Helix Energy Solutions Group, Inc.

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Helix Energy Solutions Group, Inc.

400 N. Sam Houston Parkway East
Suite 400
Houston, Texas 77060-3500
U.S.A.
Telephone: (281) 618-0400
Fax: (281) 618-0501
Web site: http://www.helixesg.com

Public Company
Founded: 1965 as California Divers, Inc.
Employees: 1,800
Sales: $799.5 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: HELX
NAIC: 213112 Support Activities for Oil and Gas Operations

Helix Energy Solutions Group, Inc., is a Houston-based marine energy services company that also is involved in oil and gas production. Although the company mostly operates in the Gulf of Mexico, it also maintains offices in Europe and Southeast Asia. Helix, formerly known as Cal Dive International, has its roots in underwater construction and repair work for offshore drilling units. It provides a host of marine contracting services, including deepwater work, as deep as 10,000 feet below the surface. Using a fleet of 33 vessels, 29 remotely operated vehicles, and trencher systems, Helix helps in construction, supports drilling and well completion, helps companies spur well production, and assists in the decommissioning of deepwater projects. The company also is involved in oil and gas production through subsidiary Energy Resource Technology, Inc., which leases mature properties in the Gulf of Mexico and uses Helix's vessels and expertise to squeeze out remaining, hard-to-reach reserves of oil and gas. This combination of contracting and production keep the assets of Helix utilized as much as possible, while providing a measure of diversity. During cycles of high demand, vessels are contracted out, and during slack periods the fleet turns its attention to company production projects. Helix is a public company listed on the NASDAQ.

POST-WORLD WAR II ROOTS

Helix was founded in southern California, very much a part of the convergence between offshore oil production and the ragtag diving industry. After World War II offshore oil production emerged in the waters of southern California around Santa Barbara, at first from piers and gradually moving away from the shore. Wells were drilled from man-made islands, then barges, and finally from jack-up rigs. In the late 1950s, as production companies moved to exploit oilfields in deeper water using floating barges (the shore quickly dropped off to 250 feet below the surface), they needed divers to replace broken or worn-out drill bits. In northern California a diving industry, started by Japanese divers, had already been established to gather abalone, a gourmet mollusk. From the ranks of abalone divers came the founders of Cal Dive: Lad Handelman, along with his brother Gene, Bob Ratcliffe, and Kevin Lengyel. At first, they were on the outside looking in with envy at a close-knit group of Santa Barbara divers, Associate Divers, who in the late 1950s controlled all drilling work below 200 feet. Unionized, they were able to make as much as $100,000 a year, an amount that proved tempting to men scrambling to make a living in the dangerous world of abalone diving.

Lad Handelman's first venture was General Offshore Divers Inc., which made its mark by pioneering mixed gas diving. Commercial diving to that point relied on tanks of regular air, which only allowed divers to remain in deep water for short periods of time due to the effects of increased air pressure and nitrogen narcosis. General Offshore refined the U.S. Navy's concept of mixing oxygen and helium to develop a new oxy-helium mix that permitted extended time on the bottom while allowing divers to remain clearheaded. As a result, a project that might require 40 dives could be completed in just ten, an advantage that established General Offshore as a player to be reckoned with in the California diving industry. In the meantime, the top Associate divers struck out on their own, forming more diving businesses, and other companies also were formed to take advantage of the oil companies' need for divers.

In the early 1960s many of the diving companies were snapped up by large corporations. General Offshore was acquired in 1964 by Union Carbide and renamed Ocean Systems. Lad Handelman and his three comrades proved too individualistic for corporate ownership and soon quit and returned to the abalone patch. The money to be made in offshore oil lured them back, however, and in 1965 the four men chipped in $5,000 apiece to form California Divers, Inc. Handelman served as president and salesman but more than a year would pass before the ragtag company won its first contract from Humble Oil. Prior to that an opportunity arose in Canada, leading to Handelman forming Can Dive with a construction diver in Vancouver.

Cal Dive was getting its share of work in California in the late 1960s when the state's oil industry was rocked by a much-publicized oil spill that led in 1969 to a halt in drilling activities. Cal Dive's existence was in jeopardy and it entertained an acquisition offer from a large company, Santa Fe International, whose resources would allow Cal Dive to compete in other markets around the world. Fearful of revisiting their experience with Union Carbide, Handelman and his partners elected instead to raise venture capital and combine Cal Dive and Can Dive into a new company called Oceaneering International.

Oceaneering became the dominant force in its field in 1971 when it acquired Divcon, the global leader in diving activities at the time and five times larger than Oceaneering. Divcon had been losing money and its corporate parent, Intentional Utilities Inc., was looking to divest the subsidiary. Oceaneering beat out the next largest diving company, Comex, to acquire Divcon, a classic case of the minnow swallowing the whale, and became the industry giant.

