Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis should be read in conjunction with our historical consolidated financial statements located in Item 8. Financial Statements and Supplementary Data of this Annual Report. Any reference to Notes in the following management’s discussion and analysis refers to the Notes to Consolidated Financial Statements located in Item 8. Financial Statements and Supplementary Data of this Annual Report. The results of operations reported and summarized below are not necessarily indicative of future operating results. This discussion also contains forward-looking statements that reflect our current views with respect to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under Item 1A. Risk Factors and located earlier in this Annual Report.
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, robotics and full-field decommissioning operations. We operate through our four business segments: Well Intervention, Robotics, Shallow Water Abandonment and Production Facilities. Our services are key in supporting a global energy transition by maximizing production of existing oil and gas reserves, decommissioning end-of-life oil and gas fields and supporting renewable energy developments.
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Industry Influences and Market Environment
Demand for our services is primarily influenced by the condition of the oil and gas and the renewable energy markets and, in particular, the willingness of offshore energy companies to spend on operational activities and capital projects. The performance of our business is largely affected by 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 various other factors. Demand for decommissioning, which has been an area of growth for us in recent years, is affected by commodity prices as well as governmental regulations and political forces globally.
Oil prices came down from their highs in 2022 but have remained robust during 2023. Global demand for oil continues to experience growth, and we expect the current market conditions will maintain continued customer spending for the industry. Despite the current commodity price environment, uncertainties to commodity price stability persist, including regional conflicts, unrest in the Middle East, OPEC+ decisions, various governmental and customer sustainability initiatives and continued shifting of resource allocation to renewable energy. We expect these factors will continue to contribute to commodity price volatility with the potential to temper customer spending for oil and gas projects.
We maximize production of existing oil and gas reserves for our customers primarily in our Well Intervention segment. Historically, drilling rigs have been the asset class used for offshore well intervention work, and rig day rates are a pricing indicator for our services. Our customers have used drilling rigs on existing long-term contracts (rig overhang) to perform well intervention work instead of new drilling activities. Current volumes of work, rig utilization rates, the day rates quoted by drilling rig contractors and existing rig overhang affect the utilization and/or rates we can achieve for our assets and services.
We are seeing oil and gas companies continue to invest in long-cycle exploration projects in addition to maintaining and/or increasing production from their existing reserves. As historically production enhancement through well intervention is less expensive per incremental barrel of oil than exploration, we expect oil and gas companies to continue to focus on optimizing production of their existing subsea wells.
We support the energy transition to renewable energy through our services in offshore wind farm developments, primarily including subsea cable trenching and burial as well as seabed clearance and preparation services. Demand for our services in the renewable energy market is affected by various factors, including the pace of consumer shift towards renewable energy sources, global electricity demand, technological advancements that increase the generation and/or reduce the cost of renewable energy, expansion of offshore renewable energy projects to deeper water and other regions, and government subsidies for renewable energy projects. We expect growth in our renewables services as the energy market transitions to continued renewable energy developments.
Once end-of-life oil and gas wells have depleted their production, we decommission wells and infrastructure in our Well Intervention and Shallow Water Abandonment segments. Our operations service the life cycle of an oil and gas field and provide P&A and decommissioning services at the end of the life of a field as required by governmental regulations. We believe that we have a competitive advantage in performing these services efficiently. The demand for P&A services should grow as the subsea tree base expands, as government regulations continue to place stronger emphasis on decommissioning aged wells worldwide (including subsea trees as well as mature dry tree wells in the shallow waters of the Gulf of Mexico), and as customers shift resources to renewable energy.
Business Activity Summary
During 2023, we continued to reap the benefits of our energy transition strategy with significant improvements in our results as compared to 2022. Utilization and rates improved across all of our operating segments in 2023, benefitting from a strong oil and gas market, continued customer demand for our renewables offerings and robust decommissioning demand across the globe.
