Helix Energy Solutions Group Inc (HLX) 2005 Q3 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants in a listen-only mode. [Operator Instructions] Today's conference is being recorded. If you have objections, you may disconnect at this time. I will now turn the meeting over to Mr. Wade Pursell, sir, you may begin.

Thank you. Good morning, everyone. Welcome to the third quarter 2005 earnings call for Cal Dive. Thank you for joining us this morning. With me today here in Houston is Martin Ferron, our President. Bart Heijermans our recently announced new Chief Operating Officer, and Jim Connor our General Counsel. Joining us from London is Owen Kratz, our Chairman and CEO. 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 website www.Cal Dive.com in the investor relations page and click on the webcast presentation there. We'll be referring to these slides as we go through the call this morning. You can see on slide 3 our format for the call this morning. I'll summarize the results and walk real quick through a financial overview and turn it over to Martin for operational highlights in the three business segments. Owen Kratz will actually step in for the oil and gas production segment and then do a strategic overview and outlook for us and that will be followed be the Q&A segment. But first of all, looking back to slide 3, Jim Connor has an important announcement to make. Excuse me, slide 2.

Good morning, everyone. As noted in the 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 our press release and to our annual report on form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission.

Thank you, Jim. Now turning to slide 4. Our highest earnings per share total for a quarter was $0.65, which was achieved last quarter. And also the fourth quarter of last year. Obviously, a $1.05 per share for the third quarter blows that number away by 61%. The strength of the business model was really on display in the third quarter, as about half of the earnings was from the Marine Contracting activities. Couple of comments on the impact of hurricanes Katrina and Rita. First and foremost, as previous reported, we are very pleased to report that all of our employees are safe and no significant physical injuries were sustained. We did sustain damage to certain of our oil and gas production facilities, which resulted in a minimal asset impairment charge for one of the production platforms taken in the third quarter of $225,000. However, we do estimate total repair and inspection costs resulting from the hurricanes will range from 5 to 8 million, net of insurance reimbursements. These costs and any related insurance reimbursements will be recorded as incurred over the next year. As a result of production shut ins, we estimate that we deferred around $0.12 of our earnings in oil and gas production and production facility segments which would have been earned in the third quarter. Turning to revenues, not long ago, I believe it was 2001, we were quite excited to generate annual revenues of over $200 million. In the third quarter we eclipsed that figure with over $209 million of revenues. This represents a $77.4 million increase over the third quarter of 2004 levels driven primarily by the significant improvement in Marine Contracting revenues, due to much better market conditions particularly in the Deep Water and shelf subsea construction areas. Gross profit margins of 40% were 5 points better than the year ago quarter, due again to improved market conditions in Marine Contracting. Also, bottom line margin of 20% for the third quarter sets a new record for us. SG&A $15.9 million increased $5 million from the same period a year ago, due primarily to additional incentive compensation accruals as a result of the improved profitability. This level of SG&A was 8% of third quarter revenues consistent with the year ago level. Equity and earnings $3.7 million reflects primarily our share of Deepwater Gateway LLC earnings for the quarter. This reflects only a $600,000 increase from the second quarter, as we anticipated ramp-up with K2 coming online. Marco Polo was offset by downtime caused by the hurricanes. Looking at the full year 2005, last quarter we increased our estimated earnings for 2005 to a range of $2.80 to $3.20 per share. We see the Marine Contracting segment having another strong quarter in the fourth quarter. Offsetting income deferrals due to hurricane-related production shut ins and the impact of repair and inspection costs to be incurred during the quarter. And now we expect earnings for the year to be in the increased range of $3.15 to $3.35 per share. And just to clarify, I'm talking about our estimated GAAP reported EPS for the year. In other words, with the $0.64 in Q1, $0.65 in Q2, and $1.05 in Q3, that implies $0.82 to $1.02 for the fourth quarter. I think there may be a penny of rounding in there. Regarding 2006, we're in the middle of the budget process currently. And as we've done in the past few years, we will be issuing formal guidance once we conclude that process, which will, again, be in December. So next month. On slide 5, you can see how these results translate to return on capital, probably the most important metric that we look at. Year-to-date we are up to 16.6% on the strength of the nearly 21% performance in the third quarter, you might remember our goal is 10 to 15%. Looking at the balance sheet real quick. See slide 6. During the third quarter we acquired for $85.4 million, 7 vessels for torch offshore, including the midnight express, total debt as of September 30, 2005, was $443 million. Which represents a 42% debt to book cap. And with the $316 million of trailing 12 month EBIDTA , through September 30, 2005, this represents 1.4 times trailing EBIDTA debt level. The debt is comprised primarily of the purple box, which is the convertible notes. Which mature in 2025 and bear interest at 3.25%. And $135 million, the green box, is the [merit] debt, which amortized mortgage style through 2027. We were able to lock in the rate on merit debt at the end of the third quarter, at an effective coupon rate of 4.81%. So essentially all of our debt is now locked at what we think are attractive rates for a very long time. We also have $150 million revolver, which remains untapped. And in addition, the company had $150 million of unrestricted cash on the balance sheet at 9/30/05. Most of these funds will utilized for the previously announced acquisition of certain assets of Stolt Offshore, which the DOJ, cleared last month and we announced the first phase of the acquisition this morning in a separate press release. Summarizing CapEx, total capital invested for the first nine months of 2005, was $444 million. $218 million of that related to oil and gas production, the Murphy acquisition Deep Water PUDs and some well work. And $101 million related to production facilities, $29 million for the independence hub, capital calls and $72 million for the debt retirement on the Marco Polo facility earlier this year. That also includes the $85.4 million for the torch assets. The remaining $30 million relates to Marine Contracting, dry docks, robotics, et cetera. Projected CapEx for the fourth quarter of '05 is about $181 million. Which includes about $133 million for the Stolt acquisition and upgrades to some of the torch assets. All of this should be [INAUDIBLE] the $150 million of cash on the balance sheet and cash flow from operations. Now turn it over to Martin Ferron for operational highlights.