FORMATION OF CAL DIVE INTERNATIONAL IN 1980

While Oceaneering was operating on a world stage, the Cal Dive unit switched its focus from California's shuttered offshore oilfields to Houston, Texas, where it could work in the Gulf of Mexico, the offshore fields of which were experiencing a boom period. Several years later Cal Dive again broke free from corporate ownership. In the late 1970s there was another major oil price collapse, leading the venture capitalists that controlled Oceaneering to attempt to sell the business, a move that Handelman and his associates very much opposed. As a result, he took the Cal Dive unit independent, in 1980 forming Cal Dive International, Inc., an oil services contracting company that specialized in underwater installations, repair, and maintenance services. In addition to its Gulf of Mexico operations, Cal Dive maintained offices on the West Coast as well as Singapore.

COMPANY PERSPECTIVES

From its infancy as strictly a diving business, our company has grown into a unique, worldwide integrated marine contractor and operator of offshore oil and gas properties and production facilities.

With Handelman serving as chief executive and chairman, Cal Dive was generating annual revenues in the $10 million range, but it lacked the financial resources to grow and in 1983 the company was purchased for $6.9 million by Diversified Energies, Inc. (DEI), a Minneapolis-based utility company that in the early 1980s became involved in oil and gas exploration joint ventures and decided to enter the services field. With DEI's backing, Cal Dive branched out beyond human divers to include saturation diving ships. In 1983 the company designed and converted its first vessel, named the Cal Diver I, put into service in the Gulf of Mexico in 1984. Two years later the company began offering turnkey contracting in the Gulf, a fixed price to provide customers with a range of subsea construction work. By this time, however, the oil and gas industry was in the throes of a major slump, one that would put a host of companies out of business. To make matters worse for Cal Dive, Handelman broke his neck in 1985 while snow skiing. Although he would continue to head Cal Dive until 1990, his attention was turning to other endeavors. In Santa Barbara he founded a support organization for people left in wheelchairs following spinal injuries. After he retired from Cal Dive Handelman moved back to Santa Barbara where he cofounded the Marine Mammal Consulting Group to help offshore industries comply with environmental regulations.

In the mid-1980s Cal Dive was forced to retrench, closing its West Coast and Singapore offices, and cutting headcount in half throughout the company. Cal Dive continued to lose money until the beginning of 1989. It would go independent once again, as its new management team, led by Gerald G. Reuhl, bought Cal Dive in 1990 with the financial backing of Connecticut investment banking firm First Reserve Corp. Reuhl joined the company as a diver in 1975 and when Cal Dive broke away from Oceaneering in 1980, he held a series of management positions with both the domestic and international divisions. In 1986 he was put in charge of the Domestic Diving Division, and two years later replaced Handelman as CEO. He became chairman and CEO, and a 19 percent owner, of Cal Dive. His chief lieutenant and chief operating officer was Owen E. Kratz, who had worked as a diver in the North Sea and as a supervisor for a number of international diving companies, and for a spell ran his own marine construction business before joining Cal Dive in 1984.

On its own once again, Cal Dive in the early 1990s was mostly involved in intervention work, making sure well bores were kept free of debris, and as an abandonment contractor, helping companies to shut down offshore wells by capping them and dismantling the rigs. "During this time, we started noticing that we were shutting-in a lot of reserves," Kratz told Offshore in a 2006 interview. Recognizing an opportunity, in 1992 Cal Dive formed Energy Resource Technology to gain interest in mature shallow-water fields. "Through this new venture," Kratz explained, "we used our inherent abandonment liability as currency to acquire our first field." This was the start of the present-day Helix business model, using the company's fleet in the open market during high-peak periods of demand and during down cycles using these assets on the company's own properties. This approach mitigated some of the industry's cyclicality, evened out earnings, and, in short, hedged risk.

As developers moved to deeper waters in the Gulf, Cal Dive followed suit in 1995 by acquiring its first dynamic positioning (DP) vessel, the Witch Queen, which was permanently deployed in the Gulf. This was followed in 1996 by the acquisition of the DP semi-submersible, the Uncle John, and the Balmoral Sea, DP diving support vessel that Cal Dive had been leasing for the past two years. Rather than using anchors, these vessels employed computer-controlled thrusters to maintain their position.

PUBLIC OFFERING IN 1997

Cal Dive was enjoying strong growth and to maintain its momentum the company filed for an initial public offering (IPO) of stock to raise money to pay down debt and expand the services it offered. Underwriting the offering were Schroder Wertheim & Co., Raymond James & Associates, and Simmons & Co. International (headed by Matt Simmons, responsible for raising the money for Handelman to make Oceaneering a reality in 1969). The IPO was completed in July 1997, allowing First Reserve to cash in on some of its investment while netting $39.4 million for Cal Dive. Some of that money was put to use acquiring more deepwater vessels and allowing Energy Resource Technology to acquire additional interest in offshore blocks in the Gulf of Mexico. The company also forged alliances with other offshore service and equipment providers to flesh out its ability to serve customers throughout the life of a field.

