Helix Energy Solutions Group - Q1 2023

Transcript

Operator (participant)

Greetings, and welcome to the first quarter Helix Energy Solutions 2023 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press 1 followed by 4 on your telephone keypad. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Tuesday, April 25th, 2023. I would now like to turn the conference over to Mr. Brent Arriaga, Chief Accounting Officer. Please go ahead.

Brent Arriaga (Chief Accounting Officer)

Good morning, everyone, thanks for joining us today on our conference call for our 1st quarter 2023 earnings release. Participating on this call for Helix today are Owen Kratz, our CEO, Scotty Sparks, our COO, Erik Staffeldt, our CFO, Ken Neikirk, our General Counsel, and myself. Hopefully, you have had an opportunity to review our earnings press release and the related slide presentation released last night. If you do not have a copy of these materials, both can be accessed through the For the Investor page on our website at www.helixesg.com. The press release can be accessed under the Press Releases tab, and the slide presentation can be accessed by clicking on today's webcast icon. Before we begin our prepared remarks, Ken Neikirk will make a statement regarding forward-looking information. Ken?

Ken Neikirk (Executive VP, General Counsel and Corporate Secretary)

During this conference call, we anticipate making certain projections and forward-looking statements based on our current expectations and assumptions as of today. Such forward-looking statements may include projections and estimates of future events, business or industry trends, or business or financial results. All statements in this conference call or in the associated presentation, other than statements of historical fact, are forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual future results may differ materially from our projections and forward-looking statements due to a number and variety of risks, uncertainties, assumptions, and factors, including those set forth in slide 2, in our most recently filed annual report on Form 10-K, our quarterly reports on Form 10-Q, and in our other filings with the SEC.

You should not place undue reliance on forward-looking statements, and we do not undertake any duty to update any forward-looking statement. We disclaim any written or oral statements made by any third party regarding the subject matter of this conference call. Also, during this call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slide of our presentation provides reconciliations of certain non-GAAP measures to comparable GAAP financial measures. These reconciliations, along with this presentation, the earnings press release, our annual report, and a replay of this broadcast, are available under the For the Investor section of our website at www.helixesg.com. Please remember that information on this conference call speaks only as of today, April 25th, 2023, and therefore you are advised that any concept of information may no longer be accurate as of this replay of this call. Owen?

Owen Kratz (President and CEO)

Good morning, everyone. We hope everyone out there is doing well. This morning, we'll be reviewing our Q1 results, performance, and operations. We'll provide an outlook for the market and review our current guidance for 2023. Moving to the presentation, slides 6 through 9 provide a high-level summary of our results and key highlights for the first quarter of 2023. Our first quarter results were largely as expected, with the backdrop of a strong global offshore energy market driving improved financial results that were negatively impacted by scheduled vessel recertification, maintenance, and project mobilization. Highlights for the quarter include strong winter utilization on the Well Enhancer and Seawell in the UK, full quarter of well intervention work at improved rates on both the Siem Helix 1 and 2, strong winter seasonal utilization and financial performance in robotics.

Helix Alliance generated a solid seasonal adjusted contribution, executing our first i-Plough project for the U.S. East Coast Wind Farm project, completion of regulatory certification and maintenance on the Seawell, Well Enhancer Q7000 and Q5000. On the sales front, we secured our first Asia-Pacific wind farm trenching project offshore Taiwan and added an additional decommissioning project in Australia for the Q7000. Revenues for the quarter were $253 million, a decrease of $38 million from our fourth quarter results. We generated a net loss of $5 million compared to net income of $3 million in the previous quarter. Adjusted EBITDA for the quarter was $35 million. During the quarter, our operating cash flow was negative $5 million, including $17 million of dry dock and recertification costs. We spent $7 million on CapEx, resulting in a negative $12 million in free cash flow.

Our quarter results were significantly impacted by the regulatory certification and maintenance on four of our well intervention assets. The Q7000 spent 37 days mobilizing to the Asia-Pacific region, with revenues and costs deferred until project commencement. I'd like to thank our employees for their efforts with a solid start to 2023. Executing safe and efficient operations for our customers has always been our hallmark, our goal is to remain an established leader in the offshore industry. On to slide 9. From a balance sheet perspective, our cash balance at the end of the quarter was $167 million. At quarter end, we were in a net debt position of $91 million. In February, we were pleased to announce our share repurchase program. During the first quarter, we repurchased 660,000 shares of our stock for approximately $5 million.

As we can continue executing the program, we will balance the need to manage our and fund our operations, capital spend, including the Alliance earn out, maturing debt and strategic investment opportunities along with the share repurchase program. We plan to generally align this program with our cash flow generation and initially target deploying 25% of our free cash flow, noting the seasonality of our business. I'll now just turn the call over to Scotty for an in-depth discussion of our operating results.