Thank you, Wade. Morning, to everybody. I'm going to start on slide 7. Which is really a nice place to start this time around. Q3 revenues increased to $144 million which represents an increase of 83% year-over-year. And 40% sequentially. Due to much improved market conditions in most segments. Gross profit margins improved by 12 points sequentially and 40 points over our target for 2005. And just to add some further color on perspective to these hopefully impressive numbers, $42 million of gross profit translates into $0.47, sorry, of earnings contribution for the quarter. Which takes us to $0.79 for the year-to-date. Those of you that have followed our investor conference presentations over the last couple of years, heard me say several times that $1.20 of annual earnings was achievable with our existing fleet in a reasonable marketplace. Well, given similar performance in quarter 4, we will exceed that number this year. Well before the peak of the upcycle. Also like to point out that EBIDTA margins for the quarter were 30%, which is achieved at a time when several of our competitors are targeting low double-digit EBIDTA returns for next year. Turning to slide 8. To look at quarter 4 and the outlook, we expect quarter 4 financial performance to improve further over quarter 3, mainly due to the fact that the positive impact on demand from hurricanes Katrina and Rita didn't really kick in until late in quarter 3. So we'll see improved utilization, especially with the shallow water fleet, improved pricing in quarter 4. Also, several of the assets that we've recently acquired from Torch and Stolt will go to work in quarter 4 and I'll be covering that in further detail when I get to slide 11. To slide 9 to talk about our shelf group. Utilization figures here are a little misleading because we elected to retire our shallow water salvage asset earlier this year. Plus we have one asset which is held for sale. So if you look at our active fleet on shelf, we actually achieved 83% utilization in the third quarter. And I expect that to increase to probably around 90% in the fourth quarter on the same basis. Turning to slide 10, just to give you an update on where we are with our strategic acquisitions in this area. We closed the asset purchase agreement with Torch Offshore on the 31st of August. This morning we announced that we've closed the purchase of the shelf assets to Stolt Offshore, and we achieved that yesterday. So we're picking up the assets that are presently working in the Gulf of Mexico as of yesterday. The two remaining shelf assets, DB801 and the Castral will be acquired when those assets complete the present work assignments in Trinidad. Now under the terms of the Department of Justice clearings for the two transactions, we will be divesting DP saturation guidance to [INAUDIBLE] more guidance support vessel on a portable saturation diving system. I'll show you the impact of that on slide 11. Now it's our intention to place all of the acquired assets, with the exception of the express, together with our existing guidance to poor vessels and a new subsidiary entity. We may sell part of the ownership interest in the entity during 2006. So we turn to slide 11. We can see what assets will be in this new entity. Before we made the first acquisition Cal Dive had a total of 16 assets. You can see the breakdown there between more pipeline through portable saturation diamond systems. Through the Stolt acquisition, we're running 9 assets, excluding the ones we have to sell. And seven of those will go to work here in the fourth quarter. In fact, all seven of them are working today on hurricane-related work. The other two being the ones in Trinidad. Then on torch, we acquired five assets, excluding one we have to sell. Again, we expect all five of those assets to go to work here in the fourth quarter. I'm particularly pleased with the start we've got off to with the pipeline assets. We've already booked work to a value of over $20 million on work which will take us well into 2006. So really nice start with those two pipeline assets. Turning to Deep Water and robotics segment on slide 12, deepwater asset utilization increased 18% sequentially. With only the Mystic Viking dry dock due in the quarter. You'll recall that the second quarter had a lot of dry docking activity in it and the utilