Helix Energy Solutions Group Inc (HLX) 2005 Q2 法說會逐字稿

[Operator Instructions]

I'd now like to introduce Mr. Wade Pursell, CFO. Sir, you may begin.

Thank you. Good morning everyone and welcome to the second quarter 2005 earnings call for Cal Dive International. Joining me as usual today is Owen Kratz, our Chairman and Chief Executive Officer, Martin Ferron, President and Chief Operating Officer, and Jim Connor (ph), our General Counsel. We will follow the same format this morning as we have the last several quarters. I'll walk through a quick financial overview, and then turn it over to Martin for operational highlights. And Owen will discuss oil and gas production and wrap it up with a strategic overview and outlook, followed by a question-and-answer segment.

Hopefully everyone has access to a copy of our press release and the slide presentation, which is linked to the press release. If you haven't already done so, you can go to our web site, www.caldive.com in the investor relations page, and click on the web cast presentation there. We will be referring to the slides as we go through the call this morning. We will start with slide 3, and turn it over to Jim Connor for an important announcement.

Good morning everyone. As noted in our press release and associated presentation, certain statements therein and in our discussion today are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For a complete discussion of risk factors, we direct your attention to the press release and to our annual report on form 10-K for the year ended December 31st 2004, filed with the Securities and Exchange Commission.

Thank you, Jim. Now, turning to slide 4, earnings for the second quarter of 2005 came in at $0.65 per diluted share. This includes pretax asset in payment charges of $3.5 million or $0.06 per share. Then the second quarter one of our fields, East Cam 374 ceased producing, resulting in a $2.5 million pretax charge for the write-off of the remaining basis in this property. This had been a very successful property before this quarter. We spent about $10.5 million in 2002 developing this shallow water pad and it cash flowed over 3 times that amount over the last three years or $34 million, so it was a nice return.

Also in July, we sold the Merlin for an amount 800,000 less than our carrying value. As a result, we recorded and $800,000 pretax charge in the second quarter results. Without these impairment charges, earnings of $0.71 per share was 57% better than last year's second quarter.

Revenues of $166.5 million were 38.8 million higher than last year's second quarter, due primarily to significant improvement in marine contracting revenues, driven by improved market conditions, particularly in both the deep water and shelf subsea construction areas.

Gross profit margins of 32%, 34% before the impairment charges, matched that of the year ago quarter, as a significant improvement in subsea construction margins due to the improved market conditions, more than offset the decline in well operations margins, as both of our vessels, the Q4000 and Seawell were in regulatory dry docks during the second quarter of 2005.

Oil and gas production margins were down slightly due to the aforementioned impairment charge.

SG&A 12.9 million increased slightly from the same period a year ago. This level of SG&A was 8% of second quarter revenues compared to 10% a year ago.

Equity and earnings, 2.7 million reflects our share of Deep Water Gateway LLC's earnings for the quarter. This reflects a 57% increase from the first quarter, due primarily to the early retirement of the debt in the first quarter, which resulted in a $600,000 charge net to Cal Dive for the write-off of deferred financing costs in the first quarter and then no interest expense beginning in the second quarter.

Looking at the full year 2005, last quarter we increased are estimated earnings for 2005, to a range of $2.30 to $2.90 per share, but the better-than-expected first-half results, coupled with continued strengthening of marine contracting business and commodity prices, we now expect earnings for the year to be in the increased range of $2.90 to $3.20 per share.

Looking at the balance sheet, slide 5, in the second quarter of the Company acquired 196 million, 163 million of which was cash, a package of mature oil and gas producing properties from Murphy Exploration. Total debt as of June 30th 2005 was $443 million. This represents a 43% debt to book cap, and with 279 million of EBITDA for the trailing 12 months into June 30th 2005, as represents 1.6 times trailing 12 months EBITDA debt levels.

The debt is comprised primarily 300 million of convertible notes, which mature in 2025, and bear interest at 3.75%, and 136 million of mere debt, which amortizes mortgage style through 2027. Interest on that debt is currently floating at about 3.23%.

In addition, the Company had 200 million of unrestricted cash as of June 30 2005, and subject to regulatory approval, these funds will be utilized for the previously announced acquisitions of certain aspects Stolt Offshore and Torch Offshore.

I'll summarize cap ex real quick. Total capital invested for the first half of 2005 was 333 million. 200 million of that related to oil and gas production, Murphy, deep-water pads and well work, and 96 million related to production facilities, 24 million for Independence Hub, and 72 million for the debt retirement on the Marco Polo facility. The remaining 37 million relates to marine contracting, primarily dry docks and Canyon robotics additions.

So assuming regulatory approval on Stolt and Torch, projected cap ex for the second half of 2005 is 355 million, which should be funded with the 200 million of cash on hand presently, as well as cash flow from operations for the second half of the year.

With that, I now turn it over to Martin Ferron for operational highlights.

Well thank you Wade. I'm going to start on slide 6, and talk about marine contracting. Now, it's very unusual for the dry-docking of five key vessels to occur in the same quarter, but that's what happened in the second quarter of 05 here. The Q4000 and Seawell were both due on the blocks for the first time since we built the former vessel, and since we bought the latter one. Also, hurricane Ivan cleanup work in quarter one delayed scheduled maintenance for the Cal Diver 2. So a combination of circumstances led to this one off high degree of maintenance on our assets in quarter two.

