Helix Energy Solutions Group Inc (HLX) 2004 Q3 法說會逐字稿

Welcome to the Cal Dive International Incorporated third quarter earnings release conference call. At this time all participants are in a listen only mode. After the presentation we will conduct a question and answer session. To ask a question, please depress star 1. The conference is being recorded, if you have any objections you may disconnect at this time. Now I will turn the call over to Mr. Wade Pursell senior vice president and chief financial officer. Sir you may begin.

Thank you. Good morning everyone welcome to the third quarter earnings cal for Cal Dive International. With me today is Owen Kratz our chairman and chief executive officer, Martin Ferron our president and Chief Operating Officer and Jim Conner our general counsel.

The format of the call this morning will be similar to that of the last quarter. I will walk through a quick financial review and turn it over to Martin for operational highlights and then Owen will discuss the oil and gas production segment and wrap it up with strategic overview and outlook followed by a Q&A segment. Hopefully everyone has access to a copy of our press release and our slide presentation. Which is linked to the press release, if you have not already done so, you can go to our website. www.caldive.com. Click on the industrial relations page and then click on the web cast presentation there. We will be referring to these slides as we go through the call this morning. Before we get started Jim Conner will like to share something with everyone.

Good Morning Everyone. As noted in our press release and associated presentation certain statements there in, 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 and to our annual report on form 10-K for the year ended December 31st 2003, filed with the Securities and Exchange Commission.

Thank you Jim. I am on slide 4 now if you are following along. 59cents of diluted EPS breaks the all time record for Cal Dive which was set last quarter as 146% better than last years third quarter output and also represents a 26% improvement over the second quarter of this year. Revenues of $132m where $28m higher than last years third quarter driven primarily by increases in our oil and gas production along, with higher commodity prices. Gross profit margins of 35% was 12 points better than that achieved in the third quarter of 2003 and 3 points better than last quarter. This is due primarily to the commodity price increases and also an improved market for marine contracting fleet especially the Q4000. You might also note that the bottom line margin 17% versus 9% a year ago and also the EBITDA of 49% versus 32% a year ago, these are levels rarely seen by our competitors.

FCIA $10.9m for the quarter is $2.3m higher than last years third quarter due primarily to the improved profitability of ERT and the incentive compensation associated with that and also the new marine contracting compensation system. This level does represent 8% of revenues which is flat with the year ago level.

Equity and earnings we recorded 3.1million for the quarter for our share of V quarter gateway earnings that’s our ownership percentage of the TOP production facility, Marco Polo. This represented demand fees which began in the second quarter with a damp of completion of the TOP as well as tariff revenue, which began in the third quarter with production beginning in the third quarter.

For the year you will note through 9/9ths of 2004 we are a $1.41 per share versus 63cents for the first 5 months of 2003. You should remember that our annual guidance provided at the beginning of this year was a range of $1.30 to $1.70 per share so with the $1.41 in the bank and what we see in the 4th quarter we are now estimating 2004 earnings to be between $1.90 and $2.00 per share.

To turn to the balance sheet real quick. So I am on slide 5 now. Generating $64.2m of EBITDA for the quarter and was able to reduce our debt further down to $49.7 million, which is a 23% debt to boot cap and also build cash of nearly $50million as of the end of the quarter so net of the cash that translates to 17% net debt to boot cap. The debt as of September 30 was comprised primarily of the myriad debt $136m that is the 25year term debt which is still floating at around 1.4% so even with our myriad associated fees we are still paying less than 2% for that debt. The rest of that debt is $13m primarily capital leases that have a fixed in flat rate 3.29%. Also during the quarter we closed a new $150m revolving credit facility with a syndicate of banks, that facility is secured only by subsidiary stocks and replaced our old $70m (inaudible) revolver.

Interest in the revolver floats at (inaudible) plus 75-175 depending on our leverage ratios and this facility is currently un-drawn upon. Also during the quarter we paid off the term loan which as helped up bend our share of the construction costs that has began thus far. That’s the financial highlights. I will now turn it over to Martin Ferron.

Good Morning everyone. I would like to start on slide 6 and talk about the impact of hurricane Ivan, on Cal Dive earnings there is a lot interest about hurricane Ivan so in quarter three net, net there was a negative impact of between 1 and 3 cents, mainly due to the fact that about half of our mature property production was shut in for approximately 4 days and also Marco Polo was shut in for about the same period so we lost tariff income. Gunnison continued production as normal because it was much further west than the storm path so those negatives were off set by a slight positive in the marine contacting group as we swung into action for inspection work towards the end of September so net, net in quarter three between 1 and 3 cents of negative earnings production.

