Helix Energy Solutions Group Inc (HLX) 2004 Q4 法說會逐字稿

Welcome to the Cal Dive International, Inc. fourth-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. (OPERATOR INSTRUCTIONS). Today's 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 fourth quarter 2004 earnings call for Cal Dive International. My name is Wade Pursell. I'm the CFO. 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 few quarters. I will walk through a quick financial overview of the quarter and then turn it over to Martin for some operational highlights, and then Owen will discuss oil and gas production and wrap it up with a strategic overview and outlook, followed by the Q&A segment.

Hopefully everyone has access to a copy of our press release and slide presentation which is linked to the press release. If you haven't ready done so you can go our website, www.CalDive.com, in the Investor Relations page, and click on the webcast presentation there. We will be referring to these slides as we go through the call this morning. But before we get started, as usual, Jim Conner has a very important announcement to make.

Good morning. As noted in our press release and associated presentation, certain statements varying and in our discussion today are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For a complete discussion of risk factors, we direct your attention to our press release and to our annual report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.

Thank you, Jim. Okay, I'm now on slide 4 for those of you that are following along. You might recall last quarter we set an all-time record for CDI quarterly earnings with $0.59 per share, breaking the record from the prior quarter. That record didn't last long as we are reporting $0.65 per share for the fourth quarter. And it is also worth noting that the $0.65 is after asset impairment charges of 3.9 million or $0.06 per share. During the fourth quarter we decided to sell the Merlin and accordingly wrote down her book value to expected sales price. In addition book values for two shelf assets were deemed impaired and written down to realizable value. Total pretax charges again were 3.9 million. So without these charges, $0.71 is over three times the $0.23 per share earned in the fourth quarter of 2003.

Revenues of 163 million were 61 million higher than last year's fourth quarter driven not only by increases in our oil and gas production and higher commodity prices, but also by a significant improvement in Marine Contracting revenues driven by Hurricane Ivan work and also improved market conditions. Gross profit margin of 33%, 35% before the impairment charges, was 9 points better than that achieved in fourth quarter of 2003 due primarily to the increase in commodity prices. Marine Contracting margins were higher as a result of improved utilization and rates, but these were offset by the marine asset value impairment charges.

You might also note the bottom-line margin of 16% as compared to 9% a year ago, as well as our EBITDA margin of 44% compared to 35% a year ago. SG&A, 14.1 million for the quarter was 4.4 million higher than last year's fourth quarter due primarily to the improved profitability of ERT and the incentive compensation associated with that, and also the Marine Contracting compensation system and the related improved financial results there. This level represents 9% of revenues, compared to 10% of revenues a year ago.

Equity and earnings, 3.6 million for the quarter reflects our share of Deepwater Gateway LLC's earnings for the quarter. This reflects a 16% increase over the third quarter as production at the Marco Polo facility began to ramp up. Looking ahead to 2005, in December we released our annual earnings guidance for 2005. We gave a range of $2.00 to $2.70 per share and provided a list of key variables included in our estimates. We will attempt to speak to these variables during the year on our courtly conference calls. I will say with the start that we are experiencing in 2005, we are very comfortable with the $2.00 to $2.70 range.

Turning to the balance sheet real quick, I'm on slide five. Generating nearly 72 million of EBITDA for the quarter and 239 million of EBITDA for the year enabled us to reduce our debt levels to 149 million at year-end, which is a 22% debt to book cap, and also a build our unrestricted cash position to 91 million as of the end of the year. So that translates to a 10% net debt to book cap as of year-end. The data at year-end on the slide, all of the green, is primarily our MARAD facility, 136 million as of year-end. You're all familiar with that facility, 25 year term debt which we're still floating the interest on at around 2.5% all in. The other debt is some capital leases, primarily a capital lease with a fixed implied rate of 3.29%. So with that, I will turn it over to Martin Ferron for operational highlights.

Thank you, Wade. I'm going to start on slide 6 and talk about Marine Contracting highlights and then go on to production facilities, before handing over to Owen for oil and gas comments. So there was a lot of talk last time around about the impact of Hurricane Ivan on Cal Dive earnings, and we estimated a positive impact of around $0.05 per share last time. I am pleased to confirm that expectation was met and the positive contribution was just above $0.05 per share, with the Uncle John and the Mystic Viking being two key assets that benefit, but also several of our shelf vessels had good utilization or full utilization at good rates on the hurricane inspection and cleanup work.

During quarter 1, the hurricane related work continued at a gradually reducing level through February and is pretty much completed at this point except for two potentially significant subsea wells P&A projects. And by significant I mean 90 days plus in terms of utilization for either the Q4000 or the Uncle John. Turning to slide 7, talk about Marine Contracting in general. You can see the revenues for the quarter were just over $101 million, compared with 77.6 in 2003 and 78.8 in the third quarter of last year -- sorry, of this year. Gross profit margins, 16%, were similar to the prior quarter.

