Helix Energy Solutions Group Inc (HLX) 2003 Q2 法說會逐字稿

Good morning and thank you for standing by. All participants will be able to listen only until the question-and-answer session of the call. This call is being recorded. If you have any objections you may disconnect at this time.

Mr. Nelson, sir, you may begin.

Thank you. Good morning everyone. This is Jim Nelson. Thank you for joining into the second quarter Cal Dive conference call.

With me today is, as usual, 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. Material that will be going through today with you consists of four pages, a two-page shareholders letter the press release, together with the summary of the financial statement. What is not part of that package that has historically been part of it is specific guidance for Q3. I'll come back and talk a minute about that, as I'm sure Owen will.

In terms of our format, I'll do just a quick overview of the second quarter. Wade will talk about some specific issues in the financial area. Martin will give an overview on the contracting side of our business, both in the second quarter and the outlook for the second half. Owen will bat cleanup.

A special welcome today to representatives that I assume are out there from Jeffries and Johnson Rice, two companies that picked up coverage on Cal Dive. Since our last call with you that brings to ten the total number of companies following research on your company.

Now, before we get into any of this, we're going to have our specific rendition of the forward-looking statement from Jim Connor.

Good morning everyone.

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. For a complete discussion of risk factors, we direct your attention to our press release regarding this and to our annual report on Form 10-K-A for the year ended December 31st, 2002, filed with the Securities and Exchange Commission.

Thanks, Jim.

As I mentioned, let me just make a couple of comments regarding a change in the guidance that we provide and our procedure there. Historically, Cal Dive has provided far more detailed guidance than those in our peer group and many others in the oil-field service industry, and a specific amount of detailed quarterly guidance. If you step back, however, and look at our goal, which we stated, our long-term goal is to develop a Company that delivers a 10 to 15% return on invested capital over the long term. So the question is whether or not that detailed quarterly guidance is really consistent with what we're about here, which is building a long-term company in the offshore industry. You get to a specific example that we had during this past quarter where we had 3 million shares traded in a given day, with the question being specific detail about Marco Polo and when that field would begin producing. That's totally apart from the two strategic questions, one being what is the reservoir size, which is actually better than when we decided to build a T L P, and is drilling in the area sufficient to fill up the T L P, which it certainly is. So what we're going to be doing sense forth is we will issue formal guidance annually and then we'll update that at the end of each quarter, as we have done this period.

With that, let's go into the second quarter. It was a good quarter, particularly since our marine contracting operations came in stronger than we had anticipated. They provided 39% of our profitability versus a target of 30% for this year. Our people did a great job in terms of utilization. 82% for our nine deepwater vessels. That enabled us to offset the impact of weather that limited some of the activity of our vessels that work on the OCS. The utilization was also a function of the fact that we were able to keep two of our deepwater vessels and the Q4000 working in the gulf spot markets. As I mentioned, Martin will talk about the specifics of where our vessels were and where we expect them to be in the second half. That enabled us to overcome oil and was production that was limited in the last ten days as a major trunk line operator shut down our production.

Some specific financial highlights; Revenues were up 41%. That includes a 16% in our marine contracting revenues with virtually all of that coming from the sea well, which was a new business acquired. In other words, if you look at the remaining asset base, they were the same in this second quarter versus a year ago, and net - net the revenues were about the same. Our oil and gas revenues increased substantially, 160% over the prior year period. Our consolidate gross profit margins of 24% were identical to the second quarter a year ago and up 2% from the first quarter of this year. With all of that improvement coming in the marine contracting area where our margins increased from break-even in the first quarter to 14% currently. When you step down to the operating margin line, 15% in the first -- in the second quarter and in the first half, it's identical to what we did a year ago, even though the cost of our business has increased and we've added significant new assets to the mix. Wade, with that, why don't you talk a little bit about some of the financial areas, and I'll come back after that.

Sure.

