Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS AND ASSUMPTIONS
This Quarterly Report on Form 10-Q contains or incorporates by reference various statements that contain forward-looking information regarding Helix and represent our current expectations or forecasts of 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 (the “Exchange Act”). All statements included herein or incorporated by reference herein 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 although not all forward-looking statements contain such identifying words. Included in forward-looking statements are, among other things:
•
statements regarding our business strategy and any other business plans, forecasts or objectives, any or all of which are subject to change;
•
statements regarding projections of revenues, gross margins, expenses, earnings or losses, working capital, debt and liquidity, or other financial items;
•
statements regarding our backlog and commercial contracts and rates thereunder;
•
statements regarding our ability to enter into and/or perform commercial contracts, including the scope, timing and outcome of those contracts;
•
statements regarding the ongoing COVID-19 pandemic and the recent oil price decline, and their respective effects and results, our protocols and plans, the continuation of our current backlog, the spot market, our cost reduction plans and our ability to manage current changes;
•
statements regarding the acquisition, construction, completion, upgrades to or maintenance of vessels, systems or equipment and any anticipated costs or downtime related thereto;
•
statements regarding any financing transactions or arrangements, or our ability to enter into such transactions or arrangements;
•
statements regarding potential legislative, governmental, regulatory, administrative or other public body actions, requirements, permits or decisions;
•
statements regarding our trade receivables and their collectability;
•
statements regarding potential developments, industry trends, performance or industry ranking;
•
statements regarding general economic or political conditions, whether international, national or in the regional or local markets in which we do business;
•
statements regarding our ability to retain our senior management and other key employees;
•
statements regarding the underlying assumptions related to any projection or forward-looking statement; and
•
any other statements that relate to non-historical or future information.
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 differ materially from those in the forward-looking statements. These factors include:
•
the results and effects of the ongoing COVID-19 pandemic and the recent oil price decline and actions by customers, suppliers and partners with respect thereto;
•
the impact of domestic and global economic conditions and the future impact of such conditions on the oil and gas industry and the demand for our services;
•
the general impact of oil and gas price fluctuations and the cyclical nature of the oil and gas industry;
•
the impact of any potential cancellation, deferral or modification of our work or contracts by our customers;
•
the ability to effectively bid and perform our contracts, including the impact of equipment problems or failure;
•
the impact of the imposition by our customers of rate reductions, fines and penalties with respect to our operating assets;
•
unexpected future capital expenditures, including the amount and nature thereof;
•
the effectiveness and timing of completion of our vessel and/or system upgrades and major maintenance items;
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•
unexpected delays in the delivery, chartering or customer acceptance, and terms of acceptance, of our assets;
•
the effects of our indebtedness, our ability to comply with debt covenants and our ability to reduce capital commitments;
•
the results of our continuing efforts to control costs and improve performance;
•
the success of our risk management activities;
•
the effects of competition;
•
the availability of capital (including any financing) to fund our business strategy and/or operations;
•
the impact of current and future laws and governmental regulations, including tax and accounting developments, such as the U.S. Tax Cuts and Jobs Act and the CARES Act and regulations thereunder;
•
the impact of U.K.’s exit from the European Union, known as Brexit, on our business, operations and financial condition, which is unknown at this time;
•
the effect of adverse weather conditions and/or other risks associated with marine operations;
•
the impact of foreign currency exchange controls, potential illiquidity of those currencies and exchange rate fluctuations;
•
the effectiveness of our current and future hedging activities;
•
the potential impact of a loss of one or more key employees; and
•
the impact of general, market, industry or business conditions.
Our actual results could also differ materially from those anticipated in any forward-looking statements as a result of a variety of factors, including those described under Item 1A. “Risk Factors” in this Quarterly Report, and Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Form 10-K. Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
We caution you not to place undue reliance on the forward-looking statements. 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, all of which are expressly qualified by the statements in this section, or provide reasons why actual results may differ. All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. We urge you to carefully review and consider the disclosures made in this Quarterly Report and our reports filed with the SEC and incorporated by reference in our 2019 Form 10-K that attempt to advise interested parties of the risks and factors that may affect our business.
