Helix Energy Solutions Group Inc (HLX) 2003 Q4 法說會逐字稿

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

At this time, we will begin the Q4 and 2003 earnings lease and 2004 earnings guidance conference call. I'd like to turn the conference call over to your leader, Mr. Jim Nelson. Sir, you may begin your call.

Welcome, everyone, to the fourth-quarter 2003 conference call. We will cover, obviously, not only the fourth quarter but the year 2003, and then we will move into a discussion of guidance for '04.

With me is our management team, Owen Kratz, our Chairman and Chief Executive Officer; Martin Ferron, our President and Chief Operating Officer; Wade Pursell, Chief Financial Officer; Jim Connor our general counsel.

Hopefully, you've got the documents that we will be walking through today, which consist of a two page fourth-quarter shareholders report, the press release related to that, which has attached to it the summary financial statements for the fourth quarter of 2003. Then we issued a separate press release where we announced 2004 earnings guidance and attached to that is a list of key variables, and we will talk through each of those documents.

Before with do that, however, Jim Connor has our version of the national anthem.

As noted in our press releases and the associate 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 releases and to our annual report on Form 10-K A for the year ended December 31, 2002 filed with the Securities and Exchange Commission.

Thanks, Jim. Let's move into the fourth-quarter shareholders report. In the fourth quarter, Cal Dive set what was for our company an all-time record for earnings in the fourth quarter. We also established an all-time record for annual earnings. The fourth quarter is typically when we see a decrease in both volume and profitability due to the seasonal downturn, which is caused by weather and reflects the completion of marine construction in our two principle markets.

Having said that, this year was a very strong year for our contracting business. We had four of our vessels working and several of our canyon robotic vehicles working in the commissioning of Gunnison. Our two well intervention (ph) vessels also had excellent utility during the quarter. As a result, the margins of our contracting group were 14 percent and would have been even higher had we not eliminated the profit related to our ownership in Gunnison. Martin will talk about that in a little more detail.

During the quarter and for the year 2003, we accomplished some very significant goals. Those are listed in the press release. But to reiterate, 40 percent of our 2003 contracting revenues were generated globally outside of the Gulf of Mexico. Our Deepwater construction fleet generated gross profit margins of 17 percent, above the target of 15 percent that they had as a goal. Finally, we were able to achieve significant utilization of our two intervention vessels.

Another goal that I didn't mention in the press release that Martin will cover is that we had divesture in quite a long time in terms of our safety record.

Looking at the financial statements themselves -- well, let me back up. Obviously, in December, we had the first revenue coming out of Gunnison in our oil and gas business. We are about to begin generating revenue related to the mechanical connection at Marco Polo. In other words, in 2004, we're going to be realizing, for the first time, a return on almost $0.25 billion of Cal Dive investments.

Now, looking at the financial highlights, revenue in the fourth quarter was up 10 percent on essentially the same asset-base. As you can see if you look at the table from a twelve months standpoint, again, with essentially the same asset base, our revenue, net income and diluted earnings per share all increased significantly.

During the fourth quarter, all of the revenue growth of 10 percent was a result of our oil and gas operation. In contracting, the work at Gunnison almost offset a decline in our shelf activity. You may recall, a year ago, the vessels that worked the outer continental shelf were extremely active, doing repair work and cleanup in the aftermath of Hurricane Lili.

Gross profit margins of 24 percent worse spot-on with the 2003 average (indiscernible) both the two sequential quarters.

Finally, EBITDA is a measure of operating performance that we focus on. The Company hasn't paid income taxes since 1996. EBITDA in the fourth quarter was 36 million, which was up 120 percent over the same period a year ago. For the year, EBITDA was 127 million, which was up 93 percent.

I think what I'd like to do now is, Martin, why don't you talk about 2003 activities and I'll come back to finish up with oil and gas?

Just a few comments on quarter four. If you remember, this time last year, the quarter four story was dominated by world activity in shallow water following Hurricane Lili and also a contract dispute on a Deepwater job in Trinidad.

During quarter four of '03, we didn't get any help from hurricanes, but we also avoided any disputes. The big news, as Jim said was, was bringing Gunnison to first production, which involved three of our key deepwater vessels for cumulative utilization of 130 days. This (indiscernible) in the (indiscernible) to achieve 100 percent and 95 percent utilization respectively during the quarter.

I'd also like to point out that, during the year, we eliminated almost $1 million of pre-tax profit due to our ownership position in Gunnison, with $600,000 of that occurring in quarter four.

A particular highlight for me about quarter four and 2003 in general was that we really showed the marketplace what the (indiscernible) in the Q4000 can do. They are now well accepted in the marketplace for all they are intended roles.

Moving on the eclipse (indiscernible) each achieved 100 percent utilization in quarter four, in the Middle East and Trinidad, respectively. This really shows the success of our efforts to find international work for some of our assets at a time when the Gulf market is poor.

Seawell had a reasonable quarter four in the North Sea, especially in December, as (indiscernible) month is really quiet due to seasonality. Particularly noteworthy, though, is that we've had no recordable incident on our vessel since August, 2002, and that, as a company, we managed to reduce our total recordable incidents by 50 percent during 2003.

Activity levels in the shelf could not have been more different between quarter four of '02 and '03. As I mentioned, we had no hurricane help and also, the general mention weather conditions were worse than normal. We also elected to drive off (indiscernible) in December and the customers seemed to take an extended Christmas break last year. So all in all, activity levels were really down on the shelf in quarter four.

Let me just quickly run through our oil and gas company production at 7.2 Bcfe -- was up 16 percent from the same period a year ago. Roughly 300 million of that relates to initial production coming from Gunnison.

For the year, we produced just under 28 Bcfe; that was up 68 percent from 2002 levels and it was a result of the significant acquisitions that we made from Shell and Hess in September of 2002.

We replaced 91 percent of our shelf reserves; we did that principally through a very aggressive and successful well-exploitation program in which we devoted roughly 30 million to that effort during 2003.

Our gross profit margins in this business -- well, you can see the average prices. The commodity prices were up 24 percent from the fourth quarter a year ago, and you can see the averages that we have here. Our gross profit margins for the year 2003 were 48 percent, up from 43 percent a year ago and that was due principally to higher commodity prices.