On the debt side, we ended the quarter with about 223 million of debt. The break-out of that is fairly similar to the end of the first quarter. Most of it being the Title 11 financing. That was 141 million. The Revolver, we were at 46 million at the end of the quarter, and 33 million on the Bank One term lone for the Gunnison. As far as interest rates on those, the myriad is still floating. I think we're down close to 1.5% for the second quarter. The Revolver, we're paying although under 4%. The term lone, about 4.3%. That represents a debt to book cap level of 38%.

As far as capex goes and projections for the rest of the year, you may recall our budget is about 105 million for the year. Through the second quarter, we've done about 60 million of that, so the remainder of the year will be 35 million in the third quarter and about 10 million in the fourth quarter. Those remaining items primarily relate to the Gunnison Spar and ERT Well work. So I still forecast our debt levels by the end of the year being down in the low to mid 30% debt to book cap range.

As far as hedges are concerned, I guess I'll talk about that a little, you might recall we still have half of our gas for the rest of the year hedged at $4.30 and half of our oil is hedged at average prices of $26.63. We've also put in place some hedges for 2004.

We have half of our PDP known reserves, that we're comfortable with production wise for the first half of 2004, hedged at an average price of $26.30. And then half of our gas is hedged using a no-cost caller with a floor of $5 and a ceiling of $6.60. Then finally we put in a smaller hedge on the oil side for July and August of 2004 at $26. I think that's probably a quarter of the production we expect in those months.

Thank you, Wade. That gets us into the operational highlights. Let me pick up where Wade left off and cover oil and gas, and Martin will jump into contracting.

Our production during the quarter, 6.7 BCF equivalent is almost double what we did in the second quarter a year ago. That was down a little bit from the 6.8 in the first quarter with the decrease, as I mentioned, due to a trunk line operator shutting in basically our three significant oil fields the last ten days in June. If we continue this run rate we will be rate at 27, 28, something like that, BCF equivalent for the year, which is right in the midpoint of the range that we gave coming into the year.

Our margins, gross profit margins, dropped from 55% on the first quarter to 45%. Part of that was due to -- we had the continuing operating expense of the oil fields without any revenue for 10 days in June. Also, we're in the midst of an aggressive well work program. In conjunction with that we were doing a lot of work trying to improve the productivity of existing zones, and that type of expenditure is expensed under successful efforts accounting.

Looking forward, I think margins will continue to run 45 to 50% as we complete the well work program. So a lot of it will be a function of where natural gas prices go for the balance of the year.

Martin? Why don't you talk a little about the contracting business.

Right, Jim.

Starting with deepwater, you know, as Jim mentioned earlier, I was very pleased that our people managed to create a lot of utilization for our deepwater assets, especially in the Intrepid, because when we spoke last time, we were expecting some stopping in April, and we were able to keep it business for 29 days in the quarter, which was great. However, in mid June, it worked right up. We were not missing opportunities. They were just not available. That situation continued through July. Combined with a one month's slippage to the Gunnison, that's making for a difficult quarter 3.

All that said, the Q4000 will return to work next week to begin a three-month backlog that includes around 45 days of good margin and operations work. We also have several opportunities to add to that backlog. Intrepid will likely be reactivated around the middle of August, and we will perform some other work for about six weeks before starting Gunnison and Marco Polo, and that work will keep her busy probably until the end of the year. And in Mexico, on a three-month extension, the present contract, during this time we expect a bid for long-term contract to finally emerge. Eclipse is working away in the Middle East and will not return until December at the earliest. And another one will mobilize to Trinidad next week for at least three months of work. That leaves a couple others in the Gulf of Mexico spot market.

Turning to the North Sea, the sea well will be utilized around 90% of the quarter in Q3 but mostly on lower margin diving support work. Although we have reasonable visibility for resumption of work in Q4, the overall volume of available well work this year has been very disappointing. Transfer of field assets from major operators will likely stir well operations activity in the medium term, but for the present, such work is being deferred. And we're also working away flat out right now employing three in-house vessels and one on a project charter.

