Helix Energy Solutions Group Inc (HLX) 2003 Q1 法說會逐字稿

Good morning, and welcome to the conference call. All participants will be able to listen only until the question and answer session. This conference call is also being recorded. If anyone does object, you may disconnect at this time. I would like to introduce your speaker for today, Mr. Jim Nelson. Sir, you may begin.

Thank you. Welcome everyone, to the First Quarter 2003 Investor Conference Call. With me today, as usual, is our senior management team. 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, our General Counsel.

Hopefully all of you have had a chance to look at the material that we will be reviewing during the meeting, which consists of a two page letter to shareholders, an appendix, which gives our guidance for the second quarter, and then the press release, which has attached to it, the summary of financial statements.

In terms of structure, I'll make some sort of overview comments from the shareholders' letter. Wade will talk about the accounting change and some issues, give you a current reading on where we stand with respect to debt and capital spending. Martin will talk about the contracting activity and vision in the second quarter, as well as some comments on the first quarter, and then Owen will bat clean up on the summary of our strategy and the contracting markets in general.

But before we get to any of that, I know you're all holding your breath for this exciting announcement from our General Counsel.

Thank you, good morning. As noted in our press release and associated report, certain statements 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-KA for the year ended December 31 2002, filed with the Securities and Exchange Commission for a complete discussion of risk factors.

All right. With that, let me make a few comments on the first quarter, coming out of the first quarter report. Obviously it was an excellent quarter. Our earnings doubled the performance of a year ago, and actually we're pretty much double the guidance that we had provided for the first quarter.

Our marine contracting operations were right about where we expected them to be, which was at break even. For those of you new to Cal Dive, the first quarter of the year is the period in which we have winter weather in both the Gulf of Mexico and the North Sea. It's a seasonal business, and our contracting business is anywhere from 55-65% of our revenues fall in the second half of the year. Because of that, we tend to take vessels out of service, as we did in the first quarter of this year, for regulatory inspection.

Having said all of that, we are still looking at, and have reaffirmed our guidance of $1-1.20 for the year, and in that we expect that 30% of our profitability this year will come from our contracting operations. With that quarter, our stock, obviously, has been under a severe amount of pressure. That appears to mostly be coming from the fact that our short position, which was maybe 500,000 shares a couple of years ago, is over 4m shares today. As apparently what is normal for that type of process, the short people have flooded the market with a number of negative rumors, virtually of all of which are flat out lies.

What we do want to address today is the fact the questions that have been raised, regarding the outlook for the offshore construction market generally, and specifically our decision to invest a significant amount of money in our Deepwater assets. That's what Owen will address when we get to the end.

A little bit of history might be helpful. In 1984 Cal Dive introduced the Cal Diver I and Cal Diver II, the first [inaudible] deployed saturation vessels in the Gulf of Mexico. That was a significant investment at the time that many in the industry questioned. Twenty years later, those two vessels are still generating significant returns for the company. In 1995 we bought the Witch Queen and made a significant investment in upgrading that vessel, and followed that very quickly with the Uncle John and the Balmoral Sea. Again, people in the industry questioned our making that significant investment and bringing DP vessels to the Gulf of Mexico. That investment was the reason why, for five years, from 1996 to 2000, our return on capital was in the 18% range.

So as simply an overall comment, each vessel and business that we have acquired, was identified as an essential building block to sustain long-term growth, and as I mentioned, Owen is going to fill in a lot of the comments behind that, when he gets on in a little bit.

In the first quarter our net income was 7% of a rapidly expanding revenue base. By rapidly expanding, I mean 65% increase over the prior quarter. That, I think, distinguishes Cal Dive from most of the offshore contractors, and certainly from many other companies that are in the United States industry in this midst of this recession.

If you turn to the operational highlights, on the contracting side, just as an overview, there were two positives. Our DP fleet we were able to work a number of vessels outside of the Gulf in Mexican waters in Trinidad, as well as working on the outer continental shelf. That provided utility of 77%, and margins for our DP construction fleet that were quite good. Also in the shallow water, Aquatica, which targets life of field services, had an excellent quarter.

On the negative side, Canyon lost a small amount of money, which was budgeted, and that represented a $3m negative swing from the first quarter a year ago, when their telecom business was still flourishing. Then finally our well [inaudible] key operation, we did not see the utility that we had projected from the Seawell, and they did have a loss of $3m as a result of that low utility as well as jobsite conditions that they ran into there.

I think I'll turn it over right now to you, Martin, and if you could go through the stuff you'd like to cover, then I'll come back and comment on some of the oil and gas stuff.

OK thanks Jim. I'll just talk about prospects in quarter two, making some comments about quarter one as I go. I think we stated last time that it's pretty tough out there, and in this environment we try to be as conservative as possible in our budget assumptions. We got things pretty much right as far as quarter one worked out, except, as Jim said, the well ops UK business around the Seawell performed worse than we expected. It's our first quarter with that business, and the negative tax implications and also the bad weather in the North Sea, caused us to actually lose $3m, which is pretty disappointing.