Turning to reserves, we closed the year 2003 with proven, developed reserves of 150 Bcf equivalent. That's down slightly from 158 the prior year. Our reserves have been reviewed in their entirety by Edelson & Coe (ph), our independent petroleum engineering firm. Of that 150 Bcf equivalent, about half of it is on the outer continental shelf and the other half in Deepwater with Gunnison. Roughly 50 percent of our reserves are oil and the other 50 percent gas.

That concludes 2003 and 2004. Let me shift then and talk about our earnings guidance for the year 2004. We have issued a press release and attached to it the list of key variables, which has some of the key assumptions listed in it. Our earnings guidance is in a range of $1.30 to $1.70. Obviously, we're targeting something in the middle of that. If the key variables are worse than what we are assuming, we will probably be at the low end of that range, and we will be at the high end of the range if things work out better than anticipated.

Normally, our business, because of the seasonal impact, particularly in marine contracting, results in 65 percent of marine contracting revenues and related profit occurring in the second of the year -- of any year. This year, most of the throughput coming from Marco Polo -- virtually all of it -- will happen in the second half of the year. At Gunnison, I think three of the ten wells (inaudible) come out online in the second half. As a result, the normal seasonality will even be further enhanced with the Deepwater fields coming online, so that a substantial portion of our 2004 earnings will occur in the third and fourth quarters.

We announced, actually in the second quarter a year ago, that we were not going to do quarterly earnings guidance. In this type of business, (inaudible) simply the timing shifts from quarter-to-quarter. What we focus on is (indiscernible) for you, our shareholders, an annual result at the end each quarter. We will be trying to narrow that range, based upon our assessment of the variables that have occurred.

So, as we move into some of the key variables and the three segments that we have today, Martin, why don't you talk about marine contracting in terms of some of the variables that we've accomplished and what we see?

Okay, starting with Deepwater, our project expectation is for lower utilization, principally due to a lack of a Gunnison-type project, continued soft market conditions. As we previously stated, we closed back the (indiscernible) in November, and we have the Uncle John back from Mexico doing the diving work here.

So, in terms of overall market conditions in Deepwater, we don't really see any improvements. (indiscernible) good transparency toward the end of the year but some of those projects might slip into '05. So in our budgeting, we are down on '03.

That said, moving onto Canyon, we've got a full year of access to a tried and trusted T 750 trenching machine. We've been targeting the Deepwater Gulf of Mexico market for additional utilization, based on (indiscernible) providing thermal insulation for both new and existing pipelines. We've already secured 40 days of such work in quarter one and we're expecting to get at least another 40 days later in the year. So, on the Canyon side, we've got a positive in terms of utilization, in terms of the T 750 in the Northern Canyon.

For the shelf, I don't really see any change over last year -- you know, continuing soft market conditions despite commodity prices being pretty high. The weather at the start of quarter one has continued to be worse than usual, so we are off to a bit of a slow start, but we are hopeful that year-over-year -- (technical difficulty).

Moving onto well ops UK, as you might recall, we had a very poor start in 2003 with only 30 percent utilization in quarter one. So we've worked really hard to obtain a quarter one backlog this year and expect to achieve around 70 percent utilization. This better situation, together with awarded work for Stadoil (ph) in the Norwegian sector should bode well for an improved year with that business unit.

Then Well Ops Inc. (ph), with the Q4000 -- we did right around 100 days of well ops work with the Q4000 in 2003. We expect about a 30 percent increase in 2004 with 30 days already working quarter 1. The rest of the utilization for that vessel would come from the construction, logistic supports sectors. And on our point, I can announce that we're just setting sail for the Dutch sector of the North Sea to carry out a lifting operation pretty similar to the job we did when the vessel first came out. So we've got 60 days of utilization to work through and then we're building a backlog for when the vessel comes back to the Gulf. So, that's pretty much our outlook for marine contracting.

Martin, why don't you handle our outlook for production facilities? Anything you'd want to say on the range that we've estimated?

You know, we've given a range of between 10 and 30 million of equity interest. Obviously, the variables there are principally when we achieve (indiscernible) completion, when we expect that to happen in March, and that is really how quickly (indiscernible) Anadarko bring on the wells. They've announced that they think the first well will be in production in July, early July, and that (inaudible) will be on production by the end of the year. So our range sort of reflects those sort of variables.

Moving to our oil and gas company, as I mentioned last year, we produced 28 Bcf equivalent. This year, we're looking for a range between 38 and 44 Bcf equivalent. That increase, obviously, is Gunnison, as it ramps up throughout the course of the year. The price spec we're using with hedges in place -- $27 for oil, 4.75 per Mcf for gas.

With that, Wade, why don't you talk about the hedges and then, if you would, talk a little bit about the interest rates that we have, as well as the components of our debt?

Yes. As Jim said, we've assumed $27 a barrel for oil and 4.75 for gas in our budget. We have hedges in place currently that cover nearly half of our PDP oil that we expect to produce for the year at average prices of $27.06 a barrel. On the gas side, we have nearly half of our expected PDP gas production the first half of the year (indiscernible) collar with a floor of $5 and a ceiling of $6.50. For the second half of the year, we have 10 percent of the PDP gas hedged also on a costless collar with a floor of $5 and a ceiling of $6.25.

I should point out, though, that we are only hedging the PDP production. We haven't hedged any of Gunnison yet and we haven't hedged any of the production that we are budgeting that results from well work. So currently, if you look at our budgeted production versus our hedges, we're probably below 20 percent total hedges, so we're watching that closely and anticipate putting some more in place over the coming months. That's hedging.

Moving onto our debt picture and our interest rates, we closed out 2003 with about 223 million of debt. That's down from a year ago of 228 million of debt. The debt to book capitalization ratio is down to 35 percent; it was at 40 percent at the close in 2002.

Looking at the components, there are similar components that we had throughout the year. Most of it is in the (indiscernible) facility. There was 139 million of debt outstanding at the end of the year in that facility. You all know how favorable the payment terms of that facility is; it's 25 year mortgage-style amortization. The interest rate is still floating. The latest payment we made came out to just short of 1.4 percent. Obviously, we are happy with that.