Our new T 750, 750-horsepower trencher, it is now performing very well on its first contract and began in the sector of the North Sea. We are very excited about the future potential of this asset. It could be deployed for the first time in the Gulf of Mexico as early as quarter 4 this year. Our shelf contracting assets were interrupted by hurricane Claudette in July and are now working through a reasonable seasonal backlog. We had expected a similar year to loss of these assets in spite of much better natural gas prices. The demand for this vessel has been disappointing due to new construction project.

Thanks, Martin. Owen, it's all tied up for you.

I've got quite a bit to cover this morning.

I wanted to start trying to standardize a little bit about what I talk about quarter to quarter with everybody, covering the -- sort of an overview of the various business models that we have in the Company. I wanted to sort of kick it off with, before getting into characterization of any specific part of the models, about talking about the Company itself and just reiterate what I've said in the past. To understand what kind of Company Cal Dive is, you've got to look at what we want to be five years from now. We want to be an energy service company that achieves a long-term average return on capital of between 10 and 15%. We do this by creating a business model where capital can be deployed in various allocations over time between the different business models that are all enabled by our areas of expertise.

And we consider our areas of expertise to be subsea construction, which includes man diving, deepwater subsea construction, including robotics, deepwater well intervention, reservoir analysis, production enhancement, and offshore production development and operation economics. Within these disciplines, we've developed a rather unique set of business models that we believe are sort of hedged and allow us to sort of modify the Company on the path within the cyclicality of our industry. Our preference is for organic growth, and we typically just look at acquisition primarily as a way to achieve a basis for enhancing organic growth potential.

Our mix of capital allocation discipline focus always includes a level of hedging between our disciplines, and like I said to better manage the volatile cyclicality of our business. It's a very fluid model for our changing industry, and the intent here is to smooth the cash flow and earnings over time that allow us to make better-informed decisions on capital allocation and budgets for the future.

I just -- trying to shorten this. I'm just looking at how many pages I've written. This is the first time I've ever actually written notes for a conference call. I think what I'll do is just go back to my old style and talk a little bit here.

We do have five business models. We've got the shelf contracting, we've got the deep construction, well intervention, we've got abandonment driven production equity and PUD production equity, which includes taking an equity production facility. Those are the five things we do. We've added and created these essentially over the last three years. There's an awful lot of work left to do to fully integrate them and realize the potential of these models. Each one of them in their own right has a lot of potential, especially given the cyclicality of the industry.

Before 9/11, Enron, and Iraq we did not anticipate a downturn. It would have been nice to have a full year under our belt with these acquisitions before the downturn hit us. It didn't happen. We made our apologies for '02. Going into '03, we said it was going to be a different game, we were going to be a little more proactive. We have lowered guidance. And what I'd like to do is just talk about real briefly the different parts of our Company and why we're doing what we're doing.

I'm trying to get everybody in the company -- I've mentioned in past conference calls, we're going through a reorganization, a restructuring of our processes. I'm trying to instill an even tighter culture that historically has been at Cal Dive on risk taking and trying to manage for downturns. The first step is to look forward and assess what your downside potential is and we've done that looking at this year. I think we've done exceedingly well this year. We're right where we thought we would be. We've accomplished the things that we were hoping for. If I was to go through the individual business models and give you an assessment of where we see the rest of the year, I think in certain areas we were hoping for a little more optimistic upturn in the market than what we're seeing. I think we're beyond the point of trying to time that. I think we're going to be going forward with just nose-down attitude and manage for what we consider the downside. And we've tried to express to you what we now consider the downside to be going forward.