But contrast that with what's happening in quarter two, we have pretty much full utilization on day rate work for well operations. So we should be able to turn that around pretty effectively and get back on track. Notably, Aquatica did a lot better than we expected in quarter one, again, as Jim said. The thing that was helped a lot by the MMS mandated inspection of facilities in the wake of Hurricane Lily. So that helped.

On the Deepwater front, the Uncle John continues in Mexico on its present contract. Expect that to continue through quarter two. After that we're hopeful that the five-year contract will kick in for quarter three and beyond. The [inaudible] work is being delayed a little bit, but we still hope to secure that work.

The Q4000 has just finished the Gunnison piling exercise. Another fiercely [inaudible] job for her, installing very large piles, 210 foot by 82 inch diameter, 130 ton piles in Deepwater, First kind from a non-heavy lift barge. We're going to keep her working probably through the third week in May, it's a bit patchy after that, but there are a few well operations jobs out there.

So I think I mentioned last time, we budgeted 205 days for the year. At this point I'm hopeful of getting maybe up to 240. So things are a little bit better, but it's still tough. The Intrepid, again, busy through April, keeping it going day by day right now. We're likely to [inaudible] her probably in the next week or two, before our Gunnison work starts in August. The Mystic Viking remains in Trinidad, has just completed a dry-docking. We've got 30 days work for her, and then we have a hole until the next round of work in August.

One good thing we managed to pull off here, just recently, is we're going to send the Eclipse to Middle Eastern waters. We've secured work there that will probably take us up until the end of the year. So that's great, because it pretty much covers our budget for that vessel for the year, plus takes another vessel out of the Gulf of Mexico, which will help the Witch Queen here for the rest of the year.

Commenting on the core fleet, and our four point vessels, it's been a very slow start to the year. We expected it to be slow, and it is, despite the high gas prices. But we're seeing our main customer, Horizon, picking up some work lately, so things are starting to move. So I'm expecting a short season for the core fleet this year.

Jim commented on Canyon, this time, or certainly in quarter one last year, we were enjoying a lot of telecommunications trenching work, and we've actually managed to pick up around $10m worth of trenching work for late quarter two and quarter three this year, which is encouraging. That's on the back of our investment in the new 750 horse power trenching unit. I'd also like to point out that 40% of that $10m is actually in the telecoms business, so that market, while being very slow, is still alive somewhat.

Do you want me to cover Gunnison and Marco Polo at this point, or later?

Yes, why don't you go ahead and do that?

While I'm on a roll, I'll just talk about Gunnison and Marco Polo. There's been a lot of questions about schedule. I'd just like to say we're right on track. Things are the same now as they were a year ago, as far as the schedule is concerned. Obviously, we're working in terms of windows for the heavy lift barges. Those windows shorten as we get nearer to the installation dates, but the guidance on schedule I've been giving you has been based on the back end of the windows.

So on Gunnison we'll be installing the power topside in quarter three, and our assets will do the hookup work in September and October and first oil is still scheduled for early 2004. I'd just like to point out that Kerr-McGee has got their A-team on this job. This is another [spar] installation for them in a succession of very successful projects. So I'm confident in their ability to deliver on time.

Marco Polo, the same heavy lift contractor is going to install Marco Polo, as Gunnison, and Marco Polo is directly after Gunnison. So it will be installed on the hull and topsides in late quarter three, early quarter four. Our hookup work is shorter on this project, so we hope to achieve mechanical completion, and that's an important point for us as Deepwater gateway, because after mechanical completion we start getting our demand fees. I'm hoping we'll achieve that in quarter four.

The [Anadarko] will start hooking up the wells, and again, production is slated for quarter one next year. So nothing has changed, and again, El Paso, our partner, El Paso Energy Partners that is, have got the same team that did Prince, so we've got tried and trusted people on that, and again, things subject to weather, hurricanes, etc., should remain on track.

Thank you Martin. Wade, before I come back in on oil and gas, why don't you just quickly review the impact of the accounting change in all the E&P companies decommissioning liabilities made the first of the year, and then some comments on our debt position?

Sure. Well we did adopt the FASB 143 in the first quarter, which requires the decommissioning obligation to go on the balance sheet at what a third party would charge, and the liability also must be discounted. We've always recorded this on an undiscounted basis. Since so much of our obligations are eight to ten years out, the effect of the adoption resulted in a $25m decrease in the liability, and also the PP&E. The discounted amount will be accreted back up over time, but this expense will be offset by lower DD&A, because of the reduced PP&E. The cumulative impact of the adoption was a positive $530,000, and that's net of tax.