The revolver had 30 million outstanding as of year end; that's a floating interest rate also. It's around 3.25 percent currently. The Bank One term loan -- that's the financing put in place for our share of the construction of (indiscernible) Gunnison; that's a 35 million facility that was fully outstanding as of year-end. It obviously began amortization now with the production beginning at Gunnison. The rate there is also floating, 3.6 percent, and the only remaining debt piece is the capital lease we put in place during the third quarter for the trencher (inaudible) one of the of ROVs, or Canyon, and that's a fixed rate of 3.29 percent.

As far as what we've budgeted with respect to interest rates, we are essentially budgeting the (indiscernible) facility to ramp up during the year between the 1.5 to 4 percent and the other facilities to average between 4 and 6 percent for the year.

Wade, would you then move into just a quick summary of CapEx for '03 and what we're looking at in '04?

The only thing I would add to the debt picture was we were in all compliance with all of our debt covenants at year-end and in fact, we've added a lot of breathing room. For example, we mentioned the debt-to-book capitalization decreasing -- another one that, as we were watching very closely last year, the debt-to-trailing EBITDA was over three times. As of the end of this year, that number is down to 1.76. The debt service coverage ratios are well in excess of the limits as of year-end.

On the CapEx side, for 2003, our total CapEx came in at about 103 million. Of that, 8 million relates to T&A work on the ERT properties. You remember that liability was already on the balance sheet, so you don't see that as pure CapEx on the cash flow; we call it CapEx. So, the remaining 95 million breaks down 38 million for Gunnison; the next highest was 31 million for our ERT well work program; we spent 18 million during '03 for the Canyon, the new trencher and the new ROVS; and then the remainder, around 8 million, was CapEx on our vessels.

Turning to 2004, we're budgeting CapEx of about 77 million. Of that, about 6.5 million will be T&A for the ERT properties; 30 million we've set aside for ERT well work; 26 million is split about evenly between Gunnison and Marco Polo. That's the completion -- the final CapEx requirements on those, bringing those two facilities online. Then the remaining 14 million is maintenance CapEx for our vessels, along with the acquisition of Horizon (ph).

With that, Owen, you are here as cleanup.

Well, I'm going to just speak generally to a couple of issues this morning. This year that we just came through was yet another difficult year for our industry.

Here at Cal Dive, we're going to be changing things a little bit. It's very easy for us to get very excited about the business models that we've created here and potentials they have. At times in the past, we've perhaps gotten a little ahead of ourselves in talking about the potential.

This year, we're taking a much more conservative approach in our budgeting and likewise, on these calls, I'm going to try and establish a little more consistency in talking about two basic topics. One is, each quarter, we will be reviewing the actual trend that has occurred in the quarter just ending versus what our budget assumptions were, so it gives some flavor to the analysts so that they can better predict what might be ahead. I think we're going to limit our guidance to that, on top of what our initial budget is. That puts all of you consistent with what we do here at management. We (indiscernible) a number at the beginning of the year after a lot of work, starting back in September, to try and figure out what we think we can do. That's the number that we have in our head throughout the year. We don't raise it and lower it; we constantly manage and strive to achieve it. So this will be an effort to report to you a report card as to how we're doing along the way, along that path.

The second thing that I'll be trying to do each quarter is just give you a little insight as to where Cal Dive is heading strategically. Our industry is in the midst of a lot of change right now. I think it's important because I think there's a lot of curiosity as to what happens to all of the construction companies out their, going forward. I want to keep all of our investors very clear on where we are going and then you can judge for yourself about our discipline and then follow (indiscernible) the path.

So to start off with, I'd like to just sort of recap '03 and compare it a little bit with what we've budgeted, going forward, for '04. In construction, while the results were positive, I've got to admit that there's sort of a mix of emotions about it. While it's a good result and consistent for the market conditions, it obviously sub-par for where we would ultimately like to be; it doesn't reflect the leverage I believe we have in our asset base. But it was a great effort on the part of our people, considering that one of our big concerns going into '03 -- knowing that it was going to be a tough year -- it was our first full year with the full costs of all of the recently added assets, and that was going to pose a challenge for our operating group to minimize the potential negative impact of that.

I think a great job was done there. I think we did a little less-than-satisfactory of being attentive to cost control and spending discipline, which is why we were going through such efforts during '03 to reorganize the Company, revamp our process and complete the full integration of all the recent acquisitions.

I think there may have been a little too much counting on or optimism on counting on the market demand to return. I'd like to consistently emphasize here (indiscernible) our culture has to be. Let's not count on market (indiscernible) do it ourselves anyway. I think, in '03, we were still developing a lot of the credibility with these new assets. It was not a matter of just coming out with them and watching them go to work. Even if the work had been there, we had to prove that they had the capability and establish the credibility. Now, those were all hurdles that we were facing.

On the good side, I think that there's just been tremendous effort and the acceleration of the credibility and establishment of the track record for our new assets exceeded my expectations, so I'm very pleased with that.

We have begun to very successfully penetrate foreign markets and I think that was a natural occurrence but now, we've actually started to put some effort behind it and I think that will gain momentum. We did complete the reorganization, which refocuses Cal Dive's culture on spending discipline and cost control. I would say, versus '02, '03 was a much improved year on (indiscernible) on contracts, as Martin mentioned. The fourth quarter of '02, as you might recall, we had the (indiscernible) issue, and for the most part of '03, it was relatively free of major contractual disputes.

Looking forward in '04, on construction, as I mentioned, our international efforts are really gaining momentum. The operating improvements that we mentioned above on spending discipline and cost controls should really start to bear fruit in '04. The market remains weak and competitive but, as I say, there's a real positive sign in that a lot of the contractors are displaying a much more rational approach to the pricing and contracting terms than in the past. But in spite of all this optimism about '04, our budgeting process -- we took a very conservative view and are basically including just a flat year-over-year result.

Moving onto facilities, '03 results really had no contribution from facilities because they were still in the development stage. Weather did delay completion on Marco Polo but now it's been agreed that mechanical completion will be complete by March 1st, and that's one of the demand charges (inaudible).

The greatest remaining variable continues to be the well completion and the ramp up rate, and we're not going to get into debates over what the ramp-up rate is going to be. We are simply going to follow the guidance that's provided to us. We have backed way off of the '04 expectations that we previously had for this, though. We feel the what we've put into our budget is very reasonable and it does not include any additional throughput tariffs for '04 in this current budget.

