Helix Energy Solutions Group, Inc.

Greetings and welcome to the second quarter Helix Energy Solutions 2022 earnings call. At the start of the presentation, all lines will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, today's call is being recorded Tuesday, July 26, 2022. I would now like to turn the conference over to Brent Arriaga, Chief Accounting Officer. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today on our conference call for our second quarter 2022 earnings release. Participating on this call for Helix today are Owen Kratz, our CEO, Scotty Sparks, our COO, Eric Staffeld, our CFO, Ken Nykerk, our General Counsel, and myself. Hopefully you've had an opportunity to review our press release and the related slide presentation we released last night. If you do not have a copy of these materials, both can be accessed through the For the Investor page on our website at www.helixesg.com. The press release can be accessed under the Press Releases tab, and the slide presentation can be accessed by clicking on today's webcast icon. Before we begin our prepared remarks, Ken Nykerk will make a statement regarding forward-looking information. Ken?

During this conference call, we anticipate making certain projections and forward-looking statements based on our current expectations and assumptions as of today. Such forward-looking statements may include projections and estimates of future events, business or industry trends, or business or financial results. All statements in this conference call or in the associated presentation, other than the statements of historical fact, are forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Act of 1995. Our actual future results may differ materially from our projections and forward-looking statements due to a number and variety of risks, uncertainties, assumptions, and factors, including those set forth in slide two in our most recently filed annual report on Form 10-K, our quarterly reports on Form 10-Q, and in our other filings with the SEC. You should not place undue reliance on forward-looking statements and we do not undertake any duty to update any forward-looking statement. We disclaim any written or oral statements made by any third party regarding the subject matter of this conference call. Also during this call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slide of our presentation provides reconciliations of certain non-GAAP measures to comparable GAAP financial measures. These reconciliations, along with this presentation, the earnings press release, our annual report, and a replay of this broadcast are available under the For the Investor section of our website at www.newlexesg.com. Information on this conference call speaks only as of today, July 26, 2022, and therefore you are advised that any time-sensitive information may no longer be accurate as of any replay of this call. Ellen?

Good morning. We hope everyone out there and their families are doing well and staying safe, healthy, and healthy. This morning we'll review our Q2 and year-to-date results, performance, and operations. We'll provide our outlook for the balance of 2022 and provide color on the rapidly improving market and its potential impact on 23 and beyond. But before we get into Q2 results, I want to start by commenting on our recent acquisition news. During the quarter, we announced we were acquiring the Alliance Group of Companies. And on July 1st, the first day of the third quarter, we closed on that transaction. Financially, we had been keeping our powder dry, so to speak, keeping cash on hand to be confident in being able to cash settle our long-term debts. On today's call, you'll hear a lot about the market improvements we're seeing and the opportunities we feel are out there. We decided to deploy some of that capital by buying Alliance at a time when we're anticipating real growth in the abandonment market. We wanted to position Helix as a full field abandonment service provider, and this acquisition expands our offerings and market. diversifies our revenue stream, and further positions Helix to benefit from the improving environment. We'll get into more detail later in the call, but it's an understatement to say that we're very excited about the prospects the Alliance acquisition offers, and we welcome Alliance into the Helix family. Moving now to the presentation, slides five through seven provide a high-level summary of our results. During the second quarter, we benefited from increased activity and improving rates across our fleet, driven by a strengthening global offshore energy market. Highlights for the quarter include robotics delivered strong results for the second quarter with added benefits provided by the addition of the Sheila Borderline, the Horizon Enabler, and increased ROV utilization. The Q5000 had strong operational performance with minimal downtime in the Gulf of Mexico. The Sewell and the Enhancer have been deployed on projects since early May. We completed regulatory maintenance on the Q4000, Sewell, and the Q7000. And production facilities continues to be a steady performer and benefited from the production of our Droske Field. Revenues for the quarter were $163 million, an increase of $13 million over our first quarter results. The increased revenues flowed to the bottom line with a net loss of $30 million. also a $12 million improvement over Q1. Adjusted EBITDA for the quarter was $17 million. The first half of 2022 was as challenging as we expected. We performed regulatory maintenance on six of our vessels in the North Sea Well Intervention Market. I'm sorry. The North Sea Well Intervention Market was slow to start. We had a significant amount of uncertainty and limited visibility for the Q7000 and sub-market rates for SH1 and SH2. As we enter the third quarter, many of these uncertainties and challenges are behind us. The scheduled maintenance periods on our vessels are predominantly complete. The North Sea well intervention season started in early May. The Q7000 is mobilizing for additional work in Nigeria, and our schedule is firming up. Above all, the offshore market is recovering. The improvements in utilization and rates that have been driving the Gulf of Mexico earlier in the year are now visible in all regions. On to slide eight, from a balance sheet perspective, our cash balance at the end of the quarter was $261 million. During the quarter, our operating cash flow was negative $6 million, including $9 million of dry dock and recertification costs. We spent $2 million on CapEx, resulting in a negative free cash flow of $7 million. At quarter end, we were in a net debt position of $4 million. As mentioned earlier during the quarter, we announced our planned acquisition of the Alliance Companies. On July 1, we finalized the acquisition using approximately $120 million of cash on hand. I'll now turn the call over to Scotty for an in-depth discussion of our operating results.

