e425
Filed by Helix Energy Solutions Group, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 and Rule 14d-2(b)
of the Securities Exchange Act of 1934
Subject Company: Helix Energy Solutions Group, Inc.
Commission File No.: 0-22739
The following documents are filed herewith pursuant to Rule 425 under the Securities Act of 1933:
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Transcript of presentation by Helix Energy Solutions Group, Inc. at Citigroup 2006 Small
and Mid-Cap Conference in Las Vegas, Nevada on March 15, 2006. |
Helix Energy Solutions Group, Inc.
Citibank Conference Presentation
March 15, 2006
Owen Kratz (OK): Hello. Thanks for having us here today and hopefully what Ill be able to
present to you is a simple story. Cal Dive, like you said, has been around since the 60s. Our
roots were as a pure diving, manned diving, service provider in the offshore Gulf of Mexico market.
But weve come a long way in a relatively short period of time, since the early 90s, and weve
created a model that is relatively unique in the industry thats been getting a lot of attention
lately and a lot of look-sees from potential copycats, as a matter of fact. I think as youll see
by the end of the presentation it points the way to where our industry offshore in oil and gas is
going with a merger between the service side and the producing side. Hopefully I can explain how
it all works. We did just change the name to Helix. Heres the new information. The reason is
pretty obvious. I think for a long time the story has been rather opaque, quite honestly a little
bit intentionally, because there were a lot of other contractors out there that would easily have
been able to move quicker than we could, considering the size of our balance sheet. But now we
have all of the toolbox filled, the models in place. We have our portfolio and a pretty good head
start over the other competitors. So I just felt that it was the right time to rebrand the company
and come out very clearly about what it is that we do. Weve included our mission statements and
values and comments and you can look at those at your leisure but I wont spent the time on it
right now. Instead Ill jump right into what we do and why we do it and hopefully explain how it
works.
Beginning in the early 90s we were looking at the service-side model as all the other
companies were. Its highly cyclical. Where were we going to go? We were moving into the deeper
waters. We were a small contractor. How would we compete and how would we capture
greater value and returns? The biggest fear for contractors is that utilization in a highly
cyclical environment. That holds back your limits to growth because you have to be
ultraconservative for the downturns and then the downturns can be extremely onerous. Looking at
the industry at the time there were some undeniable truisms that were true then and theyre still
true today. An increasing number of mature and small reservoirs, a greater contribution from these
reservoirs to total global production; the cheapest ways, the most cost-effective way, to develop
these reservoirs is subsea, but how do you do it? ... mitigating your risk in a highly cyclical
market. What we came up with is a very unique model in which we have assembled a series of
services rather than one service niche covering the life of a field. When applied with the right
methodology were able to lower the F&D cost and gain a competitive advantage. In order to do that
and be in control of the process, we also then have to become a producer. Now this started back in
1992 when we were a downstream provider of diving services on abandonment projects. We then
started bidding prime for the removal of these fields. Notice the shut-in pressures were very
high. We initiated the model of going to the producer and saying, just give us the field, instead
of contracting for its removal. We then developed a reservoir-engineering capability to enhance
the production. Our return on capital on those deals over the last couple of decades has averaged
around 28-29 percent. So its a very good model and its the one that has become the industry
standard in the Gulf of Mexico. As the name implies, our strategy has two strands to it. One is
the contracting services and the other is the oil production. Ive already explained a little bit
about how it works. But the contracting services, when you apply them, we can bias where we apply
our contracting services, whether its in the public market or on our own reserves. This allows us
a hedge to the cyclicality. For the last four years you probably heard a lot of contractors
lamenting the fact that they wished they could have access to a greater share of the
value in the reservoirs that they are creating, but they are kept from it because of the
adversarial relationship with the producers. Well, this model, by a service company becoming a
partner with the producers, aligns interests and allows you to capture that extra value and
generate the superior financial returns. To give you an idea about how were structured, its very
simple. We have a service side of the company and a production side of the company. You can see
under the service side the services that we have cover the whole gauntlet of the reservoir life,
from upstream with the reservoir well tech services through drilling with the Q-4000, provision of
production facilities. The construction includes shallow water, out to a thousand feet, which we
call the shelf and defined by man diving, and then the deepwater contracting, defined by
dynamically positioned vessels and robotics. That is anywhere from a thousand feet on down to
10,000 water depth. Then finally the well operation, which is the life-of-field service that I
will cover in a minute. On the oil and gas side we have also been moving from the downstream, the
abandonment of mature properties upstream. Around 95 we moved into the deeper waters with the
contracting services side. Following that we tried to figure out how to apply the model to
developing fields. Our first effort was with Kerr-McGee and Nexen on a 3,600-foot water depth
reservoir called Gunnison. It was a very big success. We then more recently have been trying to
grow our portfolio to match the growth on the services side. But were being a little bit thwarted
in the industry as of late, and that led to the recognition that we needed to be able to generate
our own prospects, be on the other side of the promote fence, and that is what led to the Remington
acquisition of this year. To give you a better perspective of where these services come in, you
can see through the exploration, through the abandonment phase, the full life cycle of the field.