Three months prior to the IPO, Kratz succeeded Reuhl as CEO, and in May 1998 he became chairman as well. Kratz took over a company that was enjoying strong growth. Revenues increased from $37.5 million in 1995 to $109.4 million in 1997. During that same period natural and oil production revenues grew from $4.8 million to $16.5 million, and net income jumped from $2.7 million in 1995 to $14.5 million in 1997.

KEY DATES

1965:: The company is founded as California Divers, Inc.
1969:: Cal Dive is merged with Can Dive to form Oceaneering International.
1980:: The company breaks away from Oceaneering as Cal Dive International.
1983:: Diversified Energies, Inc. acquires the company.
1990:: Management leads a buyout effort.
1992:: Energy Resource Technology is formed as a production arm.
1997:: Cal Dive is taken public.
2006:: The name is changed to Helix Energy Solutions Group.

Although Cal Dive was able in 1998 to grow revenues to $151.9 million and net income to $24.1 million, by the end of the year it had to contend with another recession in the oil and gas industry. Despite challenging conditions, Cal Dive once again delivered record revenues, $160.1 million, in 1999, although net income fell off to $16.9 million due in large measure to competitive market conditions brought on by the industry slump. The company's business model, combining contracting with development, was now paying dividends. In 2000, as commodity prices rebounded but the demand for contracting services had not yet followed, Cal Dive was able to focus more attention on its production business to drive revenues to more than $181 million and net income to $23.3 million. Contracting competitors, on the other hand, reacted to the situation by cutting their rates to ensure their vessels were in use, and all of them posted losses for the year. Cal Dive's flexibility also helped it to negotiate 2001, a year that began with high commodity prices and every available rig deployed in the Gulf of Mexico but ended with plummeting gas prices and a third of the rigs suddenly out of service. For the year, Cal Dive cracked the $200 million mark in revenues, posting $227.1 million, as well as increasing net income to $28.9 million.

Cal Dive added to its capabilities in 2002 by launching the Q4000, the world's first vessel capable of performing intervention and construction work in water as deep as 10,000 feet. It was part of an aggressive capital spending program begun three years earlier that invested $450 million in deepwater assets and another $300 million to add oil and gas properties. The company also grew externally during this period. In 2001 it spent $11.5 million to add the assets of Professional Divers of New Orleans, Inc., which included three utility vessels. Then, in January 2002, Cal Dive bought an 85 percent stake in Canyon Offshore, Inc. for $52.8 million in cash, plus $4.3 million in stock and the assumption of $5 million in debt.

Houston-based Canyon owned 18 remotely operated vehicles used to work on offshore construction projects in depths too great for divers. It also operated another six ROVs owned by other companies. Given that Cal Dive had only three ROVs, two of which worked with the Uncle John and Q4000, the Canyon assets were a great addition to Cal Dive as it made an increasing commitment to deepwater operations. The two companies had been working together since 1997 when Cal Dive became Canyon's first customer. In July 2002, Cal Dive completed another important acquisition, paying $68.6 million for the Subsea Well Operations Business Unit of CSO Ltd., which did contracting work in the North Sea. The deal brought with it the Seawell, a 368-foot support vessel for diving, ROVs, and well operations.

Sales topped $300 million in 2002 and approached $400 million in 2003, while net income grew to $32.8 million in 2003. As oil prices increased, business was even better for Cal Dive in 2004 when sales reached $543.4 million and net income grew to $80 million. The company also benefited from repair work made necessary by Hurricane Ivan, a task that continued into 2005 when the company would take on even more inspection and repair work resulting from Hurricanes Rita and Katrina. At the same time, Cal Dive was pursuing its own development program, spurred by the $200 million buyout of 19 Gulf shelf fields from Murphy Oil in June 2005 and four smaller acquisitions earlier in the year. Altogether they more than doubled the company's oil and gas reserves. Also in November 2005 Cal Dive spent $32.7 million in cash and notes to acquire a Scottish reservoir and well technology service company called Helix Energy Limited. For the year 2005 Cal Dive posted revenues of $799.5 million and net income of $152.6 million.

Cal Dive looked to become even more aggressive on the production side in 2006, early in the year reaching an agreement to acquire Dallas-based Remington Oil and Gas Corp. for $1.4 billion, a deal that would immediately double Cal Dive's oil and gas production. Remington offered even greater future potential, possessing 3-D seismic data covering 4,000 blocks in the Gulf of Mexico. To reflect an increased emphasis on production, Cal Dive changed its name in March 2006, drawing on the name of its new Scottish subsidiary to become Helix Energy Solutions Group, Inc. The company also announced a plan to spin off its Gulf of Mexico shelf marine contracting business into a new company that retained the Cal Dive name. A minority stake in the business was expected to be sold in an IPO later in the year.