That might be surprising given the positive impact of Hurricane Ivan, but as I will cover later we had some very higher volumes of pass-through revenue, and also a Seawell made a negative contribution. So the numbers here are before the asset impairment charges that Wade eight covered earlier. Turning to slide 8, as I said, overall the revenue improved both sequentially and year-over-year due to the positive impact of Ivan, a better market for Marine Contracting, what was happening with a Seawell in Norway, being the main contributors.

Turning to quarter 1 outlook, quarter 1 is usually our slowest quarter. It's usually when we catch up on maintenance, dry dock work, for many of our assets. This year the Q4000, the Mystic Viking and the Seawell will be dry docked in quarter 2 because of ongoing work commitments. So reading into that, you can expect maybe quarter 1 to be better than quarter 2 in this particular year. Market conditions continue to improve with vessel utilization visibility being a lot better than at this stage last year.

Turning to slide nine, talking about our shelf segments, the utilization of 68% was a record for the quarter due to Hurricane Ivan principally. For the year, the saturation diving vessels, the Cal Divers I and II, had a record combined gross profit which is a very impressive given the termination of the long-standing alliance with Horizon Offshore in quarter 1. The positive impact of Ivan, as I mentioned before, gradually diminished during early quarter 1 and is now virtually over.

We are however expecting better non-hurricane or normal market conditions in 2005, with the surface diving sector being a lot stronger. Slide 10, Deepwater and Robotics, you can see there that utilization actually fell from last year which again might be surprising, but although the Uncle John and Mystic Viking enjoyed full utilization from Hurricane Ivan work, the Intrepid and the Eclipse were both dry-docked during the quarter and the Witch Queen and the Merlin remained coldstacked. So those drydockings and coldstacks have a big impact on utilization. The Robotics Group, Canyon, had a much improved quarter mainly driven by strong pipeline burial demand in the Europe/Africa/Med region.

Again the outlook for quarter 1 is very good except for the Intrepid being drydocked in January, but she together with the Uncle John, Mystic Viking, and Eclipse have strong backlogs beyond the end of quarter 2 at this point. Turning to slide 11, we are going to reactivate the Witch Queen. She is presently in drydock and we intend to deploy her in the Trinidad markets beginning in April. She will be contributing to a local joint venture company formed with a local diving entity. In return we'll receive a stake in the venture and we see good prospects for both the vessel and the joint venture over the medium term.

As you know, we have been working in Trinidad for several years. We know the market work very well and are seeing a big uptick in demand for our services down there. Next point is talking about the Merlin. Obviously she was coldstacked and we have revalued her. But I just wanted to point out that the Canyon has a larger, more capable vessel on charter at this point as we are enjoying good demand for robotics support work in the Gulf of Mexico. We've had our vessel on charter since December, and again has got backlog well into quarter at this juncture.

Canyon is also experiencing good early demand for the Northern Canyon/T750 pipe barrier spread with the job in the African Med region carrying on well into quarter 1. Turning now to slide 12 in well operations. The Q4000 had another excellent quarter for both utilization and profitability based on our mix of work. Unfortunately the Seawell had a disappointing quarter due to the adverse impacts of shared risk in November on an engine failure in December while employed on the Statoil contract. Overall the vessel had a negative contribution of about $0.03 of earnings.

As you might remember, we bid that contract during quarter 1 last year when we were trying to achieve utilization in quarter 4. Quarter 4 was obviously the toughest time of year to get utilization in the North Sea. So we hoped to get utilization of some positive contribution from Seawell, but fortunately that plan did not quite turn out as we expected. Turning to page 13, Q4000 is booked until she goes in drydock in probably April. She has good prospects after that. She has worked every day since July 1st last year, and except for the drydock that would continue past July the 1st this year. So that obviously is a good situation.

Seawell has excellent utilization prospects with the Statoil contract providing us with at least 120 days of work this year. And then I'm glad to say the risk profile is considerably better on Statoil work this year as we are through the equipment mobilization stage and we will not share any weather downtime exposure this year. So I'm expecting a much better year from the Seawell.

In general, with steeply improving drill rig rates, we're experiencing improved market conditions for new well intervention contracts. And with good utilization and the 92% in quarter 4, obviously our attention is purely on pricing at this point. Okay, that completes Marine Contracting. Moving on now to production facilities, on slide 14. The equity contribution from Marco Polo is 3.5 million in the quarter, up from quarter 3 because we had a full quarter of production and with no hurricane related shut-ins.

Turning to the outlook, although production levels from the Marco Polo field have proven to be disappointing, we covered that in detail the last time around, we remain on track to get incremental tariffs from the tie back of the K2 and the K2 North fields starting in about April/May time. We anticipate that by the end of the year a significant part of our total oil production capacity of 120,000 barrels a day will be taken up. During December we also announced the closure of our second production facilities transaction, the Independence Hub. That is shown in more detail on slide 14.