On the debt side, we finished the quarter with $219m of debt, that's a 37% debt to cap. The components are pretty much the same components as year-end. We had $141m of the MERAD, which made up most of our debt. You all remember that's very favorable Title 11 financing, 25-year payment terms; we're still paying less than 2% interest on it. Our revolver was down to $43m from the $53m at year-end. We're still paying a little over 4% on the revolver, and the Bank One term loan made up $32m of the debt. That's the facility for the construction of the SPAR, and we were paying about 4.3% on that debt.

Looking ahead, as far as Cap Ex, we're still pretty much on schedule with what we discussed before, to spend about $105m this year. About $28m of that was spent in the first quarter, so the remaining $77m is to come for the duration of the year. And the main pot's there, just to refresh your memory. We still have about $10m to go on the Canyon MSA, $32m set aside for ERT, primarily well work on the new fields; $27m more at Gunnison, and then another $7m or $8m remaining for vessel maintenance, Cap Ex.

My projections show us being down 32%, debt to book cap by the end of the year, which is closer to our target of 30%.

Thank you Wade. I'll make a couple of comments here on the oil and gas side of the business. Obviously, it was a great quarter for our Energy Resource Technology, our oil and gas company. Production of 6.8 BCF equivalent was pretty much where we expected it to be. Virtually all of that improvement is the result of the four significant property acquisitions that we made a year ago. It is interesting to simply look back a year ago, when natural gas prices averaged 250 and we had a number of people that were convinced that there was way too much gas in storage. We used that outlook to go out and make these significant acquisitions.

You can see the effect of the average prices that we received. That was higher than what we expected, even net of the hedges that we have in place. Again, those hedges, 26.50 is what we have in place for oil. I think when all is said and done in 2003, that'll probably be a pretty effective hedge, I terms of being in the money. We also have hedged our natural gas at 430. The only blemish, as I mentioned, in the quarter is that when we put those hedges in place last fall, we had expected to get his well work done earlier. And because of the fact that it was delayed by the hurricane, we wound up actually hedging 61% of our first quarter production at that [hedge price]. With the well work that's now in process, I would expect we'll get back to the 50% [volet] area that we targeted.

And I guess, again in terms of our policy on hedging, whenever we can lock in acquisition economics with a significant return, we will do that. That 430 price compares to the acquisition economics we made a year ago, that were less than $3.

So, Owen, I think we've covered everything. I noticed you've been over there scribbling notes. So, I think we're ready.

Well, I may actually just stutter and stammer all through this, because for the very first time, I actually did write down something.

So, having said that, I'll probably not follow any of it. I just wanted to start out, you know, there's some concern right now. Cal Dive historically has traded at a premium to our construction peer group. That seems to have gone away here. We're trading in, I'd say, in line with our peer group, the construction group. But the construction group is something like 30% or 50% discounted to the oil field service group, which I find amazing. But, well, amazing and not amazing. And I just wanted to sort of-I had a bunch of statistics here, but those change every day.

So having said that, I'd just like to sort of talk a little bit about what's going on. Industry-wise, and I mean what's going on in the industry in Cal Dive. I'm not going to sit here and comment on investor sentiment, but I can tell you a little bit about the industry.

I think the investment community is seeing lower near-term earnings visibility. And there's little confidence, even in this among our peer group. Lower earnings are to be expected in a down cycle. The reality of the risk inherent in [inaudible] contracting losses has been pretty well demonstrated by our peers. So that bubble has been burst. The work that everyone keeps talking about in Deepwater just never seems to arrive, at least at a level that spurs enough demand to overcome some of the realities of our industry.

And, I think actually, we're down to the point where the market caps of our peer groups start maybe presenting a few liquidity problems for investors getting in and out. But I'd like to just talk about what is going on in the construction segment. Why is it down so far against the rest of the oilfield sector?

There's been a lot of talk about our difficulties, not just for our sector, but a lot of recent rumors about Cal Dive. The only news here is that none of this is news. I've tried to be honest with everyone and the fact that we're in a tough industry. But the difficulties are ones that we live with all the time, through good and bad cycles. We're just right now in a down cycle, which makes the visibility of the realities a little more acute.

You know, we have just finished a huge aggressive Cap Ex program, adding assets. And if Cal Dive indeed added $450m in assets, based on just the optimism that our competitors had, or even the euphoria that the investment community was showing over the potential of Deepwater, if we did that without considering the realities of the tough industry that we're in, then it indeed would've been a foolish mistake.

The investment community perception seems to indicate that this may actually be what people are thinking that we did. All I can say is, if we had indeed paid $450m in investment and construction assets without considering the realities, we wouldn't be sitting here continually having to explain such a unique business model.

Cal Dive made the investment because we are a sub-sea construction contractor. They are the assets that we needed to have the required capability and credibility to secure Deepwater construction contracts in the up and coming market. The more appropriate, or better question, may be, is it wise to want to be a subsea contractor? If you forget for a second that this is a downturn, and take this as a norm, and you believe that there are no solutions for the realities of our tough industry, then the answer would be no. But the fact is that this is what Cal Dive does, and we have historically done it very well. And our business model is set up to continue to do so.