In quarter four our production and tariff income from Marco Polo is unaffected so the main impact is on marine contracting. We have obviously been pretty busy doing both inspection and clean up work both is shelf and deep water. So the net impact on quarter 4 is estimated to be at least 5 cents positive in quarter 4. For 2005 it is too early to call we expect some work to carry over at least into the first quarter but it is too early to say what impact that is going to have on the marine contacting group. Turing now to slide7 to cover the marine contracting group over all during quarter 3, overall revenue and profitability improved despite a grounding incident with intrepid which I talked about during the last call and mobilizing addition of the sea well from Norwegian work which took longer than expected. Due to some thruster issues and just the time to get our well intervention system for Norway now those two incidents I estimate costs up between 4 and 5 cents of earnings in the quarter. On the positive side the Q 4000 had our best quarter ever while Eclipse continued her great performance in Middle Eastern waters.

Turing to the over look for quarter 4. As I mentioned earlier the quarter looked down to inspection and clean up work caused by hurricane Ivan but I would also like to say that we are also observing a more sustainable pick up in the market place. Especially for well operations and tie back pipe services breaking up marine contacting into its sub segments. First to talk about the shelf on slide eight 8. Utilization improved sequentially but declined on a year over year basis mainly due to longer weather delays caused by hurricane activity. The demand for sat. services, saturation diamond services remains robust but surface diamond market continues to disappoint with customers not really focuses on R&M activities at this particular time. Hurricane Ivan produced a flurry of activity for shelf hear in quarter 4 where as again I had mentioned earlier it is too early to say how long that will last. Turing a slight (inaudible) on deep water and robotics utilization declined sequentially due to the grounding incident with intrepid and also a year over year basis Witchgreen and Merling remain cold stacked. Following (inaudible) repairs intrepid performed exceptionally well on a time (ph) it is also notable on that job we used our new pipe burial technology from the Northern Canyon Q750 spread. Our marketing campaign convinced customers that pipe burials was a good instillation alternative to pipe and pie technology is really gaining momentum. Again as I mentioned earlier the Eclipse enjoyed another great quarter for utilization and good rates before entering dry dock in very late September, she is due to come out in the coming days. The Robotics group benefited from a seasonal pick up in ROV activity especially in the North Sea although the volume of European pipe (inaudible) work was less than we anticipated.

The aftermath of hurricane Ivan had a positive effect on the last ten days of September with mainly inspection and clean up work, which is lasting well into the quarter four. With the main beneficiaries being Uncle John (ph) and the Mystic Viking in the deepwater sector.

Overall the deepwater market is showing gradual improvement especially with activity rated to tie back satellite reservoirs to help production facilities.

Turning the slide eleven, I am going to talk about well operations. Utilization declined on a year over year basis, mainly due to the mobilization issue that I talked about earlier with the Seawells and Norwegian work. This process took us roughly 18 days longer than we expected, so that impacted utilization of the Seawell.

The Q4000 performed flawlessly on a well intervention job in July before commencing hook ups for poor operations for a major operator in August. This job is expected to last probably till between mid November and the end of November this term.

Well operations segment and marine contracting appears to be improving the fastest, mainly due to increasing (inaudible) rates and their declining use for well intervention projects. (Inaudible) focus right now on drilling which is a good thing.

Okay turning to page twelve to talk about production and facilities and as Wade mentioned production started on the Marco Polo just looking at July and therefore our associated tariff revenue kicked in at that point. We got out a couple of short hurricane interruptions but they had a minor impact. Turning to the outlook, there has been a lot of talk, a lot of speculation this week about the impact of lower than expected production rates from the Marco Polo reservoir. That was an uninspiring (inaudible) taking that conference call last Friday. To provide our perspective, I would start by stating that prior to this news we were uncertain as to where the production facility has sufficient capacity to process oil from the committed Marco Polo K2 and K2 north reservoirs as well as oil from other perspective tieback reservoirs such as (inaudible) Gengis Calm (ph).

Even if the eventual reserves produce on the Marco Polo field are less than expected are not so clear at this point. We believe that such a short fall will be more than offset by positive news elsewhere, with the other reservoirs K2 and K2 north I mentioned earlier. Therefore, while the recent news provides a minimal short term disappointment, it does little impact on the long term return forecast for the facility. There could even be some upside potential if we do have some spare oil processing capacity to market the third parties. After all that was the basis of the deal when we started.