Scotty Sparks (EVP and COO)

Thanks, Owen, and good morning, everyone. Firstly, I would like to thank our teams offshore and onshore for another well executed quarter. There's been a huge positive shift in the market compared to 1 year ago. The teams have reacted well, securing high utilization as well as contracting some longer-term projects with improved rates and conditions. We continue to hold strong and sound relationships with our employees, partners and clients. Market conditions are much improved. Going forward, we have much stronger backlog than we've seen in recent years and very good visibility for the next few years. All of our businesses are well positioned for 2023 and beyond. In the first quarter of 2023, we continued to operate globally with minimal operational disruption with operations in Europe, West Africa, Asia, Brazil, the Gulf of Mexico and up the U.S. East Coast.

We continued to operate at high standards with strong uptime efficiency for the quarter. Moving on to slide 11. During the first quarter, we produced revenues of $250 million, resulting in a gross profit margin of 6%, generating a gross profit of $15 million, producing EBIT for the quarter of $35 million, a significant improvement against $150 million of revenue and $3 million of EBITDA in the first quarter of 2022. During the first quarter, the well intervention fleet achieved utilization of 80% globally, down quarter-over-quarter due to the paid transit of the Q7000 to the APAC region and the scheduled regulatory maintenance of the Q7000, Q5000, Seawell and Well Enhancer.

We achieved 79% utilization in the Gulf of Mexico, 97% in Brazil, strong winter month utilization of 81% in the North Sea, and 41% utilization for the Q7000 on its paid transit to the APAC region. The robotics division chartered vessel fleet achieved high utilization of 91% of the quarter, operating 5 vessels working 295 vessel days between ROV support, trenching, renewable works globally and working on multiple renewables projects in Europe, Asia and the US East Coast. The Helix Alliance fleet achieved 86% utilization for the lift boats, 39% for the OSVs and the crew boats, and the energy service division achieved 77% utilization with the P&A systems.

1,039 operational days working for numerous clients in the Gulf of Mexico. 44% utilization on the Coiled Tubing systems of 238 days. Due to the seasonal conditions, the three diving support assets achieved 31% utilization. The heavy lift barge was mostly seasonally warm stacked as expected, conducting a short project achieving 14% utilization. Slide 12 provides a detailed review of our well intervention business in the Gulf of Mexico. The Q5000 had utilization of 59% with all available working days contracted prior to undertaking its scheduled regulatory inspection in the first quarter. The vessel performed well, conducting production enhancement work on four wells in ultra-deep water, working under a multi-year campaign for Shell. The Q4000 had increased utilization of 100% in the quarter.

The vessel completed a two well production enhancement scope for one customer, followed by a single well enhancement scope for another customer, and then ended the quarter completing a two well abandonment campaign for another client in ultra-deep water. Positively going forward, absent the Q4000 dry dock in Q2, we expect both vessels will have high utilization with contracted or awarded work into Q4 and already have work awarded in 2024 with good visibility of potential further activity with steadily increasing rates. Both Q vessels continue to operate under the integrated Helix SLB Subsea Services Alliance package. In February, managed out of the Gulf of Mexico office, one of our newly acquired 10k Subsea IRS systems commenced mobilization for an 18-month contract in Australia. Moving to slide 13.

Our North Sea well intervention business had a very strong first quarter considering the seasonal winter months with solid utilization for both vessels in the U.K. Huge improvement achieving 81% utilization compared to 13% in Q1 of 2022. The Q7000 was under paid transit to APAC region and completed dry dock in late March. Subsequently, the vessel continued its mobilization to New Zealand via Australia. The Well Enhancer performed very well and achieved 87% utilization in Q1. The vessel performed production enhancement works on three wells for two customers and then completed abandonment operations for five wells for three customers. The Seawell had a good quarter with 76% utilization. The vessel performed decommissioning works on numerous wells for several customers, also utilizing our diving services.

Utilization for both vessels was impacted by approximately 1 month of combined planned maintenance during Q1. The North Sea market continues to improve. Our business is seeing much improved utilization and achieving higher rates. The Seawell is fully contracted for the year and has recently contracted a 180-day decommissioning project in the Mediterranean, keeping the vessel contracted until the end of Q1 of 2024. The Well Enhancer is contracted for all of 2023 also. Both vessels have already been awarded multiple scopes for 2024 with further increased rates. As mentioned, the Q7000 completed its paid transit to Malaysia to undertake dry dock that commenced in early February. Upon completion, the vessel commenced its paid transit to New Zealand to commence a contract with Well Abandonment campaign.