We have the assets now to be a significant player in the deep construction. But competing straight up in the Deepwater construction market, because of the-and I've got a list, if anyone's interested. I've had a lot of fun writing up some of the realities of what it's like being a contractor in Deepwater. They're a little humorous, [but I won't worry about going with them now].

But the fact is, when we looked at getting these assets and going into the Deepwater, we realized that being just a straight up contractor in Deepwater was not enough. What we have, though, are assets that also position us to be the first into to the well ops market, as the market grows. This is a long-term sustainable growth path and the future that we feel adds a lot to just being a Deepwater contractor. We also take equity positions in reservoirs and facilities when it has us at utilization for our fleet. This hedges the utilization risk and it also allows us greater flexibility on saying no to the contracting risk that's forced upon contractors, especially during downturns.

The equity position that we take is usually there 100% when it involves reservoirs or assets that producers really don't want equity in. And that can be driven by the small size of non-core asset or the fact that they have capital constraints. Or, we'll also take partial percentage equity positions in the better properties where the producer is just merely wanting to add a partner.

And I might say, we're not driven to do these deals to replace reserves. So, we have the ability to wait for the best deals. We don't do exploration at all, which eliminates a lot of the risk. We're margin driven, rather than growth driven on that side of our business, which really differentiates what we do tremendously from producers or EMP companies.

There seems to be a little lack of confidence, as Marc- [inaudible] Marco Polo, there seems to be a lack of confidence in the start up timing for Gunnison and Marco Polo. All I can say is that we've been looking at this, believe me, a lot closer than anyone else has. We would not have invested, we could not have invested as aggressively as we did in construction assets, without having the utmost confidence in the start up timing of these cash flows.

There also seems to be a little difficulty in trying to value production deals, or these equity-contracting deals. But I'd just like to point out to you, we're very open about it, as is Tetra. Tetra has been doing this successfully now for a number of years. Superior has just announced that they want to start doing it. Companies like [Amfels] just recently announced taking an equity position in the Drew Rig, in order to get the construction contract. And in fact, it's not uncommon at al for shipyards to take equity positions in vessels in order to secure contracting work.

Even [Schlumberger] takes as much as a third of their payment on what they call "performance" basis. And that's really nothing more than a percentage of production revenue over time. [Coperner], last year, qualified themselves as an operator in the UK, specifically for the purpose of taking on fields. You know, basically every contractor's revenues come from the reservoir.

I can't help with the methodology on valuation other than to say that the way I look at it is on repeatability. It's that repeatability that allows us to make the long-term investment decisions, such as you've seen us make on the construction assets. And I'm sure that the valuation issue will sort itself out over time, because I guarantee you Cal Dive's not the only one that does that, and there are going to be plenty more contractors doing it in the future.

Yeah, I might just point out there was, and I had a note here; wait a second. I had a note. There was an interesting conference that was just held and you had two managers, both from [Fugro] as well as [Herrima] that both pointed out that contractors needed to be diversified, and not be dependent on [EPIC]. And I think those are two good comments from two well-respected and knowledgeable people that sort of start to show the merit in Cal Dive's business model here.

If I could just mention a little bit on near-term, our greatest exposure going into '03 was utilization on this fleet. Like I said before, we got caught a little short in '02, not expecting to have the fleet sitting at the dock as much as we can. On road shows and previous conference calls, I've mentioned some things that we are being proactive in. And putting the fleet-the goal is to have utilization without taking on unnecessary contract risk in order to book it up.

I'll just go through where we stand right now. The Merlin, and this is the Deepwater fleet, the Merlin is with Canyon, being effectively employed for our ROV support. Mystic Viking is down in Trinidad, with a sufficient contractual backlog down there. The Uncle John is down in Mexico for a long duration. The Eclipse is heading off on three back-to-back contracts that will keep it occupied through the year. Q4000 and Seawell are with well ops. The Northern Canyon, we're just now getting ready to take on the assets and I know that the Canyon was a disappointment in the first quarter, but we're getting the ROVs and the trencher to start doing the trenching work and ROV work under the CSO, the Coflexip of MSA. So that will be taken care of.

It basically leaves us with the Intrepid and the Witch Queen, two vessels for the spot market in the Gulf of Mexico. And, I wouldn't say that that's over burdened with unnecessary assets.

With these moves, which sort of take care of everything we were talking about going into the year, we're set now for Subsea. As bad as everyone thinks it is, we're set for the Subsea to contribute about 30% of Cal Dive's profitability this year, which is not bad given the industry.

I might also say the utilization on the Q4000, if worst came to worst and we had to make sure that we kept utilizing her and the Witch Queen, one of the two vessels for the spot market also can come up and work in the shallow water, putting even more demand on the Q4000. So, I really just don't see a problem here.