Despite all that dry-docking activity, our revenues actually increased sequentially. And just to put a bit more color on that statement, if you look at subsea construction revenues, they actually increased by $19 million, which is you know very encouraging. Some of that is seasonality, but most of it is improved market conditions.

And when you look at well operations, those revenues declined by $16 million. So net-net, an increase of three.

Turning to our gross profit margins, they declined 4% sequentially due to a high degree of fixed vessel dry-docking costs in the quarter. Now, we carry depreciation and insurance costs principally through those dry-docking periods.

Slide 7, an outlook of quarter 3 and quarter 4, we expect financial performance to be at least as good as quarter one levels, as most of the dry-docking activity is behind us. We have to complete domestic liking here in quarter three, but then we will be finished for the year, and also, pricing continues to improve, with better market conditions as I mentioned earlier.

Some detailed comments on the segments starting on slide 8 with a shelf utilization improved 7% year at the year due to better market conditions and by the same percentage sequentially due to normal seasonality.

Now, we expect a pickup in surface diving activity linked to inspection repair maintenance, and that seems to be happening, which again is encouraging. And demand for saturation diving services remains strong.

Good time to update you on the status of the strategic acquisitions. There we are on slide 9. So the separate transactions to acquire the assets from Stolt Offshore, and Torch are in the second review stage with the Department of Justice. We are pretty much through the pretty exhaustive documentation submission exercise, and we are discussing the market with the DOJ at present, and we are hopeful that the review will be completed in quarter 3.

As you may recall, during quarter 2, we were also the successful bidder for six shelf vessels and the deep-water pipeline vessel, the Midnight Express, together with a portable saturation diving system and an option for the Torch Offshore assets. The total purchase price for all those assets was approximately $85 million.

The confirmation of that transaction has been stayed, pending appeal for the fifth circuit courts. Again, we are hopeful that that will all be resolved here in quarter three.

Turning to deep water robotics on slide 10, when you look at the quarter contracting, utilization of 63%, is a little bit misleading because the Witch Queen and Merlin were both inactive during the quarter and as Wade mentioned, Merlin is now being sold, and the Witch Queen started operations here in quarter three in our new joint venture down in Trinidad. The robotics group, Canyon, had a second successive record quarter with four vessels on charter during peak periods. And we also introduced our T600 pipe burial machine.

I'll just point out to you that Canyon's revenues alone improved by $9 million sequentially.

Revenue for deep water and robotics again encouraging. Capacity utilization is largely secured for the remainder of the year and the focus is now firmly on pricing for 2006 projects. We expect Canyon to have another excellent quarter, with continued robust demand for both pipe burial and ROV services.

On the Intrepid-and we've been talking about the Intrepid for the last few quarters because of the strengthening tieback pipeline markets--we've got a backlog of projects in the quarter, one next year and she's got excellent prospects after that.

Turning to slide 12, and well operations, utilization decline of 55%, and 96% in the first quarter because of the dry-docking of the Q4000 and Seawell, which took a combined 81 days out of availability. Both vessels are now back to work and we're expecting pretty much full utilization in quarter three and quarter four. The financial impact of the dry-docking on an equivalent basis to quarter one, was $0.10 of earnings.

OK, production facilities on slide 13. As Wade mentioned, our equity in earnings was 2.7 million for the second quarter, an improvement of $1 million over the first quarter. We saw the start of production from the first K2 well in the quarter, and that production is at the high-end of expectations, which if all goes well for the next five wells, that'll be brought on-stream this year. So we are on track to achieve our expectations from that facility. Certainly, I'm expecting the fourth quarter to be a significant pickup, and then next year we will have the full 6 wells producing for the whole year, from K2 and K2 in all. That's it from me for now. I'll turn it over to Owen for some comments on the oil and gas production.

Well, as many of you out there -- oh, I'm sorry. I'm going to be a little busy here, could you go ahead and ---read off oil and gas?

On oil and gas production on slide 14 and 15, obviously commodity prices remained robust in the second quarter, with our net realized price up 24% over the prior year and slightly ahead of 8% of the first quarter, and shelf production was flat with first quarter levels. As we had mentioned, East Cam and 374 ceased production, resulting in a 2.8 million pretax impairment charge. And finally, natural gas made up 52% of the production in quarter two.

Gas and production was 2.2 Bcfe, relatively flat with quarter one levels, and oil made up 51% of that production. Significantly, we made an acquisition from Murphy in the second quarter there, which gives us great confidence in meeting our projections in terms of production for the year and I think sets us up well for next year. The proven reserves in relation to that deal was 75 Bcfe. Do you want to say anything about hedging Wade? Or we'll just cover any questions on hedging later. So, Owen, do you want to take over on the strategic comments?

OK, sorry about that distraction. Sorry to throw you in like that too. Anyway, just to give a little broader context so that everybody can understand what happens quarter by quarter here. As most of you know, my thoughts tend to lie elsewhere right now, but they tend to be focused on the years down the road. So I'd like to just sort of give you a little bit of a forward-looking view of what we're trying to do and that way you can better explain or provide a context for what's going on quarter by quarter. Essentially though everything going on right now is exactly on track with our long-term strategy for sustainable growth.