The vessel is scheduled to carry out paid transit to Australia to undertake work in the second half of 2023 for a seven-well abandonment campaign for Cooper Energy, contracted further works with two clients, possibly pushing the schedule into Q1 of 2024. The Q7000 is contracted for 12 months plus options, estimated to commence subject to the schedule in Australia at the end of Q1 or early Q2 of 2024 for abandonment work with Shell in Brazil, including a paid transit to Brazil. The Q7000 is now contracted well into 2025, and we already have visibility on work following on in 2025. Moving on to slide 14. In Brazil, we had good utilization of 97% in the first quarter.

The Siem Helix 1 was 94% utilized in Q1, undertaking work on the 2-year decommissioning project for Trident, performing work on 5 wells in the quarter. The Siem Helix 2 had a strong quarter with 100% utilization, completing production enhancement work on 1 well, and decommissioning activity on 4 wells with Petrobras. As expected, 2023 is shaping up to be a far better year for us in Brazil compared to 2022, with both vessels being back to well inter-well intervention rates. We are pleased to have 3 vessels contracted in the Brazil region in 2024 with the addition of the Q7000 contract, Shell contract. Slide 15 provides detail of our well intervention fleet utilization. Moving on to slide 16 for our robotics review.

Robotics continued their strong performance and had another good quarter, performing at high standards with strong utilization, operating 5 vessels globally during the quarter, primarily working between trenching, ROV support, site survey work, and oil and gas and renewables related projects. Robotics continued to expand its service lines and geographical expansion in the renewables market, in Q1 adding 2 chartered vessels to the fleet, and recently contracted 2 of the recently acquired trenching units off the U.S. East Coast and in Taiwan. In the APAC region, the Grand Canyon II had 100% utilization in Q1. The vessel performed well on a long-term decommissioning project in Thailand. In March, one of the newly acquired T-1400 trenching systems completed paid ship into Singapore and commenced mobilization on the Siem Topaz, a project-chartered vessel for a sizable estimated 200-day renewables trenching project in Taiwan.

In the North Sea, the Grand Canyon III was utilized 76% in the quarter, performing oil and gas trenching projects for two clients, followed by an oil and gas ROV support scope. The vessel commenced the renewable trenching project at the end of the quarter for another customer. The Horizon Enabler had 13 days of spot vessel utilization, completing renewables trenching works for one customer. Both the trenching vessels in the North Sea have a strong backlog for 2022 trenching season with a mix of renewable and oil and gas trenching works. Due to our continued expansion in renewables, in February in the North Sea, we chartered a smaller vessel, the Glomar Wave, to undertake site clearance, boulder and ordnance removal, and site survey operations. The vessel agreement is a three-year charter with committed days each year.

The vessel is currently working on an estimated 180-day ordnance removal project. In the USA, the Shelia Bordelon, a Jones Act compliant vessel, was utilized 98% in Q1. The vessel performed works in the Gulf of Mexico to support the seismic load inflation project that should continue into Q3. On the U.S. East Coast, the recently acquired i-Plough trenching system was mobilized on a client-provided vessel and commenced work undertaking site clearance preparation for wind farm support, again expanding the services that we offer in the renewables sector. Helix Robotics is performing well, and we have a good backlog and visibility globally in tightening markets both in oil and gas and global renewables markets. We're expecting strong performance in 2023 and beyond, and are enjoying our service and geographical expansion in the renewables sector.

Slide 17 details our robotics vessels yearly trenching utilization. Slide 18 provides an overview of our shallow water decommissioning and construction support service business, Helix Alliance, reported of our shallow water abandonment segment. Shallow water work tends to be seasonally affected in the winter months due to the winter weather conditions, leading to low utilization and seasonal stacking for some of our assets in the quarter. The offshore division had 9 lift boats operating in Q1, with a combined utilization of 86%, performing decommissioning services such as well abandonment and pipeline abandonment. Offshore also supplied 6 OSVs and 1 crew boat with a combined utilization of 39%. In Q1, the energy services division had 1,039 days of operations or 77% utilization for the 50 marketable P&A systems deployed conducting decommissioning services.

The division had 238 days of operations or 44% utilization for the 6 Coiled Tubing systems. The diving and heavy lift division, due to the seasonal conditions, had expected low utilization of 31% across the 3 diving vessels, and the heavy lift barge was, as expected, seasonally warm stacked for most of the quarter, undertaking 1 short lift project for 1 customer. Slide 19 provides detail for the Helix Alliance vessel and systems recent utilization. Before I hand over the call to Brent, I would again like to thank our Helix employees and partners for producing the results in a good quarter, again with strong operational efficiency. 2023 is really shaping up well for Helix. We have added some new assets and added 2 chartered vessels that have led to service guide and geographical expansion.

We are hiring new employees globally, and the market is much improved for all of our businesses, leading to strong utilization for our vessels that should lead us to produce a strong year. For the next few years, we expect to be in a strong position with some well-won long-term contracts, contracted high utilization for our spot assets, improving rates and generally better terms and conditions. I'll now turn the call over to Brent.

Brent Arriaga (Chief Accounting Officer)

Thanks, Scotty. Moving to slide 21, it outlines our debt instruments and their maturity profile as of March 31. Our total funded debt decreased to $267 million at quarter end with semiannual MARAD payment. The 2023 converts with remaining principal of $30 million mature in Q3 this year. Moving on, slide 22 provides an update on key balance sheet metrics, including cash, liquidity, long-term debt, and net debt levels at year-end. With cash of $167 million, our net debt position was $91 million. At year-end, under our ABL facility, we had no borrowings outstanding and $80 million of availability with resulting liquidity of $247 million. I will now turn the call over to Erik for a discussion on our outlook for 2023 and beyond.

Erik Staffeldt (EVP and CFO)

Thanks, Brent. As you've heard this morning, we've had a solid start to 2023, and the offshore market continues to show its strength. We're maintaining our guidance for 2023, revenue of $1 billion-$1.2 billion, EBITDA $210 million-$250 million, free cash flow generation of $110 million-$150 million, with the capital spend expected to be $50 million-$70 million. Based on our first quarter results and on the strength of the market, we are currently trending towards the higher end of our guidance range. These ranges include some key assumptions and estimates. Any significant variation from these key assumptions and estimates could cause our results to fall outside the ranges provided.

Our quarterly results are likely to continue to be impacted by the seasonal weather, North Sea and Gulf of Mexico Shelf, primarily the fourth quarter. In addition, the timing of our vessel maintenance periods and project mobilizations will cause variances between quarters. Overall, we expect the second half of 2023 to be stronger than the first half, with the third quarter likely being our strongest quarter. Providing key assumptions by segment and region starting on slide 25. First, with our Well Intervention segment. The Gulf of Mexico is expected to continue to be a very strong market, with improving rates and expected strong utilization on the Q4000 and Q5000. Q4000 is currently in dry dock and expected to last approximately 75 days. In the UK North Sea, both vessels have contracted work into Q4, with the Seawell having work into Q1 of 2024.

Both vessels completed short maintenance periods in Q1. Activity levels in the North Sea Well Intervention market continue to be robust. The Q7000 is currently in Australian waters, mobilizing for its Tui New Zealand project. The project is scheduled to start mid-Q2. The vessel has contracted work in the APAC region into late Q4 or early Q1 of 2024. In Brazil, the Siem Helix 2 is contracted into mid-December of 2024 with Petrobras, and the Siem Helix 1 is contracted, performing well abandonment work for Trident into Q4 of 2024. Moving to the Robotics segment, slide 26. The Robotics segment continues to benefit from the tight market, where both oil and gas market and the renewables market are actively competing for assets. In the APAC region, the Grand Canyon II contracted to perform decommissioning and ROV support work in Thailand into the second half of 2023.

We've expected good utilization for the balance of 2023 in that region. In addition, one of the recently acquired T-1400 trenchers is being mobilized for contracted project in Q2, Q3. The North Sea, the Grand Canyon III is contracted to perform trenching with work with expected strong utilization for 2023. The Horizon Enabler, with its flexible charter, has trenching projects in Q2 and Q3. The Glomar Wave, recently chartered for site clearance and UXO removal, is forecasted to have good utilization. In the U.S., the Shelia Bordelon is working in the Gulf of Mexico, performing ROV survey work. With opportunities in the Gulf of Mexico and the U.S. East Coast, the vessel is expected to have strong utilization for 2023. The recently acquired i-Plough completed a site clearance project off the East Coast of the U.S.

For production facilities, the HP1 is on contract for the balance of 2023 with no expected change. We have expected variability with production as the Droshky field continues to deplete. Maintenance work was completed on the Thunder Hawk production facility in mid-April, with the field coming online late April. Continuing on slide 27 for our Shallow Water Abandonment segment. The shelf decommissioning market continues to be active. We expect the marine offshore division to maintain good utilization of 8-9 lift boats with some variable seasonality on the OSV and crew boats. The energy services division should have strong utilization for 12-15 P&A spreads and 1-3 Coiled Tubing units during 2023. There is seasonality in the diving and heavy lift division, where the Epic Egret is currently idle with limited near-term opportunities.

We do expect an active season during Q2 and Q3. Moving to slide 28. Our CapEx forecast for 2023 is heavily impacted by the dry docks and maintenance periods on our Q vessels. The Q7000 and Q5000 completed their maintenance period, and the Q4000 is currently on the blocks. With a heavy regulatory year and the inclusion of Helix Alliance, our CapEx range for 2023 continues to be in the $50 million-$70 million range with a significant amount expected here. Our cash spend in Q1 was approximately $24 million. The majority of our CapEx forecast continues to be maintenance and project related, which primarily falls into our operating cash flows. Reviewing our balance sheet, our funded debt of $267 million at March 31st is expected to decrease by $34 million during the balance of 2023 with scheduled principal payments.

I'll skip the remaining slides and leave them for your reference. At this time, I'll turn the call back to Owen for further discussion of our outlook and for closing comments. Owen?

Owen Kratz (President and CEO)

Thanks, Erik. As you've heard, 2023 has started well. Helix is currently exceeding our initial 2023 expectations. Our initial guidance for the year was $210 million-$250 million EBITDA. While it may be too soon to update the guidance due to the normal gives and takes of the remainder of the year, we can say that we're currently trending toward the upper end of the guidance. Q1 is typically a bit messy. It's impacted by how much of the prior year's clients budgeted work carries into the new year, how early the new year's budgeted work begins, and how much maintenance work on our assets is scheduled. Of course, offshore work is always impacted due to the seasonality of the weather. This is also why we historically schedule dry docks and related CapEx expenditures for Q1.

The negative impact to our quarterly free cash flow is just a timing issue resulting from the front-end loading of this CapEx. The year-over-year comparison of Q1 results demonstrates that demand is strong and increasing, even while we incurred a meaningful amount of scheduled maintenance during the quarter. The Q7000 was in transit from West Africa to Asia Pacific region. Results were positively impacted by having our 2 vessels in Brazil back on multiyear contracts, doing well intervention work at better rates. These and other rates were agreed prior to the surge in demand. The contracts do have escalating rates built in, and future pricing of options means we expect to see continued improving results over the next few years. Rates for our intervention services continue to improve as rig rates continue to increase. We're seeing strong demand for our services to maximize existing production.

Decommissioning work in general also continues to be strong, especially in the Gulf of Mexico Shelf, as a result of increasing number of mature fields reaching the end of production and the strong desire to see oil fields abandoned in an environmentally safe manner. On the renewables front, we see steadily increasing demand. This industry has been led by the U.K., Norway, and the E.U., but on a global basis, many regions are now launching lease sales for future development. The time lag from lease sale to actual work can be as long as 5-7 years, which indicates that this should be a growing market for many years to come. We expect contributions to our returns from this market to grow with the market over time. Overall, we expect to be strongly free cash flow positive for the foreseeable future.

Our current course is to, first, build cash to be able to cash settle our remaining debt on maturity. Second, continue to execute the share repurchase plan as announced and in line with our free cash flow generation. Third, assess our options for growth beyond the operating leverage of our current assets. A key to growth in a cyclical industry while generating a strong return on capital is timing. We plan to be patient and selective as we explore opportunities. We believe there will be select potentials for growth within the 3 buckets of our business model. First, maximizing remaining reserves. Second, decommissioning. Third, offshore wind support. All 3 are poised for sustainable growth in the years ahead. We look forward to continuing to execute on what is shaping up to be a strong 2023.

We believe we've positioned ourselves well to capture the current market, be opportunistic about future growth, and continue to deliver value to our shareholders. Erik?

Erik Staffeldt (EVP and CFO)

Thanks, Owen. Operator, at this time, we're ready to take any questions.

Operator (participant)

Perfect. If you would like to register a question, please press the one followed by the four on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Our first question comes from the line of Gregory Lewis. Please go ahead.

Gregory Lewis (Managing Director and Analyst)

Yeah. Hey, good morning, everybody. You know, guys, hey, thanks for the updated detailed guidance. You know, I typically wouldn't ask this question because you kind of addressed it. Just given some of the weakness in the stock today, you know, Eric, I know when you made some comments about, you know, kind of trending towards the high end of the guidance, realizing we haven't changed it. Could you maybe give us a little bit of color around why we're kind of expecting now trending towards the, you know, the higher end of the range? Just was it incremental workbook, the better pricing, maybe getting a better handle on costs? Any kind of color you can give us around that?

Erik Staffeldt (EVP and CFO)

Yeah, I'll go ahead and start off. I think there's a few drivers which we tried to highlight in our slides. I think first, I think we've been able to secure additional work. I think we had 2 big contract wins here in the first quarter with the signing of the trenching project in Taiwan, and of course, being able to fill in a gap on the Q7000 in the Australian market. I think so those are definitely improvements. I think overall, though, what gives us confidence in why we feel that we're trending towards the upper range is the continued strength of the market.

