Helix Energy Solutions Group Inc (HLX) 2002 Q4 法說會逐字稿

Good morning and afternoon. Thank you for holding. All participants will be able to listen only until the question-and-answer session of the conference. This conference is also being recorded. If you have any objections, you may disconnect.

I would now like to turn the call over to Mr. Jim Nelson (ph). Thank you, sir. You may begin.

Thank you. This is Jim Nelson. Welcome to the fourth-quarter conference call. With me today, as usual, is Owen Kratz, our chairman and chief executive officer, Martin Ferron, our president and chief operating officer, Wade Pursell, our chief financial officer, and Jim Connor (ph), our general counsel.

Hopefully all of you have had a chance to receive the information that we'll be talking through today. That consists of a two-page fourth-quarter shareholders' report, two pages of guidance for 2003, and then the press release with the accompanying summary financial statements.

We're not going to spend a great deal of time on the fourth quarter. A lot of what we'll be talking about will be focused upon the current market conditions and our -- what we see in '03/'04, but -- and given that, I guess we will start with Mr. Connor giving you a Safe Harbor, because we are going to need it this year.

Good morning and afternoon.

As noted in our press release and associated report, certain statements contained therein and in our discussion today are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We direct your attention to our press release regarding this, and to our annual report on Form 10-K for the year ended December 31st, 2001, filed with the Securities and Exchange Commission for a complete discussion of these risk factors.

Let's start with just a couple of comments on the fourth quarter. Obviously the quarter was impacted by a little over 10 million in reserves that we took in conjunction with a contractual dispute and some litigation.

Martin, maybe you could just go through the contractual dispute.

Yes, Jim.

This is related to the Bombox (ph) project which we carried out in Trinidad. Now, at Cal Dive our contracting posture is to always cover the potential downside from diamond Q (ph) or loss of work, either by builder's all-risk insurance or acceptable indemnity protection. As the Bombox project was to be carried out in a remote location and involved heavy construction, we were especially careful to limit our liability to $250,000 in the indemnity provisions, as the customer wished to self-insure.

On the project, we successfully installed several very heavy items, with the Q4000, including a 400-ton manifold. However, in late September, three pipe supports failed when we placed a 200-ton pipe spool on them. This incident required the recovery, redesign, modification, and reinstallation of the supports over a 45-day period and to a plan approved by the customer.

During the waiting period, the Q4000 had no critical pathwork to do and therefore was placed on standby. Much to our surprise, on the very day that the pipe spool was reinstalled, the customer took the position that the indemnity provisions in the contract only covered the direct aspects of the recovery plan.

That is, the Q4000 standby period was not covered. The present status is that we have completed the job, submitted our invoices, and are negotiating all extra work items. Hopefully we can settle this matter, but otherwise, we'll be dealing with it in arbitration.

I'll comment just briefly on the litigation. This is a case that has been going on for over two years. We have spent well over a million dollars defending it. It is a case, I guess, that certainly argues for tort reform in this country. While we had a significant chance of success, in Texas there were -- there is no cap on the potential damages, so while we were assured by our attorneys that we had roughly a 85% chance of success, that 15% had a lot of exposure to it. EEX is being acquired by Newfield (ph) gave us an opportunity to settle this case, which we have done.

So our primary goal with those reserves was to get two items behind us to essentially clear the path for 2003 and we've done that. They are both behind us.

Having said that, if you take out the -- those reserves, we earned 16 cents in the fourth quarter, which was identical to a year ago. That was slightly below the low end of our initial guidance, and that's because there was very little activity in the North Sea, and Hurricane Lily impacted our production from ERT more than we had expected. For the year, we earned a little over 12 million. That's not something we're particularly proud of. At the same time, that's 4% of revenues in a year in which an awful lot of companies in diverse industries would be pretty happy with, net income at 4% of revenues. And we achieved that 4% of revenues even though the major contract in Bombax that Martin talked about represented 10% of our total revenues for the year.

I have a couple of comments on the operational highlights. That's Page 2 of the shareholders' report.

Our deepwater fleet achieved -- deepwater contracting fleet here in the U.S. achieved very solid utility of 81%. Again, what that reflects is the fact that our fleet targets specific niche markets. The only vessel that had significant idle time was the Intrepid. Her utilization was only 40% although our new pipeline vessel performed extremely well on a project, deepwater project at West Navajo. There is some commentary in the well operations segment regarding the situation on the North Sea, where the British government imposed a new tax on oil profits, which has got sort of a standoff occurring between the oil companies and the government. The government obviously is going to need production from the North Sea.

Even with the lack of utility that the seawell had in the fourth-quarter, which was only 40%, the vessel finished the 6 months of our ownership with gross profit margins of 16%, and that certainly compares well with what was going on worldwide for construction and well operations vessels.

Our shelf contracting turned in an excellent quarter, unusually strong utilization of 75%. Much of that in response to Hurricane Lily. Some of that work will continue in the first quarter, as many of you are aware. The NMS has mandated inspections in a certain diameter or path around the path of the hurricane.