EXECUTIVE SUMMARY
Our Business
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. With the delivery in November 2019 and the commencement of operations in January 2020 of the Q7000 , our well intervention fleet currently includes seven purpose-built well intervention vessels, six IRSs, three SILs and one Riserless Open-water Abandonment Module (“ROAM”). Our robotics equipment currently includes 44 work-class ROVs, four trenchers and one ROVDrill. We also charter ROV support vessels on both long-term and spot bases to facilitate our ROV and trenching operations. Our well intervention and robotic operations are geographically dispersed throughout the world. Our Production Facilities segment includes the HP I , the HFRS and several wells and related infrastructure associated with the Droshky Prospect.
Our alliance with Schlumberger leverages the parties’ capabilities to provide a unique, fully integrated offering to clients, combining marine support with well access and control technologies. We and Schlumberger jointly developed a 15,000 working p.s.i. IRS, which was completed and placed into service in January 2018, and our first ROAM, which is currently available to customers.
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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 and 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, global health, and several other factors, including:
•
worldwide economic activity and general economic and business conditions, including available access to global capital and capital markets;
•
the global supply and demand for oil and natural gas;
•
political and economic uncertainty and geopolitical unrest, including regional conflicts and economic and political conditions in the Middle East and other oil-producing regions;
•
actions taken by OPEC and/or OPEC+, including actions such as the oil price war during the first quarter 2020;
•
the availability and discovery rate of new oil and natural gas reserves in offshore areas;
•
the exploration and production of onshore shale oil and natural gas;
•
the cost of offshore exploration for and production and transportation of oil and natural gas;
•
the level of excess production capacity;
•
the ability of oil and gas companies to generate funds or otherwise obtain external capital for capital projects and production operations;
•
the sale and expiration dates of offshore leases globally;
•
technological advances affecting energy exploration, production, transportation and consumption;
•
potential acceleration of the development of alternative fuels;
•
shifts in end-customer preferences toward fuel efficiency and the use of natural gas or renewable energy alternatives;
•
weather conditions, natural disasters, and epidemic and pandemic diseases, including the ongoing COVID-19 pandemic;
•
environmental and other governmental regulations; and
•
domestic and international tax laws, regulations and policies.
Crude oil prices declined significantly in 2014 and have been volatile since then. Brent crude oil prices fluctuated between $53 and $75 per barrel during 2019 before declining precipitously in the first quarter 2020 to lows below $20 per barrel due to the ongoing COVID-19 pandemic as well as the price war among OPEC+ nations during the first quarter 2020. Low oil prices and the volatility and uncertainty in prices have caused oil and gas operators recently to drastically reduce spending (both operational activities and capital spending), which has decreased the demand and rates for services provided by all offshore services providers. Historically, drilling rigs have been the asset class used for offshore well intervention work, and our customers have used drilling rigs on existing long-term contracts to perform well intervention work instead of new drilling activities. This rig overhang, combined with lower volumes of work for drilling rig contractors, affects the utilization and/or rates we can achieve for our assets and services. Furthermore, additional volatile and uncertain macroeconomic conditions in some regions and countries around the world, such as West Africa, Brazil, China 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 volatility into our operations and/or financial results.
We saw improvements in 2019 as compared to 2018 and expected to see a continued recovery as we entered 2020. Rig overhang had reduced, and customer activity and oil prices had recovered to some extent. However, that recovery has now been halted with the ongoing COVID-19 pandemic as well as the OPEC+ price war during the first quarter 2020. While the full impact of these recent events, including the duration of the decrease in economic activity due to COVID-19 and the resulting impact on the demand and price of oil, is unknown, we expect that the industry may be depressed through 2021. We are seeing and expect to continue to see operators reducing spending and deferring work, asserting claims of force majeure and/or cancelling contracts and rig contractors lowering prices, stacking rigs, furloughing employees, and recognizing losses. These developments also have impacted, and are expected to continue to impact, many other aspects of our industry and the global economy, including limiting access to and use of capital across various sources and markets, disrupting supply chains and increasing costs, and negatively affecting human capital resources including complicating offshore crew changes due to health and travel restrictions as well as the overall health of the global workforce.
