Helix Energy Solutions 10-K 2018
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2017
For the transition period from__________ to__________
Commission File Number 001-32936
HELIX ENERGY SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the last reported sales price of the Registrant’s Common Stock on June 30, 2017 was approximately $785.8 million.
The number of shares of the registrant’s Common Stock outstanding as of February 20, 2018 was 148,079,552.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2018 are incorporated by reference into Part III hereof.
HELIX ENERGY SOLUTIONS GROUP, INC. INDEX — FORM 10-K
Forward Looking Statements
This Annual Report on Form 10-K (“Annual Report”) contains various statements that contain forward-looking information regarding Helix Energy Solutions Group, Inc. and represent our expectations and beliefs concerning future events. This forward-looking information is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995 as set forth in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included herein or incorporated herein by reference that are predictive in nature, that depend upon or refer to future events or conditions, or that use terms and phrases such as “achieve,” “anticipate,” “believe,” “estimate,” “budget,” “expect,” “forecast,” “plan,” “project,” “propose,” “strategy,” “predict,” “envision,” “hope,” “intend,” “will,” “continue,” “may,” “potential,” “should,” “could” and similar terms and phrases are forward-looking statements. Included in forward-looking statements are, among other things:
Although we believe that the expectations reflected in our forward-looking statements are reasonable and are based on reasonable assumptions, they do involve risks, uncertainties and other factors that could cause actual results to be materially different from those in the forward-looking statements. These factors include:
Our actual results could differ materially from those anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” beginning on page 16 of this Annual Report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these risk factors. Forward-looking statements are only as of the date they are made, and other than as required under the securities laws, we assume no obligation to update or revise these forward-looking statements or provide reasons why actual results may differ.
Item 1. Business
Helix Energy Solutions Group, Inc. (together with its subsidiaries, unless context requires otherwise, “Helix,” the “Company,” “we,” “us” or “our”) was incorporated in 1979 and in 1983 was re-incorporated in the state of Minnesota. We are an international offshore energy services company that provides specialty services to the offshore energy industry, with a focus on well intervention and robotics operations. We seek to provide services and methodologies that we believe are critical to maximizing production economics. We provide services primarily in deepwater in the U.S. Gulf of Mexico, North Sea, Asia Pacific and West Africa regions, and in 2017 expanded our operations into Brazil with the commencement of operations of the Siem Helix 1 and Siem Helix 2 vessels for Petróleo Brasileiro S.A. (“Petrobras”). Our “life of field” services are segregated into three reportable business segments: Well Intervention, Robotics and Production Facilities. For additional information regarding our strategy and business operations, see sections titled “Our Strategy” and “Our Operations” included elsewhere within Item 1. Business of this Annual Report.
Our principal executive offices are located at 3505 West Sam Houston Parkway North, Suite 400, Houston, Texas 77043; our phone number is 281-618-0400. Our common stock trades on the New York Stock Exchange (“NYSE”) under the ticker symbol “HLX.” Our Chief Executive Officer submitted the annual CEO certification to the NYSE as required under its Listed Company Manual in June 2017. Our principal executive officer and our principal financial officer have made the certifications required under Section 302 of the Sarbanes-Oxley Act, which are included as exhibits to this Annual Report.
Please refer to the subsection “— Certain Definitions” on page 15 for definitions of additional terms commonly used in this Annual Report. Unless otherwise indicated any reference to Notes herein refers to Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data located elsewhere in this Annual Report.
Our focus is on our well intervention and robotics businesses. We believe that focusing on these services will deliver favorable long-term financial returns. From time to time, we make strategic investments that expand our service capabilities or add capacity to existing services in our key operating regions. Our well intervention fleet expanded following the delivery of the Siem Helix 2 chartered vessel in February 2017 and is expected to further expand following the completion and delivery of the Q7000, a newbuild semi-submersible vessel, in 2018 or 2019. Chartering newer vessels with additional capabilities, including the Grand Canyon III chartered vessel that went into service for us in May 2017, should enable our robotics business to better serve the needs of our customers. From a longer-term perspective we also expect to benefit from our fixed fee agreement for the Helix Producer I (the “HP I”), a dynamically positioned floating production vessel that processes production from the Phoenix field for the field operator until at least June 1, 2023.
In January 2015, Helix, OneSubsea LLC, OneSubsea B.V., Schlumberger Technology Corporation, Schlumberger B.V. and Schlumberger Oilfield Holdings Ltd. entered into a Strategic Alliance Agreement and related agreements for the parties’ strategic alliance to design, develop, manufacture, promote, market and sell on a global basis integrated equipment and services for subsea well intervention. The alliance is expected to leverage the parties’ capabilities to provide a unique, fully integrated offering to clients, combining marine support with well access and control technologies. In April 2015, we and OneSubsea agreed to jointly develop and ordered a 15,000 working p.s.i. intervention riser system (“15K IRS”) for a total cost of approximately $28 million (approximately $14 million for our 50% interest). At December 31, 2017, our total investment in the 15K IRS was $14.9 million inclusive of capitalized interest. The 15K IRS was completed and placed in service in January 2018. In October 2016, we and OneSubsea launched the development of our first Riserless Open-water Abandonment Module (“ROAM”) for an estimated cost of approximately $12 million (approximately $6 million for our 50% interest). At December 31, 2017, our total investment in the ROAM was $3.6 million. The ROAM is expected to be available to customers in the first half of 2018.
We have three reportable business segments: Well Intervention, Robotics and Production Facilities. We provide a full range of services primarily in deepwater in the U.S. Gulf of Mexico, North Sea, Asia Pacific and West Africa regions, and expanded our operations into Brazil with the commencement of operations for Petrobras of the Siem Helix 1 in April 2017 and the Siem Helix 2 in December 2017. Our Well Intervention segment includes our vessels and equipment used to perform well intervention services primarily in the Gulf of Mexico, North Sea and Brazil. Our Well Intervention segment also includes intervention riser systems (“IRSs”), some of which we rent out on a stand-alone basis, and subsea intervention lubricators (“SILs”). Our well intervention vessels include the Q4000, the Q5000, the Seawell, the Well Enhancer, and the Siem Helix 1 and Siem Helix 2 chartered vessels. We also have a semi-submersible well intervention vessel under construction, the Q7000. Our Robotics segment includes remotely operated vehicles (“ROVs”), trenchers and ROVDrills designed to complement offshore construction and well intervention services, and currently operates three ROV support vessels under long-term charter, including the Grand Canyon III that went into service for us in May 2017. Our Production Facilities segment includes the HP I, the Helix Fast Response System (the “HFRS”) and our investment in Independence Hub, LLC (“Independence Hub”). All of our production facilities activities are located in the Gulf of Mexico. See Note 12 for financial results related to our business segments.
Our current services include:
We engineer, manage and conduct well construction, intervention and abandonment operations in water depths ranging from 200 to 10,000 feet. As major and independent oil and gas companies conduct operations in the deepwater basins of the world, development of these reserves will often require the installation of subsea trees. Historically, drilling rigs were typically necessary for subsea well intervention to troubleshoot or enhance production, shift sleeves, log wells or perform recompletions. Our well intervention vessels serve as work platforms for well intervention services at costs that historically have been less than offshore drilling rigs. Competitive advantages of our vessels are derived from their lower operating costs, together with an ability to mobilize quickly and to maximize operational time by performing a broad range of tasks related to intervention, construction, inspection, repair and maintenance. These services provide a cost advantage in the development and management of subsea reservoirs. Over time, we expect long-term demand for well intervention services to increase due to the growing number of subsea tree installations and the efficiency gains from specialized intervention assets and equipment.
In the Gulf of Mexico, our multi-service semi-submersible vessel, the Q4000, has set a series of well intervention “firsts” in increasingly deeper water without the use of a traditional drilling rig. In 2010, the Q4000 served as a key emergency response vessel in the Macondo well control and containment efforts. The Q4000 also serves an important role in the HFRS that was originally established in 2011. Our Q5000 semi-submersible well intervention vessel commenced operations in the Gulf of Mexico during the fourth quarter of 2015. The vessel went on contracted rates in May 2016 under our five-year contract with BP.
In the North Sea, the Well Enhancer has performed well intervention, abandonment and coil tubing services since it joined our fleet in the North Sea region in 2009. The Seawell has provided well intervention and abandonment services since 1987. The vessel underwent major capital upgrades in 2015 to extend its estimated useful economic life by approximately 15 years. The chartered Skandi Constructor performed well intervention services for us in the North Sea beginning in September 2013 and was returned to its owner in March 2017 upon the expiration of the vessel charter.
In September 2013, we executed a contract with the same shipyard in Singapore that constructed the Q5000 for the construction of a newbuild semi-submersible well intervention vessel, the Q7000, to be built to North Sea standards. Pursuant to the contract and subsequent amendments, including the third amendment that was entered into in November 2017, 20% of the contract price was paid upon the signing of the contract in 2013, 20% was paid in 2016, 20% was paid in December 2017, 20% is to be paid on December 31, 2018, and 20% is to be paid upon the delivery of the vessel, which at our option can be deferred until December 31, 2019.
In February 2014, we entered into agreements with Petrobras to provide well intervention services offshore Brazil, and in connection with the Petrobras agreements, we entered into charter agreements with Siem Offshore AS (“Siem”) for two newbuild monohull vessels, the Siem Helix 1 and the Siem Helix 2. The initial term of the charter agreements with Siem is for seven years from the respective vessel delivery dates with options to extend. The initial term of the agreements with Petrobras is for four years with Petrobras’s options to extend. The Siem Helix 1 was delivered to us and the charter term began on June 14, 2016. The vessel was accepted by Petrobras and commenced operations on April 14, 2017, at which time we agreed with Petrobras to commence operations at reduced day rates. Our day rates have improved as we addressed most of the items identified in the vessel acceptance process. The Siem Helix 2 was delivered to us and the charter term began on February 10, 2017. The vessel was accepted by Petrobras and commenced operations on December 15, 2017 at contracted rates.
We have been actively engaged in robotics for over three decades. We operate ROVs, trenchers and ROVDrills designed for offshore construction, maintenance and well intervention services. As global marine construction support operates in deeper waters, the use and scope of ROV services has expanded. Our chartered vessels add value by supporting deployment of our ROVs and trenchers. We provide our customers with vessel availability and schedule flexibility to meet the technological challenges of their subsea activities worldwide. Our
robotics assets include 48 ROVs, five trenching systems and two ROVDrills. Our robotics business unit primarily operates in the Gulf of Mexico, North Sea, West Africa and Asia Pacific regions. We currently charter vessels on a long-term basis to support our robotics operations and we have historically engaged spot vessels on short-term charter agreements as needed. Vessels currently under long-term charter agreements include the Grand Canyon, the Grand Canyon II and the Grand Canyon III. Our vessel charter for the Deep Cygnus was terminated on February 9, 2018, at which time we returned the vessel to its owner.
Over the last decade there has been an increase in offshore activity associated with the growing alternative (renewable) energy industry. Specifically there has been an increase in services required to support the offshore wind farm industry. As the level of activity for offshore alternative energy projects has increased, so has the need for reliable services and related equipment. Historically, this work was performed with the use of barges and other similar vessels, but these types of services are now being contracted to vessels such as our Grand Canyon and Grand Canyon III chartered vessels that are suitable for harsh weather conditions that can occur offshore, especially in northern Europe where offshore wind farming is currently concentrated. In 2017, revenues derived from offshore renewables contracts accounted for 15% of our global robotics revenues. We believe that over the long term our robotics business unit is positioned to continue the services it provides to a range of clients in the alternative energy business. This is expected to include the use of our chartered vessels, ROVs and trenchers to provide burial services relating to subsea power cable installations on key wind farm developments.