At this point we expect the facility to contribute the following earnings over the medium term. In quarter four around 7 cents with this number being factored into our revised the 2004 guidance. In 2005 we expect 40 cents plus or minus 10% with a range being necessary to accommodate the timing of the tieback of K2 and K2 north.

In 2006 we expect 62 cents plus or minus 10% with a full year of K2 and K2 north production factored in. As I mentioned up side still remains from maybe some spare capacity on the oil side, but we do have reasonable capacity to market on the gas front and we’re very busy doing that at this point. Just to conclude on production facilities, we’re going to cover our report part or our objectives for the year on that we have a production facility transaction to be completed during 2004. Just like to say we are on track for that. We are pretty confident that we’re going to get that done certainly by the end of the year. So now I’d like to hand over to Owen who’s going to chug on gas production starting on slide thirteen.

Let’s just do a sort of recap for what’s on slide thirteen for those that don’t have it in front of them. Revenues were essentially flat quarter to quarter and up significantly from last year. The revenues were $60m for this quarter versus 34 million for last year. Gross profit was flat, 33 million in the third quarter. Production levels were also flat with the variation from last quarter coming in the fact that the shelf was slightly down due to the, it was shut in for about four days due to Hurricane Ivan. And I was offset by Gunnison which as you may remember had some wells that needed to be worked on during the last quarter and therefore weren’t up and flowing. One of those is back up now and the other one is scheduled to come back on in the fourth quarter.

The average commodity prices were 38/12 for oil and 582 for gas, oil was up gas was down offsetting each other. Might note that most of our production right now is in gas, which I might point out is on the following pages is covered with a hedge with collars so we have plenty of up side.

Looking over to page fourteen, just a few highlights about the production rates. The notable things in this narrative. I think is the shelf was flat with last quarter. That, actually up 7% over a year ago and those that have seen this on road shows know that the side we present show the pretty dramatic decline curve and the shelf the mature properties and I think the thing to point out here is the impact of our well enhancement efforts as the narrative says that that’s primarily responsible for the 7% improvement over last year. This is in spite of the 4% decline from Hurricane Ivan shut in impact.

Gunnison, I have already mentioned if it’s 15% above last quarter and that was due to that well that was worked on last quarter coming back online and as I said we’ve got another one to come hopefully here in the fourth quarter. The outlook, we produced 30 BCF equivalent for the year. Our guidance at the beginning of the year was a range of 38-44 even if we just held flat on production we’re within that range but we do have the additional well and Gunnison coming online we do have additional well enhancement programs planned for the quarter. Of course these will be offset somewhat by decline rates on some of the mature fields.

Let’s look into page fifteen you’ll see a list of our hedges and I won’t go through the individual ones. I have already noted that our gas is hedged with collars and you can see we’ve got tremendous up side in those collars. So there is very little negative impact from hedging from the majority of our production which is gas. I will tell you the rates that were hedged right now, we are fully hedged at 50% of our PDP. Now because of our well enhancement efforts actual production exceeds PDP so the net effect is that our hedges cover about 35%-40% of our production. That sort of covers production. Things are clicking along.

I’ll now turn to slide sixteen, which is the report card. This is the list of goals that we set out at the beginning of the year, strategic goals for the company and just trying to keep you updated as to how we’re progressing on our planned improvements. In the marine contract we targeted a 2% margin improvement. This has been, it was actually targeted to be achieved as a result of internal reorganization and new processes. I think our effort has been tremendous. Everyone has received their full bonuses as a result of it but it’s also been further positively impacted by the strengthening market. Year to date we are actually, we have added 4.5 points to the marine contracting results and this quarter is 6 points.

The other goal that’s related to that was a reduction of our direct cost by $10m. We are on track to do this in spite of the occurrence of the Intrepid grounding and the Seawell performance issues on the mobilization. I might just quantify that those two incidents together impacted, may increase costs by about $3m. The reason I mentioned that is for two reasons, one it shows the up side leverage that we have in the contracting groups still performance is really good, and also to explain why we made the decision to keep with conservative guidance. These things do happen and we can’t identify exactly what they are and what the quantity is but they do happen and we sort of take that into account and in our guidance and every quarter, if we had been negative, we’re going to be telling you the negative along with the good.

Switching to the oil and gas, they are on the goals. The original goal for production levels was 40 BCF. I think we are on track and we’re certainly within range of meeting this. We had the aspiration of making an acquisition of reservoir to develop in the Gulf of Mexico. We have actually made an acquisition of the reservoir that we will be developing in ’05. There’s was nothing in the ’04 budget for development and that will be included in our ’05 budget. In mature property, we did have the aspiration to acquire one. We have not done so to date. The high commodity price component combined with the fact that there’s plenty of capital around has made it a little difficult for us to find deals that meet our investment hurdle rates. We are continuing to look at deals and we have some proposals out and we are still hopeful that by year-end we will add additional acreage to the mature property acquisition.

On the production facility side, Martin has already covered that. I do think that we are still on track to accomplish that goal by the year-end. Again there was nothing in the ’04 budget, it does impact ’05 budget and we’ll include that when we give our guidance. We’re transitioning the company to be able to do more of these type of deals and there fore one of our goals was to establish a new flexible credit structure which Wade and his group has now completed so we have got the finance machine in place to go forward and we also promise no equity dilution. There was a prior agreement on a convertible that did get exercised this year but other than that there’s been no equity dilution and there is still none foreseen.

On the safety side, this is a very big issue with Cal Dive and we are seeking continual improvement. Our goal for total recorded incident rate was two. As of September it stands at 1.69 so we are seeing an improving trend there.

Wade’s already mentioned the debt to book cap so we’re sitting in a pretty nice financial strength position. I’ll make a couple of comments on things that are not included in the report card. First as you know, I’ve been working out of the UK this year seeking to set up the infrastructure, learning the market and assess our opportunities for expanding our model into the North Sea. I do have to congratulate Martin and everybody in Cal Dive on the results that have been achieved. I feel sort of left out but there’s probably a message in that for me but the North Sea market is a market that’s in transition. There are opportunities. We’ve been learning a lot. We have been setting up infrastructure over there. We just recently submitted our first proposals and I think I mentioned before that I didn’t plan to come back without a deal, I’m on my way back over there this week but I do intend to be home by Christmas. -- laughter

This year?

This year. Things are looking bright on that front. Turning to something in our press release on our guidance, It’s been our policy to give you a range at the beginning of the year and then just guide you within that range but going into the fourth quarter here we do have the visibility and we are above the range so we thought it was prudent to come out and let you know where we think we are going to be at the end of the year.

Our guidance of $1.90 to $2.00 is conservative. We should be able to easily meet that. The reason it’s conservative is as I’ve said, there are unforeseen issues in the fourth quarter, the whether tends to be a little more unpredictable, commodity prices are high and I don’t see any reason to expect them not to remain at those levels through the fourth quarter but when they are that high you have got to start figure they are they more likely to go. And as we’ve mentioned we do have performance issues every now and the as we did with the Intrepid and Sea well. I will mention that performance wise this year, the restructuring and the new commitment to our philosophies and cultures have really paid dividends. We’ve had no contractual disputes, we’ve had no material litigations and the HSE issues are turning positively so it’s a real positive story.

Net, net, we’ve got a lot more positives than negatives happen this year, which is why we’ve sort of shot through the range of our guidance. At the beginning of the year we try and take a more balanced view of what might happen. We are very excited about the improved visibility in the service sector, I believe there is still plenty upside leverage in our marine contracting group, not only with the assets that are working now but we do have some stacked. Rates are improving … I think it’s interesting to note that actually if you look, utilization actually declined on improving performance. I think that is indicative of our ability to find enough of quality work out there without relying on just taking any kind of a job to get utilization no matter what the rate. I hate to admit that we do that but if there is a contractor that says they don’t, they are lying. That’s allowed us also to focus on our performance issues and that’s issues, our paid dividends.

We are really excited about the opportunities we see going forward to partner with producers on development and mature properties both here in the Gulf of Mexico and the North Sea. The mature property market is a little stalled right now with the high commodity prices and plentiful capital that’s available but it will return, it’s a cyclical market and the fields are only getting older.

We’ve had plenty of financial strength and in the past I’ve never been shy about telling you when I see tough times ahead but what I can tell you right now is stay tuned for some pretty good things coming up. With that I think we’ll open it up for Q&A

Thank you. At this time if you would like to ask a question, please to press star, one. You’ll be asked to record your name, it will be announced prior to asking your question. To withdraw that question, please to press star two. Once again, to ask a question please to press star, one. One moment for our first question. Jim Rollyson of Raymond James, you may ask your question.

Good morning guys. When you talked about -- you or Martin talked about the strengthening of deep water rig market having a positive effect on your utilization and well ops, what are you seeing on the pricing front, is that helping out at least going forward, do you thing that helps out pricing for the Q4000 and other assets or is it just utilization at this point?

It’s definitely pricing too, we used the next best alternative pricing in that sector because we’re competing with drill rates. When those rates go up we are able to ramp up our rates on pro rata basis really.

Right so I guess if you look at your third quarter, you mentioned a couple operational issues, nothing major but a couple things there, you obviously had some hurricane down time earlier and then some pickup work. If you look forward when you have got an improving market on the well ops basis, and at least a short term help out from the hurricane, should we expect margins in marine contract to hold this kind of rate or even possibly better, do you think?

At least hold and I think there is a good possibility of them getting better, yes.

Obviously you’ll probably give more guidance on ’05 in you budget but ERT --

Tim let me jump in there before everyone else ask about that, I should have mentioned that our policy is to give guidance once we get the budget done for the year and provide a range with the assumptions that we use in our budget. Last year we didn’t get that guidance out until February and that was a result of our new chart of accounts and our new processes, delayed it. We do intend to release full ’05 guidance in December upon completion of our budget process.

Great that will be a big help. Just within ERT, you talked about the put opportunity which you said you closed and won’t happen until ’05, what about well work, have you done a substantial well work in that segment of the business and what do you expect volume wise, I guess you’ll give more of that out in ’05 but have you done any substantial well work?

On the sub property, absolutely. That’s been what carried the production increases this year, and I’ll tell you the way we budget for this year Tim, we pretty much set aside around $30m of CapEx at the beginning of the year for the shelf crew, that depending on where we are in the cycle, if we’re in an acquisition cycle that $30m will towards acquisitions, if we’re in a difficult acquisition cycle as we are now, then we dedicate that $30m for doing well enhancement work that’s been planned on existing acreage and that’s what we’ve primarily been focused on this year.

Okay and lastly just ’06 you mentioned 62 cents plus or minus 10 percent from the production facilities, is that just assuming Marco Polo and the K2K2 North or do you have anything from Genghis Khan or anything else in there?

Well we’ve got some from other tight locked reservoirs but not much, it’s mainly the three committed reservoirs.

Alright thank you guys. Nice quarter.

Will Foley of Sidotti & Company you may ask your question.

Good morning. I guess first off does 10BCSC in terms of production which is (indiscernible) for the last quarter or so and it seems if the improvement in output in Gunnison tends to be kind of offset by declines from the shelf properties. Is it fair to assume that your production is going to continue along that level unless you go out and do an additional property acquisition or is it that Gunnison increased production plus well work can allow that to grow as we move out into ’05?

The way we look at it is that our production levels we work hard to keep them flat. Eventually you can only work the fields so hard before decline ultimately catches up and start to erode the production but then that is offset with acquisition. We just work very hard to make sure that we’ve got enough well work in house to weather the down cycles in acquisitions. We are not a production company so we’re not looking to replace reserves so we will we go through periods of not making acquisitions when the investment hurdles can’t be reached. But then for us to ultimately improve our production we do need to make acquisitions, other wise decline catches up and that’s why the goal was to make one mature property acquisition and one reservoir that we could develop next year and we’ve got half of that goal met so far.

Okay, and in terms of hedging, just to clarify, do you anticipate putting on any additional hedges for at this point.

Yes we probably will.

Okay and just a follow up on the marine construction, I know you haven’t given ’05 guidance but it sounds as if to kind of extrapolate forward based on the third quarter production given the improvement in the market and given some of the issues that you had it’s probably not unreasonable way to think about ’05 is that the first statement.

I think it’s a fair statement it wants some seasonality benefit in quarter 3 of course because that’s our strongest quarter normally. But I think what you mentioned is a fair way of looking at it.

Okay and then lastly the – could you give us a sense if the SG&A out look?

I -- if you can – for this year the fourth quarter should be similar to the third.

Okay that’s all I had thank you.

Hold for Bill Herbert of Bill Herbert & Co. you may ask your question.

Morning guys.

Morning.

Morning Bill.

Martin I hopped on the call just as you were talking about the sort of expectations for Gateway in terms of EPS. Could you go over those again?

Sure.

Sorry about that.

That’s alright in quarter 4, I stated that we expect earnings to be around 7 cents.

(indiscernible)

Yes, then in 2005 I said 40 cents plus or minus 10 cents. And we need the range because of the uncertainty of the timing and the tie backs (indiscernible). We’re expecting two or three tide in late in the first quarter with production starting towards the end of the second quarter. Then in 2006, I said 62 cents plus or minus 10%.

Okay.

That will have a full year locate K2 and K2 North.

Thank you sir. So Wade I guess the next question for you is does that given the fact that you know ex the weather here we did 60 to 62 cents implied guidance for the 4 quarter is 54 cents with Gate way flat. It really has to be a lot of things going against you in the fourth quarter for you to come up with 54 cents?

Well all I can say As Owen said, is those things can happen.

I understand that they are possible I’m just trying to attach a probability, it seem s very low.

We don’t foresee any thing out there right now Bill.

Okay great thanks. And then thirdly Owen you know the deep water market in the North Sea looks to be much improved and I’m wondering from a marine – well servicing outlook for 2005, I know you don’t have better precise guidance, could this conceptionally how do you view that market? You’ve got the Seawell over there how is the visibility of that capital, sounds pretty good and would you consider moving another vessel into that market?

That’s a good question Bill it’s an exciting market on Stat Oils web site there was an interesting article on light intervention booths recovery. As you know this would – one of the positives of this year was that we did penetrate the Norwegian market with the Sea Well. In fact she is over there now, she’ll remain over there through the end of the year. Federal does have options on the vessel for next year, they do have a lot of work. It’s going very, very well. So it’s a very bright future. Our dilemma is, can we cover two markets essentially with one vessel. The answer is obviously no. And I just be open with you – right now we are doing a GAAP analysis to look at the potential of employing the Q4000 over there to help cover the additional demands on the Seawell.

Oh and will the Q4000 found some work in the UK sector of the (indiscernible).

Yes that’s the GAAP analysis that we’re going through right now.

Okay and with your – would you have to do any modifications to the vessel in order for her to work over there or no?

Well she has already worked over in the North Sea on construction. So construction work no. For well intervention absolutely yes.

Okay then are you getting enquiries from customers with respect to the Q4000 for North Sea work?

Yes quite a few.

Great fine. That’s all I have guys thanks a lot.

Jamie Stone of UBS you may ask your question.

Yes first of all I just want to touch base on this pipe field that you talked about if you could give us perhaps a little bit more insight into what the deal is? How long it’s going to take you to bring this on line? You talked about it being part of the ’05 budget is that part of the capital-spending budget or actually part of the earnings out look for ’05?

It will be included on both Jamie we do plan to have it in production at some point in ’05. I’m quite honestly Johny is the way right now and I’m not sure when the drilling schedule is. But it is a reservoir that we have 50% of it. We are planning to drill it and then we’ll lay the pipeline and do the tying in. It’s the whole thing but we’ll include that in the ’05 budget numbers. Another one that I might mention is that if you remember we have been drilling Dawson deep and I don’t know if we’re at a point where (indiscernible) is able to quantify a whole about it. Other than I do believe that it is now commercial it will be a plugged and we will be turning that one back as well. So things look pretty bright for adding to our reserves space for next year.

And then on the first part not the Dawson Deep project, is that deep water of shallow water? And how much production potential do you have at least on an annual basis from that project?

I really can’t quantify it at this point Jaime I think we have to work up we’re still joining the development work on it. It is in – I believe it’s in 2000 feet so whether or not I don’t know where the industry is on categorizing that as shallow or deep any more.

Deep enough.

Yes it is. It’s certainly with in our comfort zone on capability.

Okay and then going back to some of the question on the North Sea Owen, the possibility of moving the Q4000 over there that is inclusive in sort of your out look – your statement that you’ll have some sort of deal to talk about by the end of the year or in addition to doing something that’s more ERT oriented?

No that’s in addition to the deal that I’m talking about for the end of the year is production acquisition related. The – I will tell you Jamie and this is a sort of (indiscernible) I don’t know how to put this I mentioned production acquisition, people are very reluctant to sell production right now. I think the path as I have been going down and learning that market and what is wanted by the producers hold more into production contracting. I think we’re – the proposals that we’re putting in are more in line with we would come in and do the development in return for a production sharing agreement leaving the reserves with the producer.

Okay.

And maybe (indiscernible) competitors a whole lot because I’m pretty sure every body has figured it out.

Okay and Wade could you just give a little bit more detail as to what the – where the marine is contracting what the revenue split looks like between deep water shelf and well ops?

Sure for the quarter shelf revenue was about $16m which include ROV s was $58m. And then well ops made it the other $20m

Okay and then do you have the – how about on a gross profit basis?

Sure the shelf is about $5.4m, the deep about $11.6m and then the well ops was at $3.6m and that’s before our shore base cost – so to reconcile for the total.

Okay so I guess the really significant pick up sequentially was obviously well ops was (indiscernible) better but it looks like deep water really had a phenomenal quarter?