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The COVID-19 pandemic and the OPEC+ price war have resulted in a significant decrease in the price of oil and caused significant disruption and uncertainty in the oil and gas market. While these events did not materially impact our operating results or financial condition during the first quarter 2020, we did incur related impairment losses and our customers have begun to reduce their spending, which we anticipate will reduce the demand for our services at least in the near term and perhaps longer. Additionally, these events have created challenges with our supply chain and human capital resources, including challenges with offshore crew changes due to travel restrictions and quarantine measures. While these market disruptions may be temporary, we cannot reliably estimate the duration of the COVID-19 pandemic or current market conditions, or the ultimate impact they will have on our financial position, results of operations and cash flows.
Although this sustained period of market weakness and volatility has been exacerbated by the ongoing COVID-19 pandemic and the OPEC+ price war, over the longer term we expect oil and gas companies to increasingly focus on optimizing production of their existing subsea wells. As oil and gas companies re-assess and focus their budgetary spend allocations, we expect that it may be weighted towards production enhancement activities rather than exploration projects as enhancement is less expensive per incremental barrel of oil than new exploration. Moreover, as the subsea tree base expands and ages, the demand for P&A services should persist. We believe that we have a competitive advantage in performing well intervention services efficiently. Our well intervention and robotics operations are intended to service the life span of an oil and gas field as well as to provide P&A services at the end of the life of a field as required by governmental regulations. We believe that fundamentals for our business remain favorable over the longer term as the need to prolong well life in oil and gas production and safely decommission end of life wells are primary drivers of demand for our services. This belief is based on multiple factors, including: (1) the need to extend the life of subsea wells is significant to the commercial viability of the wells as P&A 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.
Backlog
We 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 provide services primarily in deepwater in the Gulf of Mexico, Brazil, North Sea, Asia Pacific and West Africa regions. In addition to serving the oil and gas market, our Robotics assets are contracted for the development of renewable energy projects (wind farms). As of March 31, 2020 , our consolidated backlog that is supported by written agreements or contracts totaled $678 million , of which $392 million is expected to be performed over the remainder of 2020. The substantial majority of our backlog is associated with our Well Intervention business segment. As of March 31, 2020 , our well intervention backlog was $471 million , including $306 million expected to be performed over the remainder of 2020. 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 85% of our total backlog as of March 31, 2020 . Backlog is not necessarily a reliable indicator of revenues derived from these contracts as services may be added or subtracted; contracts may be renegotiated, deferred, canceled and in many cases modified while in progress; and reduced rates, fines and penalties may be imposed by our customers. Furthermore, our contracts are in certain cases cancelable without penalty. 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.
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 condensed consolidated financial statements, including our consolidated results of operations.
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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 GAAP. Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, our reported results prepared in accordance with GAAP. Users of this financial information should consider the types of events and transactions that are excluded from these measures.
We measure our operating performance based on EBITDA and free cash flow. EBITDA and free cash flow are non-GAAP financial measures that are commonly used but are not recognized accounting terms under GAAP. We use EBITDA and free cash flow to monitor and facilitate 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 measures of EBITDA and free cash flow provide useful information to the public regarding our operating performance and ability to service debt and fund capital expenditures and may help our investors understand and compare our results to other companies that have different financing, capital and tax structures. Other companies may calculate their measures of EBITDA, Adjusted EBITDA and free cash flow differently from the way we do, which may limit their usefulness as comparative measures. EBITDA, Adjusted EBITDA and free cash flow should not be considered in isolation or as a substitute for, but instead are supplemental to, income from operations, net income, cash flows from operating activities, or other income or cash flow data prepared in accordance with GAAP.