We made significant improvements in our balance sheet in 2023, extending the maturity of our debt to 2029, removing the dilution overhang associated with 22.9 million shares underlying the Convertible Senior Notes due 2026 (the “2026 Notes”) repurchased in December 2023, and simplifying our capital structure. We maintain our capital allocation policy of maintaining low levels of Net Debt, investing in targeted acquisitions that complement and further our strategy, and using Free Cash Flow to return cash to shareholders through share repurchases (See “Results of Operations — Non-GAAP Financial Measures” below for definitions of Net Debt and Free Cash Flow).
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We also executed a number of transactions during 2023 that demonstrate our commitment to our strategy and outlook for the markets we serve.
During 2023, we extended the charters on two of our robotics vessels in support of our trenching and site clearance operations. In January 2023, we entered into a three-year charter agreement for the Glomar Wave in the North Sea with options to extend. In July 2023, we entered into a new agreement to extend the Horizon Enabler charter until December 2025, with further options to extend.
In September 2023, we acquired assets primarily consisting of five operable P&A systems to be used in our shallow water decommissioning operations in the Gulf of Mexico.
In November 2023, we extended the agreement for the HP 1 for one year until at least June 1, 2025.
Outlook
In 2024, despite a backdrop of a somewhat uncertain macro environment globally, we expect to experience another strong year of performance driven by increasing demand for our decommissioning services internationally and continued growth in the offshore renewables trenching market. The Gulf of Mexico shallow water decommissioning demands are expected to experience volatility as customers balance their spending between decommissioning obligations and production needs.
Backlog
Our backlog is represented by signed contracts. As of December 31, 2023, our consolidated backlog totaled $850 million, of which $700 million is expected to be performed in 2024. As of December 31, 2023, our various contracts with Shell globally, our contracts with Trident Energy and Petrobras in Brazil, our contracts with Repsol globally, and our agreement for the HP I in the Gulf of Mexico represented approximately 55% of our total backlog. As of December 31, 2022, our consolidated backlog totaled $847 million. Backlog is not necessarily a reliable indicator of revenues derived from our contracts as services are often added but may sometimes be 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 amounts reflected in backlog.
RESULTS OF OPERATIONS
Non-GAAP Financial Measures
A non-GAAP financial measure is generally defined by the SEC as a numerical measure of a company’s historical or future performance, financial position or cash flows that includes or excludes amounts from the most directly comparable measure under U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, our reported results prepared in accordance with GAAP. Users of this financial information should consider the types of events and transactions that are excluded from these measures.
We evaluate our operating performance and financial condition based on EBITDA, Adjusted EBITDA, Free Cash Flow and Net Debt. EBITDA, Adjusted EBITDA, Free Cash Flow and Net Debt are non-GAAP financial measures that are commonly used but are not recognized accounting terms under GAAP. We use EBITDA, Adjusted EBITDA, Free Cash Flow and Net Debt 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, Adjusted EBITDA, Free Cash Flow and Net Debt 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, Free Cash Flow and Net Debt differently from the way we do, which may limit their usefulness as comparative measures. EBITDA, Adjusted EBITDA, Free Cash Flow and Net Debt 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 data prepared in accordance with GAAP.
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We define EBITDA as earnings before income taxes, net interest expense, gains and losses on equity investments, net other income or expense, and depreciation and amortization expense. Non-cash impairment losses on goodwill and other long-lived assets are also added back if applicable. To arrive at our measure of Adjusted EBITDA, we exclude gains or losses on disposition of assets, acquisition and integration costs, gains or losses on extinguishment of long-term debt, the change in fair value of contingent consideration and the general provision (release) for current expected credit losses, if any. We define Free Cash Flow as cash flows from operating activities less capital expenditures, net of proceeds from asset sales and insurance recoveries (related to property and equipment), if any. Net Debt is calculated as long-term debt including current maturities of long-term debt less cash and cash equivalents and restricted cash. In the following reconciliations, we provide amounts as reflected in the consolidated financial statements unless otherwise noted.