We own the HP I, a ship-shaped dynamically positioned floating production vessel capable of processing up to 45,000 barrels of oil and 80 million cubic feet (“MMcf”) of natural gas per day. The HP I has been under contract to the Phoenix field operator since February 2013, currently under a fixed fee agreement through at least June 1, 2023.
We own a 20% interest in Independence Hub, which owns the Independence Hub platform located in 8,000 feet of water in the eastern Gulf of Mexico.
We developed the HFRS in 2011 as a culmination of our experience as a responder in the 2010 Macondo well control and containment efforts. The HFRS centers on two of our vessels, the HP I and the Q4000, both of which played a key role in the Macondo well control and containment efforts and are currently operating in the Gulf of Mexico. Pursuant to an agreement with certain industry participants in exchange for a retainer fee, the HFRS provides these participants with a response resource that can be named in permit applications to federal and state agencies. The HFRS agreements with individual participants also specify the day rates to be charged should the HFRS be deployed in connection with a well control incident. The agreement providing access to the HFRS was amended effective February 1, 2017 to extend the term of the agreement by one year to March 31, 2019 and to reduce the retainer fee.
We primarily operate in the U.S. Gulf of Mexico, North Sea, Asia Pacific and West Africa regions and in 2017 expanded our operations into Brazil with the commencement of operations of the Siem Helix 1 and Siem Helix 2 vessels for Petrobras. See Note 12 for revenues as well as property and equipment, net of accumulated depreciation, by geographic areas.
Our customers include major and independent oil and gas producers and suppliers, pipeline transmission companies, alternative (renewable) energy companies and offshore engineering and construction firms. The level of services required by any particular customer depends, in part, on the size of that customer’s capital expenditure budget in a particular year. Consequently, customers that account for a significant portion of revenues in one fiscal year may represent an immaterial portion of revenues in subsequent fiscal years. The percent of consolidated revenues from major customers, those whose total represented 10% or more of our consolidated revenues is as follows: 2017 — BP (19%), Petrobras (13%) and Talos (10%), 2016 — BP (17%) and Shell (11%), and 2015 — Shell (16%) and Talos (11%). We provided services to over 40 customers in 2017.
The oilfield services industry is highly competitive. While price is a factor, the ability to access specialized vessels, attract and retain skilled personnel, and demonstrate a good safety record is also important. Our principal competitors in the well intervention business include Island Offshore, Wild Well Control and international drilling contractors. Our principal competitors in the robotics business include C-Innovation, LLC, DeepOcean Group, DOF Subsea Group, Fugro N.V. and Oceaneering International, Inc. Our competitors may have significantly more financial, personnel, technological and other resources available to them.
TRAINING, SAFETY, HEALTH, ENVIRONMENT AND QUALITY ASSURANCE
Our corporate vision is based on the belief that all incidents should be preventable. Helix strives to achieve this by focusing on controlling major hazard risks and managing behavior. We have established a corporate culture in which QHSE has equal priority to our other business objectives. Should QHSE be in conflict with business objectives, then QHSE will take priority. Everyone at Helix has the authority and the duty to “STOP WORK” they believe is unsafe.
Our QHSE management systems and training programs were developed by management personnel based on common industry work practices and by employees with on-site experience who understand the risk and physical challenges of the ocean work site. As a result, we believe that our QHSE programs are among the best in the industry. We maintain a company-wide effort to continuously improve our control of QHSE risks and the behavior of our employees.
The process includes the assessment of risk through the use of selected risk analysis tools, control of work through management system procedures, job risk assessment of all routine and non-routine tasks, documentation of all daily observations, collection of data and data treatment to provide the mechanism for understanding our QHSE risks and at-risk behaviors. In addition, we schedule hazard hunts on each vessel and regularly audit QHSE management systems; both are completed with assigned responsibilities and action due dates.
The management systems of our well intervention and robotics business units have been independently assessed and registered compliant to ISO 9001 (Quality Management Systems) and ISO 14001 (Environmental Management Systems). All of our safety management systems are created in accordance with and conform to OHSAS 18001.
Many aspects of the offshore marine construction industry are subject to extensive governmental regulations. We are subject to the jurisdiction of the U.S. Coast Guard (the “Coast Guard”), the U.S. Environmental Protection Agency (the “EPA”) as well as state environmental protection agencies for those jurisdictions in which we operate, three divisions of the U.S. Department of the Interior, the Bureau of Ocean Energy Management (the “BOEM”), the Bureau of Safety and Environmental Enforcement (the “BSEE”), the Office of Natural Resource Revenue (the “ONRR”), and the U.S. Customs and Border Protection (the “CBP”) as well as classification societies such as the American Bureau of Shipping (the “ABS”). We are also subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”) and comparable state laws that regulate the protection of employee health and safety for our land-based operations.
In the North Sea, international regulations govern working hours and a specified working environment, as well as standards for diving procedures, equipment and diver health. These North Sea standards are some of the most stringent worldwide. In the absence of any specific regulation, our North Sea operations adhere to standards set by the International Marine Contractors Association and the International Maritime Organization. In addition, we operate in other foreign jurisdictions each with their own laws and regulations to which we are subject.
With respect to North Sea operations, we also note that the U.K.’s 2016 decision to exit from the EU may result in the imposition of new laws, rules or regulations affecting operations inside U.K. territorial waters.
The Coast Guard sets safety standards and is authorized to investigate vessel and diving accidents as well as other marine casualty incidents and to recommend improved safety standards. The Coast Guard is also authorized to inspect vessels at will. We also adhere to manning requirements which are implemented by the Coast Guard on the U.S. Outer Continental Shelf (“OCS”). We are required by various governmental and quasi-governmental agencies to obtain various permits, licenses and certificates with respect to our operations.
BOEM and BSEE
The development and operation of oil and gas properties located on the OCS of the United States is regulated primarily by the BOEM and BSEE. Among other requirements, the BOEM requires lessees of OCS properties to post bonds or provide other adequate financial assurance in connection with the plugging and abandonment of wells located offshore and the removal of all production facilities. As a service company, we are not subject to these regulations, but do depend on the demand for our services from the oil and gas industry, and, therefore our business is affected by laws and regulations as well as changing tax laws and policies relating to the oil and gas industry in general.
The Deepwater Horizon incident in April 2010 resulted in enhanced standards being implemented for companies engaged in the development of offshore oil and gas wells. These standards are determined and implemented by BSEE. The applicable standards now include Notice to Lessees (NTL), NTL 2010-N06 (Environmental NTL), NTL 2010-N10 (Compliance and Evaluation NTL), NTL 2013-N02 (Significant Change to Oil Spill Response Plan Worst Case Scenario), the Final Drilling Safety Rule, and a rule regarding Production Measurement Documents.
In April 2016, BSEE issued the final Oil and Gas and Sulfur Operations in the Outer Continental Shelf-Blowout Preventer Systems and Well Control Rule (WCR), which updated requirements for equipment and operations for well control activities associated with drilling, completion, workover and decommissioning operations. Specifically, the “Well Control Rule” resulted in reforms that establish the following items: (1) incorporation of the latest industry standards that establish minimum baseline requirements for the design, manufacture, repair, and maintenance of blowout preventers (“BOPs”); (2) additional controls over the maintenance and repair of BOPs; (3) use of dual shear rams in deepwater BOPs; (4) requirement that BOP systems include technology that allows the drill pipe to be centered during shearing operations; (5) more rigorous third-party certification of the shearing capability of BOPs; (6) expanded accumulator capacity and operational capabilities for increased functionality; (7) real-time monitoring capability for deep-water and high-temperature/high-pressure drilling activities; (8) establishment of criteria for the testing and inspection of subsea well containment equipment; (9) increased reporting of BOP failure data to the BSEE and the Original Equipment Manufacturers; (10) expectations of what constitutes a safe drilling margin and allowance for alternative safe drilling margins when justified; (11) requirements for the use of accepted engineering principles and establishment of general performance criteria for drilling and completion equipment; (12) establishment of additional requirements for using ROVs to function certain components on the BOP stack; (13) requirements for adequate centralization of casing during cementing; and (14) making the testing frequency of BOPs used on workover and decommissioning operations the same as drilling operations.
The Well Control Rule further provides guidance for the design and operation of remotely operated tools including the requirement that ROV tooling used on offshore subsea systems be held to the industry standards incorporated in API 17H, First Edition. On December 29, 2017, BSEE proposed to amend the WCR to reduce certain unnecessary regulatory burdens imposed under the existing regulations, while correcting errors and clarifying current requirements. Comments were due on January 29, 2018. WC rule requirements can significantly affect our operations.
The Jones Act (Coastwise Trade Rules)
We are also subject to the Coastwise Merchandise Statute (commonly known as “the Jones Act”), which provides that only vessels built in the U.S., owned 75% by U.S. citizens, and crewed by U.S. citizen seafarers may transport merchandise between points in the U.S. This statute has been applied to offshore oil and gas work in the U.S. The Jones Act is interpreted in large part by letter rulings of the CBP. The cumulative effect of these letter rulings has been to establish a framework for offshore operators to understand when an operation can be carried out by a foreign flag vessel and when it must be carried out by a coastwise qualified U.S. flag vessel.
In January 2017, CBP proposed a modification or revocation of numerous prior letter rulings regarding the interpretation of the Jones Act, which would have significantly changed how foreign flag vessels could operate on the OCS under the Jones Act. While CBP withdrew this proposal in May 2017, CBP, its parent agency, the Department of Homeland Security, or the U.S. Congress could revisit the issue through a rulemaking, the Customs Bulletin, or legislation. If a policy change occurred along the lines proposed by CBP in January 2017, such a new interpretation of the Jones Act could adversely impact the operations of non-coastwise qualified vessels working in the U.S. Gulf of Mexico, and could potentially make it more difficult and/or costly to perform our offshore services in the area. Industry would undoubtedly challenge any such action to the extent that it seeks to limit the ability of non-coastwise qualified vessels from performing the operations they are currently permitted to perform, but such regulatory or legislative action could create the same uncertainty in the industry as the January 2017 CBP proposal did.
Other Federal and State Regulatory Agencies
Additional proposals and proceedings before various federal and state regulatory agencies and the courts could affect the oil and gas industry. We cannot predict when or whether any such proposals may become effective.
These regulatory developments and legislative initiatives may curtail production and demand for fossil fuels such as oil and natural gas in areas of the world where our customers operate and thus adversely affect future demand for our services, which may in turn adversely affect our future results of operations.
Our operations are subject to a variety of national (including federal, state and local) and international laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Numerous governmental departments issue rules and regulations to implement and enforce these laws that are often complex, costly to comply with, and carry substantial administrative, civil and possibly criminal penalties for compliance failure. There is currently little uniformity among the regulations issued by the government agencies, both state and federal, with authority over environmental regulation.