The biggest area that has impacted us so far right now is the well ops U.K. division in the North Sea. Since our budgeting effort, the tax law has changed in the North Sea. Quite a few things happened. Transfer of ownership of the property, and we have a market that is in transition over there, and we're struggling a bit, quite honestly, to find our place in it and to generate the projections that we thought we could do over there. We have started to do our own diving over there, so we are going to be moving into additional markets. I don't have a problem with it. It's market-driven over there. I think our people are operating very well. We have to penetrate little different sections of the market. But the market will improve, and I know that our operating will improve. So I don't see a real problem there. Other than short term.

Another area that has been a little bit of a disappointment as we look forward at the second half of this year is the shelf. We were expecting the shelf to be a little more consistent with historic levels, and what we're seeing is a pretty massive drop-off on the development construction market side of the shelf. Where we are strongest, though, is in the inspection repair, and maintenance end of the market. And that, we are functioning very well in. Again, it was just in making our budget projections and management forecasts, we anticipated a little stronger development side of the market. Looking forward, I don't see the development side of the market returning anytime soon. That's not to say it's not go to. It's just that I'm no longer going to try and time market returns. I don't see signs that would show a significant upturn in that market. I do believe that we can tighten our operating on the shelf, and that I believe we can actually expand our market share. But I do think that over the long run our views of the shelf may require us to take a little different assessment than we have historically.

The next area I'd like to talk about just briefly is Canyon. The robotics. As you all know, when we bought that company, it was right before the demise of the telecom. I think it's been a very successful story in recessitating the company, applying their tremendous expertise on the oil and gas side of things. We've bought three new vehicles, plus a 750 trencher this year. They are just now going into service. There was a little lag there and the contracts that we were anticipating for the second half of the year have shifted a bit. So although Canyon has turned the corner and is showing remarkable improvement on the earnings, I think we probably were a little ahead of ourselves on our projections for the second half of the year for Canyon. So we're revising that outlook a little bit.

Longer term, a lot of the robotics is market driven, which will improve. And I know as we penetrate the market with Canyon's expertise, our margin production within that market, it's in our own destiny to improve. So we aren't really -- we don't require the market to improve to see that continue to rise.

The next segment of our company, the subsea, there's an awful lot of talk, and I could go on for hours about subsea, because, quite honestly, that's where my heart lies. There's an awful lot in our industry right now that is very confused, and it's a difficult market. But I have good news to report. We are going into this year we said what we were going to do with our vessels, shifting them around, putting them on contracts. We've been very successful in doing that. We've tightened up the risk-taking in the contracts. We're holding on our margins and we are where we said we were going to be on the budget.

Looking forward, this is another bit of bright news, is that I think this is one where we have a pretty good chance of increasing our own margin generation, even though the market may not strengthen to the extent that we're hoping by the second half of the year, I think the jury is still out as to just how well we can perform. I think we have good things to look forward to.

On the production side of things, obviously this part of our business is just hitting on all eight cylinders. It's a great cash generator. We starved it a little bit at the beginning of the year. If you remember, we had cash flow concerns, and we did a preferred offering that we did a little balance sheet repair. During that process, we held back some of the capital spending for the production on the well work, which has put us behind on our production rates. So although I think we're going to have to lower our production projections for the rest of the year, I think it's primarily a timing issue, which is of our own doing at the beginning of the year.

So hopefully that will give you an idea of what we're looking at in the market and why our guidance is a little bit different than what it was. I think -- quite honestly, I think it's too early to tell exactly what will happen, but we're just trying to take a more conservative course in the management of our affairs.

Okay. Thank you. Angie, if you want to open the field to questions, we're ready.

Thank you. At this time we're ready to begin the formal question-and-answer session. 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, will you press star 2. Once again, if you would like to ask a question, please press star 1. One moment, please. Our first question comes from Jim Rollyson from Raymond James.

Good morning, guys.

Good morning.

Owen, if you add up all the things you just said about the fluid dynamics of what's going on in your budget and what you're seeing in the markets, how much of your guidance, conservative guidance reduction, do you think is from your contracting side of the business versus, you know, production and lower commodity price thoughts?