We decided to take a 20% interest in a particular project which is in the build phase and will be deployed in 8,000 feet of water in Mississippi Canyon 920. We're expecting mechanical completion in late 2006 and therefore the start of our revenue stream. That first production should quickly follow in early 2007. We see good opportunities for both associated construction work. Obviously there's going to be a lot of tie backs here for this hub, and we also see good opportunity for PUD acquisitions in the surrounding area. And that is partly why we elected to take 20% interest here and not a higher figure. Be glad to take questions on that a little bit later on.

That concludes Marine Contracting and production facilities. I'll hand it over to Owen now for oil and gas commentary.

The Oil and gas segment of the presentation picks up on page 16 on the presentation that is available on the website. I won't go through the numbers. I think Wade has done that and the slide captures it. But if you flip over to Page 17, a couple of the interesting points. In the first bullet point on the shelf for fourth quarter, it is interesting to note that the production declined 8% over last quarter. I just wanted to give you some color on that. The quarter-to-quarter decline was due in part to a couple of things. Recompletions were planned for certain wells and we had to wait for the decline of the previous zones to occur before we could carry off the recompletion. And then other well work that is planned required extensive engineering which we are in the process of.

We do expect the decline rate will continue through the first quarter of '05, but then at that point as we're able to bring on the planned well work and the recompletions, the decline should be arrested. On the next bullet point, on Gunnison, there was a big improvement over last quarter, 17% in the production. That again was due to recompletions actually going forward, some zones depleted out as they were supposed to and we shifted to recomplete new zones.

I will say also that through the year, as most of you know, some wells were not on line when they should have been. At this point all of the wells that were scheduled to be online at this point are online. The last wells that had some issues, flow issues, is just now coming online. So at this point we are back on schedule with the producing wells. We do have two more wells planned to be drilled this year, as well as a deep exploration well that was originally included in the project economics.

This deep well was actually set up to go ahead on the basis of the success that we realized in the Dawson Deep well drilled last year. Dawson Deep is now a sanctioned tieback and it will be online in '05. Turning to the last bullet point there, the production outlook. This year we were just short of the 40 Bcf target and next year our guidance is to 40 and 45. I just might point out how we are going to get there. The shelf well work is being caught on, so the decline should be arrested there. We do have the two wells I mentioned on Gunnison. We do not have anything in for the deep well to be drilled in our assumptions.

Dawson deep is coming online and we do have an extensive planned year for well work on our existing acreage. Having said that though, I will be open with you and say in order for us to make our budget of that 40 to 45 Bcf, we do need to acquire either through acquisitions or additional well work that is not planned right now, another 3 Bcf. So it is not that much, but I do want to say that we don't see that right now but it is highly likely that we'll be there.

We're looking continuously at new acquisition deals. I guess all I can say right now is that we do have several acquisitions that -- well we will be issuing press releases when they become more definitive, and I guess I should leave it at that. However I will say that the acquisitions that we have in the pipeline, the impact on those will not be felt until '06. So they are not included in our assumptions for '05. Turning to the next page, 18, shows you the current hedges that we have in place. But rather than go through each of these, I think the point to take away from this is that as you can see we use predominately costless collars to hedge our production.

Our budget assumption is based on a price stack of 37 and 5, as well as our guidance. As you can see from this slide, our hedged floors are at 37 and 5. The current strip is above this, so that should benefit us going forward in the year. But honestly it is just a little too early for us to amend any guidance other than to say that it's looking a lot more promising for the upper end the range and less likely that we will see the low-end.

Turning to the next page, 19, just a couple of words on our report card. First the one that we did last year going into '04, a little recap of how we did on the Marine Contracting side. We were targeting a 2% margin improvement. We handily beat this. Another goal was to reduce direct cost spending by 10 million. We did this, but I should point out that we revised our compensation plan. Our incentive bonuses were directly tied to this direct cost reduction and we saved over $10 million even after paying the incentive bonuses that were due from it.

On the oil and gas side, 40 Bcf, as I mentioned we were just short of that but for all intents and purposes we met that. On the PUD acquisition side we did make an acquisition during the year. It is planned to be drilled in '05 with impacts probably hitting in '06. A trend that I should mention though is that throughout the year we generated -- or we did 10 farmouts on our existing eight grids (ph). Eight of those were successful, one was a dry hole and one was a noncommercial event. Out of those ten -- I would like to point out the we generated six of those internally in-house and put them out to the market and we were 6 for 6 on the ones that we generated. It's an interesting trend to give some thought to.

On the mature property acquisitions, this is you can see the only place where we have an X on our report card. For those that have followed Cal Dive for awhile, you'll know that we are not, as opposed to a production company, we are not driven to replace our proven reserves year-over-year. We are more opportunistic and therefore you'll see a center of the market when there is a better buying cycle. Over '04, the high commodity prices, new competitors, and a lot of capital in the market made it a tough place for us to find deals that we were happy with the return. Here I think patience is the watchword and we're going to continue to be patient and margin driven rather than pressed to replace the reserves. We see no panic over that. It's just part of our normal business.

On the production side, our goal was to close a new Gateway deal, and as Martin mentioned, we did that with the Independence Hub. On the financial side, we did conclude restructuring our credit structure. We are no longer an asset-based facility. We have a new 150 million revolver that is expandable. Our intent is to use that to close deals and then roll those into more appropriate long-term financing solutions, keeping our revolver free for future deal flow.