Thanks Owen, and good morning everyone. Moving on to slide 10. Both onshore and offshore, our teams are doing a fantastic job keeping our operations functional and safe. We completed the remaining planned regulatory maintenance and inspection programs that impacted utilization in the first half of the year, and as expected, our second quarter results improved over Q1. Market conditions are improving, and we're looking forward to a much better second half of the year with expectations of high utilization across the fleet. increasing rates and more favorable terms and conditions. In the second quarter of 2022, we continue to operate 30 vessels globally with minimal operational disruption, continue to operate at high standards with 98.1% uptime efficiency for the quarter. During the second quarter, we produced revenues of $163 million, resulting in a gross profit margin of negative 1%, generating a loss of $30 million, producing positive EBITDA for the quarter of $17 million. In the second quarter, the wet intervention fleets achieved utilization of 67% globally, primarily due to the planned maintenance periods, with 80% utilization in the Gulf of Mexico, 88% in Brazil, 44% utilization in the North Sea and West Africa, with the North Sea commencing the season. Operations in West Africa completed early in the quarter, allowing for the planned regulatory maintenance period. The robotics chartered vessel fleets achieved high utilization of 94% in the quarter, operating five vessels, working 370 vessel days between R&D support, trenching, and renewable works globally. Slide 11 provides a more detailed review of our well intervention business in the Gulf of Mexico. The Q5000 had strong utilization, increasing to 95% in the second quarter, compared to 72% in Q1, performing production enhancement work on six wells for three customers, utilizing the jointly-owned Helix-Nomijay 15K intervention system in ultra-deep water. The Q4000 had lower utilization of 66%. The vessel continued a multi-well campaign for one client in ultra-deep water, prior to commencing a regulatory maintenance period. The vessel then commenced the two-well abandonment scope for another client. Pleasingly, both vessels have high utilization, with contracting and awarded work for the second half of 2022, and good visibility of potential further activity, with steadily increasing rates, now contracting at rates 40% to 50% higher than last year's rates. The key vessels have integrated Helix's underage subsea service alliance teams and equipment continuously installed, working under one contract, offering our clients numerous benefits with increased operation and safety efficiency. Moving to slide 12, our North Sea well intervention season has commenced with both vessels activated and operational. The North Sea market is finally improving, and our business is seeing much improved utilization and achieving higher rates with both vessels' contracts for most of the second half of 2022. We're already taking sizable awards for 2023 works and good visibility of further works with increasing rates. And at this time, we're expecting a much earlier start to the season in 2023. The well enhancer achieved 63% utilization in Q2. The vessel had been warm-specked in Leeds, Scotland, significantly reducing the vessel operating costs and crew levels. The vessel then performed a one-well production enhancement scope for one customer, followed by an abandonment scope conducting its first-ever works west of Shetland. The seawall had 66% utilization in the quarter after completing its regulatory dried-up maintenance and inspection in late April. The vessel then went back into warm stack mode until early May. The vessel then performed production enhancement scopes on four wells for two customers, followed by a P&A scope on one well for another customer. The UQ7000 completed work in Nigeria early in April and then completed transit to Namibia and has now completed its regulatory maintenance and inspection program. The vessel had an idle period and we had significant degree of uncertainty regarding her schedule, but for now she has completed transit back to Nigeria to conduct work on one whale with options for further free whales for an existing client. On completion of the works in Nigeria, the vessel is scheduled to commence the paid transit to the APEC region to undertake a dry dock in preparation for our contracted work in New Zealand to be performed in the early part of 2023. Following the work in New Zealand, the vessel is scheduled then to transit to Australia to undertake work in the second half of 2023 on the now fully executed contracts conducting a seven-well abandonment campaign for Cooper Energy. The vessel is then planned to conduct contracted abandonment works on two wells for another client. There is now good visibility for work for the Q7000, with further work extended in Australia, West Africa, Brazil in 2023 and onwards. Moving to slide 13, In Brazil, the SEMA Helix 2 had a strong quarter with 99% utilization, completed production enhancement work on three wells, and abandoned on one well during the quarter. The investors contracted Petrobras until mid-December, and we're in advanced discussions on a possible extension with Petrobras at a substantial rate increase, which likely would commence December of 2022. The SEMA Helix 1 was 77% utilized, and short-term FPSO and accommodation support projects in Ghana that completed in May. The vessel then transited back to Brazil to undertake awarded ROV survey work. Prior to commencing the long-term decommissioning project in Q4 on the recently awarded trident contract, the contract runs for initial two years with additional options to extend. We expect 2023 is going to be a far better year for us in Brazil, with both vessels being back to low intervention rates and it's pleasing to see good demand for the units at better rates and conditions. Forward-looking, there is a more diversified market in Brazil, with more operators discussing potential works as they take further field ownership as part of Petrobras' ongoing divestment program. Moving to slide 14 for our robotics review. Robotics had another good quarter and is having a good year, and the business continues to see an improving market for all services we provide. Operating five vessels during the quarter, primarily working between trenching, ROV support, decommissioning, and non-oil and gas and renewables-related projects. In the APEC region, Grand Canyon II had one-half percent utilization in Q2. The vessel completed work in Thailand, undertaken a well-head-to-be-commissioning project, and then commenced the Renewables RV support project in Taiwan, expected to last well into Q3 with further options to extend. In the North Sea, the Grand Canyon III was utilized 89%, undertaking renewables trenching operations for two clients, performing extremely well on a lump-sum trenching contract. The vessel has contracted oil and gas and renewables trenching scopes, which are anticipated to keep the vessel busy for most of 2022. The project-charted vessel, the Sartor, had 100% utilization, continuing site clearance and survey works that were completed in July. Also in the North Sea, the Horizon Enabler completed 25 days on an ROV support project and has been mobilized with the T1200 trenching system and commenced work offshore reject on an oil and gas trenching project. The vessel has contracted trenching works and oil and gas and renewables projects into Q4. In the USA, the Sheila Borderline, a Jones Act compliant vessel, was utilized 90% in Q2, undertaking ROV support work for four customers in the Gulf of Mexico. The vessel was then contracted on a renewable support project on the US East Coast, expected to last into late Q3, and recently has been awarded further works on the US East Coast. Overall the market for services we provide in renewables is expanding at a decent pace in size, in geography and in duration. The robotics business has tended over 3,000 trench and vessel days between 2023 and 2028 and we believe we are well positioned to secure a good portion of these works. The renewables market globally is actively contracting a large portion of global marine contracting services and for Helix Robotics, That is leading to a tightening market for vessels, RVs, trenches, and personnel, leading to increasingly high demand for our services. Over to slide 15, I'll leave this slide detail on the vessels, RV, and trenching utilization for your reference. The first half of the year that we expected would be and the second half of the year we feel it's really shaping up nicely. We expect strong utilization for all vessels and services in the second half of the year. leading to a significantly improving 2023. Based on all of this, the market is improving across all business lines. Stronger utilization, increasing rates, and in certain areas of the business, rates are improving better and quicker than we expected, along with better terms and conditions. We're securing longer-term contracts and looking to secure works with some of the intervention assets into 2025. The years ahead of us look far better than the most recent period we have endured. I would again like to thank our Helix Global team and partners. Offshore and onshore, you provided a much improved quarter compared to Q1 with minimal NPT while keeping our very high standards in safety performance. And you have secured a good backlog for the second half of the year and beyond, clearly looking forward to the more exciting times that are ahead. I'll now send the call over to Brent.

