Helix Energy Solutions Group Inc (HLX) 2002 Q2 法說會逐字稿

Welcome to the second quarter earnings release conference call. All participants are in a listen only mode until a formal question and answer session. You will be instructed at that time how to ask a question. This conference is being recorded at the request of Cal Dive International, Inc. Should have you any objections, you may disconnect. Would you like to introduce your host, Mr. Jim Nelson. Sir, you may begin.

Thank you. This is Jim Nelson. Thank you for listening tour our second quarter conference call. With me today, as always, is Owen Kratz, our Chairman and CEO, Martin Ferron our President and COO, Wade Pursell our CFO and Senior VP , and Jim Conner, our General Counsel.

The layout of what we'll try to cover this day or this morning is consistent with what we've done in the past. Hopefully, each of you -- you're all still there. Hopefully, each of you has access to five pages that I'm going to go through in some fashion or another, two-page report to shareholders to which is attached an appendix, which has forecast material, and then the press release, which has the accompanying summary financial statement. After I've gone through that, Wade will talk a little bit about give you a financial update. I stuck that on the appendix because I couldn't put it anywhere else. Martin about talk about the market terms of vessel activity in the third quarter and also what we see in the fourth quarter. Then Owen will talk about our strategy.

However, before we get to that, I have an exciting thing that will be new for this year, and I'm sure you're holding your breath for this. Jim Conner, our new general counsel, believes we really should have -- be stating a forward-looking statement, so Jim will read that to you.

Thank you, Jim. Certain statements in this discussion are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither statements of historical fact nor guaranteed of future performance of events. Forward-looking statements involve risks and assumption that could cause actual results to vary materially from those predicted. Among over things, these include unexpected delays and operational issues associated with turnkey projects, the price of crude oil and natural gas, weather conditions and off shore markets, turns in site conditions and capital expenditures by customers. For a more complete discussion of these risks factors, please see our annual report on form 10-K, for the year ended December 31, 2001, followed the Securities and Exchange Commission. The company strongly encourages listeners to note all statements on which the forward-looking statements with based are beyond the company's ability to control or estimate and may in some cases be subject to rapid and material change. Thank you.

Jim, don't you have a scarier voice? [ laughter ]

We thought with all that. Let's talk about the second quarter. As I said in the introductory paragraph, a special welcome to the people that became new shareholders in the equity offer we completed in May. Roller-coaster ride is perhaps an analogy that captures what has happened in the last two months, and the general stock markets, the OSX and our stock.

Of the 87 million of net proceeds that we received from the offering, obviously those of you that we spoke to we said issuing equity is something that's important to us and we had specific purposes, that's what brought us into the market. Those funds have been quickly redeployed, a good portion of them going to the purchase of the Coflexip Well Operations business unit, unit like the Q4000 that targets life appeal services, the long-term 20-year market that does not get as exposed to the volatility of the offshore construction markets.

You will also see in the introductory paragraph comment we expected ERT, utilize the balance of funding from this equity offer to increase our base and mature properties on the OCS. We have announced and completed the acquisition of the Williams Properties. On the OCS, it's also I think -- we can certainly say we're also pursuing two other very significant acquisitions. I would expect those will be closed by the end of August.

Looking at the second quarter, revenues of $72 million were up 48% from the same period a year ago. That increase in revenues, 29 million came from the Ford new DP vessels in the market, the Q4000, the Intreped, the Eclipse, and then you may recall the Mystic Viking was bought in June or came into service in June a year ago, so, so we had that vessel for a full three months of this quarter. Oil and gas revenues came down by 3.6 million, however, we're more than happy with that level of oil and gas volume. Margins of 24% overall were up 3% from the first quarter. They are 18% in the contracting business, in part that reflects the completion of that long-running Nance and Boomvang job. ERT continues with three dollar gas prices to deliver margins of 50%.

The one item that is non-recurring, in conjunction with the Coflexip acquisition, we put a foreign currency hedge in place. Wade, why don't you explain how that's recorded.

Sure. We had a million, 65,000 gain in the second quarter from the hedging on the foreign currency risk on the CSO acquisition. I guess the last week of June we agreed through a letter of intent to do the deal at 44.8 million British pounds. The dollar was weakening daily, so we entered into this contract, the forward contract, to lock in the exchange rate. The deal closed the following week. With the continuing weakening of the dollar, as of June 30th, we had a gain of $1.1 million. There's a SEC staff speech which is right on point with this type of transaction that says you have to run the gain through the income statement, which is what we did.

Turn to the second page of the shareholder letter, I'm talk briefly about some of the operational highlights. Our DP fleets had outstanding utility, 85% utilization, which is outstanding when you consider the fact that we doubled the size of the fleet to one quarter. And have just under 500 days of utilization for the entire quarter.

