Helix Energy Solutions Group Inc (HLX) 2002 Q3 法說會逐字稿

Welcome to the Cal Dive third quarter earnings release conference call. All participants will be able to listen only until the formal question and answer session. At that time, you will be instructed on how to ask a question. This conference is being recorded at the request of Cal Dive. I'd like to introduce your host today, Mr. Jim Nelson. Sir, you may begin.

Good morning, everyone. This is Jim Nelson. Thanks for sitting in, this, the third quarter conference call for Cal Dive International. With me today is our executive management team, Owen Kratz, our Chairman and Chief Executive Officer; Martin Ferron, our President and Chief Operating Officer; Wade Pursell, Chief Financial Officer and Senior Vice President; and Jim Conner our General Counsel.

Hopefully, you've had a chance to look at the five pieces of paper that we'll try to provide an overview on third quarter today using that -- those documents. It consists of a two-page report to shareholders, attached appendix, which is our forecast and guidance for Q4, the press release, which went out covering the quarter and then the attached summary income statement. I'll walk through the shareholders report, and hit some highlights, asking Martin Ferron for some help on explaining some of the contracting items. Wade will then give you an update on our debt position. Martin will come back and look at the demand and the contracting markets for the fourth quarter and some initial thoughts on what all three would look like, and then I will conclude with a summary of our contracting strategy in a market as difficult as it presently is, and also address some reports that have been in some of the foreign press papers recently.

So, let me start, and then let's look at the third quarter report. The third quarter typically is the peak of the offshore construction market in the Gulf of Mexico. This is obviously a very difficult market. We've been through these types of periods before, managed through them before. But I don't recall one where we've got high commodity prices. It's certainly unusual. We did expect that it was going to a slow market, and because of that, we elected to bring four of our key vessels to the dock in early July for some -- completing some construction work on those vessels as well as regulatory inspections. We got our whole team back in the field just as the weather began to hit in late August and early September. As a result, the 8 cents of earnings, while consistent with our most recent guidance that we issued right at the first part of October, it compares to our guidance three years -- excuse me, three months ago when we were speaking with you of 22 to 26 cents. So I thought it might be helpful, since the quarter includes a number of really one-time items that we wouldn't expect in the future, I thought it would be helpful if Martin could go through some of those items with you that impacted our contracting business in the third quarter.

Thank you, Jim.

Yeah, I'm going to try to explain the difference between the 8 cents and the 22. We had a number of runoff issues that negatively impacted the third quarter. The first one was the weather. We were basically shut in for the best part of September. I estimate that in terms of contracting, that cost us 5 cents. If you add to that the shutins in ERP, that was another 4 cents, so there were a bit that cost us 9 cents. And then, the Uncle John, we brought her into the shipyard in preparation for a five-month contract in Mexico principally to work on our thrusters. Then, we went down to Mexico to start the job, only to find that two of the thrusters failed on us. So that cost us 18 days of down time doing repairs, and we also had to pay some liquidated damages because we were late starting the job. So that saga basically cost us another 5 cents of earnings, one-off issue.

And then lastly, another big impact for us was the slippage of the bond backs project in Trinidad, which I talked last time. That job went to the right by six weeks, so we elected to bring the Q4000 in and to go commission a multi-purpose tower and to go through exhaustive audit in preparation for some work coming up. So that excise cost us 4 cents of earnings. So if you look at those three one-off issues, by my calculations, that amounts to 18 cents that hit us in the third quarter.

Thank you. Martin will come back and talk a little bit further about bond backs as well as the rest of the fourth quarter in a couple of of minutes.

One of the unique aspects of Cal Dive, of course, is that we have a business model that balances what is happening in the contracting markets with our ownership of oil and gas properties. Now, the same unsettled market conditions that had the construction markets so soft, also provided an excellent opportunity for us to acquire mature properties. We added through mature property acquisitions in the development of east GADMAN 374 almost 70 BCF equivalent in proven developed reserves during the third quarter. In contrast during the first nine years of BRT history, total acquisitions during that nine-year period were only 75 BCF me equivalent lnt. So in one quarter, we have essentially matched what we added in the prior nine years of ERT being in business. That property base, we estimate, next year, given the fact that they are mature properties, could produce anywhere from 25 to 30 BCF equivalent. When you look at the hedges that are in place -- and that means that next year, ERT alone could earn anywhere from 70 to 80 cents, assuming prices stay somewhat near the current strip. In other words more than all of what Cal Dive will earn this year, and it gives some idea of how if we have any sort of contracting market in '03, our earnings should double. And then when you get to '04, when we have presumably a stronger contracting market in the deep water, as well as first production from Gunnison and Marco Polo, earnings could triple from current levels. I'm assuming this significant earnings visibility explains why Cal Dive has outperformed the S&P 500, NASDAQ and Dow Jones industrials over the last three months, and it's interesting -- I'm sure you all -- most of you have access to Yahoo! and you can look at the comparisons with Cal Dive versus the three benchmarks. Not only have we outperformed the S&P 500, NASDAQ and the Dow Jones Industrials over the last three months, but it's true over the last six months, 12 months, 24 months and 60 months. So while there's certainly some volatility in our stock, it certainly performed well since we've been a public company.