Some comments on our oil and gas operations. You can go through the narrative. I would summarize with a couple of points. In 2002, our oil and gas company, Energy Resource Technology, their net income was 22% of revenues, their EBITDA margins were 60%. We finished the year in proven developed reserves on the shelf and proven undeveloped reserves at Gunnison (ph) at 160 bcf equivalent. ERT finished its 10th year in business, and annually now, over the 10-year period that ERT has operated, that entity has delivered a 28% return on capital employed. I don't know of any other company in the energy business that can state that type of a return.

While there are some analysts that are lowering their target prices because of the component of oil and gas mix that is in our forecast, or in our revenues, I would challenge anyone to find a return like that, and I really think we ought to be paid for it.

I think what we'll do now, Wade, why don't you talk a little bit about the debt picture. We've summarized the debt picture in the shareholders' report, and go through that, and then what we're looking at in terms of cap-ex and what that will do to our debt to total capitalization.

Sure.

As Jim said, the -- we have summarized the debt picture as of year-end, 142 million being the Merad (ph) long-term facility. We had 50 -- nearly 53 million drawn on our revolver at year-end. The Gunnison term loan was at 29.3, with another 4 million for capital leases.

Our board has approved a cap-ex plan for 2003 which totals 160 million. Most of that is Gunnison and Marco Polo, 55 million being Marco Polo and then 35 million being Gunnison. Maintenance cap-ex about 15 million. Then the canyon (ph) MSA being 20 million. And another 35 million for ERT wellwork and acquisitions.

I will point out that the Marco Polo amount is funded through a debt facility. Of the 35 million remaining on Gunnison, we still have another 5 million to draw on the term loan there. So that leaves about a hundred million of additional cap-ex, and based on my projections, which we'll go through later, will generate over -- somewhere in the range of 110 million of cash flow from operations during 2003 which will cover that cap-ex.

As far as our debt to book capitalization, we ended the year at around 39%, 40% actually. The -- you probably read the release. On the sale of 25 million of convertible preferred stock in January, we did that in a private placement. That's convertible into 833,334 common shares at $30 per share. The holder has the right to acquire another 30 million of additional preferred stock beginning July 1st of this year, and that would be done at convertible at 125% of the then-common stock price, but at a minimum, there's a minimum of $30 per share on that additional draw.

We have an annual dividend minimum 4%. After two years, the holder may redeem, recouping their original investment, but we have the option to settle that either in stock or in cash.

So with that said, I mentioned that our debt to book cap is around 39% currently. Based on my projections, we should be down to the low 30s by the end of the year, 32 or 33%, and that assumes no additional equity from the convertible preferred deal.

Thanks, Wade.

I have just a couple of -- one comment in terms of financial stuff. You may note on the comparative consolidated balance sheets a significant increase in other assets. That is where we are reflecting our interest in the Marco Polo tension (ph) leg platform which represents about 33 million at the end of the year.

Let's turn to 2003. You have our guidance for the first quarter, and then for the full year.

The second half of the year will be when you'll see a significant spurt in activity, and I might just comment upon that. If you look at the page that addresses the year 2003 - in terms of backlog, we did reference the seawell, while the activity in the first quarter in the North Sea is limited by weather, that vessel has an excellent book of -- order book, and she will have an excellent year. Again, what we -- the seawell was doing is well operations, which is outside of the construction activity market.

Gunnison and Marco Polo, the work that we are doing relating to our deepwater investments will be in the second half of the year. And then of course the construction season in the Gulf of Mexico kicks off in June and lasts through October.

We have completed a master service agreement, Canyon Offshore has completed a master service agreement with Coflexip (ph) whereby they have -- they, Coflexip, has committed to a certain -- a number of ROV days that we will be providing over a three-year term of the agreement. That will take not only the Merlin, but also the Mystic Viking or perhaps the Witch Queen to support that contract. We will be acquiring three new Triton (ph) XL work class vehicles to support the contract.

We will also be taking delivery of and buying a state-of-the-art 750-horsepower trenching unit that will be installed on the northern canyon, and which will then be subject to a frame agreement with Coflexip to provide further trenching services in the Norwegian waters of the North Sea. All that have will happen in the second half of the year, as the new vehicles are delivered in the second quarter.

And then finally, in the oil and gas production section of the forecast, our run rate is expected to run 6-and-a-half to 7bcf in the first half of the year, increasing to 7-and-a-half to 8 bcf the second half of the year, as we are doing a fair amount of well work on the newly-acquired Shell and Hess properties.

With that, Martin, why don't you move into just our thoughts on the markets that we're looking at, starting perhaps with the deepwater markets.

Okay. On deepwater, there will be 10 significant projects this year. That compares with 5 last year.

We will be involved in at least 8 of those projects. Six potential hub structures will be installed, compared with three last year. And this is important for Cal Dive, as while we can only play a supporting role in the initial heavy infrastructure projects, we can play a leading role in the development of the surrounding reservoirs.