Each of our services, we dont necessarily add the commodity-type services. We dont seek to grow
each service line volumetrically. Instead, our growth is derived by applying the services
that we have repetitively to one field after another, capturing the value in the reservoir and
generating growth. The services that we pick, as I say, arent the commodity-type services but
rather specialty-niche services that when applied in the right methodology can be a great advantage
in lowering the cost. As you can see down at the bottom, we feel like we have at least a 20
percent advantage in F&D costs over a typical producer. Now, we dont want to compete necessarily
with producers where this then means that our best competitive advantage lies in the smaller fields
that they are unable to compete, and that gives us a very attractive market niche to play in. In
fact its a very broad one. If you go back to the industry overview that I started out with, there
are more and more mature fields, there are more and more small reservoirs. Keeping that in mind
and to feed our growth aspirations, you can see here we have started to branch out from the Gulf of
Mexico. We now have a pretty strong presence in the North Sea and we are transplanting the entire
model there. We also have a presence in Southeast Asia that is just starting, and that would be
the next basin that we are interested in applying the model to. I might just say we really dont
have any aspirations of going to Brazil or West Africa. This is more of a niche play rather than
the play of a mainstream E&P company.
Breaking down the contracting services, let me start with a little overview. Ive already
mentioned it but again as the name implies there are two strands of our contracting. Each of our
service lines that you see on the right is relatively autonomous. Each one of them sells to the
open market, especially during high-demand periods. For instance, this last year, driven by the
high demands of the hurricane repair work, we probably generated less than 10 percent of the
utilization on our services through our own internal projects, whereas if you go back two years to
the depth of the low cycle, we were probably generating 35-40 percent of the asset utilization from
our own projects. So we have this ability to switch the emphasis back and forth and that is
what provides the smoothing character of the model. The portfolio that we carry we try to match to
be sufficient to generate roughly 30 percent of our own service requirements. Other contractors
tout a large backlog of contracted work that they have managed to build up. Our experience is you
do that by lowering your margin and taking onerous contract risks that we dont want to. Our
portfolio of reservoir projects is what we would refer to as our internal backlog and its very
analogous to what the others have.
Breaking each service down, starting with the most upstream first, last year we acquired Helix
RDS. This is a consulting outsource reservoir engineering G&G, well designed modeling. You can
see down the right-hand side of the page, its a broad array of skill sets. In fact, with these
180 people plus the ones we have already, we have 30 in ERT, 30 more prospect generators with the
Remington acquisition. We have well over 200 people with a broad set of skills. This is probably
a greater assemblage of talent than most producers our size. That makes us a very value-adding
partner, especially to the smaller producers or the larger ones looking for an outsource solution.