Under these laws and regulations, we may be liable for remediation or removal costs, damages, civil, criminal, administrative penalties and other costs associated with releases of hazardous materials (including oil) into the environment, and that liability may be imposed on us even if the acts that resulted in the releases were in compliance with all applicable laws at the time such acts were performed. Some of the environmental laws and regulations that are applicable to our business operations are discussed in the following paragraphs, but the discussion does not cover all environmental laws and regulations that govern our operations.
The Oil Pollution Act of 1990, as amended (“OPA”), imposes a variety of requirements on offshore facility owners or operators, and the lessee or permittee of the area in which an offshore facility is located, as well as owners and operators or bareboat charterers of vessels. Any of these entities or persons can be “responsible parties” and are jointly, severally and strictly liable for removal costs and damages arising from facility and vessel oil spills or threatened spills up to their limits of liability (except if the limits are broken as discussed below). There are few exceptions and defenses to OPA, including if the spill results solely from the act or omission of certain third parties under specified circumstances, an act of God or an act of war. Failure to comply with OPA may result in the assessment of civil, administrative and criminal penalties. In a final rule published on November 19, 2015, the Coast Guard increased liability limits under OPA 90 equal to the greater of $939,800 or $1,100 per gross ton for vessels other than tankers. Liability limits are higher for certain types of facilities and could apply if our operations resulted in Responsible Party status for a spill from such a facility. The liability limits are not applicable, however, (i) if the spill is caused by gross negligence or willful misconduct, (ii) if the spill results from violation of a federal safety, construction or operating regulation, or (iii) if a party fails to report a spill or fails to cooperate fully in the cleanup. Few defenses exist to the liability imposed under OPA.
In addition, OPA requires owners and operators of vessels over 300 gross tons to provide the Coast Guard with evidence of financial responsibility to cover the cost of cleaning up oil spills from such vessels. We currently own and operate five vessels over 300 gross tons. We have provided satisfactory evidence of financial responsibility to the Coast Guard for all of our vessels.
Clean Water Act
The Clean Water Act imposes controls on the discharge of pollutants into the navigable waters of the United States and imposes potential liability for the costs of remediating releases of petroleum and other substances. The controls and restrictions imposed under the Clean Water Act have become more stringent over time, and it is possible that additional restrictions will be imposed in the future. Permits must be obtained to discharge pollutants into state and federal waters.
The Clean Water Act also establishes the National Pollutant Discharge Elimination System (“NPDES”) permitting program, which governs discharges of pollutants into navigable waters of the United States. Pursuant to the NPDES program, EPA has issued Vessel General Permits covering discharges incidental to normal vessel operations. The current Vessel General Permit (the “2013 VGP”), which became effective on December 19, 2013, applies to commercial vessels that are at least 79 feet in length. The 2013 VGP requires vessel owners and operators to adhere to “best management practices” to manage the covered discharges that occur normally in the operation of a vessel, including ballast water, and implements various training, inspection, monitoring, recordkeeping, and reporting requirements, as well as corrective actions upon identification of each deficiency. The 2013 VGP has also implemented more stringent requirements than the prior Vessel General Permit, including numeric technology-based effluent limitations for ballast water discharges. The 2013 VGP expires on December 18, 2018. We expect a new VGP to be proposed this year. Additionally, certain state regulations and the VGP prohibit the discharge of produced waters and sand, drilling fluids, drill cuttings and certain other substances related to the exploration for, and production of, oil and natural gas into certain coastal and offshore waters.
The Clean Water Act provides for civil, criminal and administrative penalties for any unauthorized discharge of oil and other hazardous substances and imposes liability on Responsible Parties for the costs of cleaning up any environmental contamination caused by the release of a hazardous substance and for natural resource damages resulting from the release. Many states have laws that are analogous to the Clean Water Act and also require remediation of releases of petroleum and other hazardous substances in state waters. Our vessels carry diesel fuel for their own use. Offshore facilities and vessels operated by us have facility and vessel response plans to deal with potential spills. We believe that our operations comply in all material respects with the requirements of the Clean Water Act and state statutes enacted to control water pollution.
Clean Air Act
The U.S. Supreme Court has held that greenhouse gasses are an air pollutant under the federal Clean Air Act and thus subject to regulation by the EPA. In October 2009, the EPA published a final rule requiring the reporting of greenhouse gas emissions from specified large greenhouse gas sources in the United States on an annual basis, beginning in 2011 for emissions occurring in 2010. In November 2010, the EPA expanded its greenhouse reporting rule to include onshore petroleum and natural gas production, offshore petroleum and natural gas production, onshore natural gas processing, natural gas transmission, underground natural gas storage, liquefied natural gas storage, liquefied natural gas import and export, and natural gas distribution facilities. As of 2011, reporting of greenhouse gas emissions from such facilities is required on an annual basis under this expanded rule.
A variety of regulatory developments, proposals or requirements and legislative initiatives that are focused on restricting the emissions of carbon dioxide, methane and other greenhouse gases have been introduced in the domestic and international regions in which we operate. For example, Congress has from time to time considered legislation to reduce greenhouse gas emissions, and almost one-half of the states already have taken legal measures to reduce greenhouse gas emissions, primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs. More stringent regulations under the Clean Air Act or other similar federal or state law could materially impact our business.
The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) contains provisions requiring the remediation of releases of hazardous substances into the environment and imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons including owners and operators of contaminated sites where the release occurred and those companies that transport, dispose of, or arrange for the disposal of, hazardous substances released at the sites. Under CERCLA, those persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. Third parties may also file claims for personal injury and property damage allegedly caused by the release of hazardous substances.
We operate in foreign jurisdictions that have various types of governmental laws and regulations relating to the discharge of oil or hazardous substances and the protection of the environment. Pursuant to these laws and regulations, we could be held liable for remediation of some types of pollution, including the release of oil, hazardous substances and debris from production, refining or industrial facilities, and other assets we own or operate or that are owned or operated by our customers or our subcontractors.
The Outer Continental Shelf Lands Act, as amended (“OCSLA”), provides the federal government with broad discretion in regulating the production of offshore resources of oil and natural gas, including authority to impose safety and environmental protection requirements applicable to lessees and permittees operating in the OCS. Specific design and operational standards may apply to OCS vessels, rigs, platforms, vehicles and structures. Violations of lease conditions or regulations issued pursuant to OCSLA can result in substantial civil and criminal penalties, as well as potential court injunctions that could curtail operations and cancellation of leases. Because our operations rely on offshore oil and gas exploration and production, if the government were to exercise its authority under OCSLA to restrict the availability of offshore oil and gas leases, such action could have a material adverse effect on our financial condition and results of operations. In addition, since August 2012, the agency has implemented policy guidelines (IPD No. 12-07) under which BSEE will issue incidents of non-compliance directly to contractors for serious violations of BSEE regulations. However, on December 18, 2017, the U.S. Court of Appeals for the Fifth Circuit dismissed the U.S. government’s appeal regarding a BSEE Notification of an INC civil penalty issued against an oilfield contractor. This development brings closure to the long-standing question of whether BSEE has authority to enforce civil and criminal penalties against offshore contractors.
The United States is one of approximately 170 member countries Party to the International Maritime Organization (“IMO”), an agency of the United Nations which is responsible for developing measures to improve the safety and security of international shipping and to prevent marine pollution from ships. The IMO has negotiated the International Convention for the Prevention of Pollution from Ships (“MARPOL”). MARPOL imposes environmental standards on the shipping industry, to which we are subject. These standards relate to oil spills, management of garbage, the handling and disposal of noxious liquids, harmful substances in packaged forms, sewage and air emissions.
Greenhouse Gases and Vessel Engine Emissions
Greenhouse gases and marine engine emissions are an area of increasing regulatory action. We may be subject to a variety of regulations from multiple regulatory bodies that are designed to reduce greenhouse gases or other particulate emissions, including restrictions on the types of fuels used on our vessels, restrictions on the types of engines, carbon neutralization or offset measures and/or requirements to collect and report data on emissions and the costs attendant to each of these efforts.
Annex VI of MARPOL, which addresses air emissions, including emissions of sulfur and nitrous oxide requires the use of low sulfur fuels worldwide in both auxiliary and main propulsion diesel engines on vessels. Vessels worldwide are currently required to use fuel with a sulfur content no greater than 3.5%, which the IMO decided in October 2016 to reduce to 0.5% beginning in January 2020.
In the U.S., the EPA regulates the standards for emissions from vessel engines, both on its own and as a participant in the IMO. Beginning in 2010, the IMO designated the waters off North American as an Emission Control Area, meaning that vessels operating in the United States must use fuel with a sulfur content no greater than 0.1%. Directives have been issued designed to reduce the emission of nitrogen oxides and sulfur oxides. These can impact both the fuel and the engines that may be used onboard vessels. In addition, U.S. states can (and in the case of California, have) issue rules regulating emissions from vessels operating off their coasts. In 2016, the California Air Resources Board notified the industry that their vessel fuel regulations would not sunset due to the implementation by the IMO of the emissions regulations in the North American Emission Control Area, but would continue in effect (Marine Notice 2016-1).
In addition, foreign nations and state actors may also impose emissions restrictions. The EU has issued regulations (EU Regulation 2015/757) that requires monitoring and reporting of the emissions of vessels exceeding 5,000 gross tons that call at EU ports, with the first reports due in 2019. At present the regulation is for monitoring and reporting only, but it is anticipated that in the future the EU may move from requiring reporting of emissions to regulations aimed at reducing them.
Current Compliance and Potential Material Impact
We believe that we are in compliance in all material respects with the applicable environmental laws and regulations to which we are subject. We maintain a robust compliance program to ensure that we maintain and update our programs to meet or exceed regulatory requirements in the areas which we operate. We do not anticipate that compliance with existing environmental laws and regulations will have a material effect upon our capital expenditures, earnings or competitive position. However, changes in environmental laws and regulations, or claims for damages to persons, property, natural resources or the environment, could result in substantial costs and liabilities, and thus there can be no assurance that we will not incur significant environmental compliance costs in the future. Such environmental liability could substantially reduce our net income and could have a significant impact on our financial ability to carry out our operations.
Our businesses involve a high degree of operational risk. Hazards, such as vessels sinking, grounding, colliding and sustaining damage from severe weather conditions, are inherent in marine operations. These hazards can cause personal injury or loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and the suspension of operations. Damages arising from such occurrences may result in lawsuits asserting large claims. Insurance may not be sufficient or effective under all circumstances or against all hazards to which we may be subject. A successful claim for which we are not fully insured could have a material adverse effect on our financial condition, results of operations and cash flows.
As discussed below, we maintain insurance policies to cover some of our risk of loss associated with our operations. We maintain the amount of insurance we believe is prudent based on our estimated loss potential. However, not all of our business activities can be insured at the levels we desire because of either limited market availability or unfavorable economics (limited coverage considering the underlying cost).
Our current insurance program is valid until June 30, 2019.