Predominantly the largest contributor is the we will ops business in the U.K., 15 cents, Martin is telling me. I know following that is the shelf. It's the next largest contributor. And then I'd say after that canyon was a downward revision, as is ERT. Subsea I don't think is a revised outlook.

Sure.

Which is ironic. Everyone is thinking that subsea is the problem child, but we're actually performing pretty well there.

Right. You mentioned a lot of the issues you're having, at least so far, seem to be timing issues with, you know contracting or production, I guess in ERT's case. Last couple of quarters, I guess you've kind of suggested maybe somewhere in the two to two fifty range is what you were initially eyeballing for next year. What are your thoughts on next year right now?

We're going to be starting our budgeting process, Jim, September 1 with a budget submitted to the board in December, and I'd really like to start a practice of not getting ahead of ourselves, and I'd like to get the best information possible. What I will say is that I have no problem at all with sharing information with our shareholders and investors as to what our budget is on an annual basis. That budget is what we use to make our management decisions with, so I think it's very appropriate to, as soon as we have that, to let it be known. Anything that we've said up to this point I would characterize as potential. I mean, with what we have, obviously we make certain decisions on capital allocation years past on what we're going to spend it on, and it's got certain assumptions, and that's what we've tried to convey up to this point. What our actual guidance for '04 is going to be I think I'll hold off until we get into our budgeting further.

Sure. Probably a question everyone wants to know, looking at Gunnison and Marco Polo, where do those projects stand on timing, I guess relative to the schedule?

I'll let Martin jump back in here. He's more familiar with it.

Since we spoke last time, it's been a one-month slippage in the schedule for installation, sort of a dry-dock schedule. The heavy lift contract which will install our infrastructure is delayed due to early tropical storm activity and -- receiving project. We did have some floats in the schedule, so we're still expecting first production from Gunnison to be early in '04 and still expecting mechanical completion on Marco Polo by December.

I might jump back in, Jim and let you know that all along we have always been saying, you know, the beginning of '04. The actual production dates on the project planning charts were far in advance of that. We've been trying to be conservative all along on what we've been saying, so I think we're saying the same thing still, which is beginning of '04.

Sure. Still leaves you some buffer.

Right.

Last for me, you talked about the hedges you put in place for the first part of next year, sounds like some pretty reasonable pricing. What is the plan on hedging, I guess once you get Gunnison into production? Do you plan on hedging some of that, or what are your thoughts there?

Jim, you guys -- every time I hedge, my guys bring me things that you wrote, and you hold out for $9. I don't know. Anyway, no, we do believe in hedging. We have a corporate policy not to exceed 50% because of the risk of deliverability, but we're at the maximum amount of our existing production that we would hedge. Once Gunnison comes on line, we will certainly look to hedge it. We do work with a consultant right now, and we have a lot of strategy in-house. Again, our philosophy on hedging is anytime that we can lock in or lessen the risk to our projected budget, then we'll do it.

Sure. Thank you.

Our next question comes from Bill Herbert with Simmons. You may ask your question.

Shoe good morning.

Good morning, Bill.

Owen, you made the comment, sensibly so, I think that, with respect to the shelf, if things were going to continue as is for awhile, stag nurturing or , or whatever word you want to use, that adjustments were going to be made. What adjustments are you contemplating if the Gulf of Mexico continues in a rather subdued state for the foreseeable future?

That's a good question. I really don't know. I think -- one adjustment which is obvious is, you know, there wouldn't be any capital allocation.

Right.

What we have in the gulf is an oversupply situation with a fleet that is by any measure ancient.

Yep.

The strategy for what you do there, there's obviously gone to be a strong IRM market going forward.

Right.

So your strategy has to be based around that, less so around the development side of things. You're going to have to do a fleet replacement program. But how you do that in balance with this existing ancient fleet that's out there is a particularly difficult thing. I think what you'll see us do is probably over time reducing our shelf fleet, and at the same time upgrading certain retired vessels so that we have a longer, higher quality asset mix.

Yeah.

But on a smaller asset base numbers, targeting just the IRM work.

That makes sense to me. Secondly, which queen -- what are the particular prospect for that in the current environment some just find whatever work you can get? Is that basically it right now?

Yeah, with the eclipse in the Middle East and -- Trinidad would be our only DSV. So -- lot more demand.

Right.

Keep in mind, Bill, our market historically has always been the spot market, because we're not an epic contractor.

Sure.

So we have to have a vessel sort of allocated for spot market work. That's where our success comes. Our problem going into this year was we add few too many allocated to the.

Right. Now, the Q4000, did we make money in the quarter, and if so, do we still expect losing about 1 to 3 million dollars on the year for that vessel?

As I did mention, we did make a small amount of gross profit in the second quarter.

Martin, the full year?

I think we'll be in that range.

Meaning the same guidance of 1 to 3 million dollars in the red?

Yes.

I think that's about it. One comment. Well done on -- with respect to dodging the question on the 250 number for '04. It's too early, and I think you were right.

Jamie Stone with UBS, you may ask your question.

Couple of questions. Jim, could you just quantify for us the volume impact of the pipeline shut-ins in the second quarter? Martin, you talked about being kind of 65% of the way through the well workover program. Could you talk about what sort of, perhaps, reduction we ought to expect in gas and oil production expenses in the third and fourth quarter and then my third question related to ERT is, given that you have the 50% of your production hedged, what's your kind of base gas price forecast for the unhinged portion that you're building into your guidance?

Let me start with the last one since I know Wade is prepared for it.

Yeah, our base price for the rest of the year is, on an equivalent basis, Jamie, around 450.

Okay.

In terms of the specific loss production on those ten days, Jamie, I don't know that number specifically. I'll have to get back to you on that.

Was it only oil that was shut in or oil and it was?

No, it was a major trunk line into the shelf. It was all oil. And what was the second question?

The second question was the impact on your cost structure of having had 65% of the well workover expense showing up in the first half of the year, and it looks like it's most heavy in the second quarter, and what impact that would have in terms of reducing ops costs in the back half of the year.

Yeah, the key there, Jamie, is spent or committed. I think we had actually spent just about 22 million of the 44 million through the first half. So we've got the other half of it to be spent in the second half of the year.

Are you expensing all of that 44 million?

No, no.

How much of the 44 million is being expensed, and how much is left to be expensed in the second half of the year? Is it less than what you expensed in the second quarter on a run-rate basis? Is it the same?

I'll have to get back to you on that.

Okay. And then my last question for Martin, Martin, can you talk about -- we've had this great migration of jacket breaks to Mexico, you have the Uncle John work and the Witch Queen came back. What is the prospect for work in Mexico and what kind of conversations are you having with them now as they're about a year into the ramp-up of their more aggressive offshore drilling program? They're also adding deeper water rigs now.

Well, up to this point we have not contracted directly with PMEX. Uncle John is presently working, and we're expecting that to continue, as I mentioned earlier, for another three months at least, then we're expecting a bid for a lease for a four-month contract we're very hopeful of getting. Apart from that we will be sending vessels down there on an ad hoc basis as we've done in the past. Over the last two to three years we've got at least six months of work on an ad hoc basis, and we see that continuing.

But do you see that -- I mean, do you have the sense that the volume of work in the market is going to be picking up over the next six or 12 months, and do you see that as -- either for the shallow water business or for the DP business, as a supplement or substitute for the weakness in the gulf?

Not over the next six months, I don't. Certainly next year there's some encouraging signs. So I think the situation for us will be the same as it's been for the remainder of this year.

Jamie, I might also say that the weaker area for us right now is the shelf. Our DP fleet is doing fairly well. Mexico provides utilization for DP vessels, but it very rarely provides utilization for core point, our shallow vessels.