No equity dilution was a goal. We did not access the equity markets to raise any capital and we have no near-term plans to do so. Earnings at $1.30 a share, that obviously we beat handily. And then one of the most important things is the safety goal. The total reportable incident rate goal of two, I am pleased to say we put a lot of effort into that. The actual year-end total reportable incident rate wound up at 1.56. So we are very proud of that. Another thing I'd like to mention though is that throughout the year we had no litigious contracting incidents, because we looked at all incidents beyond just HSE. We had no contracting incidents.

I think this is an added benefit of our model. We do not seek to build big backlogs. We do not take contracting risks to generate utilization. Since we don't have the volume driven pressures, this allows us to maintain a quality of personnel that is key to achieving performance that basically results in no incidents either to HSE or contracting. And that is one of the things about our model that I'm most pleased with right now.

Switching over to page 20 for the '05 report card, starting with Marine Contracting revenues of 300 to 330 million and margins of 13 to 15%. In hindsight when we set this goal that was basically even with last year minus the impact of Hurricane Ivan. With the visibility that we have in the upcoming year I would say this is a conservative goal. Oil and gas, the 40 to 45 Bcf, I have already mentioned that we do need to find an additional 3 Bcf over what we see right now in our budget.

PUD acquisitions, as I mentioned before, I think you just need to stay tuned for the press releases there to find out when and what they are. Mature property acquisitions, this I put a question mark beside again. I will tell you that the deal flow that we are seeing now is much greater than last year, but whether or not -- well we're just going to keep patient and look for the deals that suit us. Production facility, the equity earnings of 20 to 27 million is tremendously better than the 5.5 million last year. That is a result of the full year contribution of Marco Polo and the continuing ramp up, and it is also contingent upon the second bullet point there which is the start of the production for K2 and K2 North, which at this point as Martin mentioned, are on track.

And the third bullet point there, identify and progress the next opportunity. We can check that one off now. We have identified it or the opportunities, and we have progressed them. That is a pretty generic thing to say, but I would say that the real goal here seeing that we do have the financial capacity to do another deal immediately, our goal really should be to close another deal this year. Sorry, guys.

On the financial side, the earnings range of $2.00 to $2.70, as Wade mentioned, we are very comfortable with that range. Of course our ultimate goal would be to put as much earnings to the bottom line as we can. Throughout the year we will give everyone guidance with the quarterly conference calls as to how we are trending in that direction. And again, we have no aspirations to access the equity markets this year to raise capital. We are going to be working within our cash flow and our credit capacity to do that. And then the safety goal of 1.8, we beat that last year. When we set this goal it was prior to the fourth quarter, which was a tremendous quarter. So I think we're going to have to rethink and maybe aspire to do much better than this 1.8. And then I would like to add another bullet point which is, again, to have no contracting performance issues on our work this year.

That sort of finishes the presentation, but I would like to make a few comments on Cal Dive's strategy, primarily for those maybe tuning in for the first time, just a recap. Cal Dive is a production contractor which is a true hybrid of both a service contractor and a producer. We contract our services to producers as other service companies do, as well as employ the services in nontraditional ways on fields in which we have an equity interest. We are attempting to assemble a group of services specifically targeted for materially enhancing and creating value in reservoirs at key points of the full field development cycle. That would make us a preferred partner for a producer to have.

Our services will be biased toward specializing in marginal reservoir development where we can materially enhance reservoir value. Marginal reservoirs would include such things as small prospects, stranded small discoveries, mature declining fields, and the black fields that are real near abandonment, as well as working with producers seeking value, creating partners, seeking to share risk in seeking capital contribution. Our goals are very simple. We seek to capture a fair share of the value created in the reservoir.

We seek to align interests between contractor and producer. We seek to reduce the cyclicality typical in service company earnings and cash flow, and we seek a model that has long-term sustainable growth potential. The services that we intend to expand and focus on, our select upstream rigless drilling task suitable for the Q4000 marginal reservoir assessment and management; facilities infrastructure provision; development construction; field operating; inspection, repair and maintenance; subsea well intervention; mature field engineering; and abandonment.

Our growth strategy is not to volumetrically expand any one single of these service lines to the point that we would in any way rival global providers. Instead our goal is to nurture a margin driven culture, capturing the reservoir value creating capacity of these select services and the synergies between them, especially as they are applied to marginal fields. Hopefully -- it's an unusual model but I think it is becoming more and more clear as the market matures as to how it applies. With that, I will turn it over for questions and answers.

(OPERATOR INSTRUCTIONS). Roger Read.

Good morning, gentlemen. Quick question on ERT. If we look at the gross margins that you generated there in the fourth quarter, I calculated it at about 66% versus 55 in the third quarter and the second quarter. And I was wondering what is the right way to look at that particular piece of the business? Was there anything in the fourth quarter that made gross margins unsustainably high and what would you look at in the first part of 2005?