I know there's some discussion about the back loading nature of our budget. Jim mentioned, you know, that historically that's the norm. But I think there are some other things that are a lot more easily visible. You know, we do have the assets coming to start to generate utilization under the Coflexip MSA agreements that we've negotiated. The tax situations in the UK seems to be resolving itself, and the Well Ops UK turnaround seems inevitable, given the backlog that they're carrying. And, we've got the Marco Polo and the Gunnison work all back loaded into this year, which is very visible work. So that explains the back loaded nature of our budget.

Right now, our down side is exposure, which is what a contractor needs to be concerned about in a down cycle. It's been greatly minimized, given what we've done. And we're in a much better position than we were as recently as Q4 in '02. With the downside covered, production earnings will flow straight to the bottom line. The construction work, going forward, represents true upside potential, and quite honestly the construction picture is getting better every day.

In general, I'd just to say Cal Dive's coming from, those that still have questions about our business model, Cal Dive has grown from being a small, shallow water diving company, to being a significant emerging player in the global market in a very, very short period of time, in spite of the tough realities of the contracting game. This has been possible, quite honestly, only because of the unique business model that we have. If we relied on construction alone, the growth just would not have been possible.

Right now all I can say is that our model works. We have a fleet with all the capabilities that we require, we're not EPIC dependant, the nature of our assets sets us up for well intervention, which we see as a less competitive niche with vast growth opportunity. It's also a light field oriented activity, which reduces the cyclicality of the construction cycle.

I see no limits to growth inherent with market size, for the Cal Dive business model. We've got tremendous utilization and pricing leverage built into the company right now, high visible revenue stream that's independent from the cyclical nature of the construction market. The fundamentals all indicate that this cycle is going to come full term, and our earnings growth is assured with tremendous upside potential, even above that.

Our business model has no problems right now. We're set to harvest the benefits of long-term sustainable growth, and quite honestly, we're finally at the position that we've been working so hard for years to get to. So I hope that explains a little bit about the industry and our business model may even make more sense. If anyone wants, I'll send them a list of the realities that we looked at before we jumped into this game. But all the realities are similar to all of the horror stories that you've heard about contracting in the recent days, among the investment community. But there's nothing new.

Thank you, Owen. As we approach 2004, which will mark I guess that's 40 years for gosh sake, that Cal Dive has been in the contracting business, I guess we know what we're doing, and hopefully you'll have some confidence in that too. With that, why don't we field questions?

Thank you. If you would like to ask a question, please press star, one, on your touchtone phone, and you will be announced prior to asking your question. Our first question comes from Bill Herbert.

Jim and Wade, with respect to the second quarter guidance of 17-25 cents, is the difference between 17 and 25 cents all nat-gas prices? What explains the potential variance between those two?

Yeah, you hit it pretty much on the head.

OK, and then with respect to the back end loaded earnings stream for '03 relative to the first half, which makes sense, talk a little bit about the Seawell. We lost about $3m in the first quarter from a gross profit standpoint. We talked about - is that vessel pretty much fully [inaudible] for the second and third quarter? We lost $3m in the first quarter; can you just give us a sense as to what the profit expectations for that vessel might be in the ensuing two quarters?

OK Bill. In terms of utilization, we're fully booked through the second quarter, and we have enough projects for the third quarter to give us confidence that a similar outcome will occur. In terms of profitability, I think you can [expect] $3m negative to $3m positive for the second quarter, maybe a little better than that in the third.

OK, and then last question, Owen, you presented us with a lot, which was helpful, and you sort of stole one of my questions in that you mentioned that in terms of your confidence and the visibility for the DP fleet is demonstrably better than what it was at the end of last year. At the end of last year we, or in fact on the fourth quarter conference call, which was early this year, we established guidance of $1-1.20 for the year, and while I'm in favor of managing expectations conservatively, if things are demonstrably better for the DP fleet for the balance of '03, why is the guidance still the same?

Demonstrably better, if you remember back in the fourth quarter, Bill, I was saying that we got caught with our pants down in '02 and we did nothing reactive. Then I listed a bunch of things that we were going to do that would be reactive in '03 to lock in on utilization, we would lock in utilization, albeit at low margins, it was going to be without the inherent contracting risks that you can't quantify. That is what we've done now. So by demonstrably better, I mean we were always planning to do this. By being demonstrably better we've now got it done.

OK, good, and sorry, one last one. You used the term, Martin, I think it was 'mechanical completion', for the Marco Polo TLP and once you do that, the demand fees kick in. Just to refresh us, the demand fees are what? $25m per year?

2.1 a month.

OK, and you get a 50% slice of that, right?

Yes.

OK, great. Thanks.

Thank you. Our next question comes from Marshall Adkins.

Hi there, guys. Just a couple of quick ones here. You mentioned the Uncle John had been working down in Mexico. I know you guys are looking at a long-term contract down there. Has there been any further progress on that?