Let me turn to the financial highlights. In a period when many companies in the industry downturn and throughout the United States, when many companies are dealing with declining top lines, our revenues increased by 63%, up 32% for the first nine months. In this quarter, that 63% increase reflects principally the addition of three new vessels, the Q4000, Intrepid and eclipse and then the acquisitions of the Sea Well business on the north sea and the operation of our robotics company, Canyon Offshore. Margin in the contracting side of the business were found at 7% for the reasons that Martin has explained. Our oil and gas margins improved to 43%, and the commodity prices where they are and the hedges we have in place, we should expect them to continue in that 40% range going forward.

On the overhead side, we have a fairly tight control of our overhead base in an unsettled market. The overhead increase over the prior year is all the function of the businesses that we have acquired. And finally, with respect to cash flow, EBITDA during the quarter actually increased over the prior year quarter. That's due principally to the higher level of sales volume which floes through to EBITDA.

If we can turn, and I'll kind of just briefly on some of the operational highlights. Martin has already recovered all of the interest in the deep-water area. Underwell operations, the three months in the third quarter represented the first three months of our ownership of the well operations business that we acquired from Coflexip in the North sea. The sea well operated at almost full capacity performing the jobs we've summarized. It's an excellent vessel, a good business and a good group of people that we acquired. You can see the revenue, 16 million, an excellent margin coming off of that business. Again, those margins are what we would expect in the longer term life of field services and the construction months, or the better weather months, of the third quarter.

On the fourth quarter, however, we had a large drop, 40 days, that a customer elected to cancel, so that vessel has a hole in its schedule in December when it's hard to pick up work given the weather there. The Q4000 performed very well on a job, a P&A job, before going to the dock for work that Martin discussed. And, as I'm sure as Martin will talk about, she's coming back for a significant -- well, operations project in the fourth quarter.

Shelf contracting, these are the more weather-susceptible vessels, so the utilization was 55%, down from almost 75% a year ago in this quarter. Our saturation vessels actually managed to stay relatively flat. Those vessels in our Cal Diver 5 work in support of alliance with our support of Horizon offshore. Together with Horizon laying the pipe and our vessels doing the commissioning and tie-in, we're a formidable presence on the shelf. I do get calls from time to time from investors and analysts asking about the receivables that we have with Horizon. We are their our largest customer. I can tell you that they paid a substantial amount of money recently and are current with all of their terms with us.

We also comment here about the Cal Diver 1, working with the Eclipse and commissioning the field where during the quarter one of the highlights is we completed our PUD strategy where we acquire fields for the expiration has already been completed, pud strategy, which I'm sure Owen will mention. The barge 1, also worked almost the entire quarter, working on decommissioning projects for ERT. It's important to know that almost -- that all of that revenue and any associated margin is eliminated in consolidation as we're working for internal customers. Work we did on East Cameron 374, we brought the work in six weeks earlier, so that excellent -- the margins on that work actually are reflected in a lower property base that we will recognize over time. I think the quarter is something, liker $5 million worth of inner-company contracting work that's performed for ERT.

Looking at the -- I guess the final thing on ERT, mentioning the acquisitions, they really could not have been completed without the customers, in this case, Amerada, Hess and Shell, being comfortable that Cal Dive's salvage equipment and people could handle the significant salvage obligation that came along with these properties that we acquired. In fact, on one of them, Cal Dive had to be prequalified with the MMS in terms of the MMS's comfort with our handling such a significant decommissioning piece of work.

Those are my thoughts on the third quarter. Let me quickly just spend a minute with the appendix before I turn it over to Martin. In terms of vessel availability in the fourth quarter, the Sea Well will be out of service for a couple of weeks for engine maintenance and changeout. I do have and have had a number of questions regarding the impact of hurricane Lili. The MMS has reported, and it's been our observation that the infrastructure damage was relatively limited, and it was limited in shallow water areas. In other words, it didn't create much work for our deep-water or our saturation vessels. There is a fair amount of inspection work that our shallow water assets in Aquatic have been doing. ERT suffered mostly minor platform damage in platforms producing nominal volumes. The one thing that was of interest when I looked into this, though, the -- it took almost 10 days for the pipelines to come up to full capacity in October, particularly the pipeline at South Marsh Island 130, the large oil project we acquired.