These tieback products will all be sub-sea developments involving (inaudible) This will create a lot more work for both the Q4000 and the Intrepid. It is interesting to note that our North Sea-based competitors came to the fore-as contractors once the key producing infrastructure was installed and (inaudible) oilfield province. We see exactly the same thing happening here in the Gulf. The initial infrastructure goes in, and then there's a lot of interest in surrounding reservoirs.

Now, with ERT and our deepwater gateway strategies, we have a real competitive advantage which will translate into much better margins than we were able to produce in 2002.

So from my perspective, the deepwater market is going pretty much along the lines we expected, although the pace is a little slower.

So certainly in the second half of this year, we've got Marco Polo and Gunnison going in, which creates significant work for us, and we're already seeing, you know, based on last year's hub structures, an upsurge in this type of activity. So I see the outlook as a lot better.

I'll come back with a couple of comments. One of the themes that I was getting in some of the calls during the past week was that there's the potential for a number of vessels to come in out of the telecom market, so let me just comment upon that.

Our Eclipse did, in fact, come out of the telecom market. We spent about $10 million to reinstall the diving system in that vessel, and to upgrade her for deepwater work. The notion that you could take one of these vessels and stick a million-and-a-half crane on it and do deepwater work is probably a little farfetched, particularly when you get into the technological developments that are below 4,000 feet, where much of the activity is now in the Gulf of Mexico.

Our Q4000 and Intrepid are some of the few vessels in the world that have cranes even that can reach 10,000 feet. As noted in the shareholders' report, we have just completed a 450 million expansion of our deepwater assets. The nine dynamically positioned vessels that we now have represent the fourth largest fleet in the world. If you look at that fleet, which consists of flow line lay vessels, construction, and ROV support, Sub-Sea 7 has 20 vessels, Stolt (ph) has 18, and with that size of fleet, obviously I would not expect either of those to be adding vessels. Coflexip has 11, and I think Technique (ph) is probably focused on their upstream activities. Then Cal Dive comes in at 9. Psi-Pam (ph) at 6, and then OI and Torch (ph) at two each.

So in the current market, I guess from our standpoint, what you should know is that while Martin is optimistic on the signs that we see, we're going to assume that we're going to have a fairly difficult contracting market, both this year and next, and we've planned accordingly to do that.

Two final points before I turn it over to Owen. We did have a board of directors meeting yesterday. We added two new independent board members, John Lavoie (ph). John is a founder of JVL Partnership. It's a private oil and gas investment partnership. We've known John for a long time, worked with him when he was head of Morgan Stanley's oil and gas practice, and prior to that, heading up their oil and gas research. Tony Tripotto (ph) from Veritas. Tony was CFO and is now executive vice president in charge of their North America and South America operations. Tony has had 17 years with Baker Hughes prior to that. So we're adding two excellent people with both industry as well as financial expertise.

And I think Owen, why don't I stop talking and let you sort of bat cleanup before we take questions.

Okay. Because I planned on being a little long-winded, which I know makes everyone here cringe.

But I wanted to cover a lot, in light of everything that's going on and maybe add a little -- you know, provide a little clarity.

In recent months, there's been a lot of awareness generated about how hard the construction contracting environment is. I use the word "generating awareness" because the fact of the matter is that it's always been tough. Those that know me and have listened to me know that, you know, I'm not enamored. I love being a construction contractor but it's not because it's easy. The -- you know, that is the reason that Cal Dive has such a unique counter-cyclically hedged business model. But we are in an unexplained prolonged down cycle right now. You know, with stiff competition, contracting pressures from clients, escalating costs, these are nothing new. Down cycles are where Cal Dive traditionally has excelled and thrived.

All through the second half of this year, however, I have been admitting and quite -- being quite candid about being caught, you know, this year. We were expecting an end to the down cycle that just frankly didn't come. We missed our 350 '02 year '02 year guidance for the first time ever, and I could give a lot of reasons, I guess. We were -- we were winding up a hugely aggressive acquisition program in the shipyards. Our focus was there. You know, the fundamentals, the, you know, 9/11, Enron -- I could go on, but I'm not going to, because really there's no excuse for us being caught unexpected like we were.

We should have -- we -- it is very atypical for us to plan on an optimistic outcome. We have said repeatedly on our road shows that we manage the company for downturns, and that's a motto that we need to hold to and we plan to.

I don't think that we're going to sit here and try and give guidance as to when things improve. I think there's just too many variables in the mix. Like I said, I think it's much more prudent for us to manage the company for the downtime -- down cycles, and what we can say that is in our guidance and our operating plan going forward, we're not relying on any significant pickup in construction activities for certainly '03 and potentially even '04. I think everyone can assess the fundamentals and realize that things will pick up. When it does, Cal Dive will benefit beyond what we're projecting, due to the leverage that we now have in the company.

Now what I would like to do is mention just briefly some of the -- what I have said on road shows about this upcoming year.

We can be proactive in improving the deep construction market, and I might point out that that's really the only area in the company that we're really focused on as being a problem area. Everything else is running just fine. It's just how to -- how to go forward in a, you know, a very tough market.