I mentioned, Marshall, that the tender for that work is slips on, but that's often the case down in Mexico. We're expecting that to come out probably next month. In the meantime, we're performing on our present contract on [inaudible] so the longer that continues, the better. But we're still very hopeful that the long-term deal will come through.

Aren't we really saying that a vessel like that, once it's down there, it will probably stay?

I think we've seen that already. This contract that we're on right now was supposed to end long ago. But I might add a little bit more information there Marshall. The contract that we were going after was supposed to be tendered earlier. What happened was, they actually - there were three contracts, and we were going after the third one. They actually delayed the second one, which became the third one, moved the third one up, and that was awarded to the Smith 72. So our contract moved back in the line one. But we are the only vessel available for it.

But quite honestly, the rates that we're working under right now, down there, are pretty favorable, and the contract seems to be extended, extension after extension. So we're actually not pushing too hard for that, because we've got things pretty good right now.

OK, that clarifies it. Jim, you mentioned on the hedges of 430, was that for Q2, or for the rest of the year?

That was 421 in the first quarter, and 430 for the rest of the year.

An average of 430 for the rest of the year.

But obviously, even though you have these lowered, you guys realize a lot higher gas price sell. Obviously there's still upside, particularly if that production comes on.

You just didn't read your material close enough, Marshall.

Well maybe next time. OK last question here, the last time you had suggested 250 for '04 as a number, I assume, given that the Gunnison/Marco Polo facility seems to be on track, still good with the 250?

Well Marshall, I've heard an awful lot of that, my statement was that I'd volunteer not to be around if I didn't make that 250, and I'll still stand by that. I can't see how we can miss it.

Last question. Consensus still around $1, obviously lower in the near term, back end loading, but still comfortable with $1-1.20. You'd mentioned, you guys still don't get bonuses unless you break the $1, or was it $1.20?

$1.20.

Ah, that's good to hear. Guys keep having a great day.

Thank you, Marshall. I think when you look out at that 250, if I'm correct, I think that our cash flow, EBITDA or something, in the range of $6 a share, so you could take your multiples times that I suppose. Anyway, next question.

Thank you. Our next question comes from Mark Helstrom.

Hi, Pritchard Capital. First, you had mentioned that Horizon had picked up a couple of jobs. I was just wondering if you could comment on pricing, what the - whether they're still discounting, or pricing, how's the environment on that end?

Well we work, as you know, as a subcontractor to Horizon. Martin, you might just talk about the type of rates. Most of the work we do, Mark, is turn key, and it's something that we've been doing now for many moons.

I obviously can't comment on Horizon's pricing, but certainly ours is pretty keen right now. So we're helping out as best we can.

Actually, we work under pricing that is preset under our alliance agreement, to the extent that we come off of that to try and help Horizon, well we do, do that.

OK, and then secondly, the Eclipse, the work in the Mid East, I mean that sounds like something new here. I was wondering if you could talk about the nature of that contract, how lucrative it is, and where that fits in respective to your budget and some of your prior guidances?

I think we're going to have to sort of wait and see on how lucrative, because it's a long term time charter that we're hoping will lead to other revenue streams. But basically, it's pretty low margin. We're not actually doing the contracting; we're making the boat available to other contractors. But from what our expectations are right now, the pricing was set so that we could achieve our current budget, specifically on the Eclipse.

So we achieved what we were expecting to get out of the vessel in 2003, and we also moved the vessel out of the Gulf.

OK, great. Then this has been, I guess, kind of a popular theme on the call, but it sounds to me like you had some hurricane interruptions on the production side, you had bigger, maybe some bigger than expected losses with the Seawell, and now you've got this Eclipse job. As these things turn around it should just give you increasing confidence in your numbers going forward.

What you're hitting upon, Mark, is that in our oil and gas operations we've got excellent visibility and stability, and then if you look at the leverage that we've got in this contracting fleet, it's significant.

OK, great. Thanks.

Thank you. Our next question comes from Martin Malloy.

Good morning. I was wondering if you could maybe give a little more color on what's currently going on, in the shelf contracting market, and what you're seeing, I guess since the beginning of the construction season here.

We talked about the activity for Aquatica; I guess I didn't specifically mention, but during the quarter we did take two of our oldest and smallest utility boats, and we sold those. So we moved them out of the market. We had one of our four point vessels, the Mr. Sonny, we stacked that, and we're waiting for the four-point market to strengthen a bit. Martin, I don't know if - I did give in the report the utility.

I'd just reiterate what I said on Aquatica, the shallowest part of our business. Quarter one for this year was almost identical to quarter one in '02 and '01, and if you remember in '01, we were gangbusters with the high commodity prices. So I was very, very pleased with Aquatica's performance, driven a lot by the MMS inspections. The rest of it, the mid water, where we're using our four point SAR vessels, very slow start, very slow. As I mentioned, things are just starting to turn around now. So maybe we'll have a reasonable season. But I can't say that's a definite at this point.