I don't think so, Roger. Obviously the commodity price drives it the most so that is the first thing you should look at. But I don't know of anything that unusual in the fourth quarter.

I'm just thinking of the third-quarter, revenues were substantially the same and gross margins were significantly less. I'm trying to understand if there was anything different in there.

We had some shut-ins. The commodity price was stronger but I think another significant thing we did was we used to do all our hedges with swaps, and we have just recently gone to costless collars that capture the floor but still leaves the upside open for us to realize.

Yes, we probably gave up more in the third quarter than we did in the fourth quarter on hedges. But also, we are still primarily gas, 55 or 60%. You see our realized gas price really jumped up over a dollar fourth quarter versus third quarter.

Right, and with those two factors in the first quarter, then it is reasonable to assume that you can do something closer to the fourth quarter as we are look into the first?

I think that's right.

Second thing, what exactly has occurred on the shelf that has made the visibility there better relative to what was in 2004? If we look at the rig count, it still looks fairly flat. So is this a general improvement? Is it other guys that have moved out of there? What has sort of driven that?

It is one of two things, Roger. I think I've said in previous calls that we were disappointed with the surface diving market last year. There wasn't much inspection, repair and maintenance going on. Our sales force has been out talking to customers and we are expecting a better market this year for that type of service. And I think you are right, one or two competitors perhaps have either exited the market or are sitting on the fence right now while they're going through some restructuring exercises.

Okay, final question. The Witch Queen, could you give us a little idea of what that could do in terms of day rate or revenue? What is the likelihood of utilization on this vessel in this JV? Is it full? Is it partial? Is it dependent on this JV winning contracts in Trinidad?

Right now the JV already has a backlog of some 200 days of work for the Witch Queen, so it is looking very promising.

And how should I think about it in terms of a rate similar to what it would earn in the Gulf, less than, more than?

No. It should be -- actually I think it's a little stronger than the Gulf of Mexico. But to be conservative, I would use the same kind of numbers.

Anything unusual on the cost side?

No, I will tell you we're going to the manning the vessel initially here as we did here in the Gulf of Mexico. Over time it is our intent to comply with the local content requirements of Trinidad and switch over to mostly Trinidadians which, I think, will in the long run lower our cost. How fast we can get there I think is still to be determined.

Okay. And you said you were going to have an ownership in the JV. Are you also going to be able to generate cash out of this, revenue, cash out of this event?

Yes, there is going to be distributions. We are going to be a 40 percent owner in the JV. We will also have an ROV on full-time contract to the JV. And then we have an alliance whereby we provide any additional support the JV needs going forward.

It will be noncash initially though, Roger. We're just contributing (technical difficulty).

Okay, thank you.

Jim Rollyson (ph).

Good morning. Martin, you talked about the Marine Contracting business and kind of the way the margins have shaken out the last couple of quarters. Obviously up pretty nicely from where you were the first half of the year in 2003, and you're running in the 17 percent-ish range from just the way I calculate it. Your guidance and for 2005 is 13 to 15%. Is there, besides the drydocking schedule that sounds like it's mostly in the second-quarter, is there any reason to expect margins to dramatically falloff or is this just trying to be conservative for those things that might pop-up?

We came up with those objectives last September, Jim, and obviously at that time the visibility was not included; it is now. Another factor is that even though the hurricane rated work has dropped off, we have managed to keep our rates pretty similar for normal work. So I am expecting us to do a lot better on margin than that objective.

So obviously your comments earlier about getting you between that and the ERT to the higher end of your range, still apply what that. Owen, you talked about ERT possibly needing some acquisitions to get to your total target for production and just some work over related stuff, or recompletion work early on. I guess that implies that production in the second half of the year is probably going to be up versus the first half. Is that right?

Yes, I think that is correct. We do expect the decline that we experienced in the fourth quarter to continue through the first quarter and then stop. And then from there we will be having the additional wells coming online. So it will build back up.

Wade, do you have a CapEx schedule for Independence Hub, just for ballpark on funding (ph)?

We're planning on about 45 million of CapEx in 2005 for our share of Independence Hub.

Just pretty much straight throughout the year?

Yes.

Lastly, the Merlin you have up for sale. Obviously you haven't assumed sale price based on your write-down. Any idea what the -- care to share with us what you expect to get for that?

I think it's too early. It is not really a material event Jim.

And since we are negotiating we would rather not throw that out there.

Excellent, thanks. Nice quarter.

Bill Herbert (ph).

Good morning. Martin, we alluded to the fact that given that we have improving market conditions for the deepwater portion or the DP market of the offshore construction market, we're going to start concentrating on pricing. Given that pricing for drilling rates on the deepwater front have basically doubled over the past year, are you starting to see any significant traction on pricing as you bid on a project or is this an expectation to be realized in 2005?

We have started to bid higher for the Q4000 in particular, Bill. One point is though that I'm only expecting about 100 days of well intervention work for the Q. That is just based on the number of trees out there in deepwater right now. So while we will achieve higher pricing for that duration of work, we still have to get some work in the construction area, maybe the logistics support area. So improved pricing for the 100 days, and maybe some improvement for the rest of the utilization.