Thanks Scotty. Moving to slide 17, it outlines our debt instruments and their maturity profile as of June 30. Our total funded debt was $275 million at the end of the second quarter with the final $35 million payment on our 2022 convertible senior notes during Q2. The maturity during the remainder of the year is a semiannual MERAD payment. Moving on to slide 18, this slide provides an update on key balance sheet metrics including long-term debt, liquidity, and net debt levels at quarter end. With cash and restricted cash of $263 million, our net debt position was $4 million. At quarter end, we had no amounts outstanding and $60 million of availability under our ABL with resulting liquidity of $321 million. On July 1, we used approximately $120 million of cash on hand for our acquisition of Alliance. To coincide with the Alliance acquisition, On July 1, we also amended our ABL, increasing the size of the facility to 100 million, a 20 million increase. I will now turn the call over to Eric for a discussion on our outlook for 2022 and beyond. Eric.

Thanks, Brent. Our results for the second quarter and year to date bear witness to the challenges and headwinds we have faced in 2022. We believe the first quarter signified the bottom of the market for Helix, with expected improvements thereafter. In the second quarter, we completed maintenance on three of our intervention vessels, Sewell, Q4000, and Q7000. In all, regulatory maintenance was performed on six vessels during the first half of the year. With that behind us and rapidly improving market, we expect the second half to be significantly stronger than the first half. In well intervention, the North Sea market is quickly becoming a healthy market, with operators contracting vessel days for 22 and already planning work for 23 and beyond. The Gulf of Mexico market continues to benefit from strong utilization and increasing rates. The market in Brazil is strong, with international operators increasing activity. In West Africa, we see an additional 7,000 prior to its expected departure to the APAC region. In robotics, we continue to benefit from stronger renewables markets with added benefit from expansion of the market into the U.S. East Coast. ROV utilization rates are improving. Although we will continue to deal with the headwinds from our operations in Brazil through 2022, much of the uncertainty associated with our outlook for 2022 is behind us. We are now in a position to provide our outlook for the full year 2022. Our outlook is a good faith attempt to provide investors information that balances the challenges faced during the first six months against the backdrop of an improving market for the remainder of the year and beyond. We have included an outlook for Alliance, the shallow water offshore energy services companies we acquired on July 1st. We are setting our annual guidance for 22 as follows. Revenue, the $725 to $825 million. EBITDA, $85 to $110 million. free cash flow generation, and the negative 20 to positive 15 million. These ranges include some key assumptions and estimates. Any significant variation from these key assumptions and estimates could cause our results to fall outside the ranges provided. Providing our key assumptions by segment would be slide 21, intervention segment. In the Gulf of Mexico, This continues to be our strongest market with improving rates and expected strong utilization on the Q4000 and Q5000. Contracted work extends into Q4. We expect strong utilization in this region, except for a 15-plus day schedule gap on the Q4000 as it awaited equipment mobilization. In the UK North Sea, both vessels commence their season in early May. Both vessels have contracted work into Q4 with strong utilization expected into Q4. The well enhancer did have 14 days of downtime in July for a sill umbilical replacement. In West Africa, the Q7000 completed its maintenance in Q2 and transitioned back to Nigeria in July. We have a contract for one well program with options up to four wells. Vessels then plan to transit to the APAC region to commence the two-way field abandonment towards the end of 22 or early 23. In Brazil, the CM Helix 2 is contracted into mid-December with Petrobras. The CM Helix 1 is performing ROV survey work in Brazil into the fourth quarter prior to its contracted two-year well abandonment work for Trident in late Q4. Moving to our robotics segment, slide 22. Grand Canyon II and APAC is on contract into Q3 and is expected to have good utilization for the balance of 22 in that region. Grand Canyon III is contracted to perform trenching in the North Sea for multiple customers with expected strong utilization for the balance of the year. In the North Sea, we continue to incrementally benefit from renewable site clearance work expected to continue into Q3. The Horizon Enabler commenced the trenching project offshore Egypt by utilization into Q4. The Shalia borderline is working off the US East Coast on contracted wind farm work with expected good utilization through Q3 and good follow-on opportunities thereafter. Moving to production facilities, the HP-1 is on contract for the balance of 22 with no expected changes. We have expected variability with production as the Droschke Field continues to deplete and we continue to pursue similar opportunities which could impact our results. Continuing on slide 23, we're excited to include Alliance into the Helix family. The acquisition complements our existing offerings and significantly enhances our position as a full field abandonment service provider. Alliance provides marine services with a diversified fleet of lift boats, offshore supply boats and crew boats, Energy services comprised of plug-in abandonment and intervention services in coastal areas and offshore for surface infrastructure with 24 P&A spreads, nine cold tubing spreads, diving and heavy lifting from three diving support vessels and from the Epic-Hegren Derrick Barge. There is some seasonality to the business, particularly with the diving and heavy lift service. which we expect to slow down during the first and fourth quarters of the year. The outlook for Lyons the second half of 22 includes the following assumptions. We expect to have strong utilization from the lift boats and expect the LSVs and crew boats to have variability in utilization. Energy services, we expect strong utilization on eight to 12 spreads and one to three coal tubing. Diving and heavy lift should have good utilization in Q3 prior to their seasonal slowdown. Moving on to slide 24, our CapEx forecast for 22 is heavily impacted by the amount from 21 pushed into 22, approximately $20 million. With heavy regulatory year, our CapEx range for 22 is currently $50 to $60 million. The majority of our CapEx forecast continues to be maintenance and project-related. which primarily falls into our operating cash flows. Reviewing our balance sheet, funded debt of $275 million is expected to decrease by $4 million over the remainder of 22 as a result of scheduled principal payments. I'll skip the remaining slides and leave them for your reference. At this time, I'll turn the call back to Owen for discussion on our outlook beyond 22 and for closing comments.