Contracting revenue, I'll let Martin talk mostly about that. In the commodity price hedges, in addition to what we have for the fourth quarter, I thought you might have an interest in our third quarter -- excuse me, our 2003 hedging, so I put that in here also. Oil and gas production, we're estimating 6.5 to 7 BCF in the fourth quarter. It actually is down a little bit because of the impact of hurricane Lili. I expect we'll get into the first and second quarter next year, our run rate to be between 7 and 8. That covers everything I think of interest. You see interest expense, which I guess is a fairly good introduction, Wade, about your talking about where we stand in terms of the financial position and debt position.

Sure. Thanks, Jim.

You know, at September 30, you'll see our total debt was about 225 million. Nearly two-thirds of that is our Mirad, the favorable title 11 facility we have, Pending about 2% interest on currently. Our revolver balance was 52 million at the end of the quarter. That paying around 4%, 4.5% there, I might mention that revolver is now $70 million revolver. And then finally, we had 27 million outstanding on the -- on the Bank One term loan for the construction of the bar at Gunnison. You might recall, that was a synthetic lease before, and during the third quarter, I think we mentioned at the last call, that was converted into a traditional term loan. You now see it on our balance sheet.

Mike mentioned that with respect to with respect to Marco Polo, we've now funded our requirement of 33 million, so all payments going forward will be covered by the nonrecourse financing in place at that facility. And with respect to Gunnison, we've now -- we've now funded about 50 million total of the estimated 100 million commitment on our side, 30 million of that being through the spar construction and another 20 million on other requirements other than spar.

Thank you, Wade. Martin, you want to come back and talk a little bit about what you see in terms of vessel demand, contracting demand in the fourth quarter and some initial thoughts on '03?

Sure, Jim.

Quarter four is obviously -- well, has gone better than quarter 3 did. One of the differences, main ones are both going to be fully utilized. I mentioned the issue with Uncle John in the third quarter, so it's great to see they'll enjoy full utilization in the fourth. Our Q4000, the Eclipse, are down in Trinidad. I expect that to run through until the end of this month. And then the Q4000 will come back and do a significant well operations job for a major customer. So hopefully, Q4000 will also enjoy full utilization. The Intrepid is having pattern utilization because the deep Gulf marketplace is still very flat.

Turning to the shelf, post-hurricanes, as Jim mentioned our activity levels increased dramatically, especially with Aquatica. They are have gang busters right now, mainly during inspections in shallow water areas. Hopefully some of that inspection work will turn into construction work for our other assets in due course. I think it's fair to say that our customers are being very methodical in the way they're assessing this damage.

And then, turning to '03, I just say that I feel much better about '03 sitting here this time than I did last year. Why do I say that? I got three new vessels out there, the Eclipse, the Intrepid, and Q4000, all working all through their runoff introductory issue, debugged, and we're bidding projects with them. Just, for example, with the Q4000, I got 10 in-house amounting about 300 years of potential work for her. Also, if we get through this well operations project I mentioned earlier, with the success I expect, then I think that will lead on to a significant well operations work next year.

So if you add to that the work we already have booked, especially on Gunnison and Marco Polo, we're going into next year in the deep water in a lot better shape than we went in this year, in my view. With the shelf, too early to say how that's going to pan out yet, but it's difficult to imagine it can be any worse than this year. So that's all I'll say on that one.

Did you want to mention just what it looks like for the Sea Well over in the North Sea?

Sure, the Sea Well, as Jim says, had a great third quarter. Fourth quarter is always slow for two reasons. Firstly, the weather, and secondly, customers tend to run out of budget allocations. So, you know we're taking a bit of time right now to do some repair and maintenance and also change out the marine crew, so that we're ready to get back working as soon as the new year starts. And then we have lots of opportunities with Sea Well next year. I'm expecting good utilization and good returns.

Okay, thank you, Martin. Owen, you want to jump in and talk about where you see us from a strategic standpoint and how we'll continue to figure in this market?

Well, I'm not going to dwell on the third quarter here, but I will speak a little bit to the near term and longer term. Starting with long term, I'm not displeased with where we are. We have the assets and the fleet and the market position that we had targeted strategically in our long-term growth plan. I don't feel panicked in any way about our future. I think it's sound and everything is on track.

Turning to the nearer term, we did take -- undertake an aggressive expansion strategy. We were targeting enough turn that we saw coming in '02. We had to make that decision early enough to be ready for '02. Obviously, the demand didn't come in '02, and we're seeing the results of that. The same uncertainties that plague the macrovision affect our macrovision affect us to a certain extent, so it would be prudent to take some steps going forward in the nearer term that assumes a continuance of the current market state. I think the most impacted part of Cal Dive -- I mean, Cal Dive is functioning very well. Our strategy is with the production hedges is greatly to the cyclical effects, but the most impart -- impacted part of Cal Dive is the deep construction, and I'll also touch on Canyon in a moment.