The reconciliation of our net loss to EBITDA and Adjusted EBITDA is as follows (in thousands):
Year Ended December 31,
2023
2022
2021
Net loss
$
(10,838)
$
(87,784)
$
(61,684)
Adjustments:
Income tax provision (benefit)
18,352
12,603
(8,958)
Net interest expense
17,338
18,950
23,201
Other expense, net
3,590
23,330
1,490
Depreciation and amortization
164,116
142,686
141,514
Gain on equity investment
—
(8,262)
—
EBITDA
192,558
101,523
95,563
Adjustments:
(Gain) loss on disposition of assets, net
(367)
—
631
Acquisition and integration costs
540
2,664
—
Change in fair value of contingent consideration
42,246
16,054
—
General provision (release) for current expected credit losses
1,149
781
(54)
Loss on extinguishment of long-term debt
37,277
—
136
Adjusted EBITDA
$
273,403
$
121,022
$
96,276
The reconciliation of our cash flows from operating activities to Free Cash Flow is as follows (in thousands):
Year Ended December 31,
2023
2022
2021
Cash flows from operating activities
$
152,457
$
51,108
$
140,117
Less: Capital expenditures, net of proceeds from asset sales and insurance recoveries
(18,659)
(33,504)
(8,271)
Free Cash Flow
$
133,798
$
17,604
$
131,846
The reconciliation of our long-term debt to Net Debt is as follows (in thousands):
December 31,
2023
2022
Long-term debt including current maturities
$
361,722
$
264,075
Less: Cash and cash equivalents and restricted cash
(332,191)
(189,111)
Net Debt
$
29,531
$
74,964
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Comparison of Years Ended December 31, 2023 and 2022
We have four reportable business segments: Well Intervention, Robotics, Shallow Water Abandonment and Production Facilities. All material intercompany transactions between the segments have been eliminated in our consolidated financial statements, including our consolidated results of operations. The following table details various financial and operational highlights for the periods presented (dollars in thousands):
Year Ended December 31,
Increase/(Decrease)
2023
2022
Amount
Percent
Net revenues —
Well Intervention
$
732,761
$
524,241
$
208,520
40
%
Robotics
257,875
191,921
65,954
34
%
Shallow Water Abandonment
274,954
124,810
150,144
120
%
Production Facilities
87,885
82,315
5,570
7
%
Intercompany eliminations
(63,747)
(50,187)
(13,560)
$
1,289,728
$
873,100
$
416,628
48
%
Gross profit (loss) —
Well Intervention
$
47,164
$
(40,107)
$
87,271
218
%
Robotics
60,618
37,507
23,111
62
%
Shallow Water Abandonment
71,261
23,919
47,342
198
%
Production Facilities
23,494
30,666
(7,172)
(23)
%
Corporate, eliminations and other
(2,181)
(1,369)
(812)
$
200,356
$
50,616
$
149,740
296
%
Gross margin —
Well Intervention
6
%
(8)
%
Robotics
24
%
20
%
Shallow Water Abandonment
26
%
19
%
Production Facilities
27
%
37
%
Total company
16
%
6
%
Number of vessels, Robotics assets or Shallow Water Abandonment systems (1) / Utilization (2)
Well Intervention vessels
7 / 88
%
7 / 80
%
Robotics assets (3)
46 / 62
%
48 / 53
%
Chartered Robotics vessels
6 / 96
%
5 / 95
%
Shallow Water Abandonment vessels (4)
20 / 74
%
21 / 73
%
Shallow Water Abandonment systems (5)
26 / 70
%
21 / 62
%
(1) Represents the number of vessels, Robotics assets or Shallow Water Abandonment systems as of the end of the period, including spot vessels and those under term charters, and excluding acquired vessels prior to their in-service dates, vessels managed on behalf of third parties 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, Robotics assets or Shallow Water Abandonment systems generated revenues by the total number of calendar days in the applicable period. Utilization rates of chartered Robotics vessels in 2023 and 2022 included 310 and 420 spot vessel days, respectively, at near full utilization.
