| HELIX ENERGY SOLUTIONS GROUP INC Item 1A Risk Factors |
| Shareholders should carefully consider the following risk factors in addition to the other information contained herein |
| You should be aware that the occurrence of the events described in these risk factors and elsewhere in this Annual Report could have a material adverse effect on our business, results of operations and financial position |
| Our Contracting Services business is adversely affected by low oil and gas prices and by the cyclicality of the oil and gas industry |
| Our Contracting Services business is substantially dependent upon the condition of the oil and gas industry and, in particular, the willingness of oil and gas companies to make capital expenditures for offshore exploration, drilling and production operations |
| The level of capital expenditures generally depends on the prevailing view of future oil and gas prices, which are influenced by numerous factors affecting the supply and demand for oil and gas, including, but not limited to: • Worldwide economic activity, • Economic and political conditions in the Middle East and other oil-producing regions, • Coordination by the Organization of Petroleum Exporting Countries, or OPEC, • The cost of exploring for and producing oil and gas, • The sale and expiration dates of offshore leases in the United States and overseas, • The discovery rate of new oil and gas reserves in offshore areas, • Technological advances, • Interest rates and the cost of capital, • Environmental regulations, and • Tax policies |
| The level of offshore construction activity improved somewhat in 2004 and continued the trend in 2005 following higher commodity prices in 2003 through 2005 and significant damage sustained to the Gulf of Mexico infrastructure in Hurricanes Katrina and Rita |
| We cannot assure you activity levels will remain the same or increase |
| A sustained period of low drilling and production activity or the return of lower commodity prices would likely have a material adverse effect on our financial position, cash flows and results of operations |
| The operation of marine vessels is risky, and we do not have insurance coverage for all risks |
| Marine construction involves a high degree of operational risk |
| Hazards, such as vessels sinking, grounding, colliding and sustaining damage from severe weather conditions, are inherent in marine operations |
| These hazards can cause personal injury or loss of life, severe damage to and destruction of property and equipment, pollution or environmental damage and suspension of operations |
| Damage arising from such occurrences may result in lawsuits asserting large claims |
| We maintain such insurance protection as we deem prudent, including Jones Act employee coverage, which is the maritime equivalent of workers’ compensation, and hull insurance on our vessels |
| We cannot assure you that any such insurance will be sufficient or effective under all circumstances or against all hazards to which we may be subject |
| A successful claim for which we are not fully insured could have a material adverse effect on us |
| Moreover, we cannot assure you that we will be able to maintain adequate insurance in the future at rates that we consider reasonable |
| As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased substantially and could escalate further |
| In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage |
| For example, insurance carriers are now requiring broad exclusions for losses due to war risk and terrorist acts and limitations for wind storm damages |
| As construction activity expands into deeper water in the Gulf and other Deepwater basins of the world, a greater percentage of our revenues may be from Deepwater construction projects that are larger and more complex, and thus riskier, than shallow water projects |
| As a result, our revenues and profits are increasingly dependent on our 19 _________________________________________________________________ [79]Table of Contents larger vessels |
| The current insurance on our vessels, in some cases, is in amounts approximating book value, which could be less than replacement value |
| In the event of property loss due to a catastrophic marine disaster, mechanical failure or collision, insurance may not cover a substantial loss of revenues, increased costs and other liabilities, and could have a material adverse effect on our operating performance if we were to lose any of our large vessels |
| Our contracting business typically declines in winter, and bad weather in the Gulf or North Sea can adversely affect our operations |
| Marine operations conducted in the Gulf and North Sea are seasonal and depend, in part, on weather conditions |
| Historically, we have enjoyed our highest vessel utilization rates during the summer and fall when weather conditions are favorable for offshore exploration, development and construction activities |
| We typically have experienced our lowest utilization rates in the first quarter |
| As is common in the industry, we typically bear the risk of delays caused by some, but not all, adverse weather conditions |
| Accordingly, our results in any one quarter are not necessarily indicative of annual results or continuing trends |
| If we bid too low on a turnkey contract, we suffer consequences |
| A significant amount of our projects are performed on a qualified turnkey basis where described work is delivered for a fixed price and extra work, which is subject to customer approval, is billed separately |
| The revenue, cost and gross profit realized on a turnkey contract can vary from the estimated amount because of changes in offshore job conditions, variations in labor and equipment productivity from the original estimates, and the performance of third parties such as equipment suppliers |
| These variations and risks inherent in the marine construction industry may result in our experiencing reduced profitability or losses on projects |
| Exploration and production of oil and natural gas is a high-risk activity and subjects us to a variety of factors that we cannot control |
| Our Oil & Gas Production business is subject to all of the risks and uncertainties normally associated with the exploration for and development and production of oil and natural gas, including uncertainties as to the presence, size and recoverability of hydrocarbons |
| We may not encounter commercially productive oil and natural gas reservoirs |
| We may not recover all or any portion of our investment in new wells |