OK.

I'll jump in and just add one thing that I have noticed in the trends in the P&Ls though, is a lessening on our dependence on subcontracted work, and sort of a strengthening of IRM on the shelf.

And again that goes to the fact that we've got such a dominant market position on the shelf.

OK, so you're seeing some improvements since the end of the first quarter?

Yes.

OK, and then just looking at your debt schedule. Do you expect debt to increase here during the second quarter, and then decline through the remainder of the year?

That's correct, and it's primarily because we still have the capital commitments, which I went through, and a lot of those are still in the second quarter, especially the Canyon, finishing the Canyon MSA the second quarter.

OK. Thank you very much.

Thank you. Our next question comes from James Stone.

Good morning guys. My first question is, can you update us as to where you stand vis-à-vis BP and the Q4000 well ops contract, or potential for booking about 100 days worth of work with them?

We finished a major project for BP [inaudible] in January, and that job went extremely well. I think BP achieved everything they wanted to out of that job, so they've basically given us an indication that any other well intervention they're going to have this year will come to us, and we're talking about two or three projects at this point, they'll probably occur third or fourth quarter. So I'm not sure it's going to be 100 days, but there's going to be some actual work this year.

I'll tell you what I've heard James, and you've got to understand, they don't tell me everything here. But I understand that we're starting to do the initial engineering on about another 50 days worth of work.

Right now, and then a couple of more projects after that, perhaps.

Did I hear you say that, Jim, did I hear you say that you're going to stack the Intrepid in the next couple of weeks, up until the work in August for Gunnison?

That's likely, I said that. Looking at what's out there right now, there's hardly anything, so we're keeping it going day to day, and obviously will continue to do that as best we can. But it's likely that we'll take her out of service for a while.

OK, and then lastly, I'm a little confused. I think, and correct me if I'm wrong, but at the beginning of the quarter I thought that you guys were targeting about 6 BCF a day of production, I think that's the number that came off the slides that you guys used for the presentation earlier in the year, and yet you came in at 6.8 BCF a day, and still sighted some production delays from a well work over situation. And I also noted that you ended up having to sell 61% of your production under the hedges, because I guess presumably you fell short of your target. So I'm just trying to understand, did I get the 6 BCF a day wrong?

Yes, if you look at the guidance Jamie, our guidance was 6.5-7 BCF for the first quarter.

So had you achieve 7, is that the number that would have triggered you back down to 50% on the hedges?

Yeah, it would have been pretty close. We put those hedges in last September/October, when we acquired those properties from Shell and Hess, and we had assumed at that point that we were going to do the well work in the fourth quarter, that shifted into the first quarter.

OK, because that number, the first couple of quarters of production that number has jumped around quite a bit over the last six months.

6.8 is not bad.

It jumped around because we were moving our well work around to match our cash flows, quite honestly.

OK, and so in terms of - what are you looking at in terms of the third and fourth quarter now, for production?

A lot of it will be a function of just how successful this well work is. But we'll be in the same basic range the second quarter, and then we'll be above 7 I would think. So 27 to 28 is what we've been targeting in terms of production, and as far as I can see, we're pretty much on target for that.

OK, that's all I have, thanks.

Thank you. Our next question comes from Bill Herbert.

Bill, are you there?

Sorry, I was talking into a 'mute' button. Wade, did I hear you say cap ex of 105 or 165 for '03?

Well it's $105m. The number you're referring to probably has Marco Polo in it. That's another $55m.

Great. And then secondly, with respect to the Intrepid and stacking that vessel, what do we do with the crew?

That's the good part about stacking it; we can release the foreign crew.

OK, you release the crew, and then how do we re-crew that vessel for work in the fall? I guess there's enough idle personnel around, or what?

The key people we'll try and spread through the rest of the fleet. We obviously want to keep the key people around. Some we'll have to lay off temporarily, but the market conditions are such that that's a reality right now, I'm afraid. So we're hopeful of getting those back in August.

Bill, keep in mind, every DP vessel has two full crews, because they work six on, six off. There's a lot of opportunity to work the crews, maybe they won't work as much as they would have, but it's easy to work them into the rotation schedule.

And there's a fair amount of potential work. You might just talk about how well that vessel has performed; also, she has been just incredible. She has got the best station keeping ability of any of our fleet.

As Jim said, we're very pleased with her performance. Since she came out of the shipyard we haven't had a single problem on any job that we've done. Her pipe lay capability is excellent. It's just that there's not enough work for her right now. That will turn around once these hubs go in. We're already chasing several tie back projects to the Marco Polo and other hubs. So you know, once those hubs are in and we start doing tie back work, she's going to excel. I'm very happy with her.