I’d never characterize it as good, but not good enough. I think Jim it was – it’s getting there but I do believe that there is a lot of leverage left in the marine contracting side.

I mean where do you think as you look out to 2005 or as you look out to a more healthy market, you guys used to do margin on things like the Uncle John and some of those other type of equipment that was gross margin in the mid 30s low 40s I mean you had some very healthy profitability a couple of year ago with those assets. Do you see the market you know over the next say 12 to 24 months returning to that level of that type of level of profitability?

Over the next 12 to 24 months Jamie no. Theoretically is it possible to get back there eventually yes but my honest opinion is that the contracting servicing market will never return to those levels. What I’m seeing is a gradual build up but there is a tremendous amount of over supply and it’s going to take a couple of years before demand out paces the ability to over supply.

Okay and I just had one more question for you, could you – do you want to shed any more light on the production facility transaction that you guys are looking at. I mean I know it’s been widely tipped in the press that the Eastern Gulf of Mexico – can you give us any more details there in terms of when a project like that might actually come on line? Is that –you’ve mentioned something about ’05 I can’t imagine – I thing we’d imagine you’re looking at ’06, ’07 for first production from a project of that magnitude?

I’ll take a little tip from watching the newscasters and their renaissance to announce today’s winners too soon.

Okay.

I think it may be real obvious to everyone but I prefer just not to talk about it right now.

Okay that’s all I have thanks guys.

Marty Malloy of Hibernia South Coast you may ask your question.

Hi good morning.

Good morning.

Two quick questions on the marine contracting side any potential to move the Witch Queen (ph) and the Merlin out of cold stack?

There is some potential we’re actually working on multiple deals with each of the vessel for the potential putting them back in the service. But there is nothing that we could say right now. There is the potential that we will have enough definitive visibility on their future to incorporate it into the ’05 budget release in December.

Okay and then with this recent Putt (ph) acquisition looking out in ’05 should production be at least flat versus ’04?

Again that’s – I’m sort of second guessing the budgeting process here I don’t have the final figures in from ERT and what that end product is. That’s why I couldn’t answer Jamie’s question about quantifying the effect of that development.

Okay, thank you.

Dan Brownie of NFP Investments, you may ask your question.

Morning guys most of my question have been answered but one quick question, the marketing campaign that you had on the pipe varial (ph) can you give us a little bit more color on that and tell us when you think if that’s gaining the fraction that you’re kind of indicating when that might become material as far as contributing to the bottom line?

Yes that’s a good question one I would like to talk about, what we’re essentially doing there is (indiscernible) is an alternative to a pipe in pipe technology which seem to be the accepted way of designing pipe lines for (indiscernible) in the Gulf of Mexico. So we’ve started last year marketing our alternative on Varial and we’ve already done a couple of projects. So you know going from scratch to already doing a couple of projects it’s pretty fast in terms of gaining marketing traction. I mean just to give you some (indiscernible) we have a slide in a prior road show and we believe that our approach can save 30% of the over all pipe line cost. So when you’re dealing with perhaps marginal pipe line reservoirs this has a very meaningful impact on the development cost and that’s why all the customers are showing acute interest in it. It doesn’t suit every application but it certainly suit some. So we hope to build on our good progress as it is.

Sure.

That might be the primary reason why we added that service line to our (indiscernible). It was not necessarily just to sell it as a service to the open market but for the use of changing --- the ability to change the economics of our own development.

Okay which goes back to my original question when do you think that might become material to the bottom line and I guess it’s a secondary question to that what assets do you use to do that?

Well it’s already becoming material to the bottom line and we expect it to be more so in ’05. It will be a little bit (indiscernible) is that we entrapped (ph) can actually lay the single flow lines. You know the entrapped cannot lay you know (indiscernible) tend to be the minimum size of pipe in pipe. So if we’re successful in persuading the customer to use Varial as an insulation option then we can also get the pipe lay, we entrapped plus the varial with the Northern County and 2750 spread. So those kind of be the main assets involved.

Just give me a little more specific on the materiality in ’05 correct me if I’m wrong Martin, because I don’t like – I don’t know this break out I’ve just seen the additional (indiscernible) of the budget. But the amount of varial work anticipated for ’05 would yield a result that (indiscernible) exceeded the hurdle requirement of the initial investment?

Oh absolutely. And the initial investment I – if every one remember it was what about 8 million deployed for (indiscernible)

Right thanks very much guys.

Once again if you would like to ask a question please to press star one. One moment please. Will Herbert of Simmons & Co. you may ask your question.