We did mention on the roadshow that we were looking at accomplishing three things on a proactive basis. One was to sign a multi-year master service agreement with Coflexip for providing their advanced work ROVs and a frame agreement for trenching, and that has been accomplished and is in place. In fact, we'll be putting three vessels into Canyon, our ROV group this year, to support that work, and that gives us some visibility on the utilization for those three vessels.

The second thing that we mentioned on the roadshow was an upcoming project for BP Troika with the Q4000 for well service. We did go out on the job. It is now completed, and it was a -- technically, it was just a great job. I mean, the Q4000 functioned perfectly. Everything went according to plan. We are talking about beginning the planning phase for additional work, so that -- that's a very positive, going forward, and a second success.

And third, we were talking about the likelihood of putting the Uncle John on a long-term contract in Mexico for Pemex (ph). Right now, that -- everything is looking positive. We don't have an announcement of that contract, but the contract is out for tender. We are in the running, and we expect good things.

So some of the things that we've been talking about are coming to fruition.

The fourth thing I'd like to mention today is going to occupy a lot of our attention, and that is a reorganization. And that reorganization might be the wrong term. Integration is what we're going to really be focusing on this year. We've added an awful lot of assets and new businesses, and we've yet to really reap the benefit of taking the time to really integrate all the services.

I'd like to just spend a minute here recapping what we have accomplished and then to put it in perspective as to where that puts our standing in this market going forward.

If you go back to the beginning of this latest acquisition phase, we go back to '99. In '99, we had a shelf group with five vessels, a deep group with three vessels, and ERT with 32 million in revenue from mature properties.

Today, those three parts of the company, the shelf instead of five vessels now has 13, deep instead of three vessels we now have 9, and ERT has grown to have 85BCF equivalent of proven developed reserves. That alone is tremendous growth. But on top of that, the way Canyon -- or the way Cal Dive's profile looks today is we have three robotic operating groups, basically. Canyon U.S. operating 9 ROVs and forward trencher, Canyon Asia-Pacific operating 5 ROVs and two trenchers, Canyon Europe operating 5 ROVs and 5 trenchers, and as I said earlier, we're going to be putting three vessels into further support those efforts.

We now also have a well ops company. Well ops U.K., which has -- operates the sea well with a sill technology for well service has a very visible backlog for '03, and in spite of what you might hear about tax and lack of work, you can imagine with -- with what's happening in the macro sense in the U.K. with fields now being turned over to independence and entering into a mature basin, the prospect for a well -- a low-cost well intervention company like we have with the sea well bodes well for the future.

Well ops U.S. operates the Q4000, and as I mentioned before, technically it is every bit and more of a vessel than what we had hoped to achieve out of the design, and as I've also said for the last couple of years running, this is Cal Dive's future. It is not today. It's going to take a while for the well intervention market to grow. But we have now firmly established a first-in, and we're going to be building the brand name around it.

ERT, besides now having 85bcf equivalent proven, we are also raising a fund, a $150 million fund to make further acquisitions for PUD developments which will then put our assets to work. We're just beginning this process, but -- and today may be the first -

I'm sorry.

I'm looking around to see if I even should have said that.

But it's something that we're excited about. As you all know, we have no sales force to go out and secure these activities. We typically have our phone ring off the wall with more deals to look at than we can assess. So we're very optimistic about the possibilities of putting our assets to work in this way.

And then we've also formed gateway, which is a joint venture with El Paso Limited Partners owning 50% of the TLP at Marco Polo. This is a business model that we see as being highly needed by the clients, and we think will demonstrate this year the repeatability of that kind of a model and we're very excited about that future.

And then finally, we've got Gunnison. You know, the -- you know, I don't need to go into the details there, but Gunnison is a tremendous cash flow opportunity for us, and provides a tremendous future potential there. And it's a large long-term reservoir.

Having said that, this company has a tremendous amount of leverage in it. With all of that, if you go back and compare our results that at the end of '02, as dismal as they may seem, they basically equivalent with '99. Now, to achieve that much growth, hold your earnings approximately at the same level, all in a period of turmoil in our industry like we're going through, I'm very proud of the people at Cal Dive and what we've pulled off here. And I think you can -- without even going into details, you can just sort of see the leverage and potential in it.

Right now, our projections seem a long ways from our '02 results. You know, in '03, we are saying that we're going to be 425 plus million in revenues. Climbing on up towards the $500 million mark in '04. Earnings, I think the leverage in the company and as I said before, we are not expecting a significant upturn in '03 from construction activities, and I still think that the visibility is there to support the $1.20.

Moving on into '04, with clear visibility on 250 plus. And again, not expecting significant increases in the construction market.

So I think it shows the strength of our hedged business strategy, and I'll leave it to you to just see how much better it could be.

'03 may have been a down cycle year on work volume, but it is a year of opportunity for Cal Dive. We've had the opportunity to make great gains and relative strength through our peers. We have the opportunity to fully integrate all of the leverage that we now have. And that means a tremendous ability to produce when the recover actually does come back. And I'm talking about beyond the tripling of earnings for '03, which double again by '04. We've got the kind of wrench on top of this of leverage on top of this visibility.

I'm a pessimist by nature, as most of you know, but I will say that what we've done with the company and the business model that we have is the right one for the market conditions we're in, and especially if you look forward and try and determine where our industry is heading. But time will -- time will tell, and we will overcome this '02 year.

Thank you, Owen. Amy, if you're out there, I think we'll start fielding some questions.

Thank you. At this time, it if you would like to ask a question, please press star 1 on your touch-tone phone. You will be announced prior to asking your question. To withdraw your question, you may press star 2. Once again, please press star 1 if you would like to ask a question.

Our first question is from Bill Herbert, and please state your company name, sir.

Good morning. Simmons & Company. Owen, with respect as to the Q4000, we talked about Marco Polo and Gunnison representing about 60 million bucks worth of backlog in '03, and I realize that encompasses more than just the Q4000. How many days do we have currently contracted for the Q4000 in 2003?

I'll turn that over to Martin.

On the '03 projects, Bill, it's around 75 days right now.

That's 75 days for the Q4000?

Yeah.

Okay. And in addition to that, does -- what are we talking about with respect to follow-on work for BP as a result of the work that we did on Troika? I guess we were contemplating a fair amount of work on the well servicing front with BP, and what -- what does that represent in terms of an opportunity for the Q4000 in 2003?

Well, we were talking in terms of around a hundred days there, Bill. Right now, we've got three projects that we think will generate around 60 days, that we're looking at.

Okay.

So, you know, up side, a hundred, downside 60. You know, right now we're budgeting about 140 days of well intervention for the year, Q4000 in year.

Okay. 140 days. And that is exclusive of the work on Gunnison and -

Yeah, because that's construction, yeah? So 140 for well intervention and 75 for construction on those two projects.

Okay. So that's north of 200 days for the Q4000 '03.

How-- I mean, again, I know it's difficult to handicap this stuff, but at this stage, how confident are you that the 140 days is going to be economic reality, as opposed to just promise?

We're -- I'm pretty confident in that. You know, we're budgeting 210 days for the Q4000. You know, as Owen was just talking about, there's obviously extra leverage there. There's another 155 days. So we'll we're being pretty cautious in the terms of the way we're looking at things, but based on projects that we have identified for well ops, talking to BP about their work, I think the 140 days is do-able. You know, in the first quarter, we will have already done 35.

Okay. And with respect to the profitability of that work, can you give us a sense as to -- as to what the pricing might be for the Q4000, and underlying profitability and margins, basically? Just in generalities for '03 in general.

Well, for '03, we're planning to make a small loss with the vessel.

On the Q4000?

Yeah.

Okay.

So, you know, on the basis of a downturn -- downtime, I think you can make back into the rest, yeah?

Okay.

Bill, I'd like to add, you know, the fact that we are projecting a loss on the vessel shows the conservative approach that we're taking towards the projections and guidance for this year.

Yeah.

I will -- I will say that, you know, there was some talk about the Q4000 going on a long-term contract for very low margins.

Yeah.

Yeah. Going into BP Troika - you know, Bptroika was a very big test case for us. If we had failed that test test, I think it would have been imprudent not to have a contingencies plan because the largest exposure that we have in the company is probably the Q4000 not working.

Right.

For that reason, I wouldn't rule out us doing anything with it. But the fact of the matter is, Troika is now over. It was a success, and the visibility on the Q4000 for this year has shaped up to the point where we no longer have the downside staring us in the face that we perhaps thought -- or were, at least, contemplating as a potential as recently as a couple of months ago. And, again, we're not going to go into this year assuming the best case. We're going to go into this year always assuming the worst case and making sure we've got even the worst case covered.

Okay. And then -- and then last subject, if you will, the -- Owen, you touched on the (inaudible) million dollar fund to, I guess, PUD opportunities. Can you give us a little bit more meat there in terms of what you're contemplating, what the structure is going to be, and whether it involves a cash commitment or infusion on the part of Cal Dive?

Yeah. Let me take that one.

Okay.

The board of directors yesterday did approve our moving forward with this partnership which will be called stranded field partners. It's a $150 million offering of limited partnership units. It will be sold to institutions in minimum investment size of 10 million.

What I think we will be creating is a new alternative financing investment vehicle that will -- at a time when many (inaudible) companies are not able to raise money. It does give us the opportunity to significantly expand the PUD strategy that we have in place, but it's also coming at a time when we really don't have any cap-ex available to be devoting to that side of our business. Cal Dive will function as the general partner and manager. They'll have a 1% general partner interest, which means our capital commitment is 1.5 million. We'll receive an annual management fee of 2-and-a-half percent.

We have a 20% back-end interest after each field that's acquired achieves a simple 8% return for the investors. Our goal, as it always is, in this side of our business, is to improve the utilization of our vessels. The fields that we are targeted are in the 400 feet water department out to 3,000 feet. So if we are successful in raising this money and successful in deploying it, it should work towards Owen's goal of getting us a fair amount of utilization from assets that are coming from our own -- we become our own best customer.