(3) Consists of ROVs, trenchers and the IROV boulder grab.
(4) Consists of liftboats, OSVs, DSVs, a heavy lift derrick barge and a crew boat.
(5) Consists of P&A and CT systems.
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Intercompany segment amounts are derived primarily from equipment and services provided to other business segments. Intercompany segment revenues are as follows (in thousands):
Year Ended December 31,
Increase/
2023
2022
(Decrease)
Well Intervention
$
28,396
$
16,545
$
11,851
Robotics
35,263
33,642
1,621
Shallow Water Abandonment
88
—
88
$
63,747
$
50,187
$
13,560
Net Revenues. Our consolidated net revenues increased by 48% in 2023 as compared to 2022, reflecting the addition of Shallow Water Abandonment segment in the third quarter 2022 and higher revenues from all of our segments.
Our Well Intervention revenues increased by 40% in 2023 as compared to 2022, primarily reflecting higher vessel utilization and rates in Brazil and the North Sea and higher rates in the Gulf of Mexico. Revenues in Brazil increased primarily due to both the Siem Helix 1 and the Siem Helix 2 working a full year on their long-term contracts with improved rates as compared to 2022. Revenues in the North Sea and Gulf of Mexico both benefitted from improved spot rates in 2023 as compared to 2022. Revenues on the Q7000 were also higher, despite the vessel incurring a higher number of transit and docking days in 2023 as compared to 2022, as the vessel’s operations in New Zealand were on an integrated project with higher project revenues and costs. The increase in revenues was offset in part by lower utilization in the Gulf of Mexico due to a higher number of regulatory docking days during 2023 as compared to 2022.
Our Robotics revenues increased by 34% in 2023 as compared to 2022, primarily reflecting higher utilization and rates on vessels, ROVs and trenchers. Chartered vessel days increased to 1,699 days during 2023 as compared to 1,401 days during 2022. Integrated vessel trenching days increased to 807 days in 2023 as compared to 483 days in 2022. ROV and trencher utilization increased to 62% in 2023 from 53% in 2022.
Our Shallow Water Abandonment revenues in 2023 reflect a full year of revenue generated by Helix Alliance with 74% utilization across vessels and 5,748 days, or 70%, of utilization across P&A systems and CT systems. Our Shallow Water Abandonment revenues in 2022 reflect six months of revenue generated by Helix Alliance since July 1, 2022 (Note 3) with 73% utilization across vessels and 2,324 days, or 62%, of utilization across P&A systems and CT systems.
Our Production Facilities revenues increased by 7% in 2023 as compared to 2022, primarily reflecting higher oil and gas production volumes, offset in part by lower oil and natural gas prices during 2023 as compared to 2022.
Gross Profit (Loss). Our consolidated 2023 gross profit increased by $149.7 million as compared to 2022, primarily reflecting increases in our Well Intervention, Robotics and Shallow Water Abandonment segments in 2023, offset in part by lower profitability in our Production Facilities segment.
Our Well Intervention gross profit was $47.2 million in 2023 as compared to a gross loss of $40.1 million in 2022, primarily reflecting higher revenues in 2023.
Our Robotics gross profit increased by $23.1 million in 2023 as compared to 2022, primarily reflecting higher revenues in 2023 due to increased activities.
Our Shallow Water Abandonment gross profit increased by $47.3 million in 2023 as compared to 2022, primarily reflecting full year of operating results from Helix Alliance in 2023 as compared to six months of operating results from Helix Alliance following its acquisition on July 1, 2022.
Our Production Facilities gross profit decreased by $7.2 million in 2023 as compared to 2022, primarily reflecting higher oil and gas production costs and well maintenance costs, offset in part by revenue increases during 2023.
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Acquisition and Integration Costs. Our acquisition and integration costs decreased by $2.1 million in 2023 as compared to 2022, reflecting lower spend during the later stages of the Alliance integration process.