We define EBITDA as earnings before income taxes, net interest expense, gain or loss on extinguishment of long-term debt, net other income or expense, and depreciation and amortization expense. Non-cash impairment losses on goodwill and other long-lived assets and gains and losses on equity investments are also added back if applicable. To arrive at our measure of Adjusted EBITDA, we exclude the gain or loss on disposition of assets and the provision for current expected credit losses, if any. In addition, we include realized losses from foreign currency exchange contracts not designated as hedging instruments and other than temporary loss on note receivable, which are excluded from EBITDA as a component of net other income or expense. We define free cash flow as cash flows from operating activities less capital expenditures, net of proceeds from sale of assets. In the following reconciliation, we provide amounts as reflected in our accompanying condensed consolidated financial statements unless otherwise noted.
The reconciliation of our net income to EBITDA and Adjusted EBITDA is as follows (in thousands):
Three Months Ended
March 31,
2020
2019
Net income (loss)
$
(13,928
)
$
1,318
Adjustments:
Income tax provision (benefit)
(21,093
)
324
Net interest expense
5,746
2,098
Other (income) expense, net
10,427
(1,166
)
Depreciation and amortization
31,598
28,509
Goodwill impairment
6,689
—
EBITDA
19,439
31,083
Adjustments:
Provision for current expected credit losses
586
—
Realized losses from foreign exchange contracts not designated as hedging instruments
(682
)
(869
)
Adjusted EBITDA
$
19,343
$
30,214
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The reconciliation of our cash flows from operating activities to free cash flow is as follows (in thousands):
Three Months Ended
March 31,
2020
2019
Cash flows from operating activities
$
(17,222
)
$
(34,246
)
Less: Capital expenditures, net of proceeds from sale of assets
(12,389
)
(11,630
)
Free cash flow
$
(29,611
)
$
(45,876
)
Comparison of Three Months Ended March 31, 2020 and 2019
The following table details various financial and operational highlights for the periods presented (dollars in thousands):
Three Months Ended
March 31,
Increase/
(Decrease)
2020
2019
Amount
Percent
Net revenues —
Well Intervention
$
140,652
$
122,231
$
18,421
15
%
Robotics
35,258
39,041
(3,783
)
(10
)%
Production Facilities
15,541
15,253
288
2
%
Intercompany eliminations
(10,430
)
(9,702
)
(728
)
$
181,021
$
166,823
$
14,198
9
%
Gross profit (loss) —
Well Intervention
$
(1,256
)
$
13,510
$
(14,766
)
(109
)%
Robotics
(467
)
(1,589
)
1,122
71
%
Production Facilities
4,207
4,771
(564
)
(12
)%
Corporate, eliminations and other
(474
)
(438
)
(36
)
$
2,010
$
16,254
$
(14,244
)
(88
)%
Gross margin —
Well Intervention
(1)%
11%
Robotics
(1)%
(4)%
Production Facilities
27%
31%
Total company
1%
10%
Number of vessels or robotics assets (1) / Utilization (2)
Well Intervention vessels
7/72%
6/74%
Robotics assets (3)
49/34%
52/39%
Chartered robotics vessels
6/89%
4/88%
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(1)
Represents the number of vessels or robotics assets as of the end of the period, including vessels under both short-term and long-term charters, and excluding acquired vessels prior to their in-service dates and vessels or assets disposed of and/or taken out of service.
(2)
Represents the average utilization rate, which is calculated by dividing the total number of days the vessels or robotics assets generated revenues by the total number of available calendar days in the applicable period. The average utilization rates of chartered robotics vessels during the three -month periods ended March 31, 2020 and 2019 included 272 and 84 spot vessel days, respectively, at near full utilization.
(3)
Consists of ROVs, trenchers and ROVDrill.
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):
Three Months Ended
March 31,
Increase/
(Decrease)
2020
2019
Well Intervention
$
3,304
$
3,225
$
79
Robotics
7,126
6,477
649
$
10,430
$
9,702
$
728
Net Revenues. Our total net revenues increased by 9% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting higher revenues from our Well Intervention business segment with the addition of the Q7000 , offset in part by lower revenues from our Robotics business segment.