Moving further downstream I have mentioned that we are going to be drilling with the Q4000. The
Q4000 was the first ship built in the oil industry specifically designed to do work in 10,000 feet
of water. It was built four years ago. It was early to the market. At the time we did modify the
vessel to be able to drill but we never installed the drilling equipment. The reason we didnt was
the market acceptance as us as a driller, we were premature in the development of our company
capabilities and we did not want to take the market risk. At the time we didnt have a backlog of
drilling of our own to fall back on. That is not typical of our model, so we held off. We are now
in the position where we have a portfolio. All of the Remington prospects as well as the ERT
prospects and the deepwater can be drilled by this asset. Theres a lot of interest from the other
producers in watching us go through this
process of putting the drilling equipment on board. Its likely that this vessel would wind up
with a long-term contract with one of them. That would then trigger the next phase of our growth,
which is the next Q-type vessel. The completion of putting the drilling on board is scheduled for
the first part of 07. Minimal downtime. As I said the vessel has already been modified. Its
just putting the equipment on board, and there is no shipyard risk at all. We wont require
shipyard for doing it. Ill say its not drilling in the traditional sense of a 5th or 6th semi.
Although we can go to the same water depth, the size hole we drill is a much smaller hole than a
typical drill rig. The reason that this is valuable for us is typically E&P companies take a long
time to bring their projects to development, high capital cost. They need large bore holes and
high flow rates in order to realize the NPV. Our approach is a phased development of smaller
reservoirs on a very quick time scale. That allows us to get the same kind of return from a much
smaller bore hole. When you go to a smaller bore hole, you have a smaller vessel, lower cost, less
consumables, less weight. Typically the cost for us to drill a well right now would be about half
of what a drill rig would charge.
Moving a little further downstream, starting with Gunnison we own 20 percent of the Gunnison
bar but following on that we decided that we would start providing floating production systems on a
third-party basis. The first one we did was the Marco Polo. We own 50 percent of that TLT and I
think its 4,800 feet of water. Weve supplied to Anadarko on a lease and a tariff basis.
Following on that we are currently constructing the independence hub. Were a 20 percent owner in
the Independence Hub, which is a 1Bcf per day facility going in 8,000 feet of water in the Atwater
Valley area for six different producers. The advantage to us is that this allows us an entree. We
view these facilities as just another vessel in our fleet. Contracts are just longer. So the risk
is actually less. Theres a lot of upside from increasing the amount of
throughput from tariffs on through the facility and we can do this by using our production
capability to go out and farm into the surrounding fields and be in control of where the
development goes back to these facilities. So you can see where all of the pieces start to work
together pretty well there, besides just developing marginal fields. Getting into the heart of
what we have been about, the construction side of the business, we have three basic parts: the
deepwater construction, as I mentioned before, is the deepwater contracting. We basically have as
great a capability as any contractor in the world and one of the leaders and the ultra-deepwater
right now. We are adding some assets which Ill get to further on. It will be an organic addition
to the fleet. The robotics, again here we arent a global leader in robotics. We have a
sufficient number of robots to do our own work. We specialize, however, in trenching, which nobody
else does, the burial of pipe, which applied to a marginal field lowers the cost of a pipeline when
youre considering the thermal properties for flow assurance. By burying a line, its about a
third of the cost of a pipe in pipe pipeline. Cumulatively all of these services and methodologies
added together add up to that 20 percent lower F&D cost. Finally, shelf construction, which is
where our roots are, we did move aggressively this last year in consolidating the Gulf of Mexico
shelf construction market with the acquisition of the Stolt and Torch assets. Fortuitously the
timing was perfect for taking advantage of the hurricanes. The fourth quarter results I think had
two months of these assets included in it, so were still yet to see the full impact of the
acquisitions there.
The service of well operations is rather unique to Cal Dive. We are right now about 100
percent of the world market in rigless subsea well intervention. Most producers look at entering
their wells, in their subsea wells, as a remedial. Dont put anything down the bore hole unless
you absolutely have to, and they only do it when the well goes offline and they have to get it
back on service. Both these vessels that we have, one the sea well in the North Sea and the Q4000
in the Gulf of Mexico, right now are fully utilized in well intervention. However, the reason that
we have this is not just the high demand from the open market. As we have more and more subsea
marginal reservoirs, we look at well intervention as a method of enhancing the production going
forward. Weve been very successful for the last two decades in doing that on the shallow fields,
working off of the platforms. In deep fields we needed the platform to do the same thing, and that
was the reason for adding the service to our line. Having said that Ill turn it over to Wade
here, take a rest, and let him walk you through the oil and gas side of the business.