But in deep construction, these large, deep-water assets have cost an overhead that just can't easily be cut off. If there's -- if they sit idle. If they don't work and produce revenue, then the cost is pretty significant. It's much greater than the smaller shelf assets. Because of this risk, our model has always included in our growth strategy, on the production side of contracting, to act as a hedge, and that's working very well right now.

Now, going forward, it's interesting right now to look at the construction contractors in the world and what they're doing, because, as far as deep construction, our plights seem small. You've got -- you've got three ways you can react in a market like this. You can get utilization, and, again, it's utilization that drives -- utilization is what allows you to avoid incurring the costs against no revenue. So there's a -- there's three ways to counter that. One, you can get utilization at all costs. You can accept risks and land a lot of big contracts. This sounds great going in. If you remember over a year a, I told everyone to be wary of people bragging about having large -- big contract awards. I think you see the results of that in recent times. The other way of going is sticking to your guns. You bid reasonable rates, you insist on fair -- fair contract terms, but, of course, you win little or no work, and the idle costs will kill you. Basically, that's the direction that we chose to go in in Q3. If you remember on our call, on our previous call we decided not to chase bad contracts. We kept our rates where we thought they were reasonable. We realized we would have idle time, and because we had work to do on our assets getting ready to go forward, we thought that was a more constructive use of the idle time. The results are -- were pretty devastating when you consider that on top of that decision, the events were compounded by weather and then the extraordinary breakdown on the Uncle John, but, as Martin says, they're runoffs and now we talk about what we do going forward.

Going forward, there is a middle road that you're probably hearing a lot of contractors talk about, which is to avoid the high-risk contracting and going for day rate. This all sounds well and good. You can accept day rate work with low risk and hope to book up enough utilization to avoid the impact of the idle costs. The problem is that margin becomes the only competitive tool you have to secure that utilization with, and as a result of all the contractors go that way, you can imagine which way the margin goes. Just, you know, from a possibility here. You know, can you even get into what I -- I find it an important attitude, which is trying to lose less, which is a term among contractors that we all know.

Anyway, the Cal Dive approach, what we'll try to do going forward is a bit of a combined approach. You know, having geared up and suffered the disappointment of the demand in '02, we are going to change our approach going forward a little bit. But we are not going to depart from turnkey bidding. Our turnkey bidding record is excellent. I don't -- I forgot the numbers, Jim, but it's thousands of bids with two losses, or something like that. Anyway, we'll continue bidding the turnkey using the same risk assessment that we've always had, which is worked very well for us. And perhaps with fewer crazy turnkey bidders around, this will bode well for us to us getting even more work. The next thing that we'll do is we will be competing for the low-risk day rate utilization type work. When you do that to avoid the margin hits that others may suffer, cost becomes all important. And I think most people know, Cal Dive is a very low-cost provider relative to other peers in our group, so I think that bodes well for us, especially in the Gulf of Mexico where we have the largest permanently deployed fleet.

But in general, there's just too many assets globally for the amount of work that there is out there. So relying on those two aspects alone going forward is not enough for us. I'm thinking about hedging us further. We are going to seek to place some of our assets in the near term into alternative markets to achieve utilization, and then get the number of assets in the construction market to a more manageable level where we can benefit from our other two contracting means there. To give you some examples, we're going to be putting the Merlin and the Mystic Viking into Canyon's operational control and allowing them some assets to seek work in the open market. And the visibility that we have on contracts that they can secure is very positive at this time.

We're also going to be looking forward in a very positive way to really getting our pipeline joint venture with Horizon off the ground with the Intrepid, and I think that bodes well for the utilization on the Intrepid. We're also going to be seeking to place the Uncle John on a -- you know, she's on a five-month contract now. I think we're going to go again and try to secure a long-term contract for her outside of the construction market. Given that, that puts a whole different reflection on our fleet from what it is this year.

Switching a little bit to Canyon, I think that's another area we've been disappointed with this year. It was negatively impacted '02 primarily from the demise of the telecom market. Now, to be open with you, we figured that there was the telecom crash was coming. The contracts that Canyon had in telecom market was the maintenance burial of cables. We thought the contracts would be relatively immune because of their lack of field maintenance nature. We understated the effectiveness of bankruptcies in the process. But when you're wrong, you're wrong, and that's something we're facing right now. But Canyon did make a very strong impact in burial, and I think that's a differentiator with Canyon that we can build on in the future. It's our intention to really focus Canyon, not only on maintaining a position to come back with the cable burial market, but to apply their expertise in pipeline trenching, which is a service in relatively high demand. So we see some positive steps forward to take there. The other thing that happened with canyon is they added vessels and absorbed all the losses. They actually lost out on opportunities this last year that in hindsight we probably could have seized with the benefit of foresight here, we will. We can make some of those assets available to Canyon. As I said, making the Merlin and the Mystic Viking available to them, combine that with the Northern Canyon, I think it positions Canyon to be a relatively producer in the ORB market.