Okay. And as it relates to the Q4000 or frankly any other of your DP vessels, other than the reactivation of the Witch Queen, are we contemplating any upgrades on any of these vessels or any addition of capabilities?

No, we are not.

For example, on the Q4000, any contemplation or any thought being given towards making that more of the drilling rig capability than what it is right now?

Bill, we've been doing the engineering work for over a year now. And if you remember, back when we built this we put it back into the drydock for an additional three months for upgrades for it to be able to take drilling. That is something that we have continued to look at and have been doing the drilling. We don't have plans at this time to do it for '05 because utilization-wise we just don't believe that we need it. But for '06, we will be looking at it more here. We don't have the Board approval for doing anything, but I think there is a real opportunity ahead.

Okay. If the vessel were to undergo that sort of transformation, how long would take for it to become a competitive drilling rig?

What we are targeting is not being a competitive drilling rig. What we are looking at doing is being able to drill disposable wells for data collection, to be able to set pacing and to do top hole drilling. So it is not a full drilling exercise. Like I said in my services there, it is just select upstream rigless drilling task. It sort of complements the drilling community rather than competes with them. I will tell you, it is not as big of a CapEx issue to do it. It is probably in the order of magnitude of $10 million and it is very easy since the vessel itself doesn't need any upgrading. It's more a matter of buying the equipment and installing it, a very short process to do it.

Great. And then Owen, as it relates to the PUD acquisition opportunities, obviously we have been spending a lot of time in Europe with the focus on the North Sea. Can you give us a sense as to where those acquisition opportunities are most likely to manifest themselves?

I can always count on you to bring that up, Bill. I am back in the U.S., so I will tell you the extent of my efforts over there reached an end. When I got over there I did notice that the mature property market, the abandonment opportunities, I think are in the future for the North Sea. There's some market issues and business hurdles that the North Sea needs to come to grips with before that market really becomes hot. What I turned my attention to were the PUD acquisitions, given the high commodity price and the number of fallow fields that are sitting in the North Sea.

We progressed it a long way, as far as I can take it down the road on a few, but that the North Sea is a very long, complicated, lengthy process to get things closed. So I guess that's all I can tell you at this point. But I would expect to see us becoming more active in the North Sea, particularly in the area of PUD acquisitions and I think you'll see that fairly soon.

Okay. We spoke of the pass-through related revenues associated with the Seawell in the fourth quarter and the attendant poor margin performance. Excluding the Seawell, what would have revenues been for the quarter and what would have gross margins been for the quarter for the Marine Contracting business?

Revenues would've been around 78 million and margins around 24%.

So we're talking targeted margins for '05 of 15 to 17% for the Marine Contracting business yet we achieved essentially 24% operational margins in the fourth quarter, X the Seawell.

Yes, there is some hurricane impact in there.

Okay, but you also said that basically shelf margins are holding up better than what you thought, would be the case thus far.

So far.

We're talking a price tag of $37 for oil, $5.00 for gas, yet obviously we are a lot higher with spot markets right now. And you are also talking about the fact that you're comfortable with the high end of your guidance. I would suspect that economic reality is well beyond the high end of your guidance.

I would hope so, Bill. I will tell you the tax that we are taking on our guidance is -- we do our guidance assumptions back as early as September in the preceding year. So there is a lot of visibility that is not there. We do take a very, very conservative look. We want to give guidance that we feel confident that we will achieve given all those variables. Through the year it is our intent, as the visibility shapes up, we'll give guidance within the range. And when it starts to exceed the range, we will let you know when that happens as well. At this point, this early in the year, it is too early to change the range but we are in the upper end of the range.

Wade, the last question for you. Total (technical difficulty) CapEx by quarter for 2005. Could you give us that please?

Our CapEx budget for 2005 is -- I will just give you the totals first. We mentioned the largest item, Independence Hub, 45 million. That will happen pretty evenly throughout the year. We have a potential (ph) maintenance CapEx budget of 20 million that includes a lot of drydocks this year. That will happen -- a lot of that will happen in the second quarter and some of that will happen in the first-quarter. And then the rest, I have anywhere between 50 million and 100 million in the oil and gas production area. And that is pretty hard to model throughout the year because it depends on the well work program. A lot of the well work program will be early in the year but it depends on what else we can do and timing of getting it done.

Okay, it sounds like about 140 overall?

That's good.

Thanks very much guys.

Will Foley (ph).

Good morning. First question. Can you give us a sense of what level of production you're anticipating from Gunnison in 2005?

For modeling Gunnison next year, Will, I would take the approach of -- you see what we did in the fourth quarter. We now have all the 10 wells. I think that is a pretty good projection for the coming year with upside to the additional wells that hopefully will come on during the year, if that helps.

Okay, can you give me a sense of what upside you will anticipate from those wells?

That is hard to say.