Our strategy is that Cal Dive will continue to evolve its model, with a focus on marginal field production, by way of production contracting. So what does that mean? We have come to learn and believe that the way large fields are developed and the most economical way to develop marginal fields, utilize many of the same services, but in differing manners of application. Cal Dive plans to continue to build an ad services specific to value creation in marginal fields. Over time we will continue to refine the application of these services specific to what's required by marginal fields, but at the same time will also sell these services in the open market for the oil fields with more conventional application.

With regard to marginal fields, we will develop marginal fields for clients as a service in and of itself on a contract basis or a production-sharing basis. We will also develop marginal fields with client producers as a partner, and we will also acquire the fields if the client producers wish to reconcile the portfolios. That, in essence, is what we seek to accomplish.

The key services that we have in-house right now include abandonment engineering and management, subsea construction, pipe lay and burial, facilities provision, reservoir management and well intervention, with robotics being a significant part of the subsea construction.

We will add others along the way, as they fit our integrated solution from marginal fields, and we are constantly exploring what that means; which ones around there, what applications, what technologies, and how they can improve our model. But we will also be transitioning the company with respect to some services that aren't essential to marginal field development. One of those can be considered the shelf shallow water construction, which includes the shallow pipe lay and diving. And that then gives you a context as to what we are doing right now.

On the shelf construction services, we wish to sort of separate them from the model, but we also recognize that there's a tremendous growth potential in the industry right now for the shelf services, both in the Gulf of Mexico, and internationally. It's our desire to pursue this opportunity through an acquisition of the Stolt assets and the Torch assets. Our plan is to set this company up as a wholly-owned subsidiary of, for the purpose of really capitalizing on the growth potential in that model.

And the reason for the separation of the two is a typical service company, like a shelf construction diving company seeks to grow volumetrically, which we will, and that's as opposed to the other service lines that we're seeking to apply to marginal fields. Those service lines will only grow as they keep pace with our internal needs for application to developing fields.

More specifically on -- I think Martin's covered what's going on with the shelf acquisitions, but a little more specifically give you some color. With the Department of Justice on the total deal, the DOJ doesn't really share much about what their thoughts are or what their concerns are. Right now we are continuing to provide whatever they request from us. Our speculation would be that any issues would stem from our dominant position in diving.

Having said that, I find it pretty incredible that there could be any issues in a market that has so fragmented and that suffered so much over the past four years, but it is what it is. With the recent increase in demand and associated improvement in pricing in the industry, it's not surprising that there'd be some concerns expressed. We find it a bit flattering that anyone would consider Cal Dive is a market dominant player.

But I think it's just something that we have to let run its course and realize that the positive side, which is it's a result of our rapid growth. We're hopeful of the resolution by the end of September so we can get all the people back to work on the assets and get the assets back into the industry.

On the Torch side, Martin told you specifically what's going on. Typically bankruptcy proceedings are long and drawn out and this is no exception. We don't see any problems. It's just a matter of letting it run its course and hopefully they're running in parallel. And we're hopeful of a conclusion to that issue around the same time, which is hopefully in September.

We did not add anything in our budget at the beginning of this year for these transactions so that -- so there's obviously -- the delays in consummating this deal impose no material effect on our projections or budget at all other than incurring a little bit of process costs and of course the diversion of, I guess management effort for this that could be spent on other growth opportunities right now.

But speaking of the other growth opportunities, we were successful this last year in making quite a few things happen. On the development front, one focus will be getting the PUDS that we acquired into production. I believe Tulane, correct me if I'm wrong, Martin, but Tulane's PUDS within the month here followed on with Devil's Island. Both Bass Lite and Telemark are very actively being pursued. The development plan is being pursued, leading towards sanction of the projects.

We just acquired the Murphy package and we're assimilating that and that should -- as we bring that onboard and the guys look at the fields, we should start to pick up some low hanging fruit on opportunities there. There are additional production packages coming to market here and we are looking at those and we do plan to be aggressive on making further acquisitions.

But aside from just the production front, we're very focused right now on building our infrastructure and resources for processing these deals, expanding our engineering and reservoir capabilities so that we can expand our model.

Our plan is to set this company up as a wholly owned subsidiary for the purpose of really capitalizing on the growth potential in that model. And the reason for the separation of the two is a typical service company, like a shelf construction diving company seeks to grow volumetrically, which we will, and that's as opposed to the other service lines that we're seeking to apply to marginal fields. Those service lines will only grow as they keep pace with our internal needs for application to developing fields.

More specifically on -- I think Martin's covered what's going on with the shelf acquisitions, but a little more specifically give you some color. With the Department of Justice on the total deal, the DOJ doesn't really share much about what their thoughts are or what their concerns are. Right now we are continuing to provide whatever they request from us. Our speculation would be that any issues would stem from our dominant position in diving.

Having said that, I find it pretty incredible that there could be any issues in a market that has so fragmented and that suffered so much over the past four years, but it is what it is. With the recent increase in demand and associated improvement in pricing in the industry, it's not surprising that there'd be some concerns expressed. We find it a bit flattering that anyone would consider Cal Dive is a market dominant player.