I won't go through the specifics, other than to note that in both the case of the Q4000 and the Intrepid, we've pulled the vessels out of the shipyard to meet contractual requirements, and you can see in the third quarter they're come, back into complete some of the new-build commissioning tasks that we didn't get done before we ran off to get the work done. You can also see that the Mystic Viking has come back after spending the last 14 months I believe in Mexican waters, and the Witch Green came back from Mexico in June, both in the dry dock, at the dock, having repair work. The Mystic Viking having work that 14 months without any repairs, substantial repairs, and Witch Green also some work done. I do get the question that was work in support of Horizon and P Mexicoing, I get the question in our Horizon receivables, update to tell you they are paying within the terms that we have with them.

Looking at shelf contracting, you can see the revenue piece in terms of the vessels that work on the OCS, a bright notice Aquatica delivered revenues and margins almost identical to the second quarter a year ago and a market is -- stronger market a year ago, and it highlights the strong market position in the shallow-water market. Some of the decline in revenues is a function the fact that our barge spent the quarter working on in-house ERT decommissioning projects. When we are able in a market that's not particularly strong as it was in the second quarter to use our salvage assets and people, working on the existing backlog of the ERT abandonment projects, you can also see the comment that the demand and the decommissioning market is weak at the present time because there are such a significant number of mature properties that are included in offshore packages, currently for sale.

Looking at Production Partnering, I won't go into the specifics here, other than to say that we're extremely happy with the performance of Energy Resource Technology. We formed this company exactly 10 years ago in the third quarter of 1992, and created what has now become an industry model in terms of buying and improving the value of the older properties.

Just a couple comments on the forecast. With the four vessels that are out of service for the periods that you see in the appendix. That, together with some of the -- market being weaker than we expected, is the reason why we have 22 to 26 cents now projected for the third quarter. We expect the fourth quarter will probably be better than the third quarter, which gets us to the range of 75 to 85 cents. We have not issued formal guidance on the year '03 and won't do so until the end of the year, but when you look at what's happening particularly on the OCS, that to us certainly suggests next year on the OCS will be a strong market and as you recall our DP vessels that can also work very effectively on the OCS, such as the eclipse and what it did. In the second quarter. And then finally, when we get to the year '04, we get the positive impact of Gunnison and Marco Polo.

Wade, why don't you provide us an update on all the financing stuff going on.

I guess you mentioned in the note the largest component the of our debt is the myriad financing, up to $138 1/2 million. One note there, we're still in the floating rate environment that, which approximate mates commercial paper rates, so we're paying around 2% interest year-to-date on that facility, which is very nice. The second facility, our revolver, a $60 million facility, in June we hadn't drawn anything after completing the equity offering. We've drawn around $23 million outstanding to date.

The update on the Gunnison project financing, that's the synthetic lease which we've talked about several times over the last few quarters, that's being converted to a traditional term loan. That is almost done. The terms have been agreed, and we should close it next week. That will bring 22.8 million outstanding right now on to our balance sheet. You'll see all of that disclosed in the 10-Q. That will be a -- just to remind you, that will be a $35 million facility, which will be paid down after delivery of the bar so -- from '04 through '06.

And the final piece, the Marco Polo project's financing, we're also very close to closing that facility. Should happen in the next few weeks. That's the project financing of our share of the TLP construction. Costs that Marco Polo. Our share to remind you our share with all contingencies is around $110 million. This financing would cover 77 million of that. We'll be paying our share up front through equity, and you know that June 30th we paid $12 million of that, and then the -- once that facility is in place, the payment terms of it are similar to the Gunnison deal, except it's five years, it will be paid back from '04 through '08.

Thank you. Martin, if you want to give us an update on what you see happening in the offshore markets.

Yeah, I'd like to talk about Deep Water first and just -- what Jim said. I was -- [ NOT UNDERSTANDABLE ] Great utilization. Despite difficult market conditions and introduction of three new vessels. We begin found work in international areas, Brazil, Trinidad and Mexico, supplementing slim pickings in the Gulf. It's frustrating the market is being that the few meaningful projects that are available mostly all moved to the right in terms of schedule. For reasons beyond our control. We saw out with the Boomvang and -- quarter one. Boomvang in quarter two, and now a Mardi Gras project in quarter three. This caused schedule -- [INAUDIBLE] Fill on short notice. And the Q4000 and the Intrepid have been affected by this, quarter 3. After full utilization we had a good-looking Q3 lined up for the Q4000. Until the projects of the month. So you'll not now leave for Trinidad until mid-August at the earliest, and we're using the dockside time to fully commission the vessel for well operations. As we have several good opportunities lined up for this type of work, [INAUDIBLE]- INTREPID has performed extremely well since delivery, recently completed -- in-house projects. We now have a piecemeal schedule for her until she commences the Mardi Gras -- in late August. Again, that project slipped the month. Q3 will be impacted by maintenance down time, after long periods of continuous operation for several of our vessels.