We are hopeful that '04 will see the announcement of additional deals on new facilities. I feel very confident right now about the repeatability of this model. But again, we've put no impact of this into the '04 budgets. Even if there were a new deal announced this year, the development would be multi-year, so it wouldn't impact '04 in the best of cases.

The assumptions here -- being more conservative, though -- implies that there is more inherent growth after '04. I think that's a very positive to take away from here. So, we're not backing down off of the potential of our business model; all we're doing is revamping the timing a little bit.

Moving onto production now, production -- we have several components. Mature properties -- it was a very good year but our confidence in the price deck really didn't provide an opportunity for us to be aggressive on making new acquisitions. We took a more patient wait-and-see attitude towards pricing. We did work, very aggressively, the acreage that we had obtained in prior years and the results were obviously very, very good.

In '04, we still have a lot of reservoir potential to exploit in our existing acreage. The acquisition opportunities are increasing, and that may mean that we make future acquisitions this year but right now, our budget reflects about 30 million in capital allocated to working our existing fields.

If the acquisition opportunities come up, I don't anticipate putting additional capital into this. It would more likely be that some of that 30 million was redirected, we would defer some of the well work and take advantage of the acquisition opportunities as they happen, to give you an idea for the flavor of how we would approach this here.

On the upside, '03 was relatively quiet year for pud deals -- again, impacted by the commodity price on the acquisition opportunities. Because we were very focused on developing our biggest pud, which is Gunnison, and of course Marco Polo -- we did complete one pud, though, that was on one of our existing fields. The results from that were very successful, so the pud concept (indiscernible) continued through the year.

In '04, we're taking again a very conservative approach in the budget. We are not including any assumptions for any new pud acquisitions during the year, although as some of you on road shows have seen, it is obviously a stated goal of ours to make pud acquisitions this year.

We probably have some new shareholders listening and then might not know what pud means and what we're talking about there. You might just (inaudible).

I'm sorry. As opposed to a proven and developed producing field, a PDP, that would be a mature property, a pud is a proven undeveloped property -- meaning that somebody else has gone out and drilled the expiration well; there's been pay found and for one reason or another, through capital constraints or it being non-impact or marginal in nature or stranded, there's just been no development effort made. What we do then is we come in and recognize the opportunity to put our assets to work, putting it into development with a favorable return to us. Therefore, we make the acquisition of the property and put our efforts to work.

On mature properties, I will state further that we do plan to expand our market exposure for that model. We are seriously starting to look at not only mature properties but pud acquisitions in the North Sea. Again, I'm not saying that there are any -- there's certainly none in the budget but it's just a stated goal, a strategic comment.

On Gunnison, which is the other big part of our production, '03 saw the first production initiated just before Christmas. The initial rates were modest because it was just the initial wells but it was within expectations. The completions will continue throughout '04. We've made a real conservative estimate in the budget. In fact, we've also increased the DD&A rate, which I think is a significant thing to mention relative to what we might have said to people in the past. We've increased the DD&A rate until the flow from the wells further proves up reserves, at which time there will probably be an adjustment in the DD&A rate, so it's a timing issue. But again, we're just trying to be a little more conservative.

Then, in general, we accomplished a great deal in '03. We've prepared for improved results, going forward. I'm very comfortable with the guidance that we've given here. Our business model is working extremely well, and I believe recognition of our model among our industry peers may actually be ahead of Wall Street's, but what that means is that we're getting a lot of calls from a lot of people that are starting to produce a lot of opportunities for us to start taking a look at, which is giving me all of fund in thinking forward strategically.

I feel very positive about the start that we've had in '04. Things are trending well. I will say the weather could have treated the shelf fleet a little kinder, but on other fronts, it's been very positive.

Strategically, we have a simple focus on our business models that we've been creating over the years. It's just shifting to a little strategic comment for a minute. In '04, we've got 77 million in our approved CapEx budget; 46 of it is allocated towards maintenance CapEx, but that includes the well work that I mentioned before on ERT and the mature properties. The remainder is primarily outstanding investment -- further investment in Gunnison and Marco Polo to bring those to completion. The remaining cash flow that we will generate this year, we plan to allocate it to debt repayment, and then with that capacity, then, to look as the (indiscernible) pud acquisitions and new Gateway facility ventures (inaudible) the market will allow.

We are planning to restructure our financing facilities. The idea here is to create a more flexible financial structure so that we can pursue these deals in a very timely fashion and with some capacity. We're going to focus primarily operationally this year on performance, cost control and risk-mitigations through just a real disciplined execution of the reorganization plan that we worked so hard through '03 to create.

We're going to plan ahead during '04 for what we can do to increase our sales effectiveness. By this, I mean both techniques, further integration, but real specifically on geographic expansion. I think the key for Cal Dive going forward here is to see how broadly we can expose our business models, now that they are -- (technical difficulty) -- concrete as far as the way we're going to operate. The next step is for us to see where we can apply them.

Having said that, I will now jump years ahead! (LAUGHTER). I know there's probably a lot of speculation as to what happens to contractors in our industry, going forward. I will tell you that we are sort of focused on our own actions here, not on -- (technical difficulty) -- happens to the other people in the industry. We've got -- our goal -- five years out, if I was to say what I'd like to see happen, I'd love to see us generating about 40 percent of all of our own construction work from our own facility deals and production deals. I'd like to see us have foreign equity involvement with various contracting groups around in select parts of the world, and I'd like to see us have and increased abandonment solution capability.

On the facilities side, I'd like to see us turn into a deal-making factory. I think it's possible to see us do one of those facility deals at Marco Polo every year or two, which I think is a reachable goal.

On the production side, I'd like to see us spending roughly 150 million a year on pud development. Therefore, that's what keeps that 40 percent utilization going on our fleet. Of course, then on the mature property, that model is in concrete; it's been around now for over a decade.

I think the next challenge for us now is our balance sheet growth -- is to see where that model is exportable to. I think there's a lot of exciting potential in the future.

So in general, no new models, just focusing on the ones we've got and broadening the market exposure is what we're going to be focusing on.

With that, I know I've talked longer than probably anyone wants to hear but -- (LAUGHTER).

Dennis, we are ready to take questions!