Wade Pursell (WP): Thanks Owen. Weve been an oil and gas producer for over 14 years now. We
started back in 92 with taking interest in mature fields and leveraging our salvage and
abandonment expertise, and then more recently taking interest in the proven and developed fields in
the deepwater and leveraging our development expertise there. Were an operator of 40 fields, 120
platforms and 500 wells currently. In January we announced the acquisition of Remington Oil and
Gas. That is subject to regulatory approval and their shareholder approval still. One of the
things we really are excited about this acquisition in addition to the proven reserves that it
brings is the deepwater prospects that come with this acquisition and our ability with our services
and assets to exploit those prospects. We believe that the backlogs will garner over a billion
dollars of services that we provide, and also, finally, with the resources that we were able to get
in the Helix RDS acquisition late last year. In this acquisition we have a really good platform we
think for expanding and taking the model to international areas.
Just some quick production and reserve statistics, this gives you some good history and pro
forma 2005 as if Remington would have been a part of it then. I think the theme here is we
have basically doubled the reserves and doubled the production and kept pretty much the same
portfolio characteristics with respect to PUD ratio and mix between natural gas and oil. Going
back to the prospect portfolio that I mentioned, this slide gives you an idea of what we are
talking about. I think we have about four TCF equivalent of unrisked potential prospects. On a
risk basis we think there is about 1.1 TCF equivalent, and again we believe there is over a billion
dollars of services that we provide which will be performed on these reserves. This slide simply
kind of overlays some of these deepwater prospects that Remington brings, along with ones that we
already own. So you can see where they are at in the Gulf and the proximity that they have to each
other. One more time this slide just reiterates some of the pro forma numbers for the Remington
deal. Our combined production for 06 would be about $220 million cubic feet a day equivalent.
Combined reservoirs over a half a TCF equivalent at the end of 05. Again, over 30 deepwater
fields combined and combined-risk prospects of about 1.4 TCF equivalent, and then once again over a
billion dollars of backlog for our services. We have a corporate policy at Helix to hedge the
commodity-price risk. As much as we can we like to look out year in advance and try to layer in
hedges to cover up to 50 percent of our projected PDP. We like to use costless collars, primarily
as you see these are our positions in place currently and they are all costless collars. We like
the collars. They give us some upside. This is pretty close of 50 percent of our projected PDP
right now. Obviously as PUDs come on line and as exploitation efforts bring on more reserves then
well be layering in more hedges as that happens. This does not include any hedges for Remington
production. It is important to us in the merger agreement that they agree they didnt have any
hedges in place, they were not a hedger to start putting some in place before closing. I can
tell you they have been doing that. I cant speak to any specifics but they
have been doing it. Actually, I think they listed their positions on their earnings call last
week. So if youre interested, you could find them there.
Some financial slides. The energy business is a very cyclical business but one thing we take
a lot of pride in is the business model that we laid out to you here, which really has enabled us
to consistently grow the revenue line well over a decade here, going back to 95. You see the
linear line from 95 to 02 and then more of an exponential line from 02 through 06. Its split
between the contracting services in the oil and gas. I think its interesting to note that back in
01 we topped $200 million for the first time and when we released earnings a few weeks ago for the
fourth quarter 06, our contracting services alone topped $200 million just for the quarter. More
importantly the bottom line, you see a similar growth line here. Its interesting that in 04 I
guess we had $80 million of net income and looking at our projections for 2006, thats the guidance
that weve given, well easily double that and likely triple the 04 results for 2006. Looking at
cash flow this is in terms of EBITDA we did generate a lot of cash. You look at 2004 I think
it was $240 million of EBITDA. In 2005 it was $350 million. Based on our guidance for 06 we will
generate well over half a billion of EBITDA. Probably our most important metric, return on capital
invested, weve set as a goal for ourselves 10-15 percent. You see back in 02 and 03 we fell
below that goal. That was on the heels of the $850 million capital investment program, including
the Q4000 and several other investment programs. You see, we were early to the party. About 2004
I guess the party had returned to us and we achieved our goal of 13 percent in 04, and then in 05
even better with the strong fourth quarter of 22 percent we were 17 percent for the year. I look
for that number to improve even more in 06. Heres an interesting slide showing our CapEx mix.