Change in Fair Value of Contingent Consideration. The change in fair value of contingent consideration related to the Alliance acquisition reflects an increase in the value of the earn-out consideration expected to be paid in cash in April 2024 (Notes 3 and 19).
Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $94.4 million in 2023 as compared to $76.8 million in 2022, primarily reflecting higher employee incentive and share-based compensation costs and the addition of Helix Alliance.
Equity in Earnings of Investment. Equity in earnings of investment of $8.3 million in 2022 primarily reflects the gain on the sale of the “Independence Hub” platform (Note 2).
Net Interest Expense. Our net interest expense totaled $17.3 million in 2023 as compared to $19.0 million in 2022, primarily reflecting higher interest income on our invested cash reserves and the repayment of certain indebtedness, offset in part by interest expense on our $300 million Senior Notes due 2029 (the “2029 Notes”) during the fourth quarter 2023 (Note 7).
Loss on Extinguishment of Long-term Debt. The $37.3 million loss on extinguishment of long-term debt in 2023 was primarily associated with $38.6 million inducement charges incurred from the repurchase of $159.8 million principal amount of the 2026 Notes during the fourth quarter 2023 (Note 7), offset in part by changes in fair value of the associated 2026 Capped Calls until settlement (Note 9).
Other Expense, Net. Net other expense was $3.6 million in 2023, primarily reflecting losses from the devaluation of our Nigerian naira holdings and conversion of naira into U.S. dollars during 2023, offset in part by foreign currency gains due to the strengthening of the British pound in 2023. Net other expense was $23.3 million in 2022, primarily reflecting foreign currency losses due to the weakening of the British pound in 2022.
Income Tax Provision. Income tax provision was $18.4 million for 2023 as compared to $12.6 million for 2022. The effective tax rates for 2023 and 2022 were 244.2% and (16.8)%, respectively. These variances were primarily attributable to the earnings mix between our higher and lower tax rate jurisdictions, non-deductible losses on the extinguishment of long-term debt as well as losses for which no financial statement benefits have been recognized (Note 8).
Comparison of Years Ended December 31, 2022 and 2021
Various financial and operational highlights for the years ended December 31, 2022 and 2021 were previously presented in our 2022 Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition and Liquidity
The following table presents certain information useful in the analysis of our financial condition and liquidity (in thousands):
December 31,
2023
2022
Net working capital
$
249,223
$
162,634
Long-term debt (excluding current maturities)
313,430
225,875
Liquidity
431,471
284,729
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Net Working Capital
Net working capital is equal to current assets minus current liabilities and includes cash and cash equivalents and restricted cash, current maturities of long-term debt and current operating lease liabilities. Net working capital measures short-term liquidity and is important for predicting cash flow and debt requirements.
Long-Term Debt
Long-term debt in the table above is net of unamortized debt discount and debt issuance costs and excludes current maturities of $48.3 million and $38.2 million, respectively, at December 31, 2023 and 2022. For information relating to our long-term debt, see Note 7 to our consolidated financial statements included in Item 8 . Financial Statements and Supplementary Data of this Annual Report.
Liquidity
We define liquidity as cash and cash equivalents, excluding restricted cash, plus available capacity under our credit facility. Our liquidity at December 31, 2023 included $332.2 million of cash and cash equivalents and $99.3 million of available borrowing capacity under the ABL Facility (Note 7). In December 2023, we issued $300.0 million of the 2029 Notes with proceeds of approximately $291.1 million, net of debt discount and issuance costs. We used a portion of the proceeds, as well as 1.5 million shares of our common stock, to repurchase $159.8 million aggregate principal amount of the 2026 Notes for approximately $229.7 million, and we unwound a proportionate amount of the associated 2026 Capped Calls for approximately $15.6 million. In January 2024, we issued a redemption notice for the remaining $40.0 million aggregate principal amount of the 2026 Notes to be settled March 20, 2024. Investors are permitted to convert their notes, and we will settle all conversions and/or redemptions in cash at amounts that we expect will exceed the 2026 Notes’ current carrying values. Our liquidity at December 31, 2022 included $186.6 million of cash and cash equivalents and $98.1 million of available borrowing capacity under the ABL Facility and excluded $2.5 million of restricted cash. The increase in cash and cash equivalents, excluding the impact of our debt refinancing activities, was primarily attributable to strong operating cash flows during 2023.