Thank you. (OPERATOR INSTRUCTIONS). Justin Kentor. Please state your company name.

Simmons & Company. Good morning. With regard to the Marco Polo-type project, is there any change with respect to what you think the potential equity investment in that type of project would be? You said, I believe, around the $70 million mark at the time of the last conference call. Is that still your thinking?

I think you flipped that. Typically, on a facility, a facility is going to cost anywhere between 200 and 300 million depending on what type of facility it is. Typically, 70 percent is financeable and 30 percent of that would be equity.

Okay. Then you talked about new geographic markets. Can you provide any color on new markets going into '04?

Well, there's nothing in our '04 budget to reflect new market penetration with the production. I will tell you that we have a strong presence in the North Sea right now with Canyon and Well Ops UK. We're going to be beefing that up with a group that we call SOS, Step Out Solutions, which adds a lot more construction utilization in that area. That's not going to happen overnight but it will be incremental.

Along with that, once we have that construction kind of (indiscernible) with Well Ops, then that opens the door to looking at production opportunities in the region. So, we are right now actively looking -- we are learning. We're learning the business environment over there, the regulations. We're talking with clients, trying to understand their needs. Because after all, our model is supposed to be a benefit to the other producers, so it's important for us to spend time with them.

Have you detected any changes with respect to bidding activity or I guess bidding behavior in your shallow water markets or Deepwater markets?

Yes. As I said, what we're seeing from the other contractors is a little more rational approach to pricing and especially in the contract terms being assumed, or at least pricing the risk appropriately. I think that's translated -- I know, this year, our pie plate, for instance, has been a lot more active than it's been. I think that's primarily a result of two things, the diligent effort of our individuals but also an improvement in the market conditions.

Okay, and final question -- I noticed that $3 million sequential uptick in your DD&A for your oil and gas segment. Was that attributable to Gunnison?

Yes, part of that was Gunnison. There was also an increased production -- there was also some reclassifications from items that we had included. It didn't impact the income statement at all -- items that had been in LOE that were really DD&A that were put in there in the fourth quarter. It was primarily Gunnison and the production.

Marshall Adkins.

Good morning, guys. A couple of quick ones here -- you know, of your guidance, you mentioned, obviously, it's going to be back-end loaded historically -- what 65 percent I guess back-end loaded? It appears like it's even going to be a greater percentage this year. Are we talking 70 or 75 percent back-end loaded?

About 70 percent, Marshall.

That's helpful. Also, you mentioned 38 to 44 Bcfe. How much of that is going to be coming from Gunnison?

Anywhere from 12 to 15.

Then obviously, in '05, it's going to be probably closer to half?

Yes, without additional acquisitions.

Right, and that gets me to my next one.

Let me back up. Gunnison will be up at full capacity at that point.

Right, but there's a ramp-up period obviously, and it starts the second half.

I'm talking '05.

I just want to make sure. That's roughly what we had -- the numbers. I just wanted to double check that. Also kind of back of the envelope, you guys (inaudible) be throwing off a lot of cash and yes, you'll probably end up spending a lot of that but in the model right now, I have maybe, on an annualized basis, paying off 20 million of debt. Is that close to -- if you don't do anything additionally, other than your 77 million of CapEx?

That's reasonable, Marshall.

I just want to make sure those numbers were getting close. Last one and I'll turn it over to someone else --.

We've been waiting awhile for it, Marshall! (LAUGHTER).

We're seeing or hearing from a lot of people that '05 is going to be a much, much bigger year on the construction side. Are you hearing that as well?

Quite honestly, Marshall, on the construction market, I think we're going to take a wait-and-see attitude. Like I said, we're not going to start being optimistic about the market demand bailing us out. We're going to and stay as a culture focused on bailing our own selves out.

I understand that, but what are your people hearing from I guess the customers? Is that what you are hearing, or is that just too far off?

I think it's obvious that everyone tends to be optimistic and I think everyone is talking about an improved '05. I have no doubt it will be. How to quantify that, I wouldn't even begin. I do think that the recovery in our industry -- right now, there's an awful lot of excess capacity in the construction market. I think there's a lot of discipline on the spending on the part of the majors and I think you combine those two and you're looking at a slow recovery.

Helpful. Good job, guys.

Roger Reed (ph).

Arnhold Bleichroeder. A couple questions for you -- what is the go-forward run rate on the DD&A? You kind of started off with what happened in the fourth quarter but what are looking at, going forward, given the changes in the Gunnison project?

We are budgeting totaled DD&A next year to be about 100 million with about 35 of that being marine contracting and the other 65 being oil and gas.

Then if you want the -- which I'm sure you do -- on the oil and gas side, we've got about 26 million of that relating to Gunnison.

Okay. Owen, your comments about how you'd like to see the Company in a few years, in terms of what does that mean sort of longer-term for offshore construction and the overcapacity that's out there in terms of vessels relative to work? Is this something you see as a difficult-to-fix type problem, so Cal Dive focuses internally, you create your own opportunities and so forth? Is there an opportunity for consolidation? Do you need to see some guys kind of exit this business? Can you give us an idea of what you see out that way?

To answer that, you have to actually go back to about '94 or '95, when we first made the decision to go into the Deepwater. At that time, we knew that it was capital-intensive; there were a lot of strong competitors. We were coming from a relatively obscure track record.

I've never anticipated the construction demand to be sufficient to make a meal out of. That's why our model is the way it is today.

It has always been our hope to create a model that we generate our own utilization and cover the pricing of the (indiscernible) by putting the risk (ph) against the only asset that has enough value to take the risk, which is an equity interest in the reservoir -- so that you can see where our model came from conceptually. So looking forward -- the reason we came up with that model is so that we weren't dependent on market demand.

So the short answer to your question, then, is we don't need the construction market to do anything for us to succeed. There doesn't have to be consolidation; it's sort of -- it's (indiscernible) to what we have to do.

I would put it the way Owen put it -- to our employees (indiscernible) this is it; deal with it. If anything improves, then good deal!

James Stone.

From UBS. A couple of questions -- can you just discuss with us a little bit what you're looking at in terms of cash operating costs on the oil and gas side, just either on a per Mcfe basis as you look out to 2004 (sic)?

Wade is getting out his calculator, Jamie! (LAUGHTER).