The Uncle John is flat out for the last two years. We mentioned in the report we had some weather down time issues on one job, that was caused by some thruster problems. So we've moved quicker than we expected to address those problems. She's been in the shipyard for all of July. Hope to finish that work next week. And then she will start a support contract in Mexico, which hopefully could run to the end of the year. So that's a good thing.

Witch Queen and Mystic Viking have had long periods of continuous operation, but they're in right now for engine replacements. The Eclipse is in Trinidad, likely to remain there until the end of the year, working mainly on the Boomvang project. Several cable burial jobs delayed or cancelled.

Turning to shelf contracting, I think at the end of quarter one in the last conference call, we were pretty much a lone voice and doubting a second half recovery. In demand for our shelf services. Unfortunately, we appear to be right. The second half isn't shaping up the way that perhaps others expected. The drilling hasn't picked up quick enough to have impact on our services.

That said, our performance in picking up what little work is available has been exceptional. Especially at Aquatica. They're performing the same this year as last year, despite night and day market conditions.

We'll keep up this good work, but the potential upturn in demand in the second half is unlikely to happen probably into Q1, Q2 next year.

Okay, Owen. You want to brighten us up?

Well, I don't know about bright, but I'll tell you the honest truth. We've now essentially completed the capital program, and it's been a pretty intensive capital program we've been involved in this the last couple years, adding in strategic assets. We're positioned where with we want to be with our business groups, and there are four, and again I'll mention them, the shelf contracting, the deep support contracting, Well Ops introduction.

The market obviously is not where we or anybody else expected it to be this year, for obvious reasons. But our outlook for the gradual recovery, accelerating by the end of '03 and continue through 04 and 05 remains unchanged. Things will be tight.

We are at this point I would say fully deployed on our capital, and we're going to sit where we are until the tremendous cash flows from Gunnison and Marco Polo and the rising market begin to come in primarily during '04. Following this capital program, though, to give you an idea where we do sit, we now have more leverage, both in utilization and pricing, in contracting capability than we've ever had in Cal Dive's history. We've also been successful in starting to penetrate certain international markets, Mexico, Trinidad, and we've just finished a job in Brazil. We're now the undisputed leader in rig alternative subsea well intervention, which was a goal of ours, with the acquisition of the CSO wellup screw. As this market develops, we're in control of our own destiny to a certain extent there. We'll grow with the forefront, with it.

In general, however, the market right now is pretty horrible. We have a convergence of events that negatively impacting Q3, just to run down some of them. Given the margins we can make now, it makes sense to make a management decision to get caught up on maintenance. We've been work out, chasing earnings to try to increase utilization in order to get it -- at a certain point, it makes common sense to get caught up and this seems like a logical period. Some of our new assets coming out, we've taken them out for their first jobs. We've looked at how they operate. We've recognized some efficiencies that can be gained. We've gone through both internal and third-party and client audits, which has given us really good goodance.

So right now it's the time to take a pause and I might add that we're not talking about capital improvements here, we're talking about operational procedures. And just tightening up the ship. This will probably get done in the third quarter, but that means some of the work that was planned for the third quarter will be moving to the fourth quarter. So we don't see an impact on the fourth quarter from these decisions.

It is the worst market we've seen in years, quite honestly. The volume of work is making it hard to achieve utilization. The contracting terms and the insurance coverages are making the risk more onerous than we've seen in recent years, and the competition is keeping the pricing at very low margins. It's a tough time on the contracting slide. -- side.

And on the production side, I guess that's the real bright note for us, this year. We went into the year targeting to make some production acquisitions. I'd say they probably been slower in closing than what we anticipated in the original budget, but have been good on enhancing the production and we're now right on the verge of actually realizing greater than expectations on our acquisition program for the year.

Right now, in general, we've got our heads down and our butts out, focusing on some near-term things that we can't -- we do think that we can influence. A lot of things we just can't influence. But on the shelf, for instance, we're focusing on vastly improving our safety operations and focusing on keeping our margins and utilizations where they are, which on the shelf as Jim said is a bright spot. That's an area where we can keep things at a pretty high level.

On the deep contracting side, we'll get through our startup operating procedural amendments here. We are revamping and looking at our project management process and systems in order to gain efficiencies there. We're putting in place audit checks and procedures just to make sure that we have our risk mitigation through this period, firmly in control. And we are very much focused on spending discipline, as you can imagine, following a large Cap Ex program period, that's an area where we can make some improvement, and will tighting the -- tighten the ship back up to historic standards.

On the Well Op side, with the acquisition now we're going to be focusing on really trying to come out in the market with the branding program, by combining the efforts of the U.K. and USA groups. We're going to be developing the market for the rig alternatives, well intervention, and we'll be engineering the best solutions and planning our way forward for the remainder of this year.

The ERT, we are going to be completing some significant acquisitions, and then we're going to be really focusing on enhancement of the production that we've been having in hand.