| The presence of unanticipated pressures or irregularities in formations, miscalculations or accidents may cause our drilling activities to be unsuccessful and result in a total loss of our investment |
| In addition, we often are uncertain as to the future cost or timing of drilling, completing and operating wells |
| Projecting future natural gas and oil production is imprecise |
| Producing oil and gas reservoirs eventually have declining production rates |
| Projections of production rates rely on certain assumptions regarding historical production patterns in the area or formation tests for a particular producing horizon |
| Actual production rates could differ materially from such projections |
| Production rates depend on a number of additional factors, including commodity prices, market demand and the political, economic and regulatory climate |
| Further, our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including: • unexpected drilling conditions; • title problems; • pressure or irregularities in formations; • equipment failures or accidents; • adverse weather conditions; and • compliance with environmental and other governmental requirements, which may increase our costs or restrict our activities |
| 20 _________________________________________________________________ [80]Table of Contents Estimates of our oil and gas reserves, future cash flows and abandonment costs may be significantly incorrect |
| This Annual Report contains estimates of our proved oil and gas reserves and the estimated future net cash flows there from based upon reports for the year ended December 31, 2004 and 2005, audited by our independent petroleum engineers |
| These reports rely upon various assumptions, including assumptions required by the Securities and Exchange Commission, as to oil and gas prices, drilling and operating expenses, capital expenditures, abandonment costs, taxes and availability of funds |
| The process of estimating oil and gas reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir |
| As a result, these estimates are inherently imprecise |
| Actual future production, cash flows, development expenditures, operating and abandonment expenses and quantities of recoverable oil and gas reserves may vary substantially from those estimated in these reports |
| Any significant variance in these assumptions could materially affect the estimated quantity and value of our proved reserves |
| You should not assume that the present value of future net cash flows from our proved reserves referred to in this Annual Report is the current market value of our estimated oil and gas reserves |
| In accordance with Securities and Exchange Commission requirements, we base the estimated discounted future net cash flows from our proved reserves on prices and costs on the date of the estimate |
| Actual future prices and costs may differ materially from those used in the net present value estimate |
| In addition, if costs of abandonment are materially greater than our estimates, they could have an adverse effect on financial position, cash flows and results of operations |
| Our actual development results are likely to differ from our estimates of our proved reserves |
| We may experience production that is less than estimated and development costs that are greater than estimated in our reserve reports |
| Such differences may be material |
| As a result of the large property acquisitions made in 2005 (Murphy Shelf package and five Deepwater non-producing fields), 55prca of our proven reserves as of December 31, 2005 are PUDs |
| Estimates of our oil and natural gas reserves and the costs associated with developing these reserves may not be accurate |
| Development of our reserves may not occur as scheduled and the actual results may not be as estimated |
| Development activity may result in downward adjustments in reserves or higher than estimated costs |
| Reserve replacement may not offset depletion |
| We replace reserves through acquisitions, exploration and exploitation of current properties |
| If we are unable to acquire additional properties or if we are unable to find additional reserves through exploration or exploitation of our properties, our future cash flows from oil and gas operations could decrease |
| Our oil and gas operations involve significant risks, and we do not have insurance coverage for all risks |
| Our oil and gas operations are subject to risks incident to the operation of oil and gas wells, including, but not limited to, uncontrollable flows of oil, gas, brine or well fluids into the environment, blowouts, cratering, mechanical difficulties, fires, explosions, pollution and other risks, any of which could result in substantial losses to us |
| We maintain insurance against some, but not all, of the risks described above |
| Drilling for oil and gas involves numerous risks, including the risk that the Company will not encounter commercially productive oil or gas reservoirs |
| If certain exploration efforts are unsuccessful in establishing proved reserves and exploration activities cease, the amounts accumulated as unproved property costs would be charged against earnings as impairments |
| The Remington merger is subject to certain conditions to closing that, if not satisfied or waived, will result in the merger not being completed |
| Completion of the proposed merger of Remington Oil and Gas Corporation into a wholly owned subsidiary of Helix (“Merger Sub”) is conditioned upon the receipt of (i) the approval by Remington’s stockholders of the merger agreement and the transactions contemplated thereby and (ii) all material governmental authorizations, consents, orders and approvals, including the expiration or termination of the applicable waiting periods, and any extension of the waiting periods, under the HSR Act |
| Helix and Remington are working to obtain the required regulatory 21 _________________________________________________________________ [81]Table of Contents approvals and consents |
| However, although we expect to receive the required regulatory approvals, we can give no assurance as to when or whether these approvals and consents will be obtained, or the terms and conditions that may be imposed |
| Further, under the terms of the merger agreement, neither Helix, Merger Sub nor Remington, or any of their respective subsidiaries or affiliates, will be required to sell, license, dispose of, hold separate or to operate in any specified manner, any assets of businesses of Helix, Merger Sub or Remington in order to obtain any required regulatory approvals |