While he's doing that, the second question is, on the Marco Polo equity earnings number, are you bringing that number to your income statement on a pre-or post-tax basis?

That would be pretax.

That's the pretax number?

Yes.

James Stone. That makes sense. Therefore, you are running the full tax of that through your tax line?

Yes. That's right, Jamie.

Wade, I you went a little fast on the hedging side. I was just wondering if you could kind of just go back over those numbers again for me.

sure. We've got nearly half of the proven developed production for the year on the oil side hedged in various hedges at an average price average price of $27.06.

Roughly how much of your production in '04 is going to be proven developed oil?

It's going to be about half and half.

Then, on the gas side, we've got nearly half of the proven developed production for the first half of the year only come in the collar with a floor of $5 assuming (inaudible) $6.60. Then for the second half, we have another costless collar that makes up about 10 percent of our proven developed production, $4 or $5 ceiling of $6.25. Again, that's only the proven developed production. As I said, if you add all that up, it's less than 20 percent of our total budgeted production (inaudible).

The proven developed production is only 20 percent of the guidance production?

No, no. Of the proven developed production, we have a percentage of that hedged. So, if you add up our hedges --.

The proven developed production is excluding Gunnison? All your production excluding Gunnison? The budgeted production excluding Gunnison?

It's that, Jamie, plus production coming out of the Well work (ph) program.

But if I look at your budgeted -- if I look at your 38 to 44 Bcf guidance and I strip out 12 to 14 for Gunnison, the remainder is what you guys term as your proven developed fort that --?

No. We also have some assumed for Well work. As we said in our CapEx program, ERT is going to spending 30 million on Well work. The only production that we go out and hedge is the proven developed. There is a component in there that we're not applying to our hedges, other than Gunnison.

You don't want to tell me what that portion is?

Yes, I will tell you. The range is 6 to 8 Bcf.

Six to 8 Bcf is the Well work?

Right.

We need to quit separating PDP. We will make this clearer the next time. We will start speaking in terms of budgeted production. The terms we're throwing around are the ones that we use internally.

Right. It's fine if you want to just separate out Gunnison, that is one thing. If you not going to hedge any Gunnison production, I just -- it's pretty unclear.

The only reason that we've always separated Gunnison historically is because, obviously, we can't hedge production that isn't in production yet, so Gunnison has never been included in our hedge numbers prior to this. Now that Gunnison is on line, we need to just start talking about our budgeted production.

Another thing is that (indiscernible) it's a lot different because they're so much more leverage in your numbers now to changes in commodity prices -- (multiple speakers) -- assumptions than there's ever been.

I will say, strategically, our intent here, Jamie, is to hedge 50 percent of all of our approved, developed -- all of our production we're planning to hedge 50 percent, no more than that because of deliverability problems but we would like to get to that 50 percent number. Our strategy for doing so will be to implement tranches of additional hedges every time that there's a cyclical peak in the commodity price. So, we will be adding through the year until we get to the 50 percent.

just, on the Gateway side, Owen, you stated you were pretty optimistic about the opportunity to repeat the business model. Do you have a sense as to whether an announcement is a first-half event, versus a second-half event? Can you handicap that?

(Multiple Speakers) -- we got ahead of ourselves last year. I thought we were going to have an announcement by the end of the year, so I'm going to defer from predicting timing. There won't be any impact to the budget this year, so let's let it just be announced when it gets announced.

Lastly, on K-2, do you have a sense and any update in terms of the timing of the tie-back work at K-2 and the production start-up?

Yes. The latest prediction is that the tie-back will take place to allow production to kick-in in about April of next year. The same also goes for Greene County and (indiscernible) 1-8, which is (indiscernible), which is Anadarko is 100 percent-owned reservoir in our area.

Do you know what the volumes -- expected volumes from K-2 and K-2 North are?

We would take our guidance from Anadarko, Jamie -- (Multiple Speakers).

I appreciate it. Thank you.

I don't want appear to be -- we got into -- you know, my comments about the construction market, going forward, etc. -- it's very easy to get caught up. We of tremendous leverage in this model right now and in our assets. It's very easy to get caught up. We (indiscernible) very little improvement in this market to start seeing some amazing things. I'm just really trying to -- (technical difficulty) -- away from that.

I completely understand.

Brad Orr (ph).

Brad Orr (ph) from Lord Abbott, good morning.

I had to leave the call for a few moments. Did you guys give us a year-end proven reserve number?

I did, but I will give it to you again. Total proven developed reserves are 150 Bcf equivalent. It's down slightly from 158 last year. Our reserves had been fully reviewed by our independent petroleum engineer and we've received a report -- that is Huddleson (ph) & Company.

Secondly, and I don't mean this to be critical, but you know, you said your business model is working well, but I note, in the marine construction area, you guys have been carrying over $400 million worth of net equipment value on the books with 25 million round numbers in gross profits each of the last two years and a forecast for '04 of relatively similar magnitude, which was -- even on a gross profit basis, a 6 percent return on invested capital and this will be the third year running. After-tax, that's a treasury bill rate of return. I don't see any signs that the strategy is working. I recognize that demand is the culprit here, not the equipment and not management. How long do you stay in this business without really earning any significant returns on the hundreds of millions of dollars you guys have invested in this specialized fleet with large (indiscernible) construction-oriented equipment?

Excellent question, but that's exactly the one that I asked myself in '95 when we got into it. By business model working well, the business model -- Cal Dive's business model is unique because it does include more than construction. Construction is a very cyclical business and for the last three years, we've been in the lowest downcycle since '86.

I recognize the other parts working well and being executed quite well but this marine area is just chronically disappointing. I look at you guys generating a little more than 50 cents of revenues per dollar of fixed assets. You know, I don't really see any end to it. I heard Marshall talking about potentially '05 being a better year but in fact, that usually is preceded by and upturn in offshore drilling activity in order to develop the opportunity for the marine construction industry. There's absolutely no indication of that going on, at least domestically, so I have very little confidence that '05 is going to be a significantly better year, at least in the Gulf of Mexico, for marine construction. If that's true, that's the fourth year running of very low, single digit returns on invested capital. I think, at some point, you guys have to address that issue.

Well, I think we are addressing the issue. It's obvious you understand the (indiscernible) of the contracting world.

