Harry Winston’s jewelry store. But what plan which would never happened by the way. What are you shopping for? What would you like to come out of this downturn owning or owning more of that you don’t have or don’t have enough of now? And then you can take that whatever concept you want to.

[Owen Kratz, President and Chief Executive Officer]

Yes. Strategically I’m a big fan of organic growth over acquisition. But if you look at our history, we rolled up the Gulf of Mexico under [indiscernible] pretty successfully. Looking forward coming out of the down cycle, I’m certainly looking around there’s not that great of a consolidation opportunity in our niche. We are so dominant in it. And I think you have to watch out that you don’t want to be 100% of a niche. But for a long time especially as we rebuilt the company after the 2009 period when we said the first thing that we were going to do strategically was to create the best-in-class asset base floating asset so that we could defend our niche.

And we’re now reaching the end of that process. The second phase is then adding services surrounding those hard assets softer assets with less capital cost that allow us to both generate greater utilization and tap more into the value creation that our assets to capable of. So having said all that I’m looking at acquisition opportunities that are in related niches, but not consolidation close.

[James Wicklund, Credit Suisse]

Okay. That’s interesting. My follow-up if I could, I know you’re doing some trenching in the renewables business, I would assume that first part that you would be looking maybe outside of oil and gas and into renewables. But the second part of my question and if you can address that is, so far the recovery I’m sure has been shallow water. Okay it’s been a surprise. North Sea has been moved floaters and high spec rigs of the North Sea is stereotypical, but globally it’s been a shallow water lift to the market. You guys are primarily deep, do you really need deepwater to come back in shallow water do enough for you to bridge you and is that a market like renewables that might be more interesting going forward since it’s such a big class of rigs that revenue opportunity describe at the class of rigs is so much larger?

[Owen Kratz, President and Chief Executive Officer]

I'll take that one. And firstly we do an awful lot of work as you know in the North Sea. We work very heavily in the North Sea and we have the diving niche there also. And a good portion of our trenching probably 60% of our current trenching backlog is and work that was undertaken this year is in renewables are mostly large interconnect power cables and that's very shallow sometimes we are working in 40 feet of water. We already have a good play into the shallow side, the deep side Q5000 is under contract to BP.

The two vessels in Brazil are obviously under contract and that leads us to deep water assets Q4000 obviously has it time here in the Gulf and we’ll stay in the Gulf and then Q7000 is available to market. The Q7000 also is very shallow water capable, we can run Q7000 in reasonably low water depths there, I’ll pass on to Geoff to add some Q7 questions.

[Geoff Wagner]

Yes, I think another key point, I want to make as well, the Q7 when you think about it, don't think about it only as competing with drill ships, I mean this will go all the way down into jackup range and can definitely work in those types of water depths. So it really does have a full operating envelope. I mean, this has a triangle disconnect and a lot more angle deviation for the riser, smaller riser. So it's really a very functional asset across the full space. So even the Q4 and the Q7 wells, let’s say we have a much wider range than you may have visibility to.

[Erik Staffeldt]

There is also another metric to bear in mind here, outside of BP which is merely old production enhancement work for Q5000, the rest of our well intervention assets, our rough estimate is 50% is against abandonment work or pre-abandonment work and 50% is against production enhancement activities, they're not really water depth related, the abandonment work happens as and when the oil runs out in the field and the client is forced to spend the money from either a regulatory or an environmental point of view order line really in the Gulf of Mexico and production enhancement is to keep the production flowing, is usually well maintenance. So it's not really water depth related as per sort of the construction and drilling type assets you're talking about.

[James Wicklund, Credit Suisse]

So you can stay busy with the offshore market we have today but deepwater rig pricing and activities are going to have to come back for you to get pricing across the board and really crush it, is that fair summary?

[Erik Staffeldt]

For the Q4000, yes, Q4000 is really the unit that has pricing pressure against drilling units.

[James Wicklund, Credit Suisse]

Okay. Thanks guys. Good quarter.

[Erik Staffeldt]

Thank you.

[Operator]

Thank you very much. [Operator Instructions] And we have another question queued up on the line from the line of [indiscernible]. Please go ahead with your question.

[Unidentified Analyst]

Thank you. I have a couple of questions. First of all, OneSubsea has not come up in great detail on the call, would you please bring us up to speed. What you're seeing there. And then secondarily, you had mentioned that there were two vessels that you had contracted for Schlumberger I believe you said in the Asia-Pac region, would you discuss that phenomenon and the degree to which you think that might repeat?