Plus, some of the work that we had scheduled for the Eclipse is either going to fall to the Q4000, or alternatively, to the Intrepid.

And finally, can you update us on the progress you're making with respect to this limited partnership that you guys are involved in?

That is a private placement that we're in, a private placement offering. We have just completed all of the documentation. So, the documentation is complete. I expect that we'll be in the market in the next week or so. And by the time we get to the next conference call, we should be able to have some results for you.

Super, thank you.

Thank you, and our next question comes from Jim Lewis.

Good morning. You mentioned that the DP margins were, I think the word used was good in the quarter. I was wondering, if we compare the gross margin from the DP group, to what you generated in the fourth quarter, excluding the $5m disputed claim, how would that comparison look?

Wade is looking at it. I can tell you specifically, the construction, DP construction fleet, did 16% margins in the first quarter, vs. 12% for the same quarter a year ago. Do you have the fourth quarter, Wade? I was trying to back out the reserve.

[About] 18%.

Well, they were 18%, is what Wade is thinking.

So, 18%, ex the $5m?

Yeah, Jim keep in mind too, when you hear good margins- [cross talk].

Good, relative to what they've been the last quarter or two, right? Not relative to [crosstalk].

Yeah, [crosstalk] term. There's a lot of room for us to go there.

Yeah, absolutely. I just want to get a view on what's going on in your fleet outside of Canyon and well ops. The only other question I have is, what, can you just hit the reasons why well ops, I mean, you were already being pretty pessimistic in your guidance for well ops a quarter ago. And it seemed to under perform your expectations by a pretty good bit. Was it just lower utilization equals a lot of fixed costs that end up being losses? Or, how is that-why was it that much worse than what you were forecasting?

Late cancellations of contracts that we had visibility on and they were cancelled, as a further result of the tax situation over there.

Yeah, we had one job drop out, so the market, we only had, what, 27 days of utilization. And over half of that was on a job where we had some problems with the job.

That really is the reason why we were at that loss.

And if you have late cancellations, you can't scale your costs appropriately?

You can't do anything with the costs, and in the North Sea in the first quarter, it's pretty hard to find other work.

Sure. I guess the question about, or the statement about late cancellations does make the prospective visibility that you have in the second and third quarters, that makes one a little bit concerned that those things can come and go easily. Is that a relevant concern?

It wasn't really a cancellation, it was movement of the job to the third quarter. [Crosstalk] not going to do their work in the best weather, so they weren't going to take any chances this year, in quarter one, you know, is the main reason.

I think we'd be less than honest--Jim, sure, it's always a concern, but I think if you look at the tax situation and in the North Sea right now, you've had some positive developments there, between the government and the industry. It looks like things are starting to pick back up, so it's looking better.

And, as I think we also mentioned, if you look at our backlog for the year, it appears that the Seawell will have its best ever year, in terms of well operations projects.

Well yeah, that was my only point was that, appears might be the important word, given the late cancellations. But I understand better, based on Martin's comment.

Everything we do, Jim, isn't appears. That's why they call it estimate.

Yeah, I understand. Thanks very much, guys.

Thank you. And once again, if you'd like to ask a question, please press star-one on your touchtone phone. Our next question comes from Blake Hutchinson.

Hi guys

Hey, Blake.

Just looking back at that $2.50 number for '04, I'm just trying to get an idea. Obviously, a lot of the constructs there are more or less locked in, with probably the biggest variable really being the margins, as it is today, on the Subsea business, overall. What type of margin improvement does a $2.50 outlook for '04 entail?

If you look at what's in that $2.50, we've got $1 coming from the combination of Gunnison and Marco Polo, and I think we've got another 80 cents in there, from ERT. So, we've got $1.80 already locked in. All we're looking for is roughly 60 cents coming out of all of those contracting assets.

OK, great. Thanks. That's all I have.

Thank you. And once again, to ask a question, please press star-one.

Next question comes from Jim Lewis.

The one other thing I forgot to ask was, what is the status of the disputed claim on the [Boomvax] project? Or, the status of the negotiations?

Yeah, good question. We finished the job in January, Jim, and we got all our invoicing in. And we're collecting our receivable. We've also started discussions with the customer about resolution. We're not getting very far, at this juncture, so I think it's likely, as we discussed last time, we'll be looking at arbitration.

Got you.

If it goes to arbitration, Jim, I don't think you'll see a resolution until '04, sometime.

is there any recognition, even if they're being tight with their checkbook, is there any recognition on your customer's part, that they have really stuck you a bit, in that there might be some sort of quid pro quo out there?

Oh, maybe quid for more. No, they don't work that way. Those days are over.

Thank you, and once again, to ask a question, please press star-one.

And at this time, I'm showing no further questions.

All right, thank you one and all. We appreciate your interest, and stay tuned as you see us continue to unfold what we think is going to be a very good year. Thanks again, goodbye.

Thank you. This conference call is concluded. You may disconnect at this time.