We maintain Hull and Increased Value insurance, which provides coverage for physical damage up to an agreed amount for each vessel. The deductibles are $1.0 million on the Q4000, the Q5000, the HP I and the Well Enhancer, and $500,000 on the Seawell. In addition to the primary deductibles, the vessels are subject to an annual aggregate deductible of $5 million. We also carry Protection and Indemnity (“P&I”) insurance, which covers liabilities arising from the operation of the vessels, and General Liability insurance, which covers liabilities arising from construction operations. The deductible on both the P&I and General Liability is $100,000 per occurrence. Onshore employees are covered by Workers’ Compensation. Offshore employees and marine crews are covered by a Maritime Employers Liability (“MEL”) insurance policy, which covers Jones Act exposures, and includes a deductible of $100,000 per occurrence plus a $750,000 annual aggregate deductible. In addition to the liability policies described above, we currently carry various layers of Umbrella Liability for total limits of $500 million in excess of primary limits. Our self-insured retention on our medical and health benefits program for employees is $300,000 per participant.
We also maintain Operator Extra Expense coverage that provides up to $150 million of coverage per each loss occurrence for a well control issue. Separately, we also maintain $500 million of liability insurance and $150 million of oil pollution insurance. For any given oil spill event we have up to $650 million of insurance coverage.
We customarily have agreements with our customers and vendors in which each contracting party is responsible for its respective personnel. Under these agreements we are indemnified against third party claims related to the injury or death of our customers’ or vendors’ personnel, and vice versa. With respect to well work contracted to us, the customer is generally contractually responsible for pollution emanating from the well. We separately maintain additional coverage for an amount up to $100 million that would cover us under certain circumstances against any such third party claims associated with well control events.
We incur workers’ compensation, MEL and other insurance claims in the normal course of business, which we believe are covered by insurance. We analyze each claim for potential exposure and estimate the ultimate liability of each claim. We have not incurred any significant losses as a result of claims denied by our insurance carriers. Our services are provided in hazardous environments where accidents involving catastrophic damage or loss of life could occur, and litigation arising from such an event may result in our being named a defendant in lawsuits asserting large claims. Although there can be no assurance the amount of insurance we carry is sufficient to protect us fully in all events, or that such insurance will continue to be available at current levels of cost or coverage, we believe that our insurance protection is adequate for our business operations.
As of December 31, 2017, we had approximately 1,600 employees. Of our total employees, we had approximately 380 non-U.S. employees covered by collective bargaining agreements or similar arrangements. We consider our overall relationships with our employees to be satisfactory.
WEBSITE AND OTHER AVAILABLE INFORMATION
We maintain a website on the Internet with the address of www.HelixESG.com. From time to time, we also provide information about Helix on Twitter (@Helix ESG) and LinkedIn (www.linkedin.com/company/helix-energy-solutions-group). Copies of this Annual Report for the year ended December 31, 2017, and previous and subsequent copies of our Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K, and any amendments thereto, are or will be available free of charge at our website as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission (“SEC”). In addition, the Investor Relations portion of our website contains copies of our Code of Business Conduct and Ethics and our Code of Ethics for Chief Executive Officer and Senior Financial Officers. We make our website content available for informational purposes only. Information contained on our website is not part of this report and should not be relied upon for investment purposes. Please note that prior to March 6, 2006, the name of the Company was Cal Dive International, Inc.
The general public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. The Internet address of the SEC’s website is www.sec.gov.
We satisfy the requirement under Item 5.05 of Form 8-K to disclose any amendments to our Code of Business Conduct and Ethics and our Code of Ethics for Chief Executive Officer and Senior Financial Officers and any waiver from any provision of those codes by posting that information in the Investor Relations section of our website at www.HelixESG.com.
Defined below are certain terms helpful to understanding our business that are located through this Annual Report:
BOEM: The Bureau of Ocean Energy Management (“BOEM”) is responsible for managing environmentally and economically responsible development of the U.S. offshore resources. Its functions include offshore leasing, resource evaluation, review and administration of oil and gas exploration and development plans, renewable energy development, National Environmental Policy Act analysis and environmental studies.
BSEE: The Bureau of Safety and Environmental Enforcement (“BSEE”) is responsible for safety and environmental oversight of offshore oil and gas operations, including permitting and inspections of offshore oil and gas operations. Its functions include the development and enforcement of safety and environmental regulations, permitting offshore exploration, development and production, inspections, offshore regulatory programs, oil spill response and newly formed training and environmental compliance programs.
Deepwater: Water depths exceeding 1,000 feet.
Dynamic Positioning (DP): Computer directed thruster systems that use satellite based positioning and other positioning technologies to ensure the proper counteraction to wind, current and wave forces enabling a vessel to maintain its position without the use of anchors.
DP2: Two DP systems on a single vessel providing the redundancy that allows the vessel to maintain position even with the failure of one DP system.
DP3: Triple-redundant DP control system comprising a triple-redundant controller unit and three identical operator stations. The system has to withstand fire or flood in any one compartment without the system failing. Loss of position should not occur from any single failure, including a completely burnt fire subdivision or flooded watertight compartment.
Intervention Riser System (IRS): A subsea system that establishes a direct connection from a well intervention vessel, through a rigid riser, to a conventional or horizontal subsea tree in depths up to 3,000 meters (9,840 feet). The system can be utilized for wireline intervention, production logging, coiled-tubing operations, well stimulation, and full plug and abandonment operations. The system provides the well control in order to safely access the well bore for these activities.
Life of Field Services: Services performed on offshore facilities, trees and pipelines from the beginning to the end of the economic life of an oil field, including installation, inspection, maintenance, repair, well intervention and abandonment.
QHSE: Quality, Health, Safety and Environmental programs to protect the environment, safeguard employee health and avoid injuries.
Pound Per Square Inch (p.s.i.): A unit of measurement for pressure or stress resulting from a force of one pound-force applied to an area of one square inch.
Riserless Open-water Abandonment Module (ROAM): An 18¾-inch large bore system that enhances well abandonment capabilities from a well intervention vessel.
Remotely Operated Vehicle (ROV): A robotic vehicle used to complement, support and increase the efficiency of diving and subsea operations and for tasks beyond the capability of manned diving operations.
ROVDrill: ROV deployed coring system developed to take advantage of existing ROV technology. The coring package, deployed with the ROV system, is capable of taking cores from the seafloor in water depths up to 3,000 meters (9,840 feet). Because the ROV system operates from the seafloor there is no need for surface drilling strings and the larger support spreads required for conventional coring.
Saturation Diving: Saturation diving, required for work in water depths between 200 and 1,000 feet, involves divers working from special chambers for extended periods at a pressure equivalent to the pressure at the work site.
Spot Vessels: Vessels not owned or under long-term charter but contracted on a short-term basis to perform specific projects.
Subsea Intervention Lubricator (SIL): A riserless system that facilitates access to subsea wells from a monohull vessel to provide safe, efficient and cost effective riserless well intervention and abandonment solutions. The system can be utilized for wireline, logging, light perforating, zone isolation, plug setting and removal, and decommissioning. The system provides access to the well bore while providing full well control safety for activities that do not require a riser conduit.
Tension Leg Platform (TLP): A floating production facility anchored to the seabed with tendons.
Trencher or Trencher System: A subsea robotics system capable of providing post lay trenching, inspection and burial (PLIB) and maintenance of submarine cables and flowlines in water depths of 30 to 7,200 feet across a range of seabed and environmental conditions.
Well Intervention Services: Activities related to well maintenance and production management/enhancement services. Our well intervention operations include the utilization of slickline and electric line services, pumping services, specialized tooling and coiled tubing services.
Item 1A. Risk Factors
Shareholders should carefully consider the following risk factors in addition to the other information contained herein. We operate globally in challenging and highly competitive markets and thus our business is subject to a variety of risks. The risks and uncertainties described below are not the only ones facing Helix. We are also subject to a variety of risks that affect many other companies generally, as well as additional risks and uncertainties not known to us or that, as of the date of this Annual Report, we believe are not as significant as the risks described below. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this Annual Report could have a material adverse effect on our business, results of operations and financial position.
Our business is adversely affected by low oil and gas prices, which occur from time to time in a cyclical oil and gas industry.
Our services are substantially dependent upon the condition of the oil and gas industry, and in particular, the willingness of oil and gas companies to make capital expenditures for offshore exploration, development, drilling and production operations. Although our services are used for other operations during the entire life cycle of a well, when industry conditions are unfavorable such as the current environment, oil and gas companies will likely continue to reduce their budgets for expenditures on all types of operations. The level of both capital and operating expenditures generally depend on the prevailing view of future oil and gas prices, which are influenced by numerous factors, including:
A prolonged period of low level of activity by offshore oil and gas operators may continue to adversely affect demand for our services and could lead to an even greater surplus of available vessels and therefore increasingly downward pressure on the rates we can charge in the market for our services. In the short term, our customers, in reaction to negative market conditions, may continue to seek to renegotiate their contracts with us at lower rates, both for existing contracts and when existing contracts expire, to cancel earlier work and shift it to later periods, or to cancel their contracts with us even if cancellation involves their paying a cancellation fee. The extent of the impact of these conditions on our results of operations and cash flows depends on the length and severity of the current unfavorable industry environment and the potential decreased demand for our services.
The majority of our current backlog is concentrated in a small number of long-term contracts.
Although historically our service contracts were of relatively short duration, over the last several years we have been entering into longer term contracts, such as the five-year contract with BP for work in the U.S. Gulf of Mexico, the four-year Petrobras contracts for well intervention services offshore Brazil and the seven-year contract for the HP I. As of December 31, 2017, the BP contract, the Petrobras contracts and the contract for the HP I represented approximately 87% of our total backlog. Any cancellation, termination or breach of these contracts would have a larger impact on our operating results and our financial condition than shorter term contracts due to the value at risk. The cancellation or termination of, or unwillingness to perform, these contracts could have a material adverse effect on our financial position, results of operations and cash flows.
Our current backlog for our services may not be ultimately realized for various reasons, and our contracts may be terminated early.
As of December 31, 2017, backlog for our services supported by written agreements or contracts totaled $1.6 billion, of which $503 million is expected to be performed in 2018. We may incur capital costs, a substantial portion of which we expect to recover from these contracts, we may charter vessels for the purpose of performing these contracts, and/or we may forgo or not seek other contracting opportunities in light of these contracts.
We may not be able to perform under our contracts for various reasons. In addition, our customers may seek to cancel, terminate, suspend or renegotiate our contracts in the event of our customers’ diminished demand for our services due to industry conditions affecting our customers and their own revenues. Some of these contracts provide for a cancellation fee that is substantially less than the expected rates from the contracts. In addition, some of our customers could experience liquidity issues or could otherwise be unable or unwilling to perform under a contract, which could lead a customer to seek to repudiate, cancel or renegotiate the contract. Our inability or the inability of our customers to perform under our or their contractual obligations, and/or the early cancellation or termination of our contracts by our customers, could have a material adverse effect on our financial position, results of operations and cash flows.
Our inability or failure to perform operationally under our contracts could result in reduced revenues, contractual penalties, and/or ultimately, contract termination.
Our equipment and services are very technical and the offshore environment poses its own challenges. Performing the work we do pursuant to the terms of our contracts can be difficult for various reasons, including equipment failure or reduced performance, human error, design flaws, weather, currents or soil conditions. Failure to perform in accordance with contract specifications can result in reduced rates (or zero rates), contractual penalties, and ultimately, termination in the event of sustained non-performance. For example our services and charter agreements with Petrobras provide that Petrobras can assess fines based on a percentage of our daily operating rate for certain failures of equipment, vessels or personnel (which fines may be deducted by Petrobras from our monthly payments), and that ultimately Petrobras has the right to terminate should assessed penalties reach a certain amount. Reduced revenues and/or contract termination because of our failure to perform operationally could have a material adverse effect on our financial position, results of operations and cash flows.