[Owen Kratz, President and Chief Executive Officer]

Sure. I’ll start with the latter part of that question. The two units that we're talking about in APAC were actually two ROV units, Schlumberger provided a vessel for a pumping build in Malaysia and we contracted under the alliance to put to our number of vessel. So it's actually the first time with the alliance truly outside of the Gulf of Mexico that we've been supporting each other in different regions. So hopefully that covers that roughly wasn't two vessels, it’s two ROVs.

Regarding the alliance in the Gulf of Mexico nearly all of the work on Q4000 is contracted as an integrated approach with mostly Schlumberger services onboard. So that’s all business as usual is fully integrated allows quicken mobilizations and demobilizations and less cost declines and better safety factors by having the same teams on the vessels all the time. Q7000 will certainly come to the market as an integrated approach. We'll be mobilizing equipment onboard before it leaves the yard and that will come there and be able to offer a contract, a one contract approach to the market also. And then our 15K system, as a pretty good year. It met our budget utilization expectations and it's also contracted for a minimum 120 days on the start of the BP campaign on Q5000 commencing January 1. So still good activity going on.

[Unidentified Analyst]

That is helpful. But are you expecting or seeing the operators finding the integrated services with OneSubsea to be an appealing alternative at this point? Or is it really too early just not doing enough work to find much of anything appealing quite yet?

[Scotty Sparks]

Like I said, I think it is appealing to them nearly, every contract this year for the Q4000 has had an integrated approach. It reduces the overall time on a average well program by three or four days just based on mobilizing equipments and demobilizing apartments. So it has that benefit allows the procurement teams and the operators to contract directly less and not many segments or different companies on one asset.

So we're definitely think the benefits, it's not had in pricing it's adding utilization and a more integrated approach from that one.

[Unidentified Analyst]

Congratulations and thank you for taking the question.

[Operator]

Thank you. We'll get to our next question on the line from David Smith. [Heikken Energy] Please go ahead with your question.

[David Smith, Heikken Energy]

Just thinking about the pricing discussions for the Q7000, is it fair to think there is a disconnect between the pricing operators have in mind today versus pricing you expect that vessel could earn after executing the few programs and demonstrating its capabilities.

[Geoff Wagner]

I think every vessel that comes out of the gate and then we prove our efficiencies. The efficiencies that we have definitely are settled in and improve over time. And I don't think that it changes pricing expectations on our side. It's definitely a ability to work with the spot market to prove out to an operator the value that they are receiving and then in the beginning, taking on enough exposure and risk with the client to work hand-in-hand with them. So I think just summarizing that was we expected to come out, we will follow the market as we work our way out we will prove our efficiencies to our clients and then, that value that's proven should be reflected over time.

[David Smith, Heikken Energy]

Makes perfect sense. And when I look at the semi submersibles working out the UK this year it looks like over 40% of that demand in 2018 is just for plug abandonment and work overs. I imagine that's a pretty juicy target for the Q7000 specially as we are seeing rates peep up for the UK semi's. So I was just curious how you think about the trade-off between trying to build term work for the Q7000 verses shorter-term programs that demonstrate capabilities and earn that pricing leverage?

[Geoff Wagner]

And I think that is balancing act between the two. I mean, we're obviously looking for stability but we're also looking for margins. We do find that our efficiencies and near the integrated approach the shorter mobilization and demobilization periods, the ability to contract and gain as efficiencies and deliver them are realized over spot market as well as to our markets. So will have to justify what we do at that time.

[David Smith, Heikken Energy]

could we see that creative contracting approach for sum of the initial work for the Q7000?

[Geoff Wagner]

Yeah, we are looking across the board.

[David Smith, Heikken Energy]

Thank you very much.

[Owen Kratz, President and Chief Executive Officer]

Some of the abandonment programs in the North Sea were in the place where we can offer Diving Services from the smaller vessels and Canyon related services also.

[David Smith, Heikken Energy]

Right that's it for me. Thank you.

Thank you very much. And Mr. Staffeldt. there are no further questions at this time. I'll turn it back to you for any closing remarks.

[Erik Staffeldt]

Thanks for joining us today we very much appreciate your interest and participation and look forward to having you on our fourth quarter 2018 call in February of 2019. Thank you.

[Operator]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day everyone.