Our Well Intervention revenues increased by 15% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting higher revenues with the commencement of operations of the Q7000 in Nigeria in January 2020 and higher utilization on our North Sea vessels. This revenue increase was partially offset by a reduction in vessel utilization in the Gulf of Mexico, with both the Q4000 and the Q5000 completing scheduled regulatory certification inspections during the period.
Robotics revenues decreased by 10% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting the decrease in trenching activity and a reduction in ROV, trencher and ROVDrill utilization as compared to the same period in 2019. Our results included 42 vessel trenching days during the three months ended March 31, 2020 compared to 133 days during the same period in 2019. These reductions were partially offset by higher spot vessel utilization, which increased to 272 days from 84 days in the prior year period.
Our Production Facilities revenues increased by 2% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting higher production revenues from the oil and gas properties that we acquired from Marathon Oil in January 2019 (Note 2).
Gross Profit (Loss). Our total gross profit decreased by 88% for the three -month period ended March 31, 2020 as compared to the same period in 2019 reflecting lower gross profit in our Well Intervention business segment.
The gross profit related to our Well Intervention business segment decreased by 109% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting a reduction in vessel utilization in the Gulf of Mexico, with both the Q4000 and the Q5000 completing scheduled regulatory certification inspections during the period, offset in part by the contribution from the Q7000 and higher profits in the North Sea.
The gross loss related to our Robotics segment decreased by 71% for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting a reduction in costs related to the termination of the Grand Canyon vessel charter in November 2019 and the expiration of the Grand Canyon II hedge in July 2019, offset in part by lower revenues.
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The gross profit related to our Production Facilities segment decreased by 12% for the three -month period ended March 31, 2020 as compared to the same period in 2019 primarily reflecting significantly lower direct costs as the HP I vessel went into regulatory dry dock for recertification during three -month period ended March 31, 2020 . The recertification costs are typically deferred and amortized.
Goodwill Impairment. The $6.7 million impairment charge for the three -month period ended March 31, 2020 reflects the write-off of the entire goodwill balance associated with STL (Note 6).
Selling, General and Administrative Expenses. Our selling, general and administrative expenses increased by $0.4 million for the three -month period ended March 31, 2020 as compared to the same period in 2019 . The increase was primarily attributable to the $0.6 million provision for current expected credit losses as a result of the adoption of ASU No. 2016-13 in 2020 (Note 17).
Net Interest Expense. Our net interest expense increased by $3.6 million for the three -month period ended March 31, 2020 as compared to the same period in 2019 , primarily reflecting lower capitalized interest. Capitalized interest totaled $1.2 million for the three -month period ended March 31, 2020 as compared to $5.0 million for the same period in 2019 as a result of the completion of the Q7000 .
Other Income (Expense), Net. We reported net other expense of $10.4 million for the three -month period ended March 31, 2020 as compared to net other income of $1.2 million for the same period in 2019 , primarily reflecting foreign currency transaction losses in the three -month period ended March 31, 2020 as compared to foreign currency transaction gains in the same period in 2019 due to the weakening of the British pound.
Income Tax Provision (Benefit). Income tax benefit was $21.1 million for the three -month period ended March 31, 2020 as compared to an income tax provision of $0.3 million for the same period in 2019 . The effective tax rates for the three -month periods ended March 31, 2020 and 2019 were 60.2% benefit and 19.7% expense, respectively. The variance in the effective tax rate was primarily attributable to our carrying back certain net operating losses to prior periods with higher income tax rates as well as the result of the consolidation of certain U.S. branch operations with the Helix U.S. consolidated tax group (Note 8).
LIQUIDITY AND CAPITAL RESOURCES
Overview
The following table presents certain information useful in the analysis of our financial condition and liquidity (in thousands):
March 31,
2020
December 31,
2019
Net working capital
$
151,048
$
153,508
Long-term debt (1)
303,584
306,122
Liquidity (2)
331,959
379,533
(1)
Long-term debt does not include the current maturities portion of our long-term debt as that amount is included in net working capital. Long-term debt is also net of unamortized debt discounts and debt issuance costs. See Note 7 for information relating to our long-term debt.