But I think it's just something that we have to let run its course and realize that the positive side, which is it's a result of our rapid growth. We're hopeful of the resolution by the end of September so we can get all the people back to work on the assets and get the assets back into the industry.

On the Torch side, Martin told you specifically what's going on. Typically bankruptcy proceedings are long and drawn out and this is no exception. We don't see any problems. It's just a matter of letting it run its course and hopefully they're running in parallel. And we're hopeful of a conclusion to that issue around the same time, which is hopefully in September.

We did not add anything in our budget at the beginning of this year for these transactions so that -- so there's obviously -- the delays in consummating this deal impose no material effect on our projections or budget at all other than incurring a little bit of process costs and of course the diversion of, I guess management effort for this that could be spent on other growth opportunities right now.

But speaking of the other growth opportunities, we were successful this last year in making quite a few things happen. On the development front, one focus will be getting the PUDS that we acquired into production. I believe Tulane, correct me if I'm wrong, Martin, but Tulane's PUDS within the month here followed on with Devil's Island. Both Bass lite and Telemark are very actively being pursued. The development plan is being pursued, leading towards sanction of the projects.

We just acquired the Murphy package and we're assimilating that and that should -- as we bring that onboard and the guys look at the fields, we should start to pick up some low hanging fruit on opportunities there. There are additional production packages coming to market here and we are looking at those and we do plan to be aggressive on making further acquisitions.

But aside from just the production front, we're very focused right now on building our infrastructure and resources for processing these deals, expanding our engineering and reservoir capabilities so that we can expand our model.

On the service side we're also very seriously considering adding finder well drilling onboard the Q4000. This has not been approved by our Board yet, but we've been doing a lot of work on it both technically and market study-wise and they're feeling very confident about proceeding with it, or at least proposing that to the Board.

And we're looking -- we're progressing the engineering work and looking to add additional floating production facilities. So there's an awful lot in the works. People are very -- at Cal Dive are all focused on what we need to do so I see no problems with just continuing our march towards sustainable growth.

Ultimately our goal is to be a fully integrated developer -- a development reservoir management service company with a focus on marginal fields. So hopefully that provides a context for you to understand what you see happening at Cal Dive quarter to quarter.

And with that I'll turn it over for questions.

(OPERATOR INSTRUCTIONS)

Our first question is from Roger Reid (ph) from the (inaudible).

Just one quick question on your guidance. You have marine contracting revenues 300 to 330, but then you talked about Q3 and Q4 from that business ought to look much like Q1. Is there something I'm missing or is that just it probably is better than the original guidance or you just haven't changed it there?

Let's clarify. You're probably referring to slide 17?

Yes.

Slide 17 simply lists our goals from the beginning of the year.

I'm sorry, I sort of neglected going over that. Slide 17 is the slide that we produced at the end of last year during the budget process. Every year we sort of identify what our goals for the year are. If I go down it real quick, we should -- we should be able to check off that first one, marine contracting revenues 300 to 330, pretty easily at this point. Margins I think we can check off as being accomplished. Oil and gas, the 40 to 45 BCF oil production, I don't see much problem there, so I think you can put a check there. We did make PUD acquisitions, we did make marine mature property acquisitions, so two more checks.

The equity earnings of 22 to 27 million on Marco Polo, I'd leave that blank for right now, but I think that's more of an issue of the ramp-up of K2. It's nowhere near at risk as it was when we put this together because K2 is, of course, in production and coming back to Marco Polo now. And of course you can -- therefore you can check off the startup of production from K2.

Then the next opportunities have been identified and we're negotiating, so there's another check. Earnings, I think you can pretty well check that one off. No equity dilution. We did do the convert this year, but I think, as Wade has explained before, there's minimal...

It's only dilutive above 64 per share stock price.

And then finally the total recordable incident rate at 1.8, we are well below that and the trends continue to be positive. So looking at our report card, you'd have to give us an A+ on this year.

Okay, I just wanted to understand that because you had made the adjustment to earnings so I was trying to see if there should have been an adjustment there. But that's fine.

You talked, Owen, about, and I know you guys have mentioned before, taking the Q4000 into a potential drilling mode. How should we think about that as an opportunity cost? If I look at the well ops business, we see where drilling rates are for deepwater rigs. We certainly know that availability is greatly declined for clients out there. Why take this into a drilling mode as opposed to the well ops mode? Does that reflect on a lack of demand for well ops or is it strictly that for your own benefit of drilling wells you need to move towards something like this?

Roger, it's Martin. As you know, there's not enough trees yet in the Gulf of Mexico to give full utilization in well ops for the Q4000. This year we might do between 150 and 200 days with the rest of the utilization coming from lower margin construction, maybe some accommodation work. So we feel that adding drilling to the Q4000 -- and what we intend to do is drill wells with partners, earning our normal pricing for the Q4000 when we do that work. So we should see well operations type margins for that endeavor.

Okay, so there wouldn't be any restriction on its ability to do its well servicing work with the drilling ultimately?

No, not at all.

I'd treat it a little differently, Roger. If you noticed, we picked up 50 expiration blocks along with the -- in the Bass Lite acquisition.

Right.