So all in all, we're in a good spot. We're fully deployed. But we have no concerns and the future is the brightest that I've ever seen it for Cap Ex with respect to earnings growth.

Thank you, Owen. Jennifer, I think at that point we're willing to take on some questions.

Thank you. If you want to ask a question, please press star 1. You will be announced prior to asking your question. To withdraw your question, please press star 2. Once again, if you want to ask a question, please press star 1 now. Our first question comes from Andy Hoffman.

Good morning, gentlemen.

Hey, Andy.

First question, Jim, on the guidance, want to know, if, A, 75 to 85 cents includes in 19 or 21 cent quarter for the second quarter.

Say that again, Andy?

This quarter was 21 cents, but there was a currency hedge. Are you -- calling this a 21 cent quarter in guidance for 75 to 85?

I guess answer is yes.

Okay. And also, are you including the two significant acquisitions that are coming in this August or no?

Nope.

Okay. If just I guess to follow-up up on the guidance. It sounds like it's a combination of deepwater and shallow water and some of the maintenance, is it more one than the other? I'm trying to see if you have a radically different view of the Gulf of Mexico, deepwater market, or just a modestly lower view.

I would say deepwater, Andy. These projects slipping and the holes. The work doesn't go away, just means we have to scramble for work or keep the vessels at the dock or put them into maintenance programs. So that causes our short-term costs to go up. I think that's some of the biggest impact in the near term.

So it's both. Also, if you can give an update on Gunnison and Marco Polo, sounds like they're both still on schedule?

Who wants to take that?

Yeah, they're both on schedule, Andy. Production for both is slated for quarter one, '04. And they're both right on schedule to achieve that.

Okay. And for now, just one more question, Owen, wanted to get your view on epic contracts. Obviously you've heard Halliburton is going out of that business some competitors and even you as of late have had trouble talking about insurance costs going up. How do you view that going forward in light of the fact your assets are more unique than others in the market?

Any attitude is contracting is consistent, I've always hated it. I really -- if you look at landscape, it's strewn with failed contractors. Margins achievable and the risks that you have to take on epic makes no sense to me. That's why in the strategic growth, one reason were you can't pigeonhole us like you can other contractors is because we have looked at the fact that other contractors were going epic, and we made the decision some I guess that's five to seven years ago that we were not going to go towards the epic. I don't know what happens there. I am watching very intently the marketplace as to what happens there. Something tells me that the four conditions of the epic contracting market can't continue the way it is forever. Contractors just cannot exist in a pure epic contracting mode. You have to have some kind of alternative method of making money. To that extent, I think Cal Dive has a fleet that is global in standard quality. We still focus on support contracting, but it puts us in a unique position, I think, to sit here and maintain strong cash flows and earnings and be patient and watch what happens with the rest of the fleets, and that may present some opportunities in the future.

You're right, Andy, that is as we've acquired the vessels, we try to target the markets so that they are in demand from the epic contractors because we can perform tasks more effectively than other vessels around the world.

Okay. And last question, quick for Martin, the deepwater pricing for these assets, has that pricing been going down as well, or is it just simply not as many projects?

Well, deepwater pricing has pretty much stayed the same here in quarter one and quarter two. We're also bidding some projects in 03 and 04, Andy, so it's possible depending on our differentials on our assets, put into prices up. But until we see the demand building it, won't be doing that cross the board.

You can see, Andy, the Eclipse and Q4000 both had margins at 21, 22% after depreciation. Those are -- we're happy with those.

Thank you very much.

Thank you. The next question comes from Bill Herbert.

Good morning.

Hey, Bill.

Owen, just very quickly, you've been I think relatively tempered in your outlook on deepwater for a while, and I think you've been relatively consistent that '04 will be the year that a lot of these opportunities were going to converge. Even though you've been somewhat tempered in your outlook, it sounds like you're even more temperd right now with oil prices well behaved, notwithstanding certainties that are out there, what are you hearing from your clients that causes you to be more pessimistic with respect to a deepwater in general?

I don't know that it's so much about we hear from the clients, Bill, as to what we see. The continuing shifting to the right of projects, that does a number of things, and this gets back to Andy's questions on epic contracting. It's very difficult to give pricing on a project when you don't know when it's going to occur. What is happening is you give pricing, then the work gets renegotiated and what happens is the market gets squeezed out by the time the project arises. But that's speaking to your question, Bill. The leading indicators we look at primarily are fabrication. And that's why I've been calling for '04 is because but look at the floating production systems that are being built right now, and they're scheduled launch times, and been given that installation, then that opens up the surrounding subsea tiebacks to it. That's the basis for the timing. I don't see anything -- any action on the part of the producers that would suggest that there is a big feeling of urgency to increase production. Given the uncertainty in the economy, I think there's a lot of sitting on the sidelines, and that is one reason why I'm a little more tempered than I've ever been on it, as I certainly I've always said I don't see a hockey stick coming at any point. Just don't believe it's in the producers best interest to ever see a hockey stick occur.

Okay. And -- Just to reinforce what Owen is saying, Bill, there are I believe nine structures that will be either sparse, TLPs, what have you, at installed at the end of '03. As soon as those go in, that opens up our subsee tieback work. So for -- I've not Encino anything that would change the fact we look at '04 as a year of convergence together with Gunnison and Marco Polo.

With respect to the visibility that you see in the form of the fabrication efforts on going, are you in specific dialogue with some of these folks with respect to opportunities for your deepwater vessels in '04?

Oh, sure.

Yeah, lots of bidding going on. Bill. Sure.

It doesn't sound like you're -- you spoke with -- characteristic candor about how irrational the competitive environment is for the moment. It doesn't sound like sort of the bidding discussions are all that fruitful with respect to the terms that you're talking about.

I will be candid about it, Bill. They are. That was -- we've just been two days in intensive meetings talking about -- and a lowered today it when I said we're looking at revamping our processes for project management. It's very difficult to discuss terms and pricing with clients right now on ever-changing scopes of work and nebulous start dates. It's just a very difficult contracting environment, and as opposed to the shallow water assets. Those, when you have a disruption in schedule or shipping to the right, they're very easy to plug back into the marketplace and the spot market work. When you get into the deeper water assets, it becomes a lot more difficult, which is one of the reasons why right now in third quarter, instead of going out there and maybe accepting work at higher risk or higher margins, that's what we would be doing if we were just merely chasing earnings, but I think it makes more sense to slow things down here and try to regroup, and really assess how are we going to address this market with all its difficulties?

And again, Bill, one point I was trying to make is I personally believe the shelf work is going to be fairly strong next year.

Yeah.

And it is important to keep in mind that all of our DP ves committees work the shelf very effectively.

Yep. Given the fairly irrational competitive impairment characterizing the deepwater -- base, if you will, what are your expectations for consolidation in the sector? It sounds like it's in grave need -- in grave need of that.

Yeah. I was funny because while I was talking, I was thinking about just that. If I were to -- first of all, into the finish I would say the industry stays slow for a longer period of time than whatever was expecting. I think the pain gets deeper and the salvation comes in consolidation. That's speaking for the broader market. Of course,our strategic plan has been to hedge what we've always seen as the inevitable low margin of deepwater contracting. We do have assets that we feel are specifically targeting specialty niches, we plan to work in a supporting krotor role thing out of the risk problems and pricing of epic work. And that is one of the big drivers for why we made such a concerted effort to establish ourselves as the leader in subsea well interventions. That market has not existed, and and therefore doesn't operate under the same terms as epic development work. That's like a fieldwork. There's -- that's production driven rather than economy driven.

Right.

And that's where I've always said that Cal Dive's long-term future growth will be. And right now, I think in this marketplace, it's becoming pretty evident that to why Cal Dive chose the straight 93 -- strategy it has.

Two more questions from me. Speaking to the intervention market, the recent acquisition of Coflexip's operations in the North Sea, sort of a broad commentary in part of the oil industry in general about a slowdown in the U.K. sector in the North Sea because of the new taxes, et cetera. What are you seeing with respect to the visibility of the well intervention market over there?

Martin just came back from Ebb Dean.

We'll see paid close attention when we're looking at making the acquisition. The vessel has got utilization running into it into December right now. We're thinking that she'll probably do about 300 to 310 -- of utilization this year. I'm going -- expecting the same next year based on interest already expressed by customers. So given what is happening with taxation and the general slowdown in the North Sea, that's still very good performance expectations.

And it's, again, Bill what you get when you're working with -- field.

Right. Last question, you were alluding to significant acquisitions that are on the radar screen for ERT. You can give us the size as to what the cash outlay might be that encompasses these transactions and what we could expect with respect to incremental earnings contributions from them?

I got everybody is shaking their heads.

All in good time.

Thank you, guys.

Bill, I might, if I could, add something because of what I've said, everyone may be wondering why in the world did you step out and buy the big deepwater assets over the last two years. The assets we have like I said are targeting specialty niches. We do have the aspirations to always be a contractor, but we do want to be a supporting contractor, and my vision is be epic contracting is going to take major revision, either through consolidation or exiting players, and I do think there's a future role for us -- contractors that -- nuts bolts, an actual krotor that does the installation that primarily works for the epic contractors in lieu of them having their own floating assets.

Okay. Thank you.

Thank you. The next question comes from James Stone.

Hi. I just wanted to follow up a little on some. Things we've talked about this morning. In terms of the Well Ops business in the North Sea, with the interest -- with the very high level of utilization in the high level of interest for next year, do you expect to improve your pricing in that market as you go in for the operations, into 2003? And is that basically how we should expect to see growth coming from that business since you're looking at flat utilization? My first question.