(2)
Liquidity, as defined by us, is equal to cash and cash equivalents plus available capacity under the Revolving Credit Facility, which capacity is reduced by letters of credit drawn against that facility. Our liquidity at March 31, 2020 included cash and cash equivalents of $159.4 million and $172.6 million of available borrowing capacity under the Revolving Credit Facility (Note 7). Our liquidity at December 31, 2019 included cash and cash equivalents of $208.4 million and $171.1 million of available borrowing capacity under the Revolving Credit Facility.
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The carrying amount of our long-term debt, including current maturities, net of unamortized debt discounts and debt issuance costs, is as follows (in thousands):
March 31,
2020
December 31,
2019
Term Loan (matures December 2021)
$
32,041
$
32,869
Nordea Q5000 Loan (matures January 2021)
79,959
89,031
MARAD Debt (matures February 2027)
56,639
60,073
2022 Notes (mature May 2022) (1)
116,690
115,765
2023 Notes (mature September 2023) (1)
109,092
108,115
Total debt
$
394,421
$
405,853
(1)
The 2022 Notes and the 2023 Notes will increase to their face amounts through accretion of the debt discounts through May 1, 2022 and September 15, 2023, respectively.
The following table provides summary data from our condensed consolidated statements of cash flows (in thousands):
Three Months Ended
March 31,
2020
2019
Cash provided by (used in):
Operating activities
$
(17,222
)
$
(34,246
)
Investing activities
(12,389
)
(11,956
)
Financing activities
(18,391
)
(14,055
)
Our current requirements for cash primarily reflect the need to fund our operations and capital spending for our current lines of business and to service our debt.
Given the ongoing COVID-19 pandemic, challenging market conditions and recent market events resulting in industry-wide spending cuts, we continue to remain focused on maintaining a strong balance sheet and adequate liquidity. Over the near term, we plan to reduce, defer or cancel certain planned capital expenditures and reduce our overall cost structures commensurate with our expected level of activities. We believe that our cash on hand, internally generated cash flows and availability under the Revolving Credit Facility will be sufficient to fund our operations and service our debt over at least the next 12 months.
A prolonged period of weak, or a significant decrease in, industry activity may make it difficult to comply with our covenants and the other restrictions in the agreements governing our debt. Current global and market conditions have increased the potential for that difficulty. Furthermore, during any period of sustained weak economic activity and reduced EBITDA, our ability to fully access the Revolving Credit Facility may be impacted. At March 31, 2020 , our available borrowing capacity under the Revolving Credit Facility, based on the applicable leverage ratio covenant, was $172.6 million , net of $2.4 million of letters of credit issued under that facility. We currently do not anticipate borrowing under the Revolving Credit Facility other than for the issuance of letters of credit. Our ability to comply with loan agreement covenants and other restrictions is affected by economic conditions and other events beyond our control. Our failure to comply with these covenants and other restrictions could lead to an event of default, the possible acceleration of our outstanding debt and the exercise of certain remedies by our lenders, including foreclosure against our collateral.
Operating Cash Flows
Total cash flows used in operating activities decreased by $17.0 million for the three -month period ended March 31, 2020 as compared to the same period in 2019 primarily reflecting changes in our working capital.
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Investing Activities
Capital expenditures represent cash paid principally for the acquisition, construction, completion, upgrade, modification and refurbishment of long-lived property and equipment such as dynamically positioned vessels, topside equipment and subsea systems. Capital expenditures also include interest on property and equipment under development. Significant (uses) sources of cash associated with investing activities are as follows (in thousands):
Three Months Ended
March 31,
2020
2019
Capital expenditures:
Well Intervention
$
(12,263
)
$
(11,485
)
Robotics
(44
)
—
Production Facilities
—
(2
)
Other
(82
)
(168
)
Proceeds from sale of assets
—
25
Other
—
(326
)
Net cash used in investing activities
$
(12,389
)
$
(11,956
)
Our capital expenditures primarily included payments associated with the construction and completion of the Q7000 (see below).