Do you think that will still be the case with all these jacket rigs working there?

I don't know. All I know is historically it as never been there. We're not anticipating any.

Okay. Thanks. I appreciate it.

Our next question comes from Gary Russell with Stifel Nicolaus. You may ask your question.

Good morning, everyone.

Hey, Gary.

Couple questions. The shelf comments, do your comments there include views on the salvage part of that market and considering that E and P companies traditionally have ramped up salvage work when their drilling work is slowing, are you seeing that happen currently on the shelf?

Yeah, Gary, I don't see a big ramp-up in abandonment work. Number one, commodity pricing is still at high enough levels that it makes it profitable to produce the leases.

Two, you're seeing a large transfer of ownership of packages to new independents and it typically takes awhile for them to analyze and digest those packages before you start seeing properties spun off in the mark. That's not to say that there's not going to be abandonment acquisition opportunities for ERT, but I think the market in the very shallow waters is obviously more competitive than it has been in the past, and at these commodity prices, I'm not sure it's a market that you'll see us jump into with abandon.

The deeper water, though, I think holds a little more interest for us. There's a lot more asset value in those, longer production so you can smooth your commodity price assumptions. But as far as just the abandonment work itself, I don't see a big pickup in removal work, the salvage and barge work. I don't see that for another two years, quite honestly, until all this shakes through. If commodity prices come back down, then you'll see a rush to get some of it done, but then again keep in mind, when commodity pricing is down, the last thing they're going to use -- producers are going want to use their cash for is non revenue producing level deferrals. It's just a big game.

Quite honestly, I don't see that market picking up for at least two years. There's plenty of time for us to figure out where we're going to play in it.

Okay. That makes sense given the commodity price situation. Still searching for, you know, some race of sunshine here, and Jamie touched on the Mexico question. I was wondering if you are seeing any other opportunities in any of the other surrounding areas, namely Venezuela and Trinidad, and Trinidad I know you had been busy there. I was wondering if there's anything going on there, in particular with your big customer down there, BP.

Yeah, Trinidad is a very bright spot for us. We have good contracts lined up for the quarter down there. Our third and fourth quarter. And our client base is certainly expanding beyond just BP. We're very happy with Trinidad.

I made a recent trip to the North Sea, and quite honestly I came back -- and although it is our biggest looser this year and impacting -- it's primarily what's impacting our revisions here, I came back heartened and actually feeling very optimistic about our potential over there. Five years ago, I would never have believed that Cal Dive, a gulf of Mexico contractor, had such a bright opportunity to break into the North Sea market. But the reception of our work off of the sea well, not just well ops, but in the construction mode, has been exceedingly well received.

We have a few contractual issues or hurdles to get over. There's an existing contract in the North Sea that sort of precludes our being able to do some work, and that expires in about a year from now, and as we build our credibility and market presence over there, I can see the IRM-type market and small tie-back market holding a lot of opportunity for us over there, not only for the sea well but the northern canyon the robotics, and, of course the trenching we're just getting started. We've got both of our big trenchers, the 750-horsepower trencher plus the 500-horsepower trencher out working this month for the very first time, and we've got both of them out there working. And trenching is a market that our industry is in dire need of a really good contractor, and our performance record is tremendous, and I think on a subcontracted basis to the other contractors, it holds up, keeping with our historic contractor kind of philosophy, it holds great potential.

So I'm actually very upbeat on the North Sea, although it's our biggest loser right now.

Okay. Last question. This might be for Jim. With regard to the fields surrounding Marco Polo, I realize you might be limited on what you can elaborate here, but could you give us some additional color on some of the surrounding fields and what you feel might be potential for Cal Dive in terms of filling the Marco Polo TLP but also construction work for Cal Dive?

I'll flip that over to Martin.

Yeah, the biggest opportunity I think is well publicized, not K-2. We're having detailed discussions with the operator right now, and I'm expecting a decision certainly within this quarter. In order to meet production schedules. So that's going to have a big impact, because it takes a good bit of our incremental production capability. Beyond that, we're doing another well in the vicinity right now, plus there's some more Wells planned for later in the year. We're targeting gas because we have spare capacity for gas even beyond K-2. So, you know, K-2 is a big issue for us in the short term. When we get past that, we'll be focusing on some of the smaller surrounding reservoirs.

Okay. Thanks a lot, guys.

Bill Brady.

Before another question, if I could just interject an observation, right now the world is in a big state of confusion, and our industry is undergoing a lot of transition and change. And I know we've revised our view of the second half of this year, but the company is in great shape, and we're heading where we need to be. It's just as all of these market change, and you can tell from some of the answers we've given, the world markets are in a big state of flux right now. We've got great business models. It's just going to take a little time to sort out the balance and where our opportunities are.

And relative to history, in terms of race of light, it looks like it will be one of our best years ever

Bill Brady, you may ask your question.

Most of my questions have been asked, but I do have one more. You said that 39% of your operating profit in the quarter was from deepwater contracting. Can you break out the other three areas?

We have just one segment in that area, and it's marine contracting, and that is what we were referring to.

I meant how much from well ops shelf contracting equal 100%?

Wade?

Sure. Of the contracting side, I'd say about over half of that was in the shallow water, and then of the other half, the deepwater probably had probably 30% of that, and well ops, 20% of that.

Well, okay. You said in your release that 39% of the operating profit was from deepwater contracting. Did I misread it? So my question is how much is from shelf contracting, oil and gas, and well ops.

A little over half of the marine construction's profitability was from the shelf, and then of the other half, 60% was DP, deepwater, and 40% was well ops. So 50, 30, 20. Makes sense?

And how much from oil and gas?

We have the oil and gas --

It's 15 million. It's the 100 minus the 38. It's everything --

Correct.

Okay. Thank you.

Marty Malloy from Hibernia Southcoast Capital, you may ask your question.

Good morning. I was wondering if you could give us an update on the stranded field partnership?

I'll take a shot at that. As you recall, we're talking earlier in the year of raising roughly 150 to 200 million of partnership-type funding. As we got into the marketing process, we were approached by a structured equity firm that was speaking of taking half of that. That began about mid this quarter. We spent a fair amount of time negotiating a term sheet. Part of that term sheet required -- they wanted to be a heads-up owner in our other PUD development. So we got to the point where actually they submitted an offer on our existing PUD development a couple of days ago that was below where we would sell that field today. It also gets into the whole governance issue, and I think as Owen put it, ERT is our crown jewel, and having another active participant in the management process there was something that was an issue for us. And then finally, we're sitting here in August, so we're five months away from next year when our cash flow situation will change significantly. So I think, Owen, do you want to jump in and say anything more? That issue, I think, is probably off the table for right now.

Okay, I wouldn't put it too far off the table, though. I think the potential of that business mod Del is such that it could command far more capital than what we would feel comfortable putting towards it or what we would be able to put towards it. So I do see trying to raise outside capital. I do think that Jim's right. We took so long on negotiating this first one that the time that we need to bridge before we have enough capital to do more than just be the 1% general partner is not that far away. So it may actually be wise to back up and look at doing it ourselves on -- more on our own, but I wouldn't rule out the need for outside capital.

Okay. And I'm sorry if I missed it but did you give updated production guidance for this year from ERT?

Yeah, I was saying, Marty that the run rate quarterly will probably stay where it's been, so we're looking for 27 to 28, which is in the range of 25 to 30 that we gave coming into the year.

Great. Thank you very much.

Essentially unchanged.

Bill Herbert with Simmons you may ask your question.

Yeah, my follow-up has been answered. Thanks.

There are no further questions at this time.

All right. Thank you very much. We'll see you in roughly three months. Thank you.

This will conclude today's conference call.