And can you give us a sense as to the timing as to when you think this might kick off?

Yeah. Probably in the next 30 days, for sure.

And in terms of the capital raising process, when do you think this is -- what are your expectations as to when the proceeds are going to be raised and you're ready to prosecute this -

I think the -- first of all, the fund will -- I think the -- I think we'll have it in place, Bill, by the end of April.

Okay.

But it is -- the funds will be called from the limited partners only when we have an acquisition.

Okay.

So then the question is, how long will it take us to deploy it.

Yeah.

And there again, you know, the reason we have been so successful with ERT is that we are patient, and we did have, after we were so successful with east (inaudible) 374, an awful lot of things come in over the transaction. We can go back and sort through those now. We didn't have the capital to pursue them. That capital will now be available.

Thank you very much.

Thank you. Our next question comes from Jim Rollyson. You may ask your question. And please state your company name.

With Raymond James. Good morning, guys.

Hey, Jim.

Good morning.

Owen, you talked about the Q4000 contracting. Could you spread a little more light on the -- your opportunity with the Uncle John down in Mexico? I mean, it's a long-term deal that you're looking at. What kind of rates are -- and/or margins, in general, do you think, you know, you're looking at down there?

Yeah. I think Martin can give you some specifics, but I believe it's in the 5 -- why don't you just --

Well, you know, the day rate is pretty low because we're only providing the vessel and a marine crew, so we're looking at a rate in the mid-50s. But over the course of a year, we'll generate margin of around 6-and-a-half million.

And Jim, that's at the low end of the range of where the Uncle John can produce historically.

Right.

But the strategic reason for doing this is that, you know, in this market condition, it -- you know, the low end of the range is about what we'd generate anyway.

Sure.

And two, with the -- with the Uncle John out of the market, it then shifts some of the demand over to the Q4000, which lessens our exposure.

I might jump in too and just point out that the 6-and-a-half million of gross profit is in in relation to the 18 million that we have invested in the vessel, so it's an excellent return.

Right. Your outlook for, you know, '03 and going into '04, you gave your guidance on '03. You know, the street's kind of all over the board for '04. I think the range is actually $1.30 up to $3. When you've been on the road in the past, you've talked about kind of a dollar figure that both Gunnison and Marco Polo, combined, would add. Could you walk through where you're coming out today, number one. And secondly, just kind of what assumptions are in, you know, the commodity price assumptions, I guess, for Gunnison and your utility assumption for Marco Polo?

Let me start with -- that's -- oh, why don't you start. Why don't you tell where are we in terms of building these things.

Well, in terms of the construction process, things are right on track. You know, Gunnison will be installed first this year. The (inaudible) itself will be out in August in the field, and then we'll be doing the hookup and then Kerr McGee (ph) will take over preparation of the well. So everything is on course for first-quarter production next year.

The Marco Polo again is right on track. That will be installed in September and October. Again, we'll be doing the hookup in the fourth quarter. And again, everything's on track for first production there in the first quarter of next year.

So everything's going fine.

We expect in '04 that the combination of those two to add at least a dollar. Gunnison, the -- when the spar is installed -- correct me if I'm wrong, Martin -- they're going to drill an oil well through the spar, so that production will ramp up during the year. It will be -- production in '04 is going to be principally gas?

Yeah, a lot of gas.

And then the -- I guess on the low side, we expect a 50% capacity within Anadarko (ph), or from Anadarko at Marco Polo. That could add 30 to 35 cents, and if we are successful in loading up the TLP, it could earn as much as 60 to 65 cents.

And just looking at, you know, you've obviously got some stuff around there like K2. What's the timing looking like of when some of these other tiebacks could come back for Marco Polo?

I think certainly by the middle of next year. We could see some tieback activity. We're actually talking about three separate prospects right now. All of them with the reasonable chances of coming to us.

Things are shaping up as we expected with that hub (inaudible)

And Jim, on your commodity price assumptions if 30 to 35 cents Marco Polo, then your assumption is about 70 cents, plus or minus, for Gunnison. Remind me, what's the commodity price assumptions you have in there? It's kind of low 3-dollar gas and low 20-dollar oil, if I recall correctly.

We'll have to look it up on our website. We've got that chart there, Jim. But if I recall --

24 for oil.

Yeah. We've got 24 for oil on the high side and 18 for oil on the low side and I think it ranges from 60 cents at the low side to 95 cents if oil's at 24.

Okay. So the bottom line here is between these two, you're looking at a buck, probably, on the lower end between the two, and obviously there's up side to that between commodity prices and -- and utility on the -- on the TLP looking into '04?

Yeah.

Yep.

Okay. Thank you.

Thank you. Our next question comes from Kurt Hallead. You may ask your question and please state your company name.

Yes. Good morning. RBC.