'02 was a surprise in many ways to us. That's my fault. Looking forward, I'm not going to be surprised again. We're going to be taking prudent steps going forward. I think there's nothing in our business model that in any way shapes the positive position we are in for long-term sustainable growth and ultimate realization of where we need to be. We certainly have significant leverage to pricing and utilization. And I think we're just -- we're really looking forward to getting beyond this, and we're looking at '03. And just -- my only comment on '03 is that even if the market conditions were the same, with the steps we've taken within Cal Dive, our results would be -- would be much better.

Well, the other thing I mentioned, there have been reports in the Norwegian press that have identified Cal Dive as being in some form of discussions with DS&D, the company that has a 50% joint venture with Halliburton called Sub Sea 7; I'm sure we'll get a question on that, so you just might attack the question out of the box and avoid the question.

Well, I can start with apologizing to anyone who has tried to reach me directly and not received a call back. You're not singular. I've returned no calls on the subject. I'm not going to say a whole lot. I will say that Cal Dive does believe in the strategic rationale of consolidation within the deep construction group. I think it would be good for our industry. It's our policy not to comment on things like this. Other than to say -- specific to this issue, other than to say that the Norwegian Stock Exchange has expressed an interest in us being available to answer questions as a third party, we really don't have any wish to comment further until that meeting occurs.

Okay. And I, of all things, dove right in here, and I forgot -- I know you've been clamoring to hear our general counsel to read you that statement on whatever it's called. Jim, they've got it in here.

Yeah -- well --

Go ahead. Hold on, guys.

It's our forward-looking statements comments. nd in our press release in the associated report, certain statements contained therein and in our discussion today are forward-looking statements under Apple law, just direct your attention to the press release and to our annual report on Form 10K for the year ended 12-31-01, filed with the S.E.C. and contains a complete description of the risk factors.

If that didn't send you all running for something else, we're ready for questions. Jennifer, if you're out there, we'll take questions.

Thank you. If you'd like 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'd like to ask a question, please press star 1. And our first question comes from James Stone with UBS Warburg.

Good morning, guys. And that was a very comprehensive review. I had a couple of questions, though. First of all, on the well operations side, the $16 million that you guys recorded, or cited as revenue, is that purely related to the Sea Well or does that include well ops revenue from the work in Brazil in the quarter?

No, just the sea well, Jamie.

So if we looked at that on a day rate basis, kind of a peak run rate, day rate for that kind of operation could be as high as that 170, $175 thousand a day, implied by that number?

It could be higher than that, Jamie, the level of the third-party services you have to carry in the operations, it brings our rate up.

Okay. That's very helpful. Secondly, Martin, you referenced -- you talked a little bit about bond backs and, Jim, a lot of references to bond backs in the press release about what sounds like a dispute or issues with your customers on that project. Can you give more detail into what's in dispute and what the revenue upside is, if you want to talk about that?

Yeah, actually, we were going to talk about it and we skipped over it.

Yeah, I forgot. So thanks for reminding me to give you the details on that. Late in the third quarter, in the last few days, we had three pipe supports, which are part of the permanent work on the bond backs project fail. We've had to recover those and refurbish them, so that's led to some extended down time for the Q4000, and some for the Eclipse, but not as much. Contractually, we've limited our liability for this occurance to a reasonable figure. But in this marketplace, you can never have a guarantee of customers' response in terms of the steps he's going to take and how long it will take him to give you a response. So we're always conservative at Cal Dive in terms of how we react to this type of situation. I think the range that we've given for the fourth quarter is almost entirely related to this -- to this figure. That'll give you some indication --

Okay.

-- of its size.

Total job, Jamie, is $20 million to $25 million.

Okay. And just looking at the -- you also just mentioned the intent to perhaps pursue the Horizon joint venture a little bit more aggressively with the Intrepid. I guess if we go back a quarter or so ago, you weren't really that keen on perhaps moving forward with Horizon necessarily, and the Intrepid, and perhaps were looking at some other options. Can you tell us kind of what's changed in that view, and is that a vessel that's going to be working with Horizon -- intended to work with Horizon in the Gulf of Mexico or taking it to another market?

What's changed is -- well, let me tell you what hasn't changed. We have a long-standing really good relationship with not only Horizon as a company, but Cal Dive, but personally we know the people over there very well. The situation we have that prompted comments our part before, were -- basically, they were instigated by the fact that we didn't really know what was going on. You know, the general market had some concerns over -- anytime a contractor penetrates Mexico, there are -- there's a tough period of break-in, and Horizon was in the middle of theirs. I think we were taking a conservative stance while trying to be fully supportive of Horizon and making our vessels and continuing to support them in every way. We -- just commercially, we had to take a prudent stance and hold back on going forward with the pipe lay equity transfer of the equipment. But what has changed since then is that there's been dialogue between the companies on a more open nature. We understand their situation in Mexico a lot better now, and I think Horizon has done an admiral job of the tremendous feat involved in penetrating a new market as difficult as Mexico. And we're at a position right now where we're feeling a lot more comfortable in getting back to our old comfort levels with Horizon.