We're still seeing rates improving, obviously not at the pace of last year, but we're still seeing a steady improvement there. I think we're in conversations where our customers are making plans for 2024 already. To a certain extent, our assets or our utilization is filling out quite extensively in 2023. I think so all those things are really helping us trend towards the upper end of the range. I don't know, Owen, if you have anything to add.

Owen Kratz (President and CEO)

No, just simplification. At the time of giving guidance, it's all a function of utilization and rates. Both, right now with what we're booking, in the 2nd, 3rd, and 4th quarter, utilization-wise and rate-wise are exceeding the assumptions that we made in our initial guidance.

Gregory Lewis (Managing Director and Analyst)

Great. Then, you know, around pricing, you know, clearly last year was a nice monster move higher. You know, things definitely seem to be trending in the right direction. You know, you did mention that we are starting to look at, you know, not even look at, we actually are taking some work, some contracted work into 2024. Any kind of loose, rough estimates you can give us around how the pricing dynamic is evolving in 2024 versus where we are today?

Scotty Sparks (EVP and COO)

I'll take that. First of all, in Brazil, the contracts for the two vessels are fixed, so there's not much we can do in Brazil. North Sea, we have been awarded work and the price has been increased, an increase in sort of 15%-20% year-over-year. In the Gulf of Mexico, we're still increasing pricing. Every tender that goes out, there's a bit of an increase on the pricing, and we're securing work. Gulf of Mexico and North Sea well intervention markets, we're definitely seeing a year-over-year increase. In robotics, the trenching market is very robust, thanks to the renewables expansion. We're increasing pricing there, supply and demand issues mainly.

In the robotics and renewables market, vessels are just being taken up because it's expanding globally, and we're seeing that our services are required and increasing pricing.

Gregory Lewis (Managing Director and Analyst)

Yeah. Then I did wanna just kind of touch on that, the, you know, the Horizon Enabler, which is on that flexible contract. You know, you know, it seems like the renewables, I guess we'll just broadly call it, you know, the offshore renewables market is continuing to improve. You know, obviously, your vessels are keeping busy. Is there any thoughts about maybe... I'll ask it this way. Is management worried about vessel availability not on the chartering inside to do work as kind of we look out over the next 12 months?

Scotty Sparks (EVP and COO)

No, I would say that we're quite well covered for the assets that we have.

Gregory Lewis (Managing Director and Analyst)

Mm-hmm

Scotty Sparks (EVP and COO)

options going into 2024. Remember, last year, we took the charters on the Grand Canyon vessels out for 5 years, so we have solid pricing and cost base for the Grand Canyon charters. We have an option on the Siem Barracuda going into 2024, 2025. We have an option on the Horizon Enabler going into 2025, so we're quite well set. We will be on the look for further vessels as the US market increases. You know, we have.

Gregory Lewis (Managing Director and Analyst)

Okay. That was kind of what I was getting at. Not your availability. I'm saying, like, as you look at the potential, the projects that are out there and work you wanna go win, it almost looks to me like you're gonna have to go out to the charter end market to bring in another vessel or two.

Owen Kratz (President and CEO)

I'll jump in here. I would say the market is very, very tight, both on the wind side and the oil and gas side. Vessels are just tight in all the classes. We feel like we're comfortably set, but we worry about vessel access, both having too many and too few, depending on where we are in the cycle. Right now, I think we're comfortable. It's going to be hard to add additional tonnage at reasonable rates, so it depends on where the rates go in the market as to how much you could capture of the growth opportunity. Right now, I would say that we're probably sitting asset light, compared to what we could work.

I think sitting asset-light in a tight and rate-improving market is the right position to be sitting in.

Scotty Sparks (EVP and COO)

That's the reason why we just took the Siem Topaz for the Asia trenching and also the Glomar Wave on the three-year contract to support our site clearance market. We, you know, we've been gingerly coming into the site clearance market, and we've seen that expand, and that's why we've gone all in on a three-year deal for the Glomar Wave.

Gregory Lewis (Managing Director and Analyst)

Perfect. Okay. Hey, thank you very much for the time.

Scotty Sparks (EVP and COO)

Okay. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of David Smith. Please go ahead.

David Smith (Director, Research)

Hey, good morning. Thank you for taking my question.

Owen Kratz (President and CEO)

Good morning.