Some people that have I guess accused us of selling our soul to E&P with the Remington acquisition.
I think this slide helps a little bit. You see in
the middle pie chart in 2006 obviously its a very heavily weighted oil and gas production element,
because that includes the cash component of the Remington acquisition. If you look at the four
years previous and then look at our projections for the next three years, its more of a balanced
mix of CapEx, between the contracting services side and the oil and gas production side.
Looking at the balance sheet we ended 2005 with $443 million of total debt. That represents a
40 percent debt-to-book cap and a debt to trailing EBITDA of 1.3 times. Two primary pieces. The
red box being $300 million of convertible notes. That carries a 3.75 percent coupon and a 20 years
maturity, and then the green box is our MARAD facility, which is a 25-year facility, and the
interest rate on it is fixed as well at 4.8 percent. Obviously to close the Remington acquisition
well have some more debt for the cash component of the acquisition. That will be in the form of a
senior secured term-B facility. That facility has already been underwritten and committed. Itll
be $813 million. So you see just pro forma end of 05 we will have nearly $1.3 billion of debt.
Looking at some credit statistics. The closing should take place in May-June sometime and based on
when we close the debt-to-trailing EBITDA at that point I think is somewhere close to two to one,
two times. Also, our amortization is quite favorable on the two facilities I just spoke of and
then on the term-B facility its one percent amortization for seven years with a bullet at the end
of seven. So you see our pro forma debt service coverage ratio, even with all this debt, is nearly
10 times. Ill turn it back to Owen to talk about some of our objectives and some highlights.
OK: This is report card that we set for ourselves each year that we make available to the
investment community, and well give a grade on it at the end of the year. I think the things to
notice the most on here is achieving the mechanical completion of the Independence Hub is a
big milestone. Beginning construction for the next facility opportunity, which we do plan to do.
Then probably the biggest issue is beginning production from at least one of the acquired PUDs that
we have going forward. This is sort of a snapshot and its an easy thing to look at, but what we
have tried to do is dig down a little bit and give you more detail to judge our progress as we go
through this year. Its a lot of moving parts but I think youll be able to follow the story a lot
better with this information. The toolbox is full, as Ive mentioned before. Everything is in
place. Weve got the Torch acquisition done, the Stolt acquisition done, the Helix RDS acquisition
is done. Weve announced the organic growth of adding the deep pipe layers at Caesar and the
drilling on the Q4000. Obviously, the Remington acquisition took the limelight this year, but we
did an awful lot on the other side as well. So the final bullet point there, assuming operatorship
of Telemark I think is very telling. We got into Telemark as a 30 percent partner over a year ago.
As a minority non-op partner there wasnt a whole lot of input that we could have. It went a year
of study and engineer time. We were not going to go forward at that point. Norsk took it their
board and they did not receive sanction from their board. They then turned over the operatorship
to us. So I think this is a very interesting one to watch because this is a marginal field that
did not approve that sanction and now its in our hands. Assuming that the MMS works with us on
the timing, because it is on a clock, well see what kind of a commercial success we can truly make
out of a marginal field here. Even more information, and Im not going to go through each of
these, you can look at these as the year progresses, this is what we have planned for this year, in
a pretty detailed breakdown. As you can see its not all production. We have an awful lot going
on the services side with the Independence Hub, building the next facility, engineering the next
Q4000, drilling on board the Q4000. So our moves right now, I know the growth curve looks
exponential but with the model finally put
together after the last decade of assembling it, were really looking for things to take off from
here. On the production side, we have a pretty heavy drilling year coming up, followed by the
development with our assets. Most of the development work will fall into 07 but the drilling
success I think is worth watching as the year goes through here. We have rig commitments for
virtually all of these wells, so were in good shape there. Itll just give you a way to look back
at the end of the year and judge us with a little more scrutiny. But I think the thing I just
wanted to leave you with was were pretty excited with everything going on. The market is about as
good as Ive ever seen it in the last 20 years and well get to see what the model can really do
going forward.
Q: He talked about completing the hurricane repair work in the Gulf. Im continually stunned
when I see the stats for it, the amount of capacity in the Gulf that is not yet online. What sort
of time frame do you have on that and how does that affect the larger industry?
OK: Well, keep in mind when Katrina hit it was a year after Ivan and we were still working on
Ivan work. So hurricanes, when theyre that devastating to the oil industry, the initial emergency
work covers about three or four months. Then you get into an engineering phase and plan projects
that will extend for the rest of the year. Then you get into a period where the MMS requires an
inspection program done for a certain distance on either side of the hurricane path, and that could
extend years beyond that. Its just an awful lot to do with the capacity that exists in the Gulf.
Right now were fully booked through 06 with our assets. Were sort of treating it like we do the
hedges. We have about half of our assets booked on long-term contract and the others available in
the stock market, but they all have a backlog through 06 and were building 07. My personal view
is that you can count on high demand through 06
and at least the first pass of 07, at which time youll probably start to see it tail off as you
get into the longer-term inspection.
Q: Obviously, this combination of product producing company and servicing company is unusual.
Do you think youre going to see other companies in your space replicating your model? What do you
see are the benefits from doing so from them?
OK: I think our model is sort of the way of the future for our industry. I honestly do. If
you listen to the laments of the contractors through the last downturn, the fact that we did so
well has not gone lost on them. The adversarial relationship between the service industry and
producers, this is the way of aligning interests, and it is a model that has been scrutinized by a
lot of people. You have Superior and Petra acquiring mature properties in the Gulf of Mexico.
Youve got Chesapeake onshore buying their own drill rig. Youve got Merth drilling wells in
return for equity. Youve got Oil Lexco in the North Sea, contracted a drill rig and is trading
the drilling service for equity in the reservoirs. I think it is something that the investment
community needs to be aware of, that its becoming a lot more commonplace and theres going to be
more and more of them melding between the services and the producers. Were basically heading back
towards where things were 30 years ago when the production companies owned their own assets and
services more in house.
Q: What is the timing on the spin off of the shelf assets? Can you talk a little bit more
about the consolidation opportunities there?
OK: There is a lot I cant talk about due to the period were in but we are planning to divest
a minority interest in the shelf assets. We want to retain control of the group but we want to set
it up as its own company because the model of further consolidation and growth through volumetric
expansion is not exactly the same as what the parent companys model is, which is
repetitive application of the services yielding returns from the reservoir. We do have a
restriction on further consolidations within the Gulf of Mexico imposed by the Department of
Justice but that will be gone before you know it. There are international consolidation efforts as
you saw from the geographic expansion. The North Sea and Southeast Asia is where we would like to
go. We want to stay in control of this company because we see it as the great enabler for further
penetrating those regions. That would be the consolidation areas Id see.
Q: Your range of your guidance for 2006 earnings per share is a pretty wide range. Can you go
into a little bit about the assumptions on the low end and on the high end?
OK: It would take a while because the budget has a lot of moving parts and pieces but in
general what we try and do earnings wise is we are not a big company on forecasting the next
months. We spend an awful lot of time at the end of the year setting the budget for the following
year and we have in that budgeting process with each of the groups of the company we have high and
low expectations. So by combining those we come up with this wide range. That is about all I can
do. A lot of it commodity price driven on the production but we do have our hedges in place, which
offsets that. What we will do as the year progresses, though, is after each quarter well tell
where were producing according to our assumptions and narrow the range as we go through the year.
That is the approach that were taking on earnings. One thing we will do this year a little
different is following the close of the Remington acquisition we do plan to come out and release
our 07 projections six months ahead of when we normally would, just so that people can see with a
little more clarity what the company is like. I think Im through, out of time. Sorry.
(END OF TAPE)