Time chartering of vessels requires us to make ongoing payments regardless of utilization of and revenue generation from those vessels, and we may own vessels with ongoing costs that cannot be recouped if the vessels are not under contract.
Typically, we charter our ROV support vessels under long-term time charter agreements. We also have entered into long-term charter agreements for the Siem Helix 1 and Siem Helix 2 vessels to perform work under the Petrobras contracts. Should our contracts with customers be canceled, terminated or breached and/or we do not secure work for the chartered vessels, we are still required to make charter payments. Making those payments absent revenue generation could have a material adverse effect on our financial position, results of operations and cash flows.
In addition, depending on available opportunities and market conditions, vessels and other assets may be constructed for our fleet without first obtaining service contracts covering the cost of those assets. For example, our Q7000 vessel currently does not have any contracted backlog. Once constructed and in service, there are ongoing costs of owning these capital assets, including ongoing maintenance, limited manning, insurance and depreciation. Our failure to secure service contracts for vessels or other assets could adversely affect our financial position, results of operations and cash flows.
Fleet upgrade, modification, repair , dry dock and construction projects, and customer contractual acceptance of new vessels and equipment, are subject to risks, including delays, cost overruns, and failure to commence or maintain contracts.
The shipyard scope for the Q7000, our newbuild semi-submersible well intervention vessel, is complete and currently equipment is being manufactured and/or installed for the completion of the vessel. From time to time, we construct or make capital improvements to other pieces of equipment (such as the 15K IRS that we jointly constructed with OneSubsea). In addition, we incur significant upgrade, modification, refurbishment, repair and dry dock expenditures on our existing fleet from time to time. While some of these projects are planned, some are unplanned. Additionally, as vessels and equipment age, they are more likely to be subject to higher maintenance and repair activities. These projects are subject to risks of delay or cost overruns inherent in any large capital project resulting from numerous factors, including:
The estimated capital expenditures for vessel and equipment construction, upgrade, modification, refurbishment and dry dock projects could materially exceed our planned capital expenditures. Moreover, our assets undergoing upgrades, modifications, refurbishment or repair may not earn a day rate during the period they are out of service. Any significant period of unplanned maintenance and repairs related to our vessels and other income-producing assets could have a material adverse effect on our financial position, results of operations and cash flows.
In addition, delays in the delivery of vessels and other operating assets being constructed or undergoing upgrades, modifications, refurbishment, repair, or dry docks may result in delay in customer acceptance and/or contract commencement, resulting in a loss of revenue and cash flow to us, and may cause our customers to seek to terminate or shorten the terms of their contracts with us, and/or seek delay damages, under applicable late delivery clauses. In the event of termination of a contract due to late delivery, we may not be able to secure a replacement contract on favorable terms, if at all.
A sustained period of unfavorable industry conditions could jeopardize our customers’ and other counterparties’ ability to perform their obligations.
Continued uncertain industry conditions could jeopardize the ability of certain of our counterparties, including our customers, insurers and financial institutions, to perform their obligations. Although we assess the creditworthiness of our counterparties, a prolonged period of difficult industry conditions could lead to changes in a counterparty’s liquidity and increase our exposure to credit risk and bad debts. In particular, our robotics business unit tends to do business with smaller customers that may not be capitalized to the same extent as larger operators. In addition, we may offer extended payment terms to our customers in order to secure contracts. These circumstances may lead to more frequent collection issues. Our financial results and liquidity could be adversely affected and we could incur losses.
Because we have certain capital, debt and other obligations, a prolonged period of low demand and rates for our services could eventually lead to a material adverse effect on our liquidity.
Although we continue to seek to reduce the level of our capital and other expenses and have raised capital by means of several equity offerings, in the event of a more prolonged period of the current industry environment, the failure of our customers to expend funds on our services or a longer period of lower rates for our services, coupled with certain fixed obligations that we have related to debt repayment, capital commitments, long-term time charter contracts for our vessels and certain other commitments related to ongoing operational activities, could eventually lead to a material adverse effect on our liquidity and financial position.
We may not be able to compete successfully against current and future competitors.
The oilfield services business in which we operate is highly competitive. An oversupply of offshore drilling rigs coupled with a significant slowdown in industry activities results in increased competition from drilling rigs as well as substantially lower rates on work that is being performed. Several of our competitors are substantially larger and have greater financial and other resources to better withstand a prolonged period of difficult industry conditions. In order to compete for customers, these larger competitors may undercut us substantially by reducing rates to levels we are unable to withstand. If other companies relocate or acquire assets for operations in the regions in which we operate, levels of competition may increase further and our business could be adversely affected.
Our indebtedness and the terms of our indebtedness could impair our financial condition and our ability to fulfill our debt obligations.
As of December 31, 2017, we had $495.6 million of consolidated indebtedness outstanding. The level of indebtedness may have an adverse effect on our future operations, including:
A prolonged period of weak economic conditions and other events beyond our control may make it increasingly difficult to comply with our covenants and other restrictions in agreements governing our debt. If we fail to comply with these covenants and other restrictions, it could lead to reduced liquidity, an event of default, the possible acceleration of our repayment of outstanding debt and the exercise of certain remedies by the lenders, including foreclosure against our collateral. These conditions and events may limit our access to the credit markets if we need to replace our existing debt, which could lead to increased costs and less favorable terms, including shorter repayment schedules and higher fees and interest rates.
Lack of access to the financial markets could negatively impact our ability to operate our business and to execute our strategy.
Access to financing may be limited and uncertain, especially in times of economic weakness. If capital and credit markets are limited, we may be unable to refinance or we may incur increased costs and less favorable terms associated with any refinancing of our maturing debt. Also, we may incur increased costs and less favorable terms associated with any additional financing we may require for future operations. Limited access to the financial markets could adversely impact our ability to take advantage of business opportunities or react to changing economic and business conditions. Additionally, if capital and credit markets are limited, this could potentially result in our customers curtailing their capital and operating expenditure programs, which could result in a decrease in demand for our vessels and a reduction in fees and/or utilization. In addition, certain of our customers could experience an inability to pay suppliers, including us, in the event they are unable to access financial markets as needed to fund their operations. Likewise, our suppliers may be unable to sustain their current level of operations, fulfill their commitments and/or fund future operations and obligations, each of which could adversely affect our operations. Continued lower levels of economic activity and weakness in the financial markets could also adversely affect our ability to implement our strategic objectives and dispose of non-core business assets.
Our forward-looking statements assume that our lenders, insurers and other financial institutions will be able to fulfill their obligations under our various credit agreements, insurance policies and contracts. If any of our significant financial institutions were unable to perform under these agreements, and if we were unable to find suitable replacements at a reasonable cost, our financial position, results of operations, liquidity and cash flows could be adversely impacted.
A further decline in the offshore energy services market could result in additional impairment charges.
In December 2016, we recorded a goodwill impairment charge of $45.1 million related to our robotics reporting unit. In December 2015, we recorded asset impairment charges of $205.2 million related to our previously owned Helix 534 vessel, $133.4 million related to our HP I vessel and $6.3 million related to certain capitalized vessel project costs. We also recognized a goodwill impairment charge of $16.4 million related to our U.K. well intervention reporting unit as well as losses totaling $124.3 million primarily reflecting our share of impairment charges that Deepwater Gateway and Independence Hub recorded in December 2015. Prolonged periods of low utilization and day rates could result in the recognition of additional impairment charges for our vessels and robotics assets if future cash flow estimates, based on information available to us at the time, indicate that their carrying value may not be recoverable. We may also record additional impairment losses in the future.
Our North Sea business typically declines in winter, and bad weather in the Gulf of Mexico or North Sea can adversely affect our operations.
Marine operations conducted in the North Sea are seasonal and depend, in part, on weather conditions. Historically, we have enjoyed our highest North Sea vessel utilization rates during the summer and fall when weather conditions are favorable for offshore operations. We typically have experienced our lowest utilization rates in the North Sea in the first quarter. As is common in the industry, we may bear the risk of delays caused by some adverse weather conditions. Accordingly, our results in any one quarter are not necessarily indicative of annual results or continuing trends.
Certain areas in and near the Gulf of Mexico and North Sea experience unfavorable weather conditions including hurricanes and extreme storms on a relatively frequent basis. Substantially all of our facilities and assets offshore and along the Gulf of Mexico and the North Sea are susceptible to damage and/or total loss by these storms. Damage caused by high winds and turbulent seas could potentially cause us to curtail service operations for significant periods of time until damage can be assessed and repaired. Moreover, even if we do not experience direct damage from any of these weather events, we may experience disruptions in our operations because customers may curtail their offshore activities due to damage to their platforms, pipelines and other related facilities.
The operation of marine vessels is risky, and we do not have insurance coverage for all risks.
Vessel-based offshore services involve a high degree of operational risk. Hazards, such as vessels sinking, grounding, colliding and sustaining damage from severe weather conditions, are inherent in marine operations. These hazards can cause personal injury or loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage, and suspension of operations. Damage arising from such occurrences may result in lawsuits asserting large claims. Insurance may not be sufficient or effective under all circumstances or against all hazards to which we may be subject. A successful liability claim for which we are not fully insured could have a material adverse effect on our financial condition. Moreover, we cannot make assurances that we will be able to maintain adequate insurance in the future at rates that we consider reasonable. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. For example, insurance carriers are now requiring broad exclusions for losses due to war risk and terrorist acts, and limitations for wind storm damages. The current insurance on our vessels is in amounts approximating replacement value. In the event of property loss due to a catastrophic marine disaster, mechanical failure, collision or other event, insurance may not cover a substantial loss of revenue, increased costs and other liabilities, and therefore the loss of any of our assets could have a material adverse effect on us.
Our customers may be unable or unwilling to indemnify us.
Consistent with standard industry practice, we typically obtain contractual indemnification from our customers whereby they agree to protect and indemnify us for liabilities resulting from various hazards associated with offshore operations. We can provide no assurance, however, that our customers will be willing or financially able to meet these indemnification obligations.
Enhanced regulations for deepwater offshore drilling may reduce the need for our services.
Exploration and development activities and the production and sale of oil and natural gas are subject to extensive federal, state, local and international regulations. To conduct deepwater drilling in the U.S. Gulf of Mexico, an operator is required to comply with existing and newly developed regulations and enhanced safety standards. Before drilling may commence, the BSEE conducts many inspections of deepwater drilling operations for compliance with its regulations, including the testing of blowout preventers. Operators also are required to comply with the Safety and Environmental Management System regulations (SEMS) within the deadlines specified by the regulations, and ensure that their contractors have SEMS compliant safety and environmental policies and procedures. Additionally, each operator must demonstrate that it has containment resources that are available promptly in the event of a deepwater blowout, regardless of the company or operator involved. It is expected that the BOEM and the BSEE will continue to issue further regulations regarding deepwater offshore drilling. Our business, a significant portion of which is in the Gulf of Mexico, provides development services to newly drilled wells, and therefore relies heavily on the industry’s drilling of new oil and gas wells. If the issuance of permits is significantly delayed, or if other oil and gas operations are delayed or reduced due to increased costs of complying with regulations, demand for our services in the Gulf of Mexico may also decline. Moreover, if our assets are not redeployed to other locations where we can provide our services at a profitable rate, our business, financial condition, results of operations and cash flows would be materially adversely affected.