And going back to the early part of my comment here, the way that large fields are developed and the way the marginal fields are developed sometimes employ different methodologies. We truly believe that the Q4000 with finder well drilling provides us with a very valuable exploration tool that we can make available to the clients. But it's also hedged that we're not dependent on the clients contracting it from us. We also have these 50 blocks and other potentials that this would be a very valuable tool in the context of us furthering our model for developing small fields.

Okay. And just one other question. Wade, I didn't quite catch the second half '05 CapEx number. Was that 355 or 255?

It was 355.

Okay. So the rest of that -- most of the rest of that 155 number would be towards the E&P side?

You want me to break that down for you?

If you would.

The 355 obviously assumes Stolt and Torch close and then we do a little capital upgrading there, spending about 225 total for those this year. The deepwater PUDS, Telemark, Devil's Island, Tulane, Bass Lite, I've got 78 million the second half of the year for those. Production facilities, Independence Hub, another 20 million in the second half. And then the remaining 30, 32 million is some low work, ERT, and some further maintenance CapEx.

Our next question is from Bill Herbert with Simmons.

Wade, with respect to production facilities, just sticking to the guidance here for a second, we did $2.7 million in terms of equity contribution for the second quarter. We've got a couple of wells coming on from K2 in the third quarter...

Hopefully, yes.

Hopefully, yes. Any sense as to what we can expect speaking in terms of an equity contribution for the third and fourth quarters respectively?

Well, as Owen pointed out, that is the one goal that we're watching closely as far as getting into our projected range. And from a timing standpoint, we may fall just short of that low end. I don't have actual numbers to give you for third and fourth quarter, if that's what you're asking.

Well, I think we'll know a lot better at the end of this quarter, Bill, because, as you say, the two K2 wells should be pretty much on production by then. We'll have a much better idea of the startup of the K2 North wells.

Okay. Well, what we're assuming here is that two of the K2 wells are going to be coming on stream in the third quarter and then you have two or three coming on in the fourth quarter. And sounds like that's what you have planned as well, but I'd just be curious as to whether you perhaps have more precise parameters. But it doesn't sound like you do, so I'll just catch up with you later on that front.

And then with respect to Gunnison, we have production at 2.2Bs in the second quarter, which is flat to down from the first quarter. Can you give us a sense as to how that's expected to unfold in Q3 and Q4?

Again, I think things are happening out at Gunnison right now that we are not able to project at this point. I certainly don't look for a decline in that production rate, potentially a slight increase.

Right. So a safe assumption is at least flat?

At least flat.

At least flat, absolutely.

Okay, good. And with respect to -- we had shelf production of 6.7 Bs in the second quarter, which is flat with the first quarter. Then we had Murphy and Murphy we really haven't talked about the expected production rates from that. Can you give us a sense as to what is a reasonable expectation for Murphy on a quarterly productive basis?

I think Murphy could probably add 4 or 5 BCF equivalent for the second half of the year, Bill.

4 to 5 Bs?

Yes.

Well, let's think optimistically. Is that 2.5 Bs per quarter?

Sure.

2 to 2.5.

I guess what I'm getting at is this. We've got -- Gunnison is flat but likely higher, I've got at least 2.5 Bs probably, given your record on guidance, which is very good, conservative, per quarter for the second half of the year on Murphy. It just seems to me that the production guidance of 40 to 45 Bs that we established late last year, or at least imparted in the first quarter, is quite conservative, especially when one considers the fact that you've bought Murphy and you've got rising production profiles on a couple of other fronts.

We do have some decline going on in some other fields, Bill. You'll notice that we did take a write-down on one field this quarter, so that's indicative of what's going on in the rest of the fields. At the beginning of the year, if you'll remember, we needed to make an acquisition of 3 BCF and we needed to have some successful well work to get to 40 to 45 and there was some concern expressed over whether 40 to 45 was realistic. I'm happy with the conservative approach of saying 40 to 45 is realistic at this point.

That's fine. And then I'm not trying to drill here too intently, but I just want to understand it. The shelf production, the 6.7 Bs in the second quarter, let's just call that base production pre-Murphy. What's the expectation for that production for the second half of the year? Down?

Yes.

Down?

Natural decline.

Okay. And give us a sense as to what kind of decline we can expect.

We'll have to get Johnny to get with you on that and we can give you some specific numbers, Bill.

There's also a lot of well work going on and the success of that well work will drive whether that number declines.

Okay. And then one thing that I don't think that a lot of people have a handle on are the sort of incremental earnings possibilities associated with the acquisitions that you've just done. Certainly you must have formulated a scenario for Murphy, but what kind of accretion are we contemplating for Murphy? And I realize you have to have an assumed oil and gas price, but do you have a range of parameters for us in terms of what we can expect from an earnings contribution standpoint?

I think there's a couple of issues there, Bill. We are digesting the Murphy properties right now and assessing what upside potential exists there. We're also looking at the timing of the developments that are in progress right now when they come on and all of that'll be going into our budgeting process and will be coming out in the guidance for '06.

Okay. And then Stolt, Torch, remind us what the expected accretion on that acquisition is.

We haven't stated anything on that yet, Bill. And again, we're waiting until we get through the DOJ exercise and get the assets out of the bankruptcy proceedings. So again, by the end of this quarter I think we'll be able to put a lot better color on that situation.