More than I'd care to admit to! (LAUGHTER).

You've got to understand, our construction assets are the enablers that allow us to participate in the production model, so you really can't separate the two. The construction results are a little bit skewed because you're not allowed to take the profit on the construction work when you're working through yourself. It goes into the cost basis production.

Then third, if you look at the 400 some-odd million you're talking about in our asset-base, almost half of that is the Q4000, which is pretty favorably financed. So -- (multiple speakers).

Fair enough, but I still want a return for the equity (inaudible) shareholders, even on a well-financed piece of equipment. Anyway --.

It wasn't that long ago that we were generating 20 percent returns on the construction assets in the up part of the cycle. I think there does need to be a little bit of patience. Back when that was happening, we were being criticized about not having enough leverage in our asset base. (multiple speakers) -- look at the leverage in the asset base.

I'm not trying to criticize you, but I am wondering if the extended period of time in which demand in this industry has been notably absent is beginning to cause you guys to at least consider some change in business strategy, over and above what you've already adopted, in order to improve results. The things you've done to date I think have been very productive. The IT program, the facilities-based, equity participations, etc., all work on an integrated basis, I think, to improve returns.

Constantly thinking there's nothing on the horizon right now that what cause us to change our model (inaudible).

Thanks very much. I'd appreciate it.

Philip Dodge.

Good morning, Stanford Group. Two items -- first, is the tech date frame agreement likely to have a greater impact this year than in 2003? Which (technical difficulty)? Could that eventually get you into the West African market?

I'll give you the second one. Also, there's considerable talk about a third party-owned production facility in the Eastern Gulf to tie in with some of the discoveries there. Is that one that you are specifically looking at?

Martin, you get those.

To take the (indiscernible) questions on the impact of the technique (indiscernible) agreements, I think this year we'll see more of a contribution because we have the T 750, as I mentioned, for the full-year, so we're expecting to see more trenching work come out of that particular agreement. So that will also benefit the Northern Canyon, okay? (indiscernible) The T 750 and the Northern Canyon, all right?

The second question on the Eastern Gulf facility -- sure, we've heard all the talk about that and we may participate in it, but it's one of the things that we're looking out right now. It's not the only thing.

Has it reached the point where there are specific things that you're looking at there, like size and the amount of capital and so forth?

If there's a third party facility being proposed in the Gulf at all anywhere, I think you can count on the fact that we are involved.

How far along would you say is that particular one?

You are going to have to wait on that one, Phil! (LAUGHTER).

Just West Africa -- any possibility there eventually?

I think, getting back to the caller that we had before from Lord Albert (sic), I think one of the things that will help '05 is that West Africa is kicking off. That will absorb a lot of the excess capacity, particularly from our foreign competitors.

I will mention also I said it before but we also have a presence in Southeast Asia and the Eclipse is now over there, so we're going to be working very hard to expand that presence. (technical difficulty) -- where we are and then think about where we are.

Gary Russell.

Good morning, everyone. Stifel Nicolaus. It's been a long call. I'll try to keep my questions brief and feel free to keep your interest brief if you like! (LAUGHTER).

The first question, Northern Canyon moving to the Gulf, you mentioned, I think, 40 days you've got scheduled for it in the first quarter and another 40 days after that. Is that all on this installation pipeline burial work that you've talked about before?

Yes, it is, and I'm very pleased that we managed to get that strategy working within about six months of kicking it off. I see a lot of potential, going forward, with this type of activity.

I might make the answer a little bit longer -- (LAUGHTER) -- only because I just find it fascinating. Correct me if I'm wrong, Martin, but the pipe we buried was a 12 inch pipe; we buried it to 6.5 feet of cover in one pass and it was in a water depth of 3900 feet. That's a world record. But I would just go a little further; 10 years ago it would just be unfathomable to be able to do that.

What's next, Gary?

Beyond those first 80 days, what else do you see for that vessel in 2004?

It's going to go back to the North Sea to carry out its framework duties for technique.

I got you. Next question -- shallow water outlook -- how are we looking so far here in the first quarter? On a year-over-year basis, are you expecting that to be up, flat or down?

In the first quarter, Gary, we seldom have much of anything happening because of the weather and the fact that our customers are going through their budgeting process. Most of what we do on the shelf, of course, is inspection, maintenance and repairs, so it's somewhat insulated from new construction work. Martin or Wade or Owen, did you want to jump in on that?

Last year, we were coming off of hurricane Lilly and there was an awful lot of mandated inspection work going on in January. This year, that's not happening and the weather has been rougher, so year-over-year, this year will be probably wind up being less than last year. But I think, overall, on the shelf for the year, again, talking about what our outlook for the budget is, I think we're actually looking at a flat to a very modest improvement.

Okay, moving on again, salvage revenues -- that's a market that's been highly competitive. You guys had talked about taking a second look at your participation there. Are you doing anything in the market these days? Where are those revenues showing up? Is that showing up under ERT?

No, it comes through in the shelf area, Gary, and I think we did all of what -- 4 or 5 million of revenues with our barge one last year. I think we've said -- or if we haven't, we are going -- we might talk about the barge as a regulatory inspection (indiscernible).

That actual comes up in '05 -- (multiple speakers) -- but we've had (inaudible) minimal impact in the '04 budget (inaudible) anticipating the '05.

Coming to your broader question, Gary, with commodity prices where they are, there just isn't going to be a whole lot of salvage work. What we have scheduled internally, as I think what Dave said, 6 or 7 million, something like that.

Okay, it makes sense. Then the last question -- since no one else touched on it, I'll bring it up. In your key variables page towards the bottom, you mention commercial dispute resolution. Can you update us on what's gone on? Last I recall, you had two issues outstanding. Can you touch on that a little?

I think we've only got one, which is Bondex (ph). What's the second one?

EEX, maybe that's behind you now?

That's gone.

The only major one we have is the Bondex (ph) still, and we just finished mediation and then moving onto arbitration on it.

So, any idea on the timing of when that would be finalized?

I have none. Jim, your --.

(indiscernible) to predict it, because you have -- (technical difficulty) -- process. (multiple speakers) -- certainly by next year! (LAUGHTER). What else?

That's it. Thanks, guys.

Will Foley (ph) (indiscernible).