We cannot predict with any certainty the substance or effect of any new or additional regulations in the United States or in other areas around the world. If the United States or other countries where our customers operate enact stricter restrictions on offshore drilling or further regulate offshore drilling and thereby increase costs and/or cause delays for our customers, and this results in decreased demand for or profitability of our services, our business, financial condition, results of operations and cash flows could be materially adversely affected.
Government regulations may affect our business operations.
Our business is affected by changes in public policy and by federal, state, local and foreign laws and regulations relating to the offshore oil and gas industry. Offshore oil and gas operations are affected by tax, environmental, safety, labor, cabotage and other laws, by changes in those laws, application or interpretation of existing laws, and changes in related administrative regulations or enforcement priorities. It is also possible that these laws and regulations may in the future add significantly to our operating costs or those of our customers or otherwise directly or indirectly affect our operations. For instance, In January 2017 CBP proposed a modification or revocation of numerous prior letter rulings regarding the interpretation of the Jones Act, which would have significantly changed how foreign flag vessels could operate on the OCS under the Jones Act. While CBP withdrew this proposal in May 2017, CBP, its parent agency, the Department of Homeland Security, or the U.S. Congress could revisit the issue. If a policy change occurred along the lines proposed by CBP in January 2017, such a new interpretation of the Jones Act could adversely impact the operations of non-coastwise qualified vessels working in the U.S. Gulf of Mexico, and could potentially make it more difficult and/or costly to perform our offshore services in the area. Industry would undoubtedly challenge any such action to the extent that it seeks to limit the ability of non-coastwise qualified vessels from performing the operations they are currently permitted to perform, but such regulatory or legislative action could create the same uncertainty in the industry as the January 2017 CBP proposal did.
Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. The United States recently enacted significant tax reform, and certain provisions of the new law may adversely affect us. In addition, risks of substantial costs and liabilities related to environmental compliance issues are inherent in our operations. Our operations are subject to extensive federal, state, local and foreign laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Permits are required for the operations of various facilities, and those permits are subject to revocation, modification and renewal. Government authorities have the power to enforce compliance with their regulations, and violations are subject to fines, injunctions or both. In some cases, those governmental requirements can impose liability for the entire cost of cleanup on any responsible party without regard to negligence or fault and impose liability on us for the conduct of others or conditions others have caused, or for our acts that complied with all applicable requirements when we performed them. It is possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons resulting from our operations, would result in substantial costs and liabilities. Our insurance policies and the contractual indemnity protection we seek to obtain from our customers may not be sufficient or effective to protect us under all circumstances or against all risk involving compliance with environmental laws and regulations.
Failure to comply with anti-bribery laws could have a material adverse impact on our business.
The U.S. Foreign Corrupt Practices Act (the “FCPA”) and similar anti-bribery laws in other jurisdictions, including the United Kingdom Bribery Act 2010 and Brazil’s Clean Company Act, generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. We operate in many parts of the world that have experienced governmental corruption to some degree. We have a robust ethics and compliance program that is designed to deter or detect violations of applicable laws and regulations through the application of our anti-corruption policies and procedures, Code of Business Conduct and Ethics, training, internal controls, investigation and remediation activities, and other measures. However, our ethics and compliance program may not be fully effective in preventing all employees, contractors or intermediaries from violating or circumventing our compliance requirements or applicable laws and regulations. Failure to comply with anti-bribery laws could subject us to civil and criminal penalties, and such failure, and in some instances even the mere allegation of such failure, could create termination or other rights in connection with our existing contracts, negatively impact our ability to obtain future work, or lead to other sanctions, all of which could have a material adverse effect on our business, financial position, results of operations and cash flows, and cause reputational damage. We could also face fines, sanctions and other penalties from authorities in the relevant foreign jurisdictions, including prohibition of our participating in or curtailment of business operations in those jurisdictions and the seizure of vessels or other assets. Further, we may have competitors who are not subject to the same laws, which may provide them with a competitive advantage over us in securing business or gaining other preferential treatment.
Our operations outside of the United States subject us to additional risks.
Our operations outside of the United States are subject to risks inherent in foreign operations, including:
Certain countries have in place or are in the process of developing complex laws for foreign companies doing business in these countries, such as local content requirements. Some of these laws are difficult to interpret, making compliance uncertain, and others increase the cost of doing business, which may make it difficult for us in some cases to be competitive. In addition, laws and policies of the United States affecting foreign trade and taxation may also adversely affect our international operations.
Our international operations are exposed to currency devaluation and fluctuation risk.
Since we are a global company, our international operations are exposed to foreign currency exchange rate risks on all contracts denominated in foreign currencies. For some of our international contracts, a portion of the revenue and local expenses is incurred in local currencies and we are at risk of changes in the exchange rates between the U.S. dollar and such currencies. In some instances, we receive payments in currencies that are not easily traded and may be illiquid. The reporting currency for our consolidated financial statements is the U.S. dollar. Certain of our assets, liabilities, revenues and expenses are denominated in other countries’ currencies. Those assets, liabilities, revenues and expenses are translated into U.S. dollars at the applicable exchange rates to prepare our consolidated financial statements. Therefore, changes in exchange rates between the U.S. dollar and those other currencies affect the value of those items as reflected in our consolidated financial statements, even if their value remains unchanged in their original currency.
The loss of the services of one or more of our key employees, or our failure to attract and retain other highly qualified personnel in the future, could disrupt our operations and adversely affect our financial results.
Our industry has lost a significant number of experienced professionals over the years due to its cyclical nature, which is attributable, among other reasons, to the volatility in oil and gas prices. Many companies, including us, have had employee lay-offs as a result of reduced business activities in an industry downturn. Our continued success depends on the active participation of our key employees. The loss of our key people could adversely affect our operations. The delivery of our services also requires personnel with specialized skills and experience. As a result, our ability to remain productive and profitable will depend upon our ability to employ and retain skilled workers. For certain projects we may have competition for personnel with the requisite skill set, including from drilling companies.
Cybersecurity breaches or business system disruptions may adversely affect our business.
We rely on our information technology infrastructure and management information systems to operate and record almost every aspects of our business. Similar to other companies, we may be subject to cybersecurity breaches caused by, among other things, illegal hacking, computer viruses, phishing, ransomware, or acts of vandalism or terrorism. Although we continue to implement security measures to protect against such cybersecurity risks, there can be no assurance that these measures will prevent or detect every type of attempt or attack. In addition, a cyberattack or security breach could go undetected for an extended period of time. A breach or failure of our information technology systems or networks, critical third-party systems on which we rely, or those of our customers or vendors, could result in an interruption in our operations, unplanned capital expenditures, unauthorized publication of our confidential business or proprietary information, unauthorized release of customer or employee data, violation of privacy or other laws, and exposure to litigation. Any such breach could have a material adverse effect on our business, reputation, cash flows and financial results.
Certain provisions of our corporate documents and Minnesota law may discourage a third party from making a takeover proposal.
We are authorized to fix, without any action by our shareholders, the rights and preferences on up to 5,000,000 shares of preferred stock, including dividend, liquidation and voting rights. In addition, our by-laws divide the Board of Directors into three classes. We are also subject to certain anti-takeover provisions of the Minnesota Business Corporation Act. We also have employment arrangements with all of our executive officers that could require cash payments in the event of a “change of control.” Any or all of the provisions or factors described above may discourage a takeover proposal or tender offer not approved by management and the Board of Directors and could result in shareholders who may wish to participate in such a proposal or tender offer receiving less for their shares than otherwise might be available in the event of a takeover attempt.
Item 1B. Unresolved Staff Comments
Item 2. Properties
We own a fleet of five vessels, six IRSs, three SILs, 48 ROVs, five trenchers and two ROVDrills. We also have five vessels under long-term charter. Currently all of our vessels, both owned and chartered, have DP capabilities specifically designed to meet the needs of our customers’ deepwater activities. Our Seawell and Well Enhancer vessels have built-in saturation diving systems.
Listing of Vessels and Other Assets Related to Operations (1)
We incur routine dry dock, inspection, maintenance and repair costs pursuant to applicable statutory regulations in order to maintain our vessels under the rules of the applicable class society. In addition to complying with these requirements, we have our own vessel maintenance program that we believe permits us to continue to provide our customers with well-maintained, reliable vessels. In the normal course of business, we charter other vessels on a short-term basis, such as tugboats, cargo barges, utility boats and additional robotics support vessels.
We own a 20% interest in Independence Hub, which owns the Independence Hub platform that serves as a regional hub located in the eastern Gulf of Mexico.
Our corporate headquarters are located at 3505 West Sam Houston Parkway North, Suite 400, Houston, Texas. We currently lease all of our facilities. The list of our facilities as of December 31, 2017 is as follows:
Item 3. Legal Proceedings
We are, from time to time, party to litigation arising in the normal course of business. We believe that there are currently no legal proceedings the outcome of which would have a material adverse effect on our financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Executive Officers of the Company
The executive officers of Helix are as follows:
Owen Kratz is President and Chief Executive Officer of Helix. He was named Executive Chairman in October 2006 and served in that capacity until February 2008 when he resumed the position of President and Chief Executive Officer. He served as Helix’s Chief Executive Officer from April 1997 until October 2006. Mr. Kratz served as President from 1993 until February 1999, and has served as a Director since 1990 (including as Chairman of the Board of Directors from May 1998 to July 2017). He served as Chief Operating Officer from 1990 through 1997. Mr. Kratz joined Cal Dive International, Inc. (now known as Helix) in 1984 and held various offshore positions, including saturation diving supervisor, and management responsibility for client relations, marketing and estimating. From 1982 to 1983, Mr. Kratz was the owner of an independent marine construction company operating in the Bay of Campeche. Prior to 1982, he was a superintendent for Santa Fe and various international diving companies, and a diver in the North Sea. From February 2006 to December 2011, Mr. Kratz was a member of the Board of Directors of Cal Dive International, Inc., a once publicly-traded company, which was formerly a subsidiary of Helix. Mr. Kratz has a Bachelor of Science degree from State University of New York (SUNY).
Erik Staffeldt was appointed Senior Vice President and Chief Financial Officer of Helix in June 2017. Mr. Staffeldt oversees Helix’s finance, treasury, accounting, tax, information technology and corporate planning functions. Since joining Helix in July 2009 as Assistant Corporate Controller, Mr. Staffeldt has served as Director — Corporate Accounting from August 2011 until March 2013, Director of Finance from March 2013 until February 2014, Finance and Treasury Director February 2014 until July 2015, and Vice President — Finance and Accounting from July 2015 to June 2017. Mr. Staffeldt was also designated as Helix’s “principal accounting officer” for purposes of the Securities Act of 1933, the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder in July 2015. Mr. Staffeldt served in various financial and accounting capacities prior to joining Helix and has over 22 years of experience in the energy industry. Mr. Staffeldt is a graduate of the University of Notre Dame with a BBA in Accounting and an MBA from Loyola University in New Orleans, and is a Certified Public Accountant.