Just want to try and get a sense to further on the -- Jim's prior question there on '04. So you had a buck coming from Gunnison and Marco Polo. Owen, you mentioned 250 visibility in '04. Wondering if you could outline for us, you know, that -- where that extra buck fifty is going to come from, if you're thinking the construction market is going to be generally weak.

First of all, ERT will be doing a fair amount of well work this year that we expect will carry into next year, so ERT could be anywhere from 70 cents to a buck.

Owen is (inaudible) with his pencil.

It was a buck 20 this year.

Yeah. If you take the buck 20 -- well, let me just build it by component. I think it's easier.

Okay.

In my mind, the way I look at it is we're looking at 65 cents from Gunnison, we're looking at another 35 to 45 cents from Marco Polo, so a dollar there.

ERT is producing a dollar right now. And I think it's a reasonable assumption that we can hold the production level through ERT. So no gain there. So we're at two dollars.

So then we're only looking at 50 cents from the combined efforts of construction, well ops, and robotics, and I think that's a very conservative estimate. I mean, we -- that's -- it -- if we don't do that, I'll leave.

So on the -- on the construction side, obviously you mentioned a number of different factors, and obviously many of them have been prevalent over the last couple of years.

The question I have for you, on -- specifically on the construction side of the business, is, the viewpoint, I guess, going into '04 is that there's no change, there's no deterioration, no improvement generally, no change, to current market conditions as we're experiencing them in 2003?

My personal feel on this is that deepwater will pick up in demand, but I don't personal -- personally I don't think that the pickup in demand will get to the point where it outpaces supply. In -- among the contractors.

Now, there's so many variables involved, I -- it would take me all day to go through them. And believe me, I go through them every night in my sleep.

Right.

You know, it depends on what the other contractors do, what happens in the industry. But my personal opinion is that our -- our -- the construction -- the deep construction market will continue to be oversupplied and therefore competitive with the pressure on margins through '04.

Okay. And this -- this MSA that you have with technique, roughly what percentage of the overall robotics business, you know, would that -- you know, would that entail? Would it be like 10% or would it be like 30% or somewhere in between those two?

That's a good question. I -- quite honestly, I haven't sat down and calculated that, but I think --

Somewhere in between is the right answer.

And just trying to get a base level of business for you on that end. Okay?

All right. And then my last question is: Owen, you mentioned the comment about integration. You didn't provide very much detail and what the game plan is there. I was wondering if you might be able to shed some right on that for us.

Yeah. We're starting -- in fact, Thursday of this week, we're starting a three-day initial seminar corporate-wide. We're flying in all of our personnel from around the world from all the companies. What we've been in the process of doing -- and this goes back to beginning of the fourth quarter when we decided we needed to be a lot more proactive -- is sitting down and identifying the essential functions that are common to all of the business units. We are -- we then took those functions and we've organized them in an organization chart by function, and the next step is to unveil this with the employees and get their assistance in then developing processes for each function that are standardized through the company. Then moving on to applying the systems that we have in a common fashion throughout the company.

And I think one of the biggest components is that we're going to be establishing a new chart of accounts for the company that is going to be built at the end user level. You know, with the employees that are handling the money, and then building it back up to a reportable P&L. That should give us a -- a much better tool for management corporate-wide and at the group level than what we have currently, using our old chart of accounts.

So that, in a nutshell, is what we're about right now.

Do you have -- do you have a rough -- very, very rough and broad range of what you think the net financial benefit of this integration may mean to Cal Dive?

Not a clue at this point.

All right.

I -- I -- let me get down the road a little bit. Right now, it's just -- there's just so much in the works, I just -- there's no way that I could calculate that right now.

And that the challenge going from an entrepreneurial organization to a much bigger organization, I guess, right?

Yeah, it sure is, Kurt. You know, we've grown from a hundred million in revenues a couple years ago to 500 million coming in '04. That's an aggressive growth rate, and --

Well, let me tell you, I really don't want to squelch the entrepreneurial culture in Cal Dive. I also want to put in place some controls to make sure that they don't take that as meaning that we're a cowboy risk-taking company. Saying that I like my -- my brother was in the Navy and he said that the difference between a Navy pilot and an Air Force pilot is the Air Force tells the pilots what they can do, the Navy pilots just are told what they can't do, everything else is fair game. And I think that's probably a good strategy for us going forward in our reorganization.

Uh-huh. Okay. Thanks a lot.

Thank you. Daniel Cole (ph), you may ask your question, and please state your company name.

Bank of America Capital Management.

I think Jim Rollyson hit on it a little while ago when you were talking about tiebacks into the Marco Polo TLP, but if you could just expand agents bit more on that, the K2 timing and you -- I think you mentioned two other potential projects.

Yes. Well, on K2, there's been press releases on that one. They're still drilling out there, so we're assessing the results. You know, we're talking to them about bringing our production to the TLP, and given the close proximity of K2 to the Marco Polo location, we're hopeful it will come to us.

Then we're talking to two other operators who have finds in the area and those discussions are going well, too. So given the pace that we can achieve a tieback, certainly we could get the first one done by sort of mid or third quarter next year, and the other two by late next year or early '05.