Well, most of that utilization comes from existing MSAs, Jamie. So the price something set. I think we'll be looking at the cost side of the equation more. To improve our margins. And when we get the opportunity to renegotiate the MSAs, we'll be looking at the market to improve pricing.

Okay.

I don't think that will happen next year, in terms of pricing -- probably the year after.

Okay. And then can you -- Owen, can you expand a little bit on this whole concept of branding the well operations business and maybe give us more detail as to what you're really talking about when you reference that, what assets will be involved? Is just the sea well and the Q4000 or will there be additional assets offered in the packages.

Sort of going to steal my thunder because we're planning to really do this in September, when everyone is back interest skrations. To give you a little preview, well intervention have vention -- is a market that doesn't really exist right now outside of the North Sea. It's one that there's obviously going to be an industry need for it. It's dominated right now by two major technologies, one is riser deployed of well operations, and the other one is what Coflexip has been doing, which is subsea intervention lubricateor technology, where the wire line and coil two goes town through the water column, through a lubricateor, straight into the wellhead. That's very low-cost alternative versus a riser deployed -- deployed system but also very limited. With this acquisition, we now have the only company in the world that has a track record in -- riser intervention, and we also have the Q4000 and -- which are the only rig alternative riser deployed technologies. On -- so we are the whole game right now.

I'd like to get across to our industry that we do have both technologies, that we are going to be selling the high priced one versus the low cost one. We can provide either. We'd like to increase our engineering expertise. We now have effectively a hundred percent of the rig alternative well intervention engineers in the world. So I'd like to try and start placing those into the clients' offices to assist them with the planning of their interventions. Because right now intervention is one of those things that's not really budget for. And it can be a very effective tool for production end hangsment if it's done right. So by setting up a company that actually engineers this solution for the client, I think has not been done to date, and we also have the best solutions for actually carrying it out. So it's by branding I'm talking about rolling that into a combined entity and really puttingth message out there as to what our capabilities are and where we're going. It could include both the sea well -- at this point, our plans are that it would include setting up a wholly owned subsidiary with two vessels, the sea well and the Q4000, and all of the personnel of the Coflexip group and our own group here.

And if you set up a wholly owned subsidiary, sea well, do that preclude -- does it change your access or Cal Dive's access to the Q4000?

No, that's very easy to -- a lot of companies do that. You just have a internal lease-back to the construction group.

Okay. And then, finally, Jim, I just wanted to come back to your personal view that the shelf market should be much stronger next year. So strong, in fact, that you might actually use some of the DP vessels in the shelf. Can you just elaborate on how you reached that conclusion and what kind of things you're looking at?

We're looking at it, Jamie, is the production decline on the other continental shelf and the production levels if you're seeing coming in pressure our customers. That will create the self-correcting situation.

Okay. Thank you very much.

The next question comes from Jim Lewis.

Food morning. I have a couple parts to my question. The first is primarily for Wade, I imagine. It's just on Cap Ex in the quarter and update on full-year and sort of next year Cap Ex commitments. And also, how that relates to drawing down your existing and soon to be existing debt facilities and where you think that will peak on a time and absolute dollar basis.

The Cap Ex for the quarter was around 50 million. With the 67 1/2 million being spent shortly thereafter for the Well Ops acquisition, Jim.

Uh-huh.

Most of the Cap Ex remaining this year is frankly the plan payments on done with son and -- Gunnison and Marco Polo. I have in my budget for the rest of the year the Gunnison, another 26, 27 million. And Marco Polo, 33, 34 million. And you know, both of those have their own project financing facilities, the Marco Polo will have to pay the first 30 million, and then the financing will kick in. And on the Gunnison, it will be go -- about half of that, getting us up to 35 million will be financed through the project financing there. And ERT, as we discussed, I can't say anything further on that. Moving to '03, nothing has really changed in our projections there. Basically have a budget of 150 million range, with most of that being continued payments on Marco Polo and Gunnison. There's also money set aside for -- as we always do, 20 and 30 million range.

Just -- to be clear on Gunnison, since it's now a term loan, you're going to be running the full amount through Cap Ex, and not just your equity portion. Is that also going to be true of Marco Polo?

You're right on Gunnison. On Marco Polo, you'll through Cap Ex you'll just see our equity portion.

Okay.

Because it's investment in a 50% JV with El Paso.

Okay. So when you say you're going to be spending 33 to 34 million -- I'm giving the full amount when I give you those full numbers.

Sure. And as far as our debt levels, even with all the spending, we capped out in the high 30s, near 40% debt to book cap. And trails down -- trailing down in '03, down to the low 30s.

Do you have been absolute dollar estimate in terms of your peak debt?

The peak -- in the 200 million range is where it peaks this year. And then following on next year, including all of the Marco Polo debt, which would not be on our balance sheet, but including all of that, in the -- we peak at about 235 million in total.