Thanks, Eric. Yeah, well, the certainties and variables that previously caused us to refrain from providing guesswork guidance for the full year 22 have been resolved to a point we can give guidance for the second half of 22 in the range of 51 million to 66 million for our pre-alliance business. 70 million to 85 million for the full year. This second half run rate exceeds the full year run rate of 2021. The alliance acquisition that closed at the beginning of July is expected to add an additional $15 to $25 million for the second half of 2022. Not only are the uncertainties of 2022 becoming clearer, we also have perhaps the best visibility in recent years at this point for what may happen next year in 2023. We expected that 2022 would be a tough year and the market and demand would improve for 2023. 2022 what we have previously called a transition year. There are certain events in 22 that negatively impacted results that should not repeat and positive events that we're fairly confident in to the point we feel we should share them with you at this early stage ahead of next year. Let me be clear that we feel 2023 is expected to be a substantially better year than 2022. We've not engaged in our budgeting process, so this is not our formal guidance for 23, but merely directional indicators. It is appropriate that we share our estimates on these areas with the understanding that it's only our best estimate of what we might expect at this point in time. Event number one is the Q7000. Until April, the vessel has been working nonstop in Nigeria for 15 months straight. Due to the logistical specifics of working in Nigeria, it was not possible to perform the regulatory required maintenance normally done while working. The vessel was operating quite well, but the regulatory bodies required us to remove the vessel from operations in order to conduct the regulatory required maintenance and overhaul typically done while operating. This non-revenue generating period began at the beginning of April and the vessel is expected to return to generating revenue next week. This is roughly 115 days of lost opportunity that's not expected to repeat in 2023. The cost of this period has been taken against the 22 P&L. There remains work to be completed in West Africa, but after that, we're planning to relocate the vessel to Australia and New Zealand for a campaign of intervention work. This transit is expected to take approximately 95 days with a dry dock along the way in compliance with regulatory requirements for working in Australia. The vessel is expected to be ready to work in that region around the beginning of the year pending completion of the work in West Africa. We're required to defer the cost and revenue for this transit period and amortize over the project in 2023. The Q7000 is not expected to add any contribution to 2022 EBITDA during this period. The Q7000 currently has a campaign of three contracts in 2023 with visibility for further contracts to be added. As a result of these one-time events in 2022 that are not expected to repeat and the visibility on 2023 contracts in hand plus visibility of further work, Our current expectations for the EBITDA contribution from the Q7000 are to go from a range of $3 to $7 million in 2022 to a range of $20 to $30 million for 2023 or a year-over-year positive swing of at least $13 million. The second event I'll cover involves the SH-1 and the SH-2. For both 2022 These vessels were beyond the initial four-year term of their contracts with Petrobras. Petrobras extended the SH-2 contract by one year, but at rates that guarantee the cash loss to Helix. Petrobras did not extend the contract on the SH-1. Helix sought wealth of work and ROV support work for the SH-1 during 22 to keep the vessel active while pursuing meaningful options for 23. The EVDOT contribution for these two vessels for full year 2022 is currently expected to be approximately a negative $35 million. The SH-1 is now contracted for two years on intervention work in Brazil at profitable rates, with that work scheduled to start either late 22 or early 23. Helix is exploring several options for the SH-2, including a multi-year extension with Petrobras at profitable rates, as Scotty mentioned. Based on current expectations, Helix believes that these two vessels could provide 20 to 30 million of EBITDA contribution in 2023 and potentially increasing beyond 23 in the event of contracted rate improvement. That would represent a positive $55 to $60 million of EBITDA improvement in 2023 over 2022. A third topic is intervention rates. A discussion on rates is not a simple one, but in general, they're increasing dramatically and rapidly. Rates vary greatly depending on region, client, competition, scope of work, and duration of the contract. In general, though, over the last six months, rates are up from as little as 15% in some cases to others that were up over 70%. On average, rates can be considered to be up 30 to 45 percent over just past the past six months and continue to increase. We're tendering at these higher rates and are being awarded work well into 2023 and in some cases beyond. We're somewhat reluctant in offering rates beyond 24 as costs are also increasing, but generally not at the same pace as rates. Our current assumptions are that costs will increase by 5% a year on average. This