Following the slowdown triggered by the COVID-19 pandemic and beginning 2022, we have seen an improvement in the markets we serve as evidenced by increases in our revenues and gross profit. We expect strong ongoing operating performance, increases in our cash position, high availability on the Amended ABL Facility and reductions in Net Debt (See “Results of Operations — Non-GAAP Financial Measures” for the definition of Net Debt). We believe that our cash on hand, internally generated cash flows and availability under the Amended ABL Facility will be sufficient to fund our operations and service our debt and other obligations over at least the next 12 months.
A period of weak industry activity may make it difficult to comply with the covenants and other restrictions in our debt agreements. Our failure to comply with the covenants and other restrictions could lead to an event of default. Decreases in our borrowing base may limit our ability to fully access the Amended ABL Facility. We currently do not anticipate borrowing under the Amended ABL Facility other than for the issuance of letters of credit.
In February 2023, we announced that our Board authorized a new share repurchase program under which we are authorized to repurchase up to $200 million issued and outstanding shares of our common stock. The 2023 Repurchase Program has no set expiration date. Repurchases under the 2023 Repurchase Program have been made through open market purchases in compliance with Rule 10b-18 under the Exchange Act, but may also be made through privately negotiated transactions or plans, instructions or contracts established under Rule 10b5-1 under the Exchange Act. The manner, timing and amount of any purchase will be determined by management at its discretion based on an evaluation of market conditions, stock price, liquidity and other factors. The 2023 Repurchase Program does not obligate us to acquire any particular amount of common stock and may be modified or superseded at any time at our discretion. Any repurchased shares are expected to be cancelled. During 2023, pursuant to the 2023 Repurchase Program we repurchased a total of 1,584,045 shares of our common stock for approximately $12.0 million.
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Cash Flows
The following table provides summary data from our consolidated statements of cash flows (in thousands):
Year Ended December 31,
2023
2022
2021
Cash provided by (used in):
Operating activities
$
152,457
$
51,108
$
140,117
Investing activities
(18,659)
(138,289)
(8,271)
Financing activities
25,109
(44,844)
(95,997)
Operating Activities
The increase in our operating cash flows for 2023 as compared to 2022 primarily reflects higher earnings, offset in part by higher regulatory recertification costs for our vessels and systems and higher working capital outflows. Regulatory recertification spend on our vessels and systems amounted to $62.5 million and $35.1 million, respectively, during the comparable year over year periods.
Investing Activities
Cash flows used in investing activities for 2023 decreased as compared to 2022. The decrease is primarily due to the $112.6 million in net cash paid to acquire Alliance (Note 3) during 2022 as well as lower capital expenditures during 2023.
Financing Activities
Net cash inflows from financing activities for 2023 primarily reflect proceeds from the issuance of $300.0 million 2029 Notes and the proportionate settlement of the 2026 Capped Calls, offset in part by cash outflows of $230.7 million related to the 2026 Notes, $30.4 million related to Convertible Senior Notes due 2023, the principal repayment of $8.3 million related to the MARAD Debt and $12.0 million in repurchases of our common stock under the 2023 Repurchase Program. Net cash outflows from financing activities for 2022 primarily reflect the repayment of $7.9 million related to the MARAD Debt and $35.0 million related to Convertible Senior Notes due 2022.
Material Cash Requirements
Our material cash requirements include our obligations to repay our long-term debt, including additional funds needed to settle the conversion and/or redemption of the remaining 2026 Notes, satisfy other contractual cash commitments and fund other obligations, including the payment of the earn-out consideration to the seller in the Alliance transaction.