We can check on that. Quite honestly, I would need to go and talk with the ERT guys to get the specific answer.

Okay. Just going back to your comments on the mature property acquisitions, I guess in general what I'm hearing is that market, the opportunities are a lot better this year than they were last year. Is your cautiousness on that front a function of pricing or just how competitive these deals are or just not seeing deals that kind of fit the kind of criteria that you use?

The biggest drivers that we saw last year was too much capital chasing too few deals, making them -- and then there were more players in the market starting to do what we do. So that made it very competitive. What has changed now is that we have a lot more deals. Now whether or not that deal flow is enough to absorb all of the appetites allowing us -- because we are not going to go in with very small margins capturing the initial deals. We will probably wait and see what happens probably later on in the year.

There are some larger property packages coming out. I think as the competitors come in, looking at the small individual properties and the majors exiting or what appears to be exiting the shelf more, putting packages on, there is an opportunity sort of in their sweet spot for Cal Dive and ERT to play in, which is the larger packages of mature properties. And that is an area that we're really focusing on this year.

Okay. Wade, just a question on the Marine Contracting depreciation amortization. That looked like it was up from the prior quarter. What was driving that and what do you expect going forward?

I think the biggest increment there is that is where we put the asset impairment charges. So if you go back to the levels before.

Last question. It sounds like, just in listening to your comments, that Marine Contracting is likely to be improved in the March quarter over the December quarter, just as you go through the various components here. Is that a -- am I interpreting that correctly?

I expect it to be pretty similar, I will say that, Will.

That's all I had, thank you.

James Stone (ph).

My questions have been answered, thanks.

Michael Bodino (ph).

Congratulations on such a fine year last year. A couple questions on the EMP side. Can you give us, if you have it, concluded what the reserves look like on a total proved basis and also on a PDP and a PUD basis?

Our 10-K will be coming out next week which will have all of that information in it. But I will go ahead and tell you the total proven reserves which you'll see in the report, will be 116.3 Bcf equivalent.

Do you have a breakdown percentage PUD?

I believe the PUD percentage is about 30 percent.

Relative to your capital budget, you mentioned a range of 50 to 100 million for the oil and gas production area. What would cause you to fall at one end of the range or the other?

I think our visibility on the deal flow is, we have a high degree of confidence in that right now. I think the major variable would be on the timing of when we are able to secure rigs and actually get out and actually get the work done.

You feel pretty confident you can get to the low-end of the range and depending on a couple of number variables, to get to the high-end of the range?

Yes, if not above. The market is showing a lot of strengthening. I actually could see us exceeding that.

Okay, last question. In the Gunnison area around Dawson Deep where you are going to drill a deep test, will you have the same percentage ownership in that deep test as you did in Dawson Deep, or do you know yet?

Dawson Deep, I believe we had external partners and this new well will be just split among the Gunnison partners. So our percentage will go back up. It will be twice what it is in the Dawson Deep.

Okay, that's all I have. Congratulations.

Philip Dodge (ph).

My question was actually on the guidance, which I think you pretty well covered. But let me ask you about Torch Offshore and what effect the bankruptcy has on the competitive situation in the Gulf.

Wow, there's a big one. Well, Martin, go ahead.

Well you know Torch is mainly in the shallow water pipelay business and they did their own diving supports. I think the effect of the bankruptcy is better felt in that sector. We are not really seeing a benefit from their lack of activity right now.

Assume they keep operating, is their pricing changing or do you know anything there?

I don't believe they have been pricing much lately, so I guess that is a positive for us.

I think it is fair to say that prior to this they were an impediment to upward pricing movement, so that should ease.

So if anything, positive?

Yes.

Thanks very much.

Joe Agular (ph).

Thank you. I was wondering if you could maybe give us some help on the CapEx in the ERT segment with respect to your estimate for how much is required just to get that production level flat year-over-year.

Well we budget, and I will give you a generic answer, because we look at it similarly every year. We budget roughly 30 million a year for ERT and we include that 30 million as our maintenance capital. Maintenance capital for the Company is roughly 50 million a year, 30 of which is for ERT and the purpose of that is to hold the production level. Now depending on where we are in the acquisition cycle, that 30 million will be deployed either in well work to keep the production level or it will be applied in acquisitions and mature fields. So that is the only change in that 30 million.

So obviously 50 to 100 includes acquisitions there.

Absolutely, that includes -- the 30 million I'm talking about is the existing acreage which is predominantly mature properties, whereas the majority of that 150 million is for PUD development work.

That 30 million has been pretty consistent and I think you all have indicated in the past, fairly consistently. Second question, just real quick on Gunnison, would you care to maybe give a production estimate for Q1? It should be up versus Q4, I would presume.

I would assume that it -- as I said earlier if you look at the fourth quarter that could be a proxy for the coming year. I would think first quarter will be a little above that, though, you're right.