increase in rates is progressing rapidly, and the second half of 2022 is expected to be a mix of old and new rates, with a greater extent of impact likely occurring in 2023 and beyond. A fourth topic is utilization. Utilization is a larger driver of our profitability than rates. As such, our team is typically very good at achieving utilization. Available days to market is impacted by regulatory dry dock and maintenance requirements. The year 2022 was unusual in that we decided to perform the dry docks and maintenance on seven of our vessels. I've already mentioned the roughly 200 plus days of unavailability for the Q7000 during 22. Additionally, looking solely at the other six vessels, there should be over 200 days of additional unavailable days for these six vessels that would reduce available marketed days in 2022. That should not occur in 2023. There's still a significant dry dock and regulatory inspection plan for the Q4000 and Q5000 in 2023, respectively, which could require as much as 100 days of unavailable marketed days. Altogether, though, this means that we should have over 300 days of additional vessel availability in 2023 compared to 22, for which vessels will be available to market. This would coincide well with the demand visibility we anticipate for 2023. Topic five is Helix Alliance. Due to the uncertain nature of the market and hazy visibility, Helix has been retaining cash on the balance sheet to have a greater degree of confidence in being able to cash settle our convertible debt at maturity, and we finished redeeming one series of our notes in May. Given the improving visibility on market and in response to what we believe is a significant opportunity, we felt comfortable at this time to put $120 million of our cash to work with the acquisition of Alliance. Due to regulatory and commercial pressures, there's a significant push underway to abandon and remove many of the Gulf of Mexico oil and gas fields that have built up over time. We believe this demand will be sustained over the years ahead. Our initial estimates for Alliance for a full year was $30 million to $40 million of annual EBITDA. Based on the second half of 2022 expectations as a continuing run rate, we feel we can now raise the upper range of expected EBITDA. 2023 expectations could be in the $30 million to $50 million range for 2023. Topic six is robotics. Demand increased in all of our areas of our business model. Helix is a meaningful player in the provision of world-class ROVs and a global leader in robotic jet trenching. These are vital services to the offshore wind market. In addition, our robotics division provides site clearance for the wind farms required prior to installation. We are seeing an increase in demand as well as rate increases outpacing cost escalation as Scotty covered. This has resulted in our robotics gross profit margin increasing from 3% for the year to date ending July 30th, 21 to 17% for the year to date ending July 30th, 22 and 23% in the last quarter. We're seeing an increase in demand for all of our robotics offerings and especially trenching, which generates our greatest margins. The seventh topic is production facilities. The HP-1 continues on contract with Talos with current expectations for further extensions. The reserves on Drosky are declining and at some point will end. However, we do anticipate closing on additional similar transactions. The last topic I'll cover is M&A. The current landscape presents a fairly rich environment for opportunities to consolidate or add to the Helix business model as an energy transition story. We are mindful of maintaining a strong balance sheet and the alternative uses for cash, such as returning value to shareholders. Our intent is to explore and analyze in order to achieve the greatest value to shareholders, as well as progress our commitment to being a meaningful contributor to the energy transition process. We've called 2022 a transition year for Helix. We fully intend to transition from a weak market in 22 to a high demand market in 23 and beyond. We'll also transition from being defined as simply an oilfield service company to being more clearly defined in what we do in support of energy transition and sustainability. Helix will focus on late life oil and gas activities and support of offshore wind. Number one, we will work to maximize the remaining reserves. Two, we will be expanding our ability to be a player in the abandonment of oil and gas offshore fields. And three, we'll provide key specialty support services to the offshore wind market. Earlier this year, we faced many uncertainties. I hope this color makes up for the lack of information going into 22. The market and Helix are evolving rapidly, and there are surely variables that will become more clear over time, but this is a glimpse into what our current expectations may include. We'll endeavor to provide transparency on our best estimates as we approach and proceed with the budgeting process for 2023 in this dynamic developing market. Again, to be clear, we expect 2023 to be substantially better than 2022. We've shared our views and recognize these are forward-looking statements and subject to change, but you deserve to know what our current expectations are and how we're feeling at this time about the company, the market, and our prospects. Eric?

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

Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press 1-3. One moment, please, for the first question. First question comes from the line of James Schoen with Cohen. Please go ahead. Hey, good morning, guys.

Good morning.

What gives you confidence in the outlook for Brazil? I know you touched on it, but clearly you have an anchor contract with Trident next year, but the SH2 contract with Petrobras expires in December. You mentioned advanced discussions with Petrobras, but they tend to be really tough on services companies, as I think you guys know well. So what gives you confidence there?

I'll take that. Like you say, we have the anchor contract with Trident that's a two-year anchor contract with options to extend. And then we are in very advanced healthy negotiations with Petrobras. We've pretty much agreed on rates, and they're far more substantial compared to the 2021 rates and 2022 rates we've had. We're expecting approximately a 40% increase on the rates, and the duration of that contract will be about two years. Like I say, we're in advanced discussions. The discussions are very healthy, and I'd like to think that we'll be shortly having that contract in place.

Okay, thanks.

Outside of that, there are other options of other operators that are showing significant interest in the vessel in reserve oil safety. That's helping us with our discussions with Petromus.

Right. Makes sense. Okay. And then can you maybe just provide an update on the UK North Sea Well Intervention Market? I mean, it appears that we went from weak to strong almost overnight. Obviously, there's seasonality at play, but how sustainable is this? And just any other color there would be great.

I'll take a shot and then let Scotty follow up with probably more detail. But in general, a year ago, the only market the North Sea was really talking about was the abandonment decommissioning market. That was in the early stages of planning. The first phases would have been dry tree, P&A, followed by subsea and facilities at a later date. So we were really thinking that the North Sea would ramp up in middle to 23 and beyond. Then Ukraine happened, and all of a sudden their sustainable energy source became important, and finding more reserves. Our work almost overnight shifted from planning of abandonment to production enhancement. I think I'll just leave it at that.

We've got very... Good contracts in 2022 for the second half of the year with very high utilization for both vessels in the North Sea. We're already taking awards for 2023, and usually we don't get awards until the third or fourth quarter for the following year. And I'd say for at least the last three or four years, we have the best visibility and ongoing discussions with our clients for the work they have for 2023 and beyond.

And do you guys, I mean, do you guys, so that makes a lot of sense, but do you guys feel like this was a wake-up call and it's longer term in nature? Or, you know, is this just a Ukraine issue and, you know, perhaps this gets resolved over the next year and then there's, you know, a huge focus on renewables and, you know, the demand for your services just kind of wanes again? How structural is this improvement?

I think that's certainly possible. I think the UK North Sea market is very politically influenced, so that could happen. But we did have a pretty big backlog of P&A work that was building up. That isn't stopping, but it could be a little delayed. So by 2024, I think you're Even if the production enhancement were to reverse itself yet again and switch back to focus on renewables and decommissioning, then there's a backlog of work that's built up that would sustain our utilization levels.

Okay. Thank you guys very much.

Our next question comes from the line of Don Crist with Johnson Rice. Please go ahead.

Good morning, gentlemen. How are you all today? Good. How are you? Pretty good. I wanted to touch on the Shallow Water Gulf of Mexico Alliance. You know, now that you've closed the deal, can you give us a little bit more insight into the customer base? Is it widespread or is it kind of focused on a couple individual customers there? And number two, what does the demand look like? Obviously, you're going to have some seasonal slowdown in late Q4, which is normal for the Gulf of Mexico. But what does demand look like going into 23 and beyond there? I know it's a large market.

Yeah, I'll take that in reverse order. Some analysts have predicted that the Gulf of Mexico shelf market is as much as $7 billion today. over the next 10 years. So that would equate to a $700 million a year market. The activity, I've always been very skeptical of P&A. The hockey stick just never seems to happen. But I think what's going on in the Gulf of Mexico was precipitated by the Fieldwood bankruptcy. Fieldwood and Cox are the two major players, along with Arena, in the shelf. When Fieldwood went bankrupt, under the proceedings, most of their shelf properties reverted back to the legacy owners. So as opposed to being a concentration of properties with one client, it's now been dispersed back to the legacy owners, which includes Shell, E&I, BHP, Chevron, Exxon. All of the majors that divested shelf properties now have them back. big impetus from both the government and the legacy owners is to get this abandonment done as quickly and expeditiously as possible. I think the only impediment to that is over the past years, the Gulf of Mexico shelf contracting community has sort of been decimated. There's really not a lot of capacity left on the Gulf of Mexico shelf. And therein we saw the opportunity I think Steve Williams, the owner of Alliance, had the foresight to start accumulating assets ahead of this. And if you look there, the one contractor that has a full suite of assets and services to do full field abandonment, one stop shop, if you look at their individual asset classes, they own anywhere from, in some cases, up to 33% of all of that class of assets available in the Gulf of Mexico. So they're almost assured, in my mind, through their integrated offering and the sheer volume of their assets to capture a large share of that market annually. Layer in over the top of this the fact that the work is now going to revert back to majors who expect a little bit different operating process and systems than what Gulf of Mexico contractors have evolved to or devolved to over the last five to ten years. And therefore, it represents a really good opportunity for Helix to bring the systems in with the Alliance capabilities and provide a best-in-class service on a full integrated basis. And I think that gives us, it's a market that we were in historically. It's one we understand. And I think we're well positioned to be the best in class alternative in that market going forward.

Yeah, I appreciate all that color. And if I could ask just one more macro question, kind of following on the previous guy who was asking questions. You know, fleet status reports from some of the drillers have, have shown uplift of 20 to 40 percent in rates. I know your rates are impacted by the offshore driller rates. Are you seeing similar uplift in rates across the industry, not necessarily just in the Gulf of Mexico or Brazil, but just across the industry in general? And how correlated are your rates generally to the offshore driller?

I'll take that. We are seeing an increase across the board for all services from robotics and interweb intervention. Rates have really jumped up from the bottom. We're nearly 100% higher than where we were in the debt of the market in the Gulf of Mexico. But compared to last year's rates, we're up 40% and 50% in the Gulf of Mexico and increasing and seeing high visibility and contracting at those rates. In Brazil, we've already discussed Brazil. We're seeing about a 40% increase on the Petrobras contracts. And rates are steadily creeping up in the North Sea. You have to understand it's a slightly different market in the North Sea. We're not a rig. We're two smaller diver-based worms of engine assets. So our cost base is far less than what we have in the Gulf of Mexico and Brazil and what drillers have in the North Sea. So we have a much lower cost base. But we are seeing an increase in rates.

Right. Okay. And do you see anything that could be an impediment to increased utilization over, say, the next 12 to 18 months?

The only thing we have coming up is, like Alan said, we do have a dry dock plan for the Q4000 and a regulatory maintenance plan for the Q5000. But with that, I think it's going to be very healthy over the next 12 to 18 months. Rates will be high and utilization will be high.

Exactly what I was looking for. I appreciate the color, guys. Best of luck to you. I'll send it back.

Thank you. Have a good day.

Next question from the line of David Smith, Pickering Energy Partners. Please go ahead.

Good morning, and congratulations on the improved outlook. I was hoping to revisit the Beyond 22 section of the outlook. It seems pretty straightforward. I just want to make sure I'm understanding correctly. For the three items you quantified, the Brazil vessels Q7, the Alliance acquisition, and aggregate at the midpoint, should generate around 100 million better EBITDA in 23 versus 22. That's before the impact of better expected utilization and rates for the other well-invention vessels and for robotics. And this is before any potential additional Droschke-like deals. So at the midpoint, if I'm reading this right, it looks like you're pointing to 23 EBITDA that is around 200 million or better. So I just wanted to make sure that that was the intent and whether I'm missing anything that might be an offset.

I think that's certainly a possibility. We'll stop short of giving full guidance for 2023 because, as you mentioned, there's a lot of unknowns still to be considered there. I don't know that I'm ready to put a hard number on it. There are a lot of things to consider in our budgeting process. We're giving you insight into portions of the budgeting process that we have firm visibility on and have a degree of confidence in sharing. But like you said, we don't know where rates will eventually wind up. So that could be a big upside or it could be a small upside. I mentioned 300 days of utilization, additional utilization. How much of that we'll actually be able to market is an uncertainty. And, of course, any days not marketed becomes a drag on EBITDA. So we have to sort of figure out what the balance is there. You have other things to consider. You know, are we in a recession? Are we going into a recession? And what's going to be the impact on demand at that point? What's the reaction to the clients? Ukraine and China, what is that impact on supply and demand going to be? And are we going to see any potential for unforeseen reactions by the clients, such as shutting off spending and canceling contracts? I mean, I'm sort of getting into, I live in the world of always expecting the worst and planning for it. But these are the things. You know, like you mentioned in the North Sea, is there going to be a balance between the environmentalists pushing decommissioning versus sustainable energy levels? Where is that balance going to fall out? We've got the HP1 renewal coming up next year. We do expect it to be renewed, but it is producing on a declining field. So what are the terms and rates of that renewal going to be? You mentioned the production deals. You know, production deals are most favorable for us in a high commodity price environment that has an outlook of declining, combined with high expected abandonment costs. Right now we have high commodity prices and we have rising abandonment cost expectations. So we're certainly heading towards the horizon of an interesting market in that respect. So there's a lot left for us to mull through and quantify in our minds before we're ready to give 2023 full guidance. But as I believe we said in the presentation, this is directional, and it's significantly to the upside.

Yeah, David, I think we wanted to present to the investor base and specifically address the headwinds that we entered 22 with. And, you know, I think a big picture, we had three areas of uncertainty, the North Sea, the Q7000, and the impact of sort of the Brazil operations. And so as the year has progressed, obviously the North Sea market has solidified very, very quickly, and it's even improving, as Scotty mentioned, with work supported for for 23. So that one has addressed. And I think with the Trident Award early in the year and where negotiations are going with Brazil, we feel that that position is solidified as well. And then with the Q7, the remainder of 22, and as we head into 23 with the contracted awards in 23, we wanted to specifically address the headwinds that we faced in 22 and how we expect that to reverse in 23.

I do think in general, though, you are thinking right about it. These are positives, and then on top of that, we've got the rates, utilization, and production deals to consider.