Scott A. (“Scotty”) Sparks is Executive Vice President and Chief Operating Officer of Helix, having joined Helix in 2001. He served as Executive Vice President — Operations of Helix from May 2015 until February 2016. From October 2012 until May 2015, he was Vice President — Commercial and Strategic Development of Helix. He has also served in various positions within Helix’s robotics subsidiary, Canyon Offshore, Inc., including as Senior Vice President from 2007 to September 2012. Mr. Sparks has over 27 years of experience in the subsea industry, including Operations Manager and Vessel Superintendent at Global Marine Systems and BT Marine Systems.
Alisa B. Johnson has served as Executive Vice President, General Counsel and Corporate Secretary of Helix since November 2008, and joined Helix as Senior Vice President, General Counsel and Secretary of Helix in September 2006. Ms. Johnson oversees the legal, human resources and contracts and insurance functions. Ms. Johnson has been involved with the energy industry for over 27 years. Prior to joining Helix, Ms. Johnson worked for Dynegy Inc. for nine years, at which company she held various legal positions of increasing responsibility, including Senior Vice President and Group General Counsel — Generation. From 1990 to 1997, Ms. Johnson held various legal positions at Destec Energy, Inc., and prior to that Ms. Johnson was in private law practice. Ms. Johnson received her Bachelor of Arts degree Cum Laude from Rice University and her law degree Cum Laude from the University of Houston.
Geoffrey C. Wagner is Executive Vice President and Chief Commercial Officer. Mr. Wagner joined Helix in January 2018. Prior to joining Helix, he worked in a consulting capacity with Blackhill Partners from September to December 2017. Prior to that time, he served in various capacities for Atwood Oceanics, Inc., an offshore drilling contractor, as Vice President, Strategic Planning from August 2016 until August 2017, Vice President, Technical Services and Supply Chain from August 2015 until August 2016, Vice President, Marketing and Business Development from October 2012 until August 2015, and Director, Marketing and Business Development from March 2010 until October 2012. He served from January 2005 to March 2010 in management positions of increasing responsibility with Transocean, prior to which he was employed by SeaRiver Maritime, Inc., an ExxonMobil company, that owns and operates vessels providing maritime transportation of petroleum and chemical products. Mr. Wagner holds an MBA from the Jones Graduate School of Business at Rice University and an undergraduate degree in Marine Engineering and Nautical Science from the United States Merchant Marine Academy at Kings Point, New York.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “HLX.” The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock:
On February 20, 2018, the closing sale price of our common stock on the NYSE was $6.45 per share. As of February 20, 2018, there were 302 registered shareholders and approximately 13,700 beneficial shareholders of our common stock.
We have not declared or paid cash dividends on our common stock in the past nor do we intend to pay cash dividends in the foreseeable future. We currently intend to retain earnings, if any, for the future operation and growth of our business. In addition, our financing arrangements prohibit the payment of cash dividends on our common stock. See Management’s Discussion and Analysis of Financial Condition and Results of Operations “— Liquidity and Capital Resources.”
Shareholder Return Performance Graph
The following graph compares the cumulative total shareholder return on our common stock for the period since December 31, 2012 to the cumulative total shareholder return for (i) the stocks of 500 large-cap corporations maintained by Standard & Poor’s (“S&P 500”), assuming the reinvestment of dividends; (ii) the Philadelphia Oil Service Sector index (the “OSX”), a price-weighted index of leading oil service companies, assuming the reinvestment of dividends; and (iii) a peer group selected by us (the “Peer Group”) consisting of the following companies: Diamond Offshore Drilling, Inc., Forum Energy Technologies, Inc., Frank’s International N.V., GulfMark Offshore, Inc., Hornbeck Offshore Services, Inc., McDermott International, Inc., Noble Energy Inc., Oceaneering International, Inc., Oil States International, Inc., Rowan Companies plc, TETRA Technologies, Inc., and Tidewater Inc. The returns of each member of the Peer Group have been weighted according to each individual company’s equity market capitalization as of December 31, 2017 and have been adjusted for the reinvestment of any dividends. We believe that the members of the Peer Group provide services and products more comparable to us than those companies included in the OSX. The graph assumes $100 was invested on December 31, 2012 in our common stock at the closing price on that date price and on December 31, 2012 in the three indices presented. We paid no cash dividends during the period presented. The cumulative total percentage returns for the period presented are as follows: our stock — (63.5)%; the Peer Group — (79.2)%; the OSX — (32.1)%; and S&P 500 — 108.1%. These results are not necessarily indicative of future performance.
Comparison of Five Year Cumulative Total Return among Helix, S&P 500,
OSX and Peer Group
Issuer Purchases of Equity Securities
Item 6. Selected Financial Data.
The financial data presented below for each of the five years ended December 31, 2017 should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data included elsewhere in this Annual Report. In February 2013, we sold our former domestic oil and gas subsidiary, Energy Resource Technology GOM, Inc. (“ERT”), and as a result, the assets and liabilities included in the sale of ERT and the historical operating results of our former Oil and Gas segment are presented as discontinued operations in this Annual Report.
Non-GAAP Financial Measures
A non-GAAP financial measure is generally defined by the SEC as a numerical measure of a company’s historical or future performance, financial position, or cash flows that includes or excludes amounts from the most directly comparable measure under U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, our reported results prepared in accordance with U.S. GAAP. Users of this financial information should consider the types of events and transactions that are excluded from these non-GAAP measures.
We measure our operating performance based on EBITDA, a non-GAAP financial measure that is commonly used but is not a recognized accounting term under U.S. GAAP. We use EBITDA to monitor and facilitate the internal evaluation of the performance of our business operations, to facilitate external comparison of our business results to those of others in our industry, to analyze and evaluate financial and strategic planning decisions regarding future investments and acquisitions, to plan and evaluate operating budgets, and in certain cases, to report our results to the holders of our debt as required by our debt covenants. We believe that our measure of EBITDA provides useful information to the public regarding our ability to service debt and fund capital expenditures and may help our investors understand our operating performance and compare our results to other companies that have different financing, capital and tax structures.
We define EBITDA from continuing operations as net income (loss) from continuing operations before income taxes, net interest expense, net other income or expense, and depreciation and amortization expense. We separately disclose our non-cash asset impairment charges, which, if not material, would be reflected as a component of our depreciation and amortization expense. Because these impairment charges are material for certain periods presented, we have reported them as a separate line item. Non-cash goodwill impairment and losses on equity investments are also added back if applicable. Loss on early extinguishment of long-term debt is considered equivalent to additional interest expense and thus is added back to net income (loss) from continuing operations.
In the following reconciliation, we provide amounts as reflected in our accompanying consolidated financial statements unless otherwise footnoted. This means that these amounts are recorded at 100% even if we do not own 100% of all of our subsidiaries. Accordingly, to arrive at our measure of Adjusted EBITDA from continuing operations, when applicable, we exclude the noncontrolling interests related to the adjustment components of EBITDA. Our measure of Adjusted EBITDA also excludes the gain or loss on disposition of assets from continuing operations. In addition, we include realized losses from foreign currency exchange contracts not designated as hedging instruments, which are excluded from EBITDA from continuing operations as a component of net other income or expense.
Other companies may calculate their measures of EBITDA and Adjusted EBITDA differently from the way we do, which may limit their usefulness as comparative measures. Because EBITDA and Adjusted EBITDA are not financial measures calculated in accordance with U.S. GAAP, they should not be considered in isolation or as a substitute for, but instead are supplemental to, income from operations, net income or other income data prepared in accordance with U.S. GAAP. The reconciliation of our net income (loss) from continuing operations to EBITDA from continuing operations and Adjusted EBITDA from continuing operations is as follows:
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis should be read in conjunction with our historical consolidated financial statements located in Item 8. Financial Statements and Supplementary Data of this Annual Report. Any reference to Notes in the following management’s discussion and analysis refers to the Notes to Consolidated Financial Statements located in Item 8. Financial Statements and Supplementary Data of this Annual Report. The results of operations reported and summarized below are not necessarily indicative of future operating results. This discussion also contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under Item 1A. Risk Factors and located earlier in this Annual Report.
We are an international offshore energy services company that provides specialty services to the offshore energy industry, with a focus on well intervention and robotics operations. We believe that focusing on these services will deliver favorable long-term financial returns. From time to time, we make strategic investments that expand our service capabilities or add capacity to existing services in our key operating regions. Our well intervention fleet expanded following the delivery of the Siem Helix 2 chartered vessel in February 2017 and is expected to further expand following the completion and delivery of the Q7000, a newbuild semi-submersible vessel, in 2018 or 2019. Chartering newer vessels with additional capabilities, including the Grand Canyon III chartered vessel that went into service for us in May 2017, should enable our robotics business to better serve the needs of our customers. From a longer-term perspective we also expect to benefit from our fixed fee agreement for the HP I, a dynamically positioned floating production vessel that processes production from the Phoenix field for the field operator until at least June 1, 2023.
In January 2015, Helix, OneSubsea LLC, OneSubsea B.V., Schlumberger Technology Corporation, Schlumberger B.V. and Schlumberger Oilfield Holdings Ltd. entered into a Strategic Alliance Agreement and related agreements for the parties’ strategic alliance to design, develop, manufacture, promote, market and sell on a global basis integrated equipment and services for subsea well intervention. The alliance is expected to leverage the parties’ capabilities to provide a unique, fully integrated offering to clients, combining marine support with well access and control technologies. In April 2015, we and OneSubsea agreed to jointly develop and ordered a 15K IRS for a total cost of approximately $28 million (approximately $14 million for our 50% interest). At December 31, 2017, our total investment in the 15K IRS was $14.9 million inclusive of capitalized interest. The 15K IRS was completed and placed in service in January 2018. In October 2016, we and OneSubsea launched the development of our first Riserless Open-water Abandonment Module (“ROAM”) for an estimated cost of approximately $12 million (approximately $6 million for our 50% interest). At December 31, 2017, our total investment in the ROAM was $3.6 million. The ROAM is expected to be available to customers in the first half of 2018.
Economic Outlook and Industry Influences
Demand for our services is primarily influenced by the condition of the oil and gas industry, and in particular, the willingness of oil and gas companies to spend on operational activities as well as capital projects. The performance of our business is also largely dependent on the prevailing market prices for oil and natural gas, which are impacted by domestic and global economic conditions, hydrocarbon production and capacity, geopolitical issues, weather, and several other factors, including:
Oil prices have gradually risen above $60 per barrel, fueled by OPEC-led production cuts and increased demand for commodities as global economic conditions continue to improve. We have started to see an uptick in oil and gas exploration and production activities as evidenced by an increase in the global rig count. However, prolonged oversupply, partially attributable to increased shale oil production, is expected to constrain oil prices at least in the near term. The resulting weak industry environment may continue to curtail investments in offshore exploration and production as well as other offshore operational activities. Increased competition for limited offshore oil and gas projects has driven down rates that drilling rig contractors are charging for their services, which affects us, as drilling rigs historically have been the asset class used for intervention work. This rig overhang combined with lower volumes of work may affect the utilization and/or rates we can achieve for our assets. In addition, the current volatile and uncertain macroeconomic conditions in some countries around the world, such as Brazil and the U.K. following Brexit, may have a direct and/or indirect impact on our existing contracts and contracting opportunities and may introduce further currency volatility into our operations and/or financial results. The recently enacted U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”) may also introduce uncertainty in terms of capital spending by oil and gas companies.