In September 2013, we entered into a contract for the construction of the Q7000 , a newbuild semi-submersible well intervention vessel built to U.K. North Sea standards. Pursuant to the contract and subsequent amendments, 20% of the contract price was paid upon the signing of the contract, 20% was paid in each of 2016, 2017 and 2018, and the remaining 20% was paid upon the delivery of the vessel in November 2019. At March 31, 2020 , our total investment in the Q7000 was $539.3 million , including $346.0 million of installment payments to the shipyard. The vessel commenced operations in Nigeria in January 2020.
Financing Activities
Cash flows from financing activities consist primarily of proceeds from debt and equity transactions and repayments of our long-term debt. Net cash outflows from financing activities of $18.4 million for the three -month period ended March 31, 2020 primarily reflect the repayment of $13.4 million of our indebtedness (Note 7). Net cash outflows from financing activities of $14.1 million for the three -month period ended March 31, 2019 primarily reflect the repayment of $13.3 million of our indebtedness.
Free Cash Flow
Free cash flow increased by $16.3 million for the three -month period ended March 31, 2020 as compared to the same period in 2019 primarily attributable to the increase in operating cash flows.
Free cash flow is a non-GAAP financial measure. See “RESULTS OF OPERATIONS” above for the definition and calculation of free cash flow.
Outlook
We anticipate that our capital expenditures, including capitalized interest and regulatory certification costs for our vessels and systems, will approximate $38 million for 2020 . We believe that cash on hand, internally generated cash flows and availability under the Revolving Credit Facility will provide the capital necessary to continue funding our 2020 operating needs and to meet our debt obligations due in 2020 .
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Contractual Obligations and Commercial Commitments
The following table summarizes our contractual cash obligations as of March 31, 2020 and the scheduled years in which the obligations are contractually due (in thousands):
Total (1)
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
Term Loan
$
32,375
$
3,500
$
28,875
$
—
$
—
Nordea Q5000 Loan
80,357
80,357
—
—
—
MARAD Debt
60,054
7,378
15,879
17,503
19,294
2022 Notes (2)
125,000
—
125,000
—
—
2023 Notes (3)
125,000
—
—
125,000
—
Interest related to debt (4)
46,683
18,058
22,371
5,206
1,048
Property and equipment
5,319
5,319
—
—
—
Operating leases (5)
338,310
103,400
181,871
48,029
5,010
Total cash obligations
$
813,098
$
218,012
$
373,996
$
195,738
$
25,352
(1)
Excludes unsecured letters of credit outstanding at March 31, 2020 totaling $2.4 million . These letters of credit may be issued to support various obligations, such as contractual obligations, contract bidding and insurance activities.
(2)
Notes mature in May 2022. The 2022 Notes can be converted prior to their stated maturity if the closing price of our common stock for at least 20 days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter exceeds $18.06 per share, which is 130% of the conversion price. At March 31, 2020 , the conversion trigger was not met. See Note 7 for additional information.
(3)
Notes mature in September 2023. The 2023 Notes can be converted prior to their stated maturity if the closing price of our common stock for at least 20 days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter exceeds $12.31 per share, which is 130% of the conversion price. At March 31, 2020 , the conversion trigger was not met. See Note 7 for additional information.
(4)
Interest payment obligations were calculated using stated coupon rates for fixed rate debt and interest rates applicable at March 31, 2020 for variable rate debt.
(5)
Operating leases include vessel charters and facility and equipment leases. At March 31, 2020 , our commitment related to long-term vessel charters totaled approximately $299.2 million, of which $111.5 million was related to the non-lease (services) components that are not included in operating lease liabilities in the condensed consolidated balance sheet as of March 31, 2020 .
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our discussion and analysis of our financial condition and results of operations, as reflected in the accompanying condensed consolidated financial statements and related footnotes, are prepared in conformity with GAAP. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes.
For information regarding our critical accounting estimates and policies, please read our “Critical Accounting Estimates and Policies” as disclosed in our 2019 Form 10-K.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.