I appreciate all the color, and given your caution, your comments around potential things that could go awry, I'm going to hold up. I'll save my question about returning cash to shareholders for another day. So, I do want to ask this real quick. In your outlook for Beyond 22, you mentioned an outlook for additional Droschke-type deals. So, I wanted to ask if the acquisition of Alliance means that those deals could be shallow water going forward, and if you're seeing more interest from operators in this approach for shallow versus deep water.

It certainly could include shallow water fields. We have looked at a few. We don't have anything in the hopper that we would consider a reasonable deal that we would jump on top of. Right now, our main focus is still towards the deepwater.

Perfect. I appreciate the call. Thank you.

Next question from the line of Samantha Hope with Evercore ISI. Please go ahead.

Hey, guys. Maybe just to expand on that last question, can you talk more broadly about the type of synergies that you expect to see from this alliance acquisition? You know, I'm just kind of curious, like, what sort of combinations that you could have with your legacy deepwater services beyond just sort of targeting that major's customer base?

As far as cost synergies, we don't really see cost synergies. It's a separate business from what we do in the Gulf of Mexico. It is additive to our story of energy transition, expanding our abandonment capability. To that extent, there is revenue synergies, I believe, from becoming a meaningful dominant player in the Gulf of Mexico and what that translates into other high decommissioning areas as far as credibility and capacity. Some of those areas include, we've mentioned the North Sea is a high potential for decommissioning. Brazil, each one of these divestments from Petrobras to the other players, the new players, carries a requirement for decommissioning within a certain period of time. So Brazil is going to become not only a bigger decommissioning market along with the production enhancement, but you're also going to probably see wind start to make a meaningful impact in Brazil. And then finally, the last decommissioning market is the Asia-Pacific region. It's a mature basin. In Australia, they had a bankruptcy similar to what happened in the Gulf of Mexico, which has put a lot of impetus from the government on to the producers to accelerate their abandonment plans. So indirectly, I think there's revenue synergy from having the alliance acquisition and gaining the credibility as a full field decommissioning company.

Is there going to be any growth CapEx that you're anticipating for next year? I know the guidance that you gave stated mostly is for maintenance. It looks like you raised the upper end there. But could we see growth CapEx rise from just this very, very low level that you're running at this year?

The only CapEx that I can foresee over the future years would be perhaps the addition of additional trencher because we're seeing such demand growth in that market. Beyond that, we don't have any significant growth capital requirements or aspirations, actually. Having said that, in my closing comments, I mentioned M&A, we're going to balance that opportunity against ultimately returning value to shareholders. So to the extent that there are opportunities like Alliance, that result in accretion to free cash flow per share, which ultimately helps the return of value to the shareholder, then as long as they fit our strategic story of energy transition and they're accretive to free cash flow per share, we would take a look at them.

And if I could just sneak in one more. Your robotics revenue guidance seems kind of light, given that you're coming up on typically strong third quarter revenues. Are you just expecting a bit more of a seasonal drop-off in 4Q? Could you kind of explain what's driving your guidance there?

There will always be a bit of a seasonal drop-off in the trenching because the trenching works in winters in shallow water and in the North Sea regions where the harsher conditions come along in the winter season. But we are seeing an improved market in trenching for next year. Next year we expect to have two vessels in trenching. completing more trenching days than this year and increasing as we go forward. Like I said, we have over 3,000 either awarded or tendered trenching days out there between 23 and 28. I'm expecting a much healthier year in 23, and we are also increasing rates in that area as well.

Yes, I would add to that that we did experience a very strong first half of the year in robotics. We had a very strong first quarter for them, which is unusual just because of the seasonality, and added on that with the second quarter with a couple of very successful renewables trenching program. So we had a very strong first half of the year. And at this point in time, we would expect to see a seasonal drop-off in the fourth quarter, depending on how the market goes, that could fill in. But from our standpoint, I think that's probably a little bit the drop-off is a product of the very strong first half of the year that we had.

Okay. That does it for me. Congrats on a really productive first half. Thank you.

Next question from the line of Sid Grover, Kendall Berry Lane. Please go ahead.

Hi, thanks for taking the question. I believe Owen touched on this in his response to the last question, but I was wondering if you could provide a little more color on, at a high level, how the board is thinking about balancing M&A with returning capital to shareholders, whether there are certain internal targets or hurdles that a particular M&A target needs to meet or whether it's a certain amount of free cash flow that's expected to go to M&A on a yearly basis? Is there any sort of color you can share about structurally how you're thinking about that?

I'm sure the board will appreciate me speaking for them, so I will. I think we're in a dynamic market. We've always thought that ultimately, especially in the recent years, there's been the greatest emphasis on generating free cash flow and returning value to shareholders as opposed to growth. I don't know, there may be a little swing back on that, but bottom line, I know the board, I think I can fairly confidently say that the board is also interested And the fact that we're just too small right now. We need some scale. So to the extent, you know, we've made some moves here that I think significantly increases the cash flow per share in the company for next year as well as the share, as well as the scale. Both of those I think are positives for shareholder value. But the number one priority for us will always be managing our balance sheet. So to the extent that we do have the towers of converts coming up, we're not going to do anything that jeopardizes our ability to cash settle those. We're just at a point now where we see enough positive visibility on cash generation that there's a certain amount that we're willing to use in order to achieve better scale and accretion to free cash flow per share.

Thank you. We have no further questions on the phone line.

Thank you. Thanks for joining us today. We very much appreciate your interest and participation and look forward to having you on our third quarter 22 call in October. Thank you.