Many oil and gas companies are increasingly focusing on optimizing production of their existing subsea wells. We believe that we have a competitive advantage in terms of performing well intervention services efficiently. Furthermore, we believe that when oil and gas companies begin to increase overall spending levels, it will likely be for production enhancement activities rather than for exploration projects. Our well intervention and robotics operations are intended to service the life span of an oil and gas field as well as to provide abandonment services at the end of the life of a field as required by governmental regulations. Thus over the longer term, we believe that fundamentals for our business remain favorable as the need for prolongation of well life in oil and gas production is the primary driver of demand for our services.
Our current strategy is to be positioned for future recovery while coping with a sustained period of weak activity. This strategy is based on the following factors: (1) the need to extend the life of subsea wells is significant to the commercial viability of the wells as plug and abandonment costs are considered; (2) our services offer commercially viable alternatives for reducing the finding and development costs of reserves as compared to new drilling as well as extending and enhancing the commercial life of subsea wells; and (3) in past cycles, well intervention and workover have been some of the first activities to recover, and in a prolonged market downturn are important to the commercial viability of deepwater wells.
Business Activity Summary
We have enhanced our financial position and strengthened our balance sheet with proceeds from the sale of certain non-core business assets, which, together with net proceeds from our equity offerings in 2016 and early 2017 as well as liquidity under our Revolving Credit Facility, has allowed us to strategically focus on our core well intervention and robotics businesses. Our non-core business asset dispositions since 2009 primarily included the sale of individual oil and gas properties and former reservoir consulting business in 2009, the sale of our stockholdings in Cal Dive International, Inc. in 2009, the sale of ERT in 2013, and the disposition of our subsea construction business, including the sale in 2013 of the Caesar and Express pipelay vessels and the sale in 2014 of the spoolbase facility located in Ingleside, Texas.
Our business activities in 2017 included the following:
RESULTS OF OPERATIONS
We have three reportable business segments: Well Intervention, Robotics and Production Facilities. All material intercompany transactions between the segments have been eliminated in our consolidated financial statements, including our consolidated results of operations.
We seek to provide services and methodologies that we believe are critical to maximizing production economics. Our services cover the lifecycle of an offshore oil or gas field. We operate primarily in deepwater in the U.S. Gulf of Mexico, North Sea, Asia Pacific and West Africa regions, and in 2017 expanded our operations into Brazil with the commencement of operations of the Siem Helix 1 and Siem Helix 2 vessels for Petrobras. In addition to servicing the oil and gas market, our Robotics operations are contracted for the development of renewable energy projects (wind farms). As of December 31, 2017, our consolidated backlog that is supported by written agreements or contracts totaled $1.6 billion, of which $503 million is expected to be performed in 2018. The substantial majority of our backlog is associated with our Well Intervention business segment. As of December 31, 2017, our well intervention backlog was $1.2 billion, including $388 million expected to be performed in 2018. Our contract with BP to provide well intervention services with our Q5000 semi-submersible vessel, our agreements with Petrobras to provide well intervention services offshore Brazil with the Siem Helix 1 and Siem Helix 2 chartered vessels, and our fixed fee agreement for the HP I represent approximately 87% of our total backlog. At December 31, 2016, the total backlog associated with our operations was $1.9 billion. Backlog contracts are cancelable sometimes without penalty. In addition, if there are cancellation fees, the amount of those fees can be substantially less than the rates we would have generated had we performed the contract. Accordingly, backlog is not necessarily a reliable indicator of total annual revenues for our services as contracts may be added, renegotiated, deferred, canceled and in many cases modified while in progress, and reduced rates, fines and penalties may be imposed by our customers.
Comparison of Years Ended December 31, 2017 and 2016
The following table details various financial and operational highlights for the periods presented (dollars in thousands):
Intercompany segment amounts are derived primarily from equipment and services provided to other business segments at rates consistent with those charged to third parties. Intercompany segment revenues are as follows (in thousands):
Net Revenues. Our total net revenues increased by 19% in 2017 as compared to 2016. Increased revenues for 2017 reflected higher revenues in our Well Intervention segment, offset in part by revenue decreases in our Robotics and Production Facilities segments.
Our Well Intervention revenues increased by 38% in 2017 as compared to 2016 primarily reflecting higher revenues generated from all of the well intervention vessels except for the Q4000. In Brazil, the Siem Helix 1 achieved 96% utilization since it commenced operations for Petrobras in mid-April 2017. The Siem Helix 2 commenced operations for Petrobras in mid-December 2017 with 53% utilization. In the North Sea, the Well Enhancer was 74% utilized during 2017 while the vessel was 64% utilized during 2016. The Seawell was 78% utilized during 2017 whereas it was 42% utilized during 2016. In the Gulf of Mexico, the Q5000 was 91% utilized during 2017 as compared to being 65% utilized during 2016. The Q4000 was 75% utilized during 2017 as compared to being 98% utilized during 2016. The vessel was out of service for 49 days during the first half of 2017 undergoing its scheduled regulatory dry dock. Additionally in 2016, we recognized $15.6 million associated with cancellation of work originally scheduled to be performed by the Q4000 in late 2016.
Our Robotics revenues decreased by 5% in 2017 as compared to 2016. The decrease primarily reflected lower utilization of our robotics assets and performing work at reduced rates. Some of our ROV units have been affected by other industry participants laying up vessels or canceling work as a result of the oil and gas industry downturn.
Our Production Facilities revenues decreased by 11% in 2017 as compared to 2016, which reflected reduced retainer fees from the amended HFRS agreement which was effective February 1, 2017, no revenue from the HFRS for 33 days as the Q4000 underwent its regulatory dry dock, and lower revenues from the amendment of the agreement with the Phoenix field operator for the HP I to a fixed fee agreement that commenced June 1, 2016.
Gross Profit. Our 2017 gross profit increased by 34% as compared to 2016. The gross profit related to our Well Intervention segment increased by 147% in 2017 as compared to 2016, primarily reflecting higher revenues in our North Sea region.
The gross profit associated with our Robotics segment decreased by 157% in 2017 as compared to 2016 primarily reflecting decreased utilization for our robotics assets and performing work with lower profit margins.
The gross profit related to our Production Facilities segment decreased by 17% in 2017 as compared to 2016 primarily reflecting revenue decreases for the HFRS and the HP I.
Goodwill Impairment. The $45.1 million impairment charge in 2016 reflects the write-off of the entire goodwill balance associated with our robotics reporting unit.
Gain on Disposition of Assets, Net. The $1.3 million net gain on disposition of assets in 2016 was attributable to the sale of the Helix 534 in December 2016.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses decreased by $2.7 million in 2017 as compared to 2016. The decrease was primarily attributable to a $4.7 million decrease associated with the provision for uncertain collection of a portion of our then existing trade and note receivables as well as our overriding royalty interest asset being fully depreciated in April 2017, offset in part by an increase in payroll related costs including share-based compensation associated with our long-term incentive plan (Note 11).
Equity in Losses of Investments. Equity in losses of investments was $2.4 million in 2017 as compared to $2.2 million in 2016 primarily reflecting an increase in our share of losses that were recorded by Independence Hub (Note 5).
Net Interest Expense. Our net interest expense totaled $18.8 million in 2017 as compared to $31.2 million in 2016 reflecting increases in interest income and capitalized interest and a decrease in interest expense. Interest income totaled $2.6 million for 2017 as compared to $2.1 million for 2016. Interest on debt used to finance capital projects is capitalized and thus reduces overall interest expense. Capitalized interest totaled $16.9 million for 2017 as compared to $11.8 million for 2016. The decrease in interest expense was primarily attributable to a significant reduction in our debt levels including an $80 million principal reduction of our term loan in June 2017. Interest expense for 2017 and 2016 also included charges of $1.6 million and $2.5 million, respectively, to accelerate the amortization of a pro-rata portion of debt issuance costs related to the lenders whose commitments in our revolving credit facility were reduced (Note 6).
Loss on Early Extinguishment of Long-term Debt. The $0.4 million loss in 2017 was associated with the write-off of the unamortized debt issuance costs related to certain lenders exiting from the term loan then outstanding under our credit agreement prior to its amendment and restatement in June 2017 (Note 6). The $3.5 million loss in 2016 was associated with the repurchases of $139.9 million in aggregate principal amount of our 2032 Notes in 2016.
Other Income (Expense), Net. We reported other expense, net, of $1.4 million for 2017 as compared to other income, net, of $3.5 million for 2016. Other income (expense), net, in 2017 and 2016 included foreign currency transaction gains (losses) of $(2.2) million and $0.2 million, respectively. These amounts primarily reflect foreign exchange fluctuations in our non-U.S. dollar currencies. Also included in the comparable year-over-year periods were net gains of $0.8 million and $1.3 million associated with our foreign currency exchange contracts primarily reflecting gains related to the portions of the contracts that were not designated as cash flow hedges (Note 17). In addition, other income, net, for 2016 included a $2.0 million net foreign currency translation gain reclassified out of accumulated other comprehensive loss into earnings during the year.
Income Tax Benefit. Income taxes reflected a benefit of $50.4 million in 2017 as compared to $12.5 million in 2016. This variance is primarily due to the effect of U.S. tax law changes enacted in December 2017, offset in part by a decrease in pretax loss for the current year period and a tax charge in 2017 attributable to a change in tax position related to our foreign taxes. The effective tax rate was 247.5% for 2017 as compared to 13.3% for 2016. The increase was primarily attributable to the effect of the tax law changes, partially offset by the earnings mix between our higher and lower tax rate jurisdictions and the change in tax position related to our foreign taxes (Note 7).
Comparison of Years Ended December 31, 2016 and 2015
The following table details various financial and operational highlights for the periods presented (dollars in thousands):
Intercompany segment amounts are derived primarily from equipment and services provided to other business segments at rates consistent with those charged to third parties. Intercompany segment revenues are as follows (in thousands):
Net Revenues. Our total net revenues decreased by 30% in 2016 as compared to 2015. In general, decreased revenues for 2016 reflect both reduced opportunities for work and the acceptance of work at reduced rates for some of our assets in light of the continuation of the industry-wide downturn as a result of the substantial decline in oil prices since late 2014.
Our Well Intervention revenues decreased by 21% in 2016 as compared to 2015 primarily reflecting significantly lower revenues in our North Sea region due to lack of work and our acceptance of work at reduced rates, offset in part by revenue increases in our U.S. Gulf of Mexico region. In the North Sea, the Well Enhancer was 64% utilized during 2016 while the vessel was 89% utilized during 2015. The Skandi Constructor was 4% utilized during 2016 as compared to being 56% utilized during 2015. The Seawell was re-activated in June 2016 and was 42% utilized during 2016 as compared to being out of service undergoing its life extension capital upgrades during the first eight months of 2015 and being stacked after those life extension activities were completed in September 2015. In the Gulf of Mexico, the Q4000 was 98% utilized during 2016 as compared to 71% utilized during 2015. Idle time for the Q4000 included 64 days in the second quarter of 2015 for its scheduled dry dock, and some downtime attributable to IRS mechanical issues in January 2015. In addition, we recognized $15.6 million associated with a work scope cancellation under a “take or pay” contract for 42 days of work originally scheduled to be performed by the Q4000 in late 2016. The Q5000, which was delivered to us in April 2015 and went on contracted rates under our five-year contract with BP in May 2016, was 65% utilized in 2016 due to operational downtime. The Helix 534