Thank you.

Thank you. Gary Russell (ph), you may ask your question. And please state your company name.

Good morning, everyone. Stifel Nicolaus (ph).

Hey, Gary.

Good morning.

A couple quick ones, I think. TMEX (ph) long-term, can you say? Do you know about how long term?

Well, first of all, let me just -- PMIX, as many of you may be aware, their capital budget this year is $11.2 billion, and they have that pretty well funded. The next largest, I think, worldwide player is Exxon at 9.7 billion.

Martin, what -- the term is five years?

Yes.

Okay. The first-quarter guidance, consensus is 23 cents, so the guidance is a little lower than that. The marine construction revenues are a little lower than what I was looking for, but not a whole lot, so it seems like margins might still be a challenge there for the first quarter. Can you -- can you talk a little bit about that? And also discuss, if you can, shallow versus deep and also the well ops side of the business?

Well, I'd maybe like to start with well ops. We bought the business in mid last year, the sea well business, that is, and we achieved great results in the third quarter. Unfortunately, as Jim mentioned, things slowed down in the fourth quarter and we had one job just cancel at short notice. So that produced a 8-cent swing between the third and fourth quarter on that contract alone.

The work for Quarter 1 is slow to start due to weather, and the overhang of the tax issues, so we're expecting a slow quarter for that -- for that vessel.

The shallow water markets is a more traditional scene this year, with a slow start. Nothing really unusual there. You know, bidding activity doesn't -- doesn't start until February. We don't really get swinging until April or May.

So, again, no real surprises there.

On the deepwater front, we -- we have some downtime for the Q4000 expected in March. The Intrepid, again, will have some downtime in March. But the second half is looking better because of the projects I mentioned earlier.

Okay. And can you -- margins for marine construction in the fourth quarter, excluding the BP impact, can you tell us that?

I think most of Wade's numbers, Gary, have got that in it. I --

Did you -- did you --

I can --

Did you set apart the BP component of the 10 million versus the EEX?

No, we haven't, Gary, because we're still negotiating with the (inaudible) settlement, so I'd just as soon not have that --

Okay, okay. Then let's skip that. Next question, troubles at El Paso any implications there for Marco Polo?

No. Obviously, El Paso Energy Partners are dealing with that sort of question pretty regularly, but things are very stable in terms of our relationship, and we are looking at future deals.

Okay. Let's see. That will do it for me. Thanks very much.

Gary, I might just add, on -- you know, whenever you're into a down cycle with lower work volumes, you'll see not only us but all of the contractors returning to more of a seasonal curve on their -- their earnings.

Okay. Thanks a lot, Owen.

Thank you. Bill Herbert, you may ask your question, and please state your company name.

Yeah. Just a couple follow-ups here.

Getting back to the Canyon question and the master servicing agreement, Wade or Owen, with respect to, you know, the revenue contribution for Canyon in '02, can you roughly size that for us? And then what is the expectation for '03, so we can get a sense as to what the incremental contribution is from this master servicing agreement with Technique.

Yeah. The -- Bill, the expectation for '03 is a little over 60 million of revenue from Canyon.

All right.

And they came in '02 in the -- about 37 million. So you can see the impact there.

And it's just a half year, Bill, that the MSA is in place.

It doesn't begin till July.

Okay. So the $60 million in revenues in '03 contemplates 150 days with technique in '03, roughly? I mean, is that fair? Of work? I mean, we had talked about 900 days over the next three years. And you said the half a year this year.

Yeah.

I think 150 is achievable.

That's fair.

Okay. And then last --

The 900 can also be interpreted in aggregate, though, also, Bill.

Sure. Okay.

That's just the downside protection we have on the agreement.

Okay. And then the last question is with respect to SG&A. Guidance is -- is a decent amount higher than what the run rate has been for most of 2002. What's driving the increase in that?

The increase, Bill, is principally -- well, a little bit the result of adding the seawell well ops business for a full year but also, as you know, one of the reasons ERT is so successful is because of their bonus pool, which is 8% of their pretax earnings, we're contributing a significant -- a significantly higher volume of profitability this year.

Okay. All right. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your touch-tone phone.

David Wright (ph), you may ask your question, and please state your company name.

Yes. It's David Wright with UBS Warburg. Just following on that, in the fourth quarter, how much of that -- of the $10 million charge was included in SG&A for the fourth quarter and where was the -- where was the rest of that charge on the income statement?

As I mentioned, David, we're not getting into the specific pieces because we're still negotiating the settlement of the contract, but the portion that relates to the dispute is up in cost of sales, and then you'll see some in the increase in SG&A.

Okay. Thanks.

Thank you. At this time, I show no further questions.

All right. Thank you all for listening in. We appreciate your interest, particularly appreciate all those new shareholders that came on last week. Hopefully -- I personally, for whatever it's worth, believe you got one helluva good price in Cal Dive stock and we'll go out to prove it. Thanks, everybody.

Thank you. That does conclude today's conference. You may disconnect at this time and thank you for participating.