Martin, the other thing I -- you may comment on, but all of the feedback I get is that it's just an incredible pipe lay vessel.

Yeah. We've been very pleased with the performance of the Intrepid, I'd on the few jobs it's done since coming out of the yard. Just the market will come up. But looking at next year, there are a dozen or so tie-back projects, two or three linked to Marco Polo that the Intrepid could do. So next year and definitely the year after we'll see a lot more projects that will lead to good fortune for the vessel.

Jamie, any more questions?

I guess that means you're looking to keep in the Gulf of Mexico?

Yeah. Sorry.

Okay, thanks.

Thank you. And the next question comes from Jeff Cubrit from Solomon Smith Barney.

Good morning. It's Andy Hoffman.

Hey, Andy.

A couple of questions. One, Owen, in light of the commentary you just gave on your new -- not new, but your adapting/contracting strategy, do you believe that margins, let's say, in '03 and '04 for DP may be lower than your initial expectations? If there will be more competition, if there's going to be more day rate work versus turnkey?

I think there almost has to be, if you just look at the number -- you know, if you take what is being fed to the market by all the contractors, and you just count the number of vessels and the number of jobs out there, and there has to be competitive pressure on margin.

Has your outlook for the size of the DP market, particularly in the Gulf for '03 and '04 changed from what you had been assuming?

Well, I would -- let me jump in. Think Owen's comments, I would agree, in terms of '03, we do see a fairly significant shift in the market, Andy, in '04. I would expect that it's going to move from an overcapacity market to one that's more balanced by the time you get into the second half of the year.

I'd also say, I wouldn't rule out '03. I mean, right now, the uncertainties, like I said before, that plague everyone else, affect us. I think what we're trying to do is be prudent about how we go forward in '03, but quite honestly it would be hard to imagine a market worse than '02.

Right.

And it doesn't take a whole lot of improvement -- given the strategy that we're going to be adopting here, it doesn't take a whole lot of improvement to really positively affect our margins.

Okay. And, also, not really to go too far into the whole Sub Sea 7, but I'm looking at the -- you're talking about the -- looking at prudence because the economy is uncertain. An oversupply of vessels and uncertain timing as to when the deep water truly comes out. Also your debt levels are moving up towards the 40%, 45% range. So I just -- I'm having trouble with the -- you know, putting together the consistency of prudence and possibly making a major acquisition.

You do make one good point, given that -- where Cal Dive sits in our strategic plan, we're certainly not panicked in any way into thinking that there's something we have to do. But we'd be remiss if we didn't explore the opportunities. And I think during that exploration process, we're keenly aware of our debt levels, the effect of delusion on shareholders. And I think any solution we sought would have to have not only a -- you know, stay within Cal Dive's conservative historic parameters on investment, but also have a very clear strategic way forward, you know, with regards to the industry conditions. Now, that's the one that's probably not readily apparent to everybody, but it's one that I think is certainly being looked at strongly from this side.

And I would assume the 50% debt to cap ceiling is still your internal feeling, I should say?

Yes, it is.

It is.

One final question for now, I just wanted to understand better the revenues during the quarter. Initial guidance was 55 to 60, and then you had the storms, which lowered your best utilization, I realize you're talking a lot about pesters during the quarter, but it seems to be incongruent that revenues were a lot higher than your initial forecasts. If I could better understand where you are coming from.

Well, as far as the revenues in the fourth quarter go --

you're asking third quarter, Andy?

Yes, first to third quarter and then going forward, is there going to be a big shift in the amount of pass-throughs that you're booking? For instance, you're giving fourth quarter guidance of revenues, does that include significant level of pesters?

The answer is, yes it does. It's the higher level of pass-throughs especially with respect to the well ops you gave, that came up.

Oh, okay. Because I'm just trying to think of the timing. What was the difference between the guidance a quarter ago and what happened? Was it the well ops came in afterwards?

We didn't --

That was the biggest component.

Okay. Okay. Thank you very much.

And the next question comes from Jim Rollinson from Raymond James.

Good morning, guys.

Good morning, Jim.

If you look, Martin, you talked about the Q4000 working on a well ops job and if it went well, it could lead to more work next year. Is it something that if you're looking at the type of work for next year, is that term work, just a certain number of days or just a runoff event, or what kind of contracts opportunities are you actually looking at for the Q4000?

Well, this particular customer said to us --if the job goes well in the fourth quarter then they will give us all their work in the next year, so the only question is is how much do they have?

Yeah.

They've given us friendly estimates and that will increase going forward given the number of Sub Sea 3s that they're putting in.

And you kind of laid out before kind of where you expect to see ultimately your rates on the Q4000 go, position yourself just under some of the semisubermsibles. What are you seeing so far, if you want to comment?

We've been doing different things with it. Heavy lifting down in Brazil. And for this upcoming job, when we get back, it'll be probably on the 150.

So probably average somewhere in the 130ish range, it sounds like?

Yes, around there.

Which is pretty good for introduction. If you look at prices ahead, when gas prices are or if at this point, gas prices come up meaningfully, do you see yourself putting more hedges in place?

Another 25%. Yeah, we would probably increase our hedge to the 50% level. I don't know that we'd go above that. Our strategy is we're not trying to speculate. What we're trying to did is lock in on a pre-targeted budget level to the extent we've got the chance to do that, we certainly would.

Sure. If you look at kind of what you have locked in in terms of production, ERT, hedges on part of that, looking at a soft market with your conservative strategy, how are you feeling about the forecast?

We will have our formal guidance which we'll issue when we get together three months from now. Again, Jim, if I'm looking at 70 to 80 cents from ERT, it's pretty hard to imagine -- well, at that point, I think we would say we're comfortable with the buck 30 that's out there.

Okay, thank you.

Thank you. And the next question comes from Roger Reid with Simons & Company.

Good morning, gentlemen.

Hey, Roger.

A couple of questions, kind of getting at the of putting the two vessels with Canyon, what markets would you consider that maybe you haven't been in before, if any, geographically?

Well, Canyon at the end of -- at the end of' 01 opened up a base in the U.K. During this year, as has been under-performing. We took delivery of the northern Canyon, which is a state-of-the-art vessel. Unfortunately, the crane that was supposed to be delivered with the vessel was late in delivery. So we basically have been suffering through having a vessel that was not able to work in the market that we had targeted for it, and it's been working in the supply boat industry. The good side to it is that it's allowed the clients to see that vessel, and it is state-of-the-art, and the crane is going on board as we speak. As we put our OBs over there in that UK sector, then the -- I believe that that vessel is such a nice spread and the visibility on the work there is pointing to full utilization, spillover then could result in additional work for other vessels. Beyond that, the U.K. is also the base for supporting operations down in west Africa and the Med, so I think the vessel will have opportunities down there. So, you know, it's quite possible that the -- right now, I would not foresee the Merlin or Mystic Viking going outside the Gulf of Mexico for OB support, but I do anticipate there would probably be the demand for them if we wanted to send them there.

Okay. And then, in terms of your sort of changing philosophy here about going for a blend of day work and turnkey, how much does that depend on what you want to do versus what your customers want? Do they have a want a day work contract and you bid that way and they choose among the selections?

It's a good question what the clients want is for us all to work for free and be bankrupt in a year. That's unfair. It's just the way contractors feel some mornings. Seriously, I think it will be an uphill road for the contractors to meaningfully affect the bidding that comes out from the client. The clients, of course, have downsized and put engineering with contractors and third-party engineering terms over the years. They look to the contractors to provide more. What to change is the contracting terms under which the risks are undertaken. That, I don't know if there can be -- I don't know if there's been enough consensus among the contractors to compel that. I think the more logical driver is I think everyone is too weak to do anything other than day rate. So we'll see. I think you'll see contractors willing to take epic jobs, but there's a lot of work to be done. Until think I think our conservatism is a healthy approach.

Thank you. The next question comes from Martin Milloy from Hibernia.

Good morning.

Hey, Marty.

I wanted to ask you some questions about capital expenditures, if you could give us some perspective on 2003 versus 2002, and particular in what you expect to spend at the ERT unit.

Good. Let's get Wade into model.

Yeah, Marty, we'll I guess, from the standpoint of '02 first, we'll finish the year with over 300 million, including the business acquisitions this year. ERT, since you asked about, will be in the -- around 45, 46 million range, of that number. Looking out into '03, you know, I'm looking at around 130 million of 55 of that is the Marco polo, which is funded through nonrecourse financing, so the rest of it, you've got -- we've got Gunnison being 30 to 35 million, maintenance Cap Ex on the vessels, 10 to 15 million and then ERT, just well work, our typical well work budget of 10 million, and then we would review, you no, further acquisition opportunities as they come up.

We didn't specifically comment on that, Owen, but we were successful in our first 374, and I know that's where you're really focused next year in terms of providing alternative use of our vessels?

I'm really excited about that whole -- the whole model, the business model that we've got. Although commodity prices are high and you would suspect that the producers have a lot of cash, I think without the equity markets returning to a higher level, there's still not enough cash for the amount of work that would be needed to offset production/declines. There are a lot of nonimpact reserves discovered. There's a lot of opportunity for us to become involved in developments out there. I think the extent to which that we could put our assets to work in that market is limited on by our available capital to develop the PUDs.

Roger, did you have any other questions?

It's Marty.

Marty, I'm sorry.

That's okay. Just looking at your production, the 25 to 30 DBs next year, can you give us some idea as if you expect that to be fairly constant throughout each of the quarters, or is there a ramp up?

Actually, Marty, you know, on our website, we have our most recent road show.

Okay.

And there is a slide that shows that. It comes down, I think, from seven to eight in the first and second quarter, going down to 6 1/2, I think, in the fourth quarter.

Okay. And then, using your vessels to work on the Gunnison project, when do you expect that work to begin?

Quarter 2.

Okay. And can you give us some perspective on approximately how much that will be during 2003?

Right now, we're looking at about 25 million, 30 million.

Okay. Great. Thank you very much.

Once again, if you'd like to ask a question, please press star 1, and the next question comes from Jeff Cubrit from Solomon Smith Barney.

Yeah, it's Andy again. Martin, just wanted to get an update kind of on your '0 backlog for the DP fleets, like if you had a best guess as to what the utilization range would be of the fleet for the year, that would be good, too. I know it's a bit early.

Oh, it's very early. I mentioned earlier we got Gunnison and Marco Polo. We do have several other awards, as Owen mentioned, seeing some long-term utilization contracts on a couple of our sets, so it depends on how the opportunities pan out over the next few weeks.

I think, Andy, we'll have a much better fix on that when we put our formal guidance for '03, which we'll do when we get the next conference call.

Right. You have a number on the backlog currently in DP for '03?

45.

Okay. And last question, I might as well as just finish on the ERT. Are there more opportunities to buy properties out there, or are you kind of full right now?

Oh, it really runs to the PUD strategy, Andy, where we've got -- they have a number of opportunities, and likely headed East Cameron 374 where we basically pick up a field that's been drilled where the customer, it's a smaller reservoir, and the customer is wanting to devote his Cap Ex elsewhere, so we, you know, in terms of the capital, we're able to provide our vessels basically our costs.

Might also comment, Jim, on the abandonment side.

Yeah, good point. With the commodity prices as high as they are right now, we're seeing an extrodinarily high number of properties available.

Yeah. And particularly the visibility that we got out of these two acquisitions, the ERT people are looking at all sorts of potential acquisitions, and there again, Andy, most of those involve very little capital, most of it's the assumption of the abandonment obligation.

The only thing I caution there is we historically have not made the abandonment acquisitions at high commodity price levels.

So would you say the outlook out there is, you know, what is constraint on making more acquisitions? Is it capital, human capital? Or is it -- it's just finance?

No, there -- we could put all of the capital -- I wish we had a source of capital to put to work. I think we could be showing some spectacular results.

Thank you.

And the next question comes from James Stone with UBS Warburg.

Could you just, given the -- some of the high-profile project delays that have happened with like Front-runner and a few other project , could you give us an update on where the construction stands on Marco Polo and the Gunnison facilities?

Yeah, good question.

Those are two projects that have remained right on track throughout. As I mentioned earlier, Gunnison construction work for us will start in quarter 2, and it'll go through into quarter 3 and some in quarter 4, and then Marco Polo for us will probably start late quarter 3 and into quarter 4 next year.

And both of those are still looking at right at the end of '03, early '04 first production?

Yeah, mark co-Polo will be late as the demand charge kicks in early, as soon as the TLP is installed.

Right.

When does it -- when does the demand charge kick in?

As soon as the TOLP is installed and the customer is ready to start hookup.

And do we know when that is?

Sometime late in the fourth quarter next year. I can't say beyond that.

Okay.

You were mentioning mark co-Polo, we talked about production deals that were available out there. Marco Polo, the model there, has a lot of impact or potential impact on production deals, because it is such a good model for the producers to use, and we provide the assets, it changes Cap Ex to Op Ex and lets their capital constraints ease. So I wouldn't be surprised if -- to see an opportunity for another Marco Polo.

That's terrific. Thank you.

The next question comes from Roger Reid from Solomon Smith Barney.

Yes, one follow-up question. I had a lot of vessel downtime in the third quarter and it sounds like some in the latter part of this -- is there anything currently scheduled or any vessels down, any significant part of 2003?

Good question in terms of regulatory dry dockings and that sort of thing.

We have a couple of planned dry dockings, but, you know, nothing major.

Okay, thank you.

And it appears there are no further questions. Mr. Nelson?

All right. Thank you, all, for listening in. We will be meeting with you in approximately three months, in February, and we'll cover the full year 2002 as well as give you our formal forecast on '03. Thanks again for listening.

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