I just wanted to clarify that. One kind of bigger picture question, I guess. Going back number of years in the marine construction segment back in sort of the '97 timeframe when you were hitting kind of the 30+%gross margins, obviously there have been some structural changes with the Company and also obviously the industry too, but I was just wondering if maybe you could give us a refresher course on some of the differences versus the market then, the Company then versus today, and maybe the outlook over the next couple years. I guess in terms of marginal -- on the trend of margins, is there anything we can learn from the prior cycles going forward at this point?

Yes, that is a good question. It's a lengthy answer though. Prior to '97 we were operating primarily a shallow water shelf fleet. The book values were written down to a point where depreciation was not as big of a drag on margin as the deeper fleet. After spending all of the capital for the deep fleet, we were expecting a real expansion in the market in '02 and obviously that didn't happen. As a result we were saddled with a lot of capital depreciation costs that took margins down. It has taken awhile for us to build back up to double-digit return on capital as the market strengthened.

I think the lesson to take away from it is that we probably -- at the time Cal Dive needed to transition itself from being a shallow water Gulf of Mexico contractor to being more to significant player, and it was important for us to acquire the deep water assets that then would open up the subsea fields for us to participate in. So we got ahead of ourselves on the construction asset acquisition, and since then we have been focusing on the productionside.

I think another impact on the margin is that when we do more and more work on our own fields, the way we have been accounting for it is to only take the costs to the Marine Contracting side. Then what happens is the profit that would have occurred to the Marine Contracting side is taken as a cost basis reduction in the production and that shows up over time in the DD&A range (ph) on the production. So again, that is another negative effect. You really have to look at the model as a blended overall model and look at the bottom-line margins to see the net effect.

Okay, that's a great explanation. So kind of piece by piece analysis is not necessarily always applicable here.

That is a very good point. But that is the easiest way for most people to value us.

Right, one I guess final question on the upcoming year. Obviously this past year, I guess if my numbers are correct, you probably generated something north of $120 million of free cash flow, even at a heightened level of CapEx, say in the 140 million range for this year. I least I still show, without any big working capital changes, $100 million of free cash flow is possible again in '05. Does that sound reasonable?

Very reasonable.

Thank you very much.

I would like to add to that. I think one of the benefits of our model is that it does smooth our cash flow and it gives us greater visibility. I would say that 100 million plus number is good for at least another three years here, based on what we have got. And that the impact of that is it makes it much easier on us as managers to make capital allocation decisions when you've got that kind of visibility on cash flow versus the cyclicality of the service industry.

Thank you.

Steven Townes (ph).

Yes, I think you sort of covered this, but could you just give us some more color on what is as going on in the Gulf of Mexico market? Last year really wasn't a very good market for property acquisitions, or PUDs, or whatever you want to call it up here. It just seems to me there are a number of people that have announced that they want to sell properties in the shelf and a lot of those properties have to be getting to the point where they are certainly on your radar screen. Do could you give us an idea of how big you think that market might be this year and sort of what the timing of it might be for you?

How big the market is is a hard question for us to answer because we really -- the things that we focus on are such a small share of the total market. We don't really focus on the overall market. We do see the same thing that you mentioned, a lot of properties on the shelf coming to the market. There has been a pretty aggressive buying atmosphere over the last year. Our view is that perhaps some of the other competitors are becoming a little satiated, and I think we will see better pricing discipline in the offers.

And as I said before, besides a large number of small deals relative to last year we are also seeing the larger packages which we see as real opportunities for us. Now, right now I am putting a question mark beside it. Certainly the opportunity to make the acquisitions is much enhanced over last year but I don't have enough confidence to say definitively that we will make one.

Okay, thank you.

I was speaking about just the mature properties. The PUDs on the other hand, I think with this high commodity price environment there is a lot of activity in putting new reservoirs into production. With our focus on the smaller ones, it opens up a real opportunity for us to both acquire them outright and to partner with other producers. And that I see as a very active market for us this year, which hopefully we'll be able to share a lot more with you in the near future.

Dan Barrett.

Great quarter. A couple of quick questions on the Seawell. You said 120 days with Statoil's visibility for '05. Is that spreadout throughout '05? Is it mostly in the first and second quarters? And can you give us a little bit more color on that work?

It will be done in a continuous period, probably starting in about May time. And Statoil will actually want some more days, maybe up to 180. So we are talking to them about that right now, Dan. The work is pretty similar to what we did in '04 for them.

And from now until May, what kind of work will you -- are you still continuing to work up in the North Sea with them?

Yes. We came off Statoil late January and then we are working the British sector right now, probably until the end of the first quarter. And then as I mentioned, Seawell has to go into drydock probably in April or maybe May. So when it comes out of drydock it will go straight on to Statoil.

All my other questions have been answered. Thanks very much.

(OPERATOR INSTRUCTIONS). A follow up from Bill Herbert.

Wade, FASB 123, any sort of preliminary thoughts as to what the potential impact might be in '05 to EPS?

Yes, as you know we are required to adopt it July 1st. And we think the impact will be nothing more then a penny a quarter maybe. We're still looking at it, obviously.

Thanks.

At this time there are no further questions in queue.

Thanks, everyone. We look forward to talking to you in a few months again.