Sidoti & Company, good morning. A question with respect to the oil and gas production -- can you give me a sense of where you see production being in the first quarter, and perhaps overall, and how you see it ramping up for the year? Also, what kind of gross margins you see based on your commodity price today?

We're trying to stay away from specific quarterly guidance, Will.

Margins will be near 50 percent, though.

Margins for the year will be 50 percent, given our price deck.

At the end of the quarter, we will let everyone know how the actual turned out versus what our (indiscernible) were so that you can see whether we were on track for our budget or not.

Okay. I know '05 is a long way out, but is it fair to assume that oil and gas production in '05 can be kind of be maintained at the '04 level? What's your sense there?

You'll get a full year from Gunnison, which will be up from '04, and then the shelf, I think if we're anywhere near as successful with our well work program -- yes, I --.

For what it's worth, I think something in the 38 to 45 Bcf range is still doable in '05.

Lastly, it looked like your G&A ticked up in the fourth quarter. Just let me know what was the issue there?

What we typically do in the fourth quarter is accrue for all of the year-end stuff. Wade, was there anything else?

Nothing unusual.

Bill Desmond (ph).

Davidson Investment Advisers. A couple of questions -- first of all, the Gunnison project, the DD&A increased that you referenced earlier relative to prior expectations, what is the magnitude of that dollar amount?

Secondarily, when are you anticipating that you may be able to prove those up oil reserves and bring that DD&A rate back down to the original number?

You're mixing apples and oranges. Wade, do you want to (inaudible)?

It's hard to say. We're working through that, frankly, with Ernst & Young right now. We will say we're very comfortable with the amount of DD&A we put in the budget. You know, there's a lot of factors included when you go through a DD&A rate, the largest being -- we put 110 million, our share of this investment. that's one factor -- when do you start depreciating portions of that balance? Then what goes into your reserve base? As a Jim (indiscernible) mentioned earlier. When do you get to include the puds? So, that will happen during the year. I don't have any more clarity than that at this point. We have just been on the conservative side of what we put in our budget is all I'll say.

I might say (indiscernible) the brand-new reservoir -- (Multiple Speakers) -- this isn't an issue we have on all of our other -- (Multiple Speakers).

Then the dollar amount that the DD&A was increased relative to prior thought process on Gunnison?

We've got total DD&A anticipated at 26 million.

We didn't specifically announce anything ourselves. I have no idea what we would be comparing it to, so I'll pass on that.

Let me, then, give you one that's straight up the middle. Relative to the construction market, where are the two geographic areas that you see the most opportunity to win business in '04?

For us, I think the biggest -- well, I think, for everybody, Mexico is a big opportunity. For us particularly, I think Trinidad. We've done all of the work down there for the last three years and I think there's a chance to really establish a great presence there. Those would be the first two of the international opportunities that I think hold the most opportunity. But then we've also covered the UK sector. I think that will follow closely.

Then third would be southeast Asia, and I think it's a little early to predict what kind of positive impact we can create there.

Thank you.

Joe Agular.

Johnson Rice. Good morning. Just the decommissioning liability increased from Q3 to Q4. Is that Gunnison?

A little bit of it's Gunnison. It's primarily bringing on Gunnison in December. We had to put the (indiscernible) liability for that on the books. Also, we went through our year-end review of all of the properties. We go through a pretty detailed process of looking at each field, and there were some adjustments made there.

In regards to your guidance for '04 for production, if we backout Gunnison, it looks like you all are anticipating your kind of base level production to be roughly equivalent to '03, I guess.

Yes.

Are you going to have a similar sort of work program in '04 as you did in '03, about $30 million?

Yes.

So you don't really have any potential acquisitions built into that?

We have no acquisitions built into it but as Owen mentioned, we are aggressively pursuing -- we've tons of opportunities out there, Joe.

(Multiple Speakers) -- on the mature properties, I see redirecting that 30 million toward acquisitions and then saving the well work, rather than increasing the capital.

To put it another way, Joe, (inaudible) we're looking in terms of the packages that out there, whereas we didn't make any acquisitions in '03, were pretty comfortable that you will see us do something on the acquisition side in '04.

Gulf of Mexico mainly?

Yes.

Have you noticed any change in the majors' willingness to maybe discuss more properties these days?

There is an awful of discussion of majors wanting to divest packages. The issue has been on the price deck used to consummate deals. There, whether or not you are willing to use the board strip on pricing and acquisition, we haven't been. Therefore, we've been --.

But to answer your question, Joe, yes, definitely. The majors -- we're seeing more packages and they're coming from the majors.

I may be asking you something that I should know, but would you all consider -- if there was a sizable type of divestment by the majors -- joining up with somebody else to purchase something?

We do that as an ordinary course of our business. As you know, we don't have a sales group for what we do. We are involved in several bids on packages, quite often with larger production companies. That's why our model is a partnering model rather than a competitive model.

It's produced big packages. We take the smaller ones and our partner will take the bigger ones.

Okay, it sounds like that could be an interesting area in '04. Thank you very much.

Jim -- (technical difficulty).

Last-minute question, guys -- your breakout of second half being 65 to 70 percent of the year, what's going to ramp up? I mean, Gunnison ramps up, obviously, throughout the year; Marco Polo comes on second half of the year. What's your outlook for ERT production? Is that just kind of a flat throughout the year? What's second half weighted beyond Gunnison and, say, Marco Polo? What's your outlook on Marine in terms of timing?

As you know, 65 percent of our contracting revenues come in the second half of the year.

Just generally higher utilization and rates and obviously, your gross margins are going to come in usually better?

Yes.

(OPERATOR INSTRUCTIONS). At this time, I show no further questions.

That's good news, actually! I have to go to the bathroom! Let me also make one personal comment. I announced at our Board meeting yesterday that I will be retiring when we get to May and the shareholders meeting. As many of you know, I will turn 62 at that point. I've got a place in the Wyoming I'm trying to spend more time at.

This is a company that has meant my life, actually. It's a hard thing to do but we're at the right time; we've got Gunnison and Marco Polo coming online, so we've got an assured path of growth in revenues and earnings. So, I'll be in a transition period for the next three or four months or so, and then obviously I will be around to do whatever I can to help this company that I love continue to grow. So thank you all for being with us, and we will talk to you in May.