Long-term debt and other contractual commitments
The following table summarizes (in thousands) the principal amount of our long-term debt and related debt service costs as well as other contractual commitments, which include commitments for property and equipment, operating lease obligations and Alliance earn-out consideration, as of December 31, 2023 and the portions of those amounts that are short-term (due in less than one year) and long-term (due in one year or greater) based on their stated maturities. Our property and equipment commitments include contractually committed amounts to purchase and service certain property and equipment (inclusive of commitments related to regulatory recertification and dry dock as discussed below) but do not include expected capital spending that is not contractually committed as of December 31, 2023.
We acquired Helix Alliance in July 2022 for total consideration that included cash plus an earn-out to the extent Helix Alliance’s financial results exceed certain thresholds in 2022 and 2023 (Note 3). During the fourth quarter 2023, we finalized the calculation and agreed with the seller in the Alliance transaction on an $85.0 million earn-out expected to be paid in cash in April 2024. Accordingly, we reported $85.0 million of Alliance earn-out consideration in “Accrued liabilities” in the consolidated balance sheet as of December 31, 2023 (Note 4).
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The 2026 Notes have certain early conversion and redemption features that could affect the timing and amount of any cash requirements. On December 29, 2023, we announced that the 2026 Notes are convertible at the option of the holders from January 1, 2024 through March 31, 2024 as a result of the closing price of our common stock exceeding 130% of the conversion price for at least 20 days of the last 30 consecutive trading days in the quarter ended December 31, 2023. The 2026 Notes are also redeemable by us when the closing price of our common stock exceeds 130% of the conversion price for at least 20 days of the last 30 consecutive trading days in a quarter.
On January 16, 2024, we issued a notice for the redemption of all remaining 2026 Notes on March 20, 2024 to be settled in cash (Note 7). Holders can convert their 2026 Notes prior to the redemption date and any conversion thereof will be settled in cash. The ultimate settlement amount of the 2026 Notes will depend on various factors, including the number of notes converted and the volume weighted average trading price of our common stock during the measurement period preceding their settlement. The fair value of the 2026 Notes as of December 31, 2023 was approximately $64.1 million (Note 19).
Total
Short-Term
Long-Term
MARAD debt
$
32,580
$
8,749
$
23,831
2026 Notes (1)
40,199
40,199
—
2029 Notes
300,000
—
300,000
Interest related to debt
161,181
33,935
127,246
Property and equipment
5,712
5,712
—
Operating leases (2)
322,507
116,542
205,965
Earn-out consideration
85,000
85,000
—
Total cash obligations
$
947,179
$
290,137
$
657,042
(1) Represents principal amount of the remaining 2026 Notes which are subject to conversion and/or redemption in 2024 and thus classified as a short-term commitment.
(2) Operating leases include vessel charters and facility and equipment leases. At December 31, 2023, our commitment related to long-term vessel charters totaled approximately $306.4 million, of which $119.0 million was related to the non-lease (services) components that are not included in operating lease liabilities in the consolidated balance sheet as of December 31, 2023 . Subsequently, operating lease commitments increased by $559.6 million due to vessel charter extensions for the Shelia Bordelon in January 2024 and the Siem Helix 1 and the Siem Helix 2 in February 2024.
Other material cash requirements
Other material cash requirements include the following:
Decommissioning. We have decommissioning obligations associated with our oil and gas properties (Note 15). Those obligations, which are presented on a discounted basis on the consolidated balance sheets, approximate $80.9 million (undiscounted) for Thunder Hawk Field oil and gas properties and $37.1 million (undiscounted) for Droshky oil and gas properties as of December 31, 2023, none of which is expected to be paid during the next 12 months. We are entitled to receive $30.0 million (undiscounted) from Marathon Oil as certain decommissioning obligations associated with Droshky oil and gas properties are fulfilled.