A follow up here with respect to the Witch Queen and the Merlin on what – in Martin’s – in order to bring the vessels back what would be the re-activation cost associated with that?

Very little on the Merlin she is basically just one step ready to go. The Witch Queen is about $5m Will.

Okay and were you to bring back the Witch Queen would you basically have to have enough work in order to pay for the full cost of re-activation?

Yes we’re looking long term on the Witch Queen at her remaining life and we would not – we have been very patient in bringing her back. We’re not going to bring her back for a little flurry of pot work it would have to be a sustainable amount of work that we see in the industry.

Okay thank you.

Joe Agular, Johnson Rice you may ask your question.

Thank you just a quick clarification on Gate way equity and income is that recognized on your income statement pre-tax?

Yes it’s pre-tax.

Okay and is the tax rate on that similar to the over all corporate rate?

It is you can assume the same expected rate.

Right thank you.

Gary Russell of Stifel Nicolaus you may ask your question.

Good morning every one.

Hi Gary.

I cant help but go back to the marine construction margin a little bit and forgive me if I ask things that you’ve already touched on. But assuming the mid part – mid point of your guidance for the fourth quarter what kind of level of marine construction margins would you be expecting there?

Well you know it’s (indiscernible) a period in quarter 3 Gary we are seeing some benefits from our recognizing which (indiscernible) separately. And I say we incrementally expect the hurricane to give us twice times of your earnings. In the normal market the margins would be similar to what we earned in third quarter. But hurricane Ivan (indiscernible).

Okay that was --.

Over the whole year though Gary we do see the market improving in strength and you can look at our margins that we’ve generated this year and incrementally increasing the – if we were to write a report card right now I would probably guess that we’re looking for at least another 2% margin (indiscernible).

Okay so even with out the Ivan work you think your marine construction margins would have been around this level in the fourth quarter?

Yes.

Okay and then Ivan related work do you expect that to continue through the first quarter?

No not at the same level. We expect some repair work to carry into the first quarter but it’s too early to say how our work is going to be at this point.

Okay next regarding deep water Gate way and we talked a little bit already on the call but I just wanted to touch on that a little as well. Do you think (indiscernible) production guidance pretty much at face value for your own forecast here or do you (indiscernible) what they are giving you on the production rate?

We use both and what they give us – sort of what’s called an MVQ on maximum daily quantity projection. And then we obviously look at what is actually being produced and use our own forecast on new wells and come up with what we expect the quantities to be. And then we talk about it.

Okay and then ramp up projection timing issues aside and all that aside can you give us roughly what you’re modeling in terms of production rates for Marco Polo fields itself K2 and K2 North just kind of on a long term run rate basis?

Well I sort of covered that in the earnings projections that I gave Gary did you catch those?

I didn’t I’ll go back and look at it again so we don’t have to run through it again. Thanks very much that’s all I have.

If I could just jump in here there have been a couple of questions about this new development and every thing, it might be rate for me just to re-iterating something that we’ve said on previous conference calls. The capital out look for our spending in our models consist of about $20m per year in maintenance Cap-Ex for the fleet, $30m per year as I’ve mentioned before for making mature property acquisitions and or well enhancement work. Then we’re targeting to spend about $80 per year on new development and then about $50m per year on average on the facility Gate way type deal. So that gives you an idea of the quantitative additional effects of what we would be looking at going forward.

Roger Reid of Nate Investments (ph) you may ask your question.

Good morning gentlemen. No edging on Genison (ph) is that something you’re going start edging on or any of the edges that you listed here does that impact Genison at all?

yes some of the edge that you see in place as of the end of the quarter relate to parts of the projects from Genison. That comment was just related to the third quarter productions.

Okay is that a function of getting more comfortable with the production volumes there?

That’s right.

Thank you and what’s the decline rate you think you’re still experiencing on the conventional ERT or the shelf type properties there? If you look at just ERT production.

That’s sort of hard for me to quantify I would really need to – I can get back to you on that talking with Johny it’s sort of lumpy. It sort of falls in line with the planned well enhancement programs. So what it is over all are anticipated – that’s one reason why we don’t try to put it into our road show slide.

Okay one final question on the new developments that would be where you’re looking at something either I presume deep water belt of Mexico or something in the North Sea or else where not your conventional ERT which is included in the $30m is that right?

right it’s correct.

Okay thanks.

At this time sir there are no further questions.

Okay well thanks every one we’ll report back to you in December on our projections for ’05 and then talk to you next year, thanks.

Thank you for participating in today’s conference.