Okay. And my next question relates to the Well Ops business that you announced the acquisition of not too long ago. There wasn't much given in the way of sort of financial sketch that we can use to build it into our model, by just wonder if you can highlight what your revenue and gross margin assumption are there, and also whether they'll be any impact on GNA and what the impact on depreciation might be.

I guess one place you can start, Jim, was Coflexip's announcement their revenues why coming down because 30 million Euro will be lost in the second half related to the business unit of Coflexip. I think that translates into 45 million of revenues in the second half of the year.

One to one right now? More or less?

One to one.

What we have right now, Jim, are acquisition economics. Go ahead.

I was just going to from got bomb line standpoint it, will add about 4 cents a quarter, EPS.

Is there not a significant component of seasonality to that business, being in the North Sea?

Yeah, the fourth quarter will probably be a little less.

And average of 4 cents, with less in the 4th quarter.

Okay. Fair enough. And finally, as far as the Well Ops business goes, looking out -- and this question is probably to best Owen, what would change about the way you view the business if we accepted an assumption which may or may not be true that the deepwater drilling segment is overbuilt and there's going to be -- always a segment of the deepwater rigs that are going to be available or looking for work. Does that change the opportunity in any real way in Well Ops being that that's going to be your marginal alternative to what you're offering?

Relative to the deepwater drill rigs that would become available, of course the biggest competing event is rig pools. They already are paying a rig and it's sitting idle. Of course they're going to use it. When I say we need to make the market, part of that includes us getting in and influencing the producers on how to do intervention by including a Q4000 within their rig pool plans. That's the contracts rollover. I think that's very important. I will volunteer, Jim, that I think that bigger risk to the Q4000 and well operations comes from advancement and technologies like Polly free standing risers and surface BOPs that put second and third-generation rigs back into the market. And of course we've looked at that extensively. If that happens, and there's a viable use for the rigs, then of course the day rates don't stay where they are. They go up. They are -- those rigs have certain limitations as the Q4000 isn't subject to. So it may mean the Q4000 operates in a little different water range than they do. And then it means that we really do need to sit down and fully engineer the best solutions because there's a lot we can do off the Q4000, much more efficiently, especially with technologies right at the horizon right now that really make us much more cost-effective than a drill rig. So all of that rolls into -- it's a very complicated picture when you're sitting here, trying to create a market that doesn't exist. But it's one that we spent a lot of time on.

Sure. Fair enough. Last question, and this is just sort of a broad brush question. But when you think about the outlook for the Q4000's strategically, if you had to give your sort of best guess or estimate of what percent of its time might spend on Well Ops versus construction activities, sort of in the near term and in the long run, what is your thinking in that respect?

If somebody doesn't take the Q4000 on a long-term contract, based on vision, that's the first assumption, I would say that for the next two to three years at a decreasing rate, the primary use for the Q4000 will be construction. I think it's going to be in that two to five-year range for the well intervention market to fully come into its own and for us to figure out how it most effectively applied the Q4000, and at that point then I think very quickly goes to a hundred percent utilization in Well Ops. That is why I said well operations is Cal Dive's long-term growth. It does require some vision.

Okay. Thanks a lot.

Thank you. And our next question comes from Jim Rallyson.

Good morning, guys.

Hey, Jim.

Couple things. You mentioned -- first of all, the Williams acquisition you closed in the quarter, what kind of production growth opportunities do you have coming from that? And then in the next quarters? What do you think the ultimate growth on production?

It's hard to give a spefrk on that, Jim, when I think all you can do is look at historically what ERT has been able to do with their properties.

Sure. And obviously, it depends on what you guys are doing and certainly commodity prize as to how you rev that up. Any -- looking at the acquisition opportunities you're evaluating that you didn't comment on, what are pricing expectations for shelf properties today given the commodity price environment? Good, bad, or indifferent?

I guess what I would say it -- is the properties we're looking at are principally oil.

Okay. The -- both the Gunnison project and the TL, and with El Paso, are you running into any difficulties with Williams look to be build the Gunnison pipeline and El Paso on the TL, and with what is going on in the merchant power sector, any issues on financing from their side?

Well, not specific to those two projects at all. I will tell you that we've been watching the Williams situation fairly closely. We just bought Barrett properties from Williams, and there's a close closing settlement. We have other outstanding receiveables from affiliate companies, so we've been very meticulous on trying to assess what our -- what our maximum exposure is. I wouldn't say it's -- yeah, I wouldn't call it highly material. But it is an exposure that we are looking at. But right now, in the last few days we've gotten comfort from the press releases if from Williams internally that we don't see a big threat there.

Sure. Then lastly, just with your operations you've been working in Brazil and I guess going forward, Trinidad, what has been the veption? Sounds like your performance is pretty good with the Q4000, so what are they saying and any indications that you might get some additional work down the road out of that?