David Smith (Director, Research)

Net debt near $90 million. You know, at the midpoint of your free cash flow outlook, you would be net debt negative by year-end, you know, despite returning 25% of free cash flow through repurchases. I wanted to ask how much flexibility there might be on that 25%, you know, re-free cash flow return framework and maybe how you see the trade-off between, you know, targeting net debt neutrality versus buying back your stock that, you know, looks to be approaching a low teens free cash flow yield?

Owen Kratz (President and CEO)

Yeah, yeah, I think obviously, on the numbers that you cited, I think you're directly correct. I think it's important that as we initiated our share repurchase program, we set an initial target of 25%. Obviously, that is something that we're going to monitor and manage. Obviously, there will be an opportunity to increase that. I think part of that is as we start generating our outlook for 2024 and our cash position for 2024. It's an initial target that we put out there, David, and we'll continue to look at it as you could say, our outlook and visibility continues to grow. I think there is room for you could say, upwards revisions to that going forward.

In general, I still think, obviously, we tried to outline the parameters that are important to us from a cash generation, cash management. We do have the maturing debt that we feel we need to be in a position to cash settle. We do have the earn-out associated with Alliance, which will be due in early 2024. We have these competing needs for our cash that we're balancing, we feel good about the position that we're in and the direction that we're going with our cash. Once again, I think we'll have the opportunity to revisit our positions as we go forward.

David Smith (Director, Research)

I appreciate the color. If, if I could ask a slightly long follow-up, maybe a little bit bigger picture question. You know, if I remember correctly, the original thesis for the heavy well intervention vessels is you could do the D&A and intervention work more efficiently than a rig. You, you could build a vessel at a discount to the rig and price it at a discount to the rig. Now I think you've demonstrated the efficiency improvement. Certainly, you know, during the downturn, it looked like you were pricing the Q4 and Q5 at or better than where market rates troughed, you know, for deepwater rigs.

I wanted to ask, with deepwater rig rates back into the $400, you know, day-for-day plus range, should we think about the opportunity for the heavy well intervention vessel pricing, you know, to migrate back to that historical discount to the deepwater rigs? Or, you know, might there be an opportunity to close that historical discount just given the demonstrated efficiency advantages versus the rigs?

Owen Kratz (President and CEO)

I'll take that. I think historically, you'll find that during strong demand cycles, we are able to close that discount. In fact, for a brief period back in 2013, we were actually pricing at a premium to rigs because of our efficiency. I think. There's two components of the rate increases going forward that I'm looking at. One is in response to where the rig rates go, and I believe the rig rates are gonna go higher, and therefore, all of our spot rates can move higher. On top of that, we entered into these multiyear contracts and some MSAs giving pricing prior to 2022, which are at substantially lower than current market rates.

As the escalators in those contracts kick in each year, and then as those contracts roll over and we're able to price back to the spot market, then there's a substantial potential for rate increase, for some of our main assets.

Scotty Sparks (EVP and COO)

I'll just add.

David Smith (Director, Research)

Great

Scotty Sparks (EVP and COO)

that I think you're picking up on the heavy intervention rigs, but you should also think of the North Sea and the light intervention, where our rates are substantially higher than rig rates purely because of our efficiencies. You know, rigs in the North Sea are generally moored, and they're probably at about 50% or 60% of the current rates we charter in the North Sea because of the pure efficiencies of not having to put out anchors and other services, so.

David Smith (Director, Research)

I appreciate that extra color.

Scotty Sparks (EVP and COO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of James Schumm. Please go ahead.

James Schumm (VP and Equity Research Analyst)

Hey, good morning, everybody.

Owen Kratz (President and CEO)

Morning.

James Schumm (VP and Equity Research Analyst)

Good morning. The midpoint of the robotics revenue guidance calls for an increase of about 9% or so this year. Can we expect a similar EBIT or EBITDA uplift in 2023?

Owen Kratz (President and CEO)

I think overall, Jim, I think that our, I think that our, probably our EBIT would

Erik Staffeldt (EVP and CFO)

Off the top of my head, more than likely be flat, at best. I don't think you assume a dollar for dollar increase there.

James Schumm (VP and Equity Research Analyst)

Matt, Eric, that's because less trenching work? Is that what's driving that?

Erik Staffeldt (EVP and CFO)

No, we had some. You know, I think there were some obviously increased costs that are flowing through our structure as we've added more charters. I think there was, we naturally expected it to be a little bit more challenging with a few of the contracts that we were able to execute in 2022, above improvements over our fixed pricing. We were able to get excellent margins. Some of that was a combination of better weather and better execution from our operations. As we planned and forecasted our 2023, we assumed that area would more than likely be flat. We didn't necessarily expect to see improvements in those areas.