Regulatory certification and dry dock. Our vessels and systems are subject to certain regulatory recertification requirements that must be satisfied in order for the vessels and systems to operate. Recertification may require dry dock and other compliance costs on a periodic basis, usually every 30 months. Although the amount and timing of these costs may vary and are dependent on the timing of the certification renewal period, they generally range between $3.0 million to $15.0 million per Well Intervention vessel and $0.5 million to $5.0 million per system or Helix Alliance asset.
We expect the sources of funds to satisfy our material cash requirements to primarily come from our ongoing operations and existing cash on hand, but may also come from availability under the Amended ABL Facility and access to capital markets.
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our discussion and analysis of our financial condition and results of operations, as reflected in the consolidated financial statements and related footnotes included in Item 8 . Financial Statements and Supplementary Data of this Annual Report, are prepared in conformity with GAAP. As such, we are required to make certain estimates, judgments and assumptions that have had or are reasonably likely to have a material impact on our financial condition or results of operations. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. These estimates involve a significant level of estimation uncertainty and may change over time as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We believe that the most critical accounting estimates are described below. See Note 2 to our consolidated financial statements for a detailed discussion on the application of our accounting policies.
Business Acquisition
We account for business acquisitions under the acquisition method of accounting. We determine the purchase price to be the cash and other assets transferred to the seller and the value of any liabilities, such as contingent consideration or other seller financing incurred. The estimate of any contingent consideration and its fair value on the acquisition date and subsequent reporting periods is a significant estimate.
We allocate the purchase price of businesses we acquire to identifiable assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. Any excess purchase price over the fair value of the net identifiable assets acquired is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed. These estimates and assumptions may include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted average cost of capital, and the estimated useful lives. Changes in these assumptions could affect the carrying value of these assets, the amount of future depreciation or amortization and any possible impairment charges.
We use available and relevant information to estimate fair values (including quoted market prices when available) and the nominal value of acquired assets and assumed liabilities as well as deploy various valuation techniques such as discounted cash flows. We may engage third party specialists to assist in the fair value determination of acquired assets and liabilities, including identifiable long-lived assets and identifiable intangible assets, as well as any contingent earn-out consideration to be paid to the seller if certain future conditions are met. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, the estimated fair value of contingent earn-out considerations, as well as the remaining useful lives of these assets, could materially impact our financial condition or results of operations. See Note 3 to our consolidated financial statements for further discussion on our acquisition of Alliance during 2022.
Property and Equipment
We review our property and equipment for impairment indicators at least quarterly or whenever changes in facts and circumstances indicate that the carrying amount of the asset or asset group may not be recoverable. We evaluate impairment indicators considering the nature of the asset or asset group, the future economic benefits of the asset or asset group, historical and estimated future profitability measures, and other external market conditions or factors that may be present. We often estimate future earnings and cash flows of our assets to corroborate our determination of whether impairment indicators exist. If impairment indicators suggest that the carrying amount of an asset may not be recoverable, we determine whether an impairment has occurred by estimating undiscounted cash flows of the asset and comparing those cash flows to the asset’s carrying value. If the undiscounted cash flows are less than the asset’s carrying value (i.e., the asset is unrecoverable), impairment, if any, is recognized for the difference between the asset’s carrying value and its estimated fair value. The expected future cash flows used for the assessment of recoverability are based on judgmental assessments of operating costs, project margins and capital project spending, considering information available at the date of review. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or based on a multiple of operating cash flows validated with historical market transactions of similar assets where possible.
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The review of property and equipment for impairment indicators, the projection of future cash flows of property and equipment, and the estimated fair value of any property and equipment that may be deemed unrecoverable involve significant judgment and estimation by our management. Changes to those judgments and estimations could require us to recognize impairment charges in the future.
New Accounting Standards
For discussion on the potential impact of new accounting standards issued but not yet adopted, see Note 2 to our consolidated financial statements.