Our next question is from Jim Rollyson with Raymond James.

Owen, maybe one just bigger picture question. Right now you guys are going through clearly an investment phase, right, you've got a lot of PUD opportunities you're working through this year and into next that really start to pay off next year and '07. You've got -- production facility again doesn't start to pay off till '07. Last time you went through this investment cycle you kind of had a flattening of earnings until the returns started happening and your earnings started growing. Do you expect that to be the case if you look over the next couple of years, that maybe next year your earnings growth versus the last couple of years maybe isn't quite as exciting but it really starts to ramp-up in '07, kind of a bigger picture?

That's pretty astute, Jim, and hopefully we've learned how to create a little more sustainable curve here than we did the last time. But I wouldn't be surprised to see a -- I wouldn't call it flat, but I think...

Slower growth maybe next year versus the last two years and then re-accelerating in '07?

Yes. And again, it'll come out in our guidance when we do the budgeting. But if you just -- you can just eyeball this and see that these big developments are going to be coming on late '06, '07. So really, the big ramp-up from the recent acquisitions will be '07 obviously with a modest growth in '06 is what we're predicting right now.

I have to say that this sort of stair step approach is a result of growing so fast from modest beginnings. We've made some big moves and we've had to let the balance sheet catch up. It takes a while to get some of these big acquisitions on line. As we go forward, one of the things that we're really focusing on in the model, I mentioned increasing our infrastructure for deal making and engineering. We're looking at smoothing the process the larger we become and I think that becomes possible as we gain critical mass.

If you look at your -- all the stuff you have going on going into next year, I know you haven't given guidance next year, but we'd -- do you have some rough idea of what CapEx would look like next year based on what you guys have going on today?

Yes, just, I mean just based on what we have right now it'd be a couple hundred million. And that, and half of that would be for the development of these Deep Water PUDs.

I will say, Jim, we have more opportunities than we have capital right now, which is a good thing to have. We're, and to address your stair step issue on the earnings, we'll be high grading the opportunities we look at not only from a margin generation but from a timing issue.

Right. Just last question kind of a smaller issue.

Your unit costs on the ERT all in with Gunnison and just the shelf properties has been kind of creeping up here in the last couple of quarters.

Is that something you think is a trend or is this just a function of the fact your production was down last couple of quarters? Or what do you think there?

Well if you're calculating that based on the actual numbers, you have an impairment charge in the second quarter. You have the seismic write off in the first quarter. So you have some non-recurring items that are probably raising that unit cost a little bit. So that's part of it.

It looks like even back of that it comes up a little bit higher than what you're running last year.

It could be. That's probably right. And going forward the DDNA rate will be a little higher with the Murphy acquisition.

Okay. Very nice, thanks.

Our next question is Will Foley with Sidoti & Company.

Good morning, guys.

Hi, Will.

I'm trying to get a handle on marine contracting revenue and margin I guess in the second half. I mean I guess the given the dry dock in what looked like the June quarter overall marine contracting kind of somewhat better than certain I was anticipating.

I know you stated that September quarter should be better than March. But it seems to me like it probably should be quite a bit better. Can you just help me think about the revenue and margin for marine contracting in the second half?

Yes, hi, Will. It's Martin.

Yes, I made the statement that I expect marine contracting revenues to be at least as good as in quarter 1. You'll remember that during quarter 1 we did have some help from hurricane Ivan in terms of utilization and pricing.

So in quarter 3 I'm expecting better market conditions to sort of replace the Ivan effect and get us back on track with. Our revenues are obviously better than the second quarter given more utilization from some key assets.

And then gross profit again back above the 21% level.

Okay. And can you talk also, what commodity price assumptions are in your guidance range? Can you just speak to that, your revised guidance range?

What I would say, Will is that if you look at the mid point of the range that pretty much assumes flat realized commodity prices from the second quarter. If you look at the prices on the, whatever slide it was where we had the statistics from this quarter. If you just keep those flat, that's the mid point.

And if you do, you realize how sensitive it is. I mean if you just look at the second quarter production levels and for every, I figure for every dollar a barrel change in the commodity price that's $0.05 a share.

Okay. Just you, I think Owen you made a comment with respect to the last question about more opportunities than you have capital, any thoughts that you might seek additional capital to pursue further opportunities?

Our last recourse would be to consider equity. I think we have some, our debt is such high quality that I think that we're looking, depending on what the opportunity is and the whether the capital requirement was short-term or long-term.

We, on short-term we probably lean towards a debt solution. I think if there were an acquisition opportunity that presented itself, an M&A kind of opportunity, then we might consider some stock component of it.

But other than that, I think I prefer to try and match our capital spending opportunities with our available capital rather than dip into equity.

And those opportunities are they more mature properties or Deep Water PUDs or where are you seeing more of these opportunities?

I think it's really across the board. I think there are some property acquisition opportunities both mature and PUD. I think there's also a facility opportunities, which of course is a pretty big capital item.

And then I think there are some bolt on additions to our existing service lines that it's small but they're also interesting.

Thank you.

Thank you.

The next question is from James Stone with UBS.

Owen can you just comment as to that's just a sense of, have you picked up any, have you picked up the rigs that you need right now to drill Bass Lite and the follow-on wells? Do you have that? Is that capacity secured at this point?