James Schumm (VP and Equity Research Analyst)

Okay. Understood. Thank you. From an earnings perspective, can we expect a sequential benefit for the Q7000 in 2Q? If so, can you quantify that? I know there's a lot of moving pieces with MOB and DMOB and the, you know, and the accounting for that. I don't know if you could provide any help there.

Erik Staffeldt (EVP and CFO)

Yeah, the Q7 is going to, in general, have a lot of noise in our quarterly results. Here in the first quarter, no revenue, but we still had some costs flow through the P&L on depreciation of some of our ROVs. Here in the second quarter, we expect it to start working in the May timeframe. Then from that standpoint, as we recognize the revenue, we're gonna be recognizing our daily rate, plus the amortization of the deferred revenue and deferred cost. Overall, it's going to appear with a very high day rate and a very high cost in our daily numbers. Overall, obviously, we expect improvements to the overall Q7000 P&L performance quarter-over-quarter.

We expect to be in a position, obviously, of generating, positive cash here as it goes to work.

Okay. Thanks a lot. Appreciate it.

Operator (participant)

Thank you. Our next question comes from the line of Donald Crist. Please go ahead.

Donovan C. Crist (Senior Research Analyst)

Morning, gentlemen. How are y'all today?

Erik Staffeldt (EVP and CFO)

Good.

Owen Kratz (President and CEO)

Good.

Donovan C. Crist (Senior Research Analyst)

I wanted to ask a bigger picture question. You know, we recently saw one of the drilling contractors sign a contract for P&A work and that at least indicated to me that the market is really tight and should remain tight for many years to come. I just wanted to ask about when you're having customer conversations out there, are they getting a little bit more desperate today on work for 2024 and 2025 and more willing to sign contracts farther out than we were, call it, you know, 9 or 12 months ago today? How are those customer conversations going?

Owen Kratz (President and CEO)

I think you're right. I think the customers are starting to worry about availability. They are looking for longer term commitments at today's pricing. Of course, the corollary to that is the contractors are a little worried about giving today's pricing in an environment where the rates are continuing to move up. Going into this year, we were willing to give rates for 2 years, but not beyond that because we didn't know where the market was going. As a result, we've got some contracts that are priced below the current market for the next couple of years. We're sort of in that same boat. We're a bit leery about giving contract pricing too far out in this robust market. You are right.

There are a number of producers that are looking for multi-year commitment on long-term contracts and just long-term priced MSAs.

Donovan C. Crist (Senior Research Analyst)

Does that lend you to do more kind of variable rate or, you know, quarterly repricing contracts going forward? Is that what we should see on any new contracts?

Owen Kratz (President and CEO)

It takes two forms. One, we can just set higher rates in the contract, each, you know, as the years progress, or you can pick a rate and tie it to an index. Those are the two main mechanisms.

Donovan C. Crist (Senior Research Analyst)

Okay. I appreciate the color. It looks like there's several good years coming up. I appreciate the color. Thanks.

Erik Staffeldt (EVP and CFO)

We hope so.

Operator (participant)

Thank you. As a reminder, it is the one followed by the four on your telephone keypad to register a question. Our next question comes from the line of Samantha Hoh. Please go ahead.

Samantha Hoh (Director)

Hey, guys. Just a real quick one for me. I was wondering if you could maybe address the cost side of the equation a bit more. You know, maybe just even on the SG&A line, but also in terms of just what you're seeing on like labor and material and all that good stuff.

Erik Staffeldt (EVP and CFO)

Yes. Obviously, the labor market is very tight at the moment. We at the start of this year, we implemented some good salary increases for all of our employees, both onshore and offshore. Our costs have increased, but that's also in line with pushing our rates up as well. Supply chain is also tightening. Those rates are going up, we are definitely seeing an increase in costs, but we're countering that with an increase in rates.

Owen Kratz (President and CEO)

I think on the SG&A side, obviously, I think there has been an impact, obviously from the, you could say inflation that's been seen out there. In addition to that, from our standpoint, we're gonna see the full year impact of the acquisition of Alliance in our numbers. Overall, from a dollar standpoint, we do expect an increase. I think overall, you know, we do focus on SG&A that's, you know, less than 10% of our revenues. I think this quarter was just under 8%, and I expect it to be in that 8%-9% range going forward.

Samantha Hoh (Director)

Okay. That was it for me. Thanks.

Operator (participant)

At this time, there are no further phone questions. I'll turn it back to you speakers to continue the presentation or give any closing remarks.

Erik Staffeldt (EVP and CFO)

Okay. Thanks for joining us today. We very much appreciate your interest and participation. We look forward to having you on our second quarter 2023 call in July. Thank you.

Operator (participant)

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.