Well, we managed to expose Q4000 to Petro pros and they liked the vessel. And no doubt. But they're a deposit -- company that deals in long-term contracts. So just going down there, we couldn't easily pick up spot market work because there isn't any. But as I say, the -- we are talking to them about a longer term relationship, one of three or four opportunities in that respect. Stars Trinidad goes, over the last couple years we've managed to penetrate that market. And we are doing most of the work there. With DP and British gas and others, really liking the -- we can deploy now.

Sure. All right. Thanks, guys.

Once again, if you want to ask a question, please press star 1, and the next question comes from Kevin Cope.

Good morning. Could you guys tell us what debt to equity level you have to maintain to be in compliance with your covenants?

That would be 50%.

Okay. And couple housekeeping issues. The days payable went up to 81 days this quarter. Any reason up from 53 last?

Just booking the remaining invoices related to the construction of the vessels.

Okay. What was the DNA expenses quarter, depreciation amortization?

On the summary financial statement that's broken down between subsea and natural gas, about 9 million.

9 million. And unbilled receivables?

We always have unbilled receive ablses.

What were they this quarter?

In the two million range.

Thank you.

Thank you. Our next question comes from Kevin Simpson.

Good morning.

Hey, Kevin.

Sorry to do this, because I got to get pulled away for maybe a crucial period, you may have already gone over it, but you've given good guidance for this year, but fairly cautious about the timing of market on the deepwater side in terms of tightening utilization for next year. Consensus is pretty high, it's in the dollar-almost 40 range. I guess probably to make -- early to make a forecast, but I'm wondering if we should assume tough market conditions continue in the first half of the year for next year, and then really begin to firm up in the second half, and begin to bake that into our assumptions.

Well, I think the reason we haven't given any guidance right now is that what we're seeing the street has been sat doesn't cause us any heartache on next year. I think it is -- I think it would be less than honest to say that we had a crystal ball that was better than anyone eltions on next year, given the wild fluctuations in the market this year. That's why our conservativeness on actually stating anything definitive for next year. But to put that projection in perspective, if you look at the leverage that we have in our assets and our earnings ability, it doesn't take much of an improvement in the market over this year for us to achieve that

Another way of saying it, Kevin, buck 30 to buck 50 based upon everything we're seeing and aware of right now, there's something we're reasonably comfortable with.

Okay. And I guess -- what has the change do you think to -- I guess number one, there's an underlying assumption the shallow water market will be stronger next year than this year.

Yep.

How about timing on the deepwater, though? I guess -- I didn't -- may be where I missed here that some of the specific assets and when they're going to work?

We'll have our three new assets for the whole of next year, yeah. And we've already got work booked for two of them. And the first quarter. And there are bids out there that give us some comfort that there will be word next year than this. So on the deepwater side, just having more utilization of assets, plus visibility on projects.

I might add a lot of this year there's just so much uncertainty in the market that it's kept a lot of projects on the sideline. All you have to see is a little uncertainty leave the economy, either up or down, as long as everyone knew which way it was going, you would see some movement on some some of those pro equities jm also, this year we're right out the chute with these assets, trying to work them -- it's a difference between this year we were trying to seize contracts for the assets without actually having them out where you can take the tires and watch them float. Next year, they will be in the market and the clients know they're in the market, and we're pretty pleased with the performance the clients' been pleased, so even with the significant market improvement, I think Cal Dive's improvement would happen next year over this year. And then like I said before, if there's any easing of the uncertainty that causing improvement in the fundamental market conditions of contracting, then Cal Dive will benefit tremendously. And then finally, we've been ever increasing the success of our international work. And these assets now give us a global quality fleet, and that also translates into increased earnings power for next year.

The only thing I would add is that the deepwater of course is an oil plate. So that with oils prices where they are, those projects are pretty much progressing on target.

Okay. So -- I think in terms of the answer a little bit, the project specific risk in terms of delays would be that you're pretty confident that you've given a little visibility in terms of when projects may get pushed out that you can farewell and -- fare well in the spot market for the new assets.

That, and of course we've had the hedge that -- our peer group does not have. We think will have a larger property base working for the balance of 32 year and next year.

That I did hear. Thanks a lot. That's good.

Thank you. We now have a follow-up from Jim Lewis.

Sorry. There was one other housekeeping item I didn't get to earlier. It's -- can you break out, Wade, the interest versus the income on the hedge that that's netted in your presentation?

Yeah, the hedge is one million, 65,000 of income, so just back that out, and the rest is interest expense.

Is that one,65,000 pre-tax?

Yeah.

Great. Thanks a lot.

Thank you. And at this time, I'm showing there are no further questions.

Thank you all very much. We'll see what the next turn has on this little ride. Talk to you in three months.

Operator: Thank you. This concludes today's conference call. All participants may now disconnect.