| Therefore, any conditions or divestiture requirements may delay completion of the merger, may reduce the anticipated benefits of the merger or may cause the merger not to be completed |
| In limited circumstances, if either party fails to close the transaction, Remington must pay Helix a dlra45 million breakup fee and reimburse up to dlra2 million of expenses related to the transaction |
| We may not be able to compete successfully against current and future competitors |
| The businesses in which we operate are highly competitive |
| Several of our competitors are substantially larger and have greater financial and other resources than we have |
| If other companies relocate or acquire vessels for operations in the Gulf or the North Sea, levels of competition may increase and our business could be adversely affected |
| The loss of the services of one or more of our key employees, or our failure to attract and retain other highly qualified personnel in the future, could disrupt our operations and adversely affect our financial results |
| Our industry has lost a significant number of experienced professionals over the years due to, among other reasons, the volatility in commodity prices |
| Our continued success depends on the active participation of our key employees |
| The loss of our key people could adversely affect our operations |
| We believe that our success and continued growth are also dependent upon our ability to attract and retain skilled personnel |
| We believe that our wage rates are competitive; however, unionization or a significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in the wage rates we pay, or both |
| If either of these events occurs for any significant period of time, our revenues and profitability could be diminished and our growth potential could be impaired |
| If we fail to effectively manage our growth, our results of operations could be harmed |
| We have a history of growing through acquisitions of large assets and acquisitions of companies |
| We must plan and manage our acquisitions effectively to achieve revenue growth and maintain profitability in our evolving market |
| If we fail to effectively manage current and future acquisitions, our results of operations could be adversely affected |
| Our growth has placed, and is expected to continue to place, significant demands on our personnel, management and other resources |
| We must continue to improve our operational, financial, management and legal/compliance information systems to keep pace with the growth of our business |
| We may need to change the manner in which we conduct our business in response to changes in government regulations |
| Our subsea construction, intervention, inspection, maintenance and decommissioning operations and our oil and gas production from offshore properties, including decommissioning of such properties, are subject to and affected by various types of government regulation, including numerous federal, state and local environmental protection laws and regulations |
| These laws and regulations are becoming increasingly complex, stringent and expensive to comply with, and significant fines and penalties may be imposed for noncompliance |
| We cannot assure you that continued compliance with existing or future laws or regulations will not adversely affect our operations |
| Certain provisions of our corporate documents and Minnesota law may discourage a third party from making a takeover proposal |
| In addition to the 55cmam000 shares of preferred stock issued to Fletcher International, Ltd |
| under the First Amended and Restated Agreement dated January 17, 2003, but effective as of December 31, 2002, by and between Helix and Fletcher International, Ltd, our board of directors has the authority, without any action by our 22 _________________________________________________________________ [82]Table of Contents shareholders, to fix the rights and preferences on up to 4cmam945cmam000 shares of undesignated preferred stock, including dividend, liquidation and voting rights |
| In addition, our by-laws divide the board of directors into three classes |
| We are also subject to certain anti-takeover provisions of the Minnesota Business Corporation Act |
| We also have employment contracts with all of our senior officers that require cash payments in the event of a “change of control |
| ” Any or all of the provisions or factors described above may have the effect of discouraging a takeover proposal or tender offer not approved by management and the board of directors and could result in shareholders who may wish to participate in such a proposal or tender offer receiving less for their shares than otherwise might be available in the event of a takeover attempt |
| Our operations outside of the United States subject us to additional risks |
| Our operations outside of the US are subject to risks inherent in foreign operations, including, without limitation: • the loss of revenue, property and equipment from hazards such as expropriation, nationalization, war, insurrection, acts of terrorism and other political risks, • increases in taxes and governmental royalties, • changes in laws and regulations affecting our operations, • renegotiation or abrogation of contracts with governmental entities, • changes in laws and policies governing operations of foreign-based companies, • currency restrictions and exchange rate fluctuations, • world economic cycles, • restrictions or quotas on production and commodity sales, • limited market access, and • other uncertainties arising out of foreign government sovereignty over our international operations |
| In addition, laws and policies of the US affecting foreign trade and taxation may also adversely affect our international operations |
| Our ability to market oil and natural gas discovered or produced in any future foreign operations, and the price we could obtain for such production, depends on many factors beyond our control, including: • ready markets for oil and natural gas, • the proximity and capacity of pipelines and other transportation facilities, • fluctuating demand for crude oil and natural gas, • the availability and cost of competing fuels, and • the effects of foreign governmental regulation of oil and gas production and sales |
| Pipeline and processing facilities do not exist in certain areas of exploration and, therefore, any actual sales of our production could be delayed for extended periods of time until such facilities are constructed |