Tulane and Devil's Island they're secured. I don't believe that Bass Lite or Telemark is secured yet.

And Tulane is the one that's starting this month?

Yes. And then Devil's Island will utilize that same rig on, in a follow-on.

Okay. And then just could you talk to us a little bit more? I guess you're going to be going to be the Board in September with your proposal on the Q4000?

Correct.

Can you give us a sense as to what the financial magnitude of that upgrade would be?

Yes. It's a little short of $20 million. If you'll remember, Jamie, we left the Q4000 in the shipyard for an extra 3 to 4 months and did upgrade work to it to be able to drill.

The only thing that we didn't do is go ahead acquire the drilling equipment. And that's what we're talking about.

The upgrade is just to acquire equipment. It's not a dry dock. It's not a modification to the vessel. It's wiring equipment and then installing it.

So what equipment does it need?

BOP, riser, tensioner, and mud capacity.

Okay. And the existing derrick that you have is sufficient?

Yes, yes.

And when you talk about drilling finder wells, these are what, slim bores?

Yes. We're talking about slim bores. Right now the expectations are that we can drill to about a 12,000-foot depth from the seabed in that settlement and in water depths approaching 8,000 feet.

And what sort of diameter hole?

4.5 inch, which would allow us to do all of the logging and data collection plus coring necessary for exploration work. What we won't be able to do is complete these wells as development wells.

Right. Okay and then just if you could in the quarter that you had with the Q4000 and the sea well being down for those 80 some odd days.

On the Q4000 works outside of the well ops operation, you're still putting in the revenues back to the well ops business, right?

Yes.

Okay. And then lastly, you didn't give us your famous update on the North Sea, maybe wondering if you could touch on that for us?

Well with everything going on here I've been sort of captive in the Gulf of Mexico. I am on my way back over to the North Sea August 12 to resume the pursuit of the elusive deals. And I've got to apologize when I left last year. We had some deals that I thought were imminent and closing. They haven't gone away. They just haven't closed.

Other than that I'd just have to say the North Sea is a very different place of doing business and I'm, I think we need. I alluded to increasing our infrastructure and primarily that's what I'm going to be doing over in the North Sea is expanding our presence and building more infrastructure resources.

Okay. I'm just curious with the opportunities that you've now built in the last 6 or 8 months in the Gulf of Mexico and the visibility that you've added sort of through 2007 maybe 2008, how much priority do you have, should you put on that effort at this point, which I would think sort of steps you out a little further on your - it stretches you out quite a bit from where you are today given all the things that have got to go on here.

Well I think one of the things that we've learned over this last year is we've been trying to look at the North Sea deals, utilizing our resources here in the Gulf of Mexico. The guys here, I mean everyone here is really focused and the deals are coming in and being processed and we're getting the developments underway.

The North Sea has been sort of an additional burden for the group here. So I think my goal is to establish the infrastructure over there to look at them on a stand alone, separate basis so that we don't detract from what's going on in the Gulf here since so many exciting things are happening here.

Okay. That's all I had. Thanks.

All right. I just want to add, Jamie, that before I was over there alone. I'm looking to create a group over there so that it's not dependent on me being there.

Right. Great.

Our next question is from Michael Bodino with Sterne, Agee.

Good morning, gentlemen.

Good morning, Michael.

A couple of quick questions. Most of my questions have been answered. But due to the impairment out of East Camp 374, were there any reserve revisions? And can you quantify that?

I think we had assumed another $1 million of earnings for the rest of this year from that field. So we had projected reductions already.

So just, we had $2.8 million in basis left and we wrote it off. That's all.

Yes, but any reserves? Can you quantify the reserves associated with the loss production?

Not sure but I'll get back to you on that one, Michael.

Okay. Just relative to the Eastern Gulf of Mexico, we keep hearing about a lot of successes, not only delineation wells but also some further smaller discoveries.

Was the independence of being built to accommodate additional productive fields out there? Or is there some upside to the size of the facility? How do you view that?

The independent sub will certainly take the production from I think it's 10 discoveries already. We are getting to a point where it's going to be pretty full from the get go.

But obviously some of these reservoirs, as you say, are small and quick to produce. So as new fields are found we'll sequence them into the production stream there.

So I think it's going to work out pretty well given the timing of development costs, sorry, development in terms of when Hubble will be available.

Okay. Relative to the projects you acquired particularly on the EMP side in terms of the assets. I understand Tulane and Devil's Island are on target. Are the rest of the projects, particularly the stuff you bought in conjunction with Bass Lite, is that moving faster or slower than you anticipated relative to the timing of acquisition?

Pretty much I'd expect it in the recent acquisitions. And we are aggressively pursuing development plans, going as fast as we can. So it's pretty much as expected right now.

Well no one's saying that you're dragging your feet this year. You all have been pretty active.

And Wade, last question for me, for you. Relative to this convert, we know it gets dilutive at a price not too far from your current stock price. And relative to our earnings estimates, I'm trying to figure out what we should do in terms of projecting earnings in cash flow estimates. Do we include the dilutive shares? Do we not? Or we close enough to think about that?

And in addition, is it a trigger that it needs to an end of the quarter price to trigger that to be calculated as part of the weighted average diluted shares outstanding? Or is it days that the stock may be up over that price that it factors into the weighted average shares outstanding?

Yes, there's 2 things. One is it does get included if the quarter closes over 64. But the way you do that calculation is we have said that we'll pay the $300 million off as debt. So it is debt.

So the only dilution is for any value above the $64. So I'll be happy to run through some sensitivities with you some time. But it's not very dilutive. It has to go well above the $64 before it really starts being having any meaningful dilution at all.

And as far as when they can covert, the stock price has to close over actually 77 for 20 days of the last 30 days of a quarter before they can even convert.

So you can factor that into your model. I'd be glad to help you. But it's going to be very minor dilution at these prices levels.

Yes I just want to make sure that we didn't miss anything. Thank you.

That's the point. Even at, we ran up some sensitivity. Even at $100 a share, the dilution is 4%.

Okay. Thank you.

Our next question is from Philip Dodge with Stanford Group.

Good morning everybody.

My question is whether you can give us some help on how the marine contracting associated with development of the PUDs and the independent tub and maybe Dawson Deep would fall year-by-year over the next 3 years, where the concentration might be?

I'll try, Phil. I think we put a slide in last time talking about the filing with that construction work.

We thought at that time it was around $90 million in relation to Telemark there was on 2 in Bass Lite.

Timing wise I think you'll see us do Telemark and Devil's Island work next year. Sorry, Devil's Island and Tulane work next year. And then Bass Lite and Telemark in 2007.

That would be my take on timing. And then value wise I think $30 million next year and 60 in '07.

Okay. Thanks. And can you give us an update on Dawson Deep? Things have been pretty quiet on that front for a while.

We're just finalizing the development plan, bringing that production back to Gunnison. I believe you'll see that happening in the latter part of this year.

Okay. And then just final detail, if you gave us the production from East Camp 374 in the first half I missed the number. Or can you give that number to us?

Yes, I'll have to get back to you on that one, Phil. But with the actual production of East Camp 374, we didn't give it. It wasn't real material. I'll tell you that.

Okay. Just wondering how to adjust for it even if trivial. Thanks Wade.

Thanks.

The next question is from Jim Lewis (ph) with (inaudible).

Hi. My question is on the marine contracting side. Trying to look out, and I realize you haven't given any guidance for '06, but in terms of thinking about how the market's evolving from a revenue and margin standpoint.

I think it'd be useful if Martin could talk a little bit about where he sees pricing today vis-à-vis in the market today vis-à-vis what's in your backlog and how you guys see that evolving?

And I also recognize pricing is difficult to talk to in general terms in that market. But any thoughts you could give us on that, Martin?

This is Owen. I'll jump in here.

Because of what's going on right now I think it's out of place for us to talk about pricing. Other than to say it would be purely speculative anyway. I don't think our view is any different that yours that we've got an increasing demand driven market. And I'll just leave it at that.

Okay.

Our next question is from Steve Pouns with 2003 Houston Energy Partners.

Thank you.

We've heard from some other people that when you go into dry-dock that the Coast Guard is more aggressive on enforcement. Did you see that with your vessels that were in dry-dock in the quarter?

Not more so than usual. We plan these dry-docks well in advance in terms of what we do there. Things went pretty much as we expected.

Obviously the Coast Guard plays a part in that. And I didn't really see any increased scrutiny or increased requirements for these particular dry-docks.

And second in ERT business with prices up a lot of the stuff in the Gulf, particularly in the shelf has been produced really hard. And it seems like a lot of that would be ready to kind of dive into your ERT model here.

Are you seeing companies that are getting down to the end of each project more interested in doing deals now that are kind of right down your alley?

I'm not sure I understood the question fully. The, we're in the abandonment in 2 ways. One is for our own fields.

The backlog that we see there continues to be shifted to the right, as our guys have been successful on enhancing and extending the life of the fields.

Just to give you a flavor, I think it was 5 years ago we predicted that maybe in 3 years we'd have need for a contracted full-time abandonment barge. It's now 5 years later and the projection is still 3 years. That gives you a flavor anyway.

The other side of it is the open abandonment market. And I think ever since we introduced the model in the early 90s of acquiring these fields, the industry as a whole has become more and more efficient at prolonging the life.

In fact I don't think you see any companies showing the old hockey stick of the abandonment market that's coming.

So if, and as you've probably noticed, we have not acquired an abandonment heavy lift asset and we don't intend to because I quite honestly just don't see the big ramp up in that market that would justify such a large capital expenditure.

Thank you.

[OPERATOR INSTRUCTIONS]

And at this time I show no further questions.

I'd just like to apologize to everybody a little bit for the number of questions that we weren't able to answer. Obviously there's a lot going on with the Department of Justice that limits our ability to respond on certain things.

And on other forward-looking things there's an awful lot of good, exciting things going on at Cal Dive here. And, we're really fighting the propensity to express that enthusiasm. And we're trying to not to get ahead of ourselves on what we say is coming up.

Things are exciting and as they become clear on their timing and quantity then we'll be sharing as much as we possibly can of our thought processes.

Thank you everyone. See you next quarter.

Thank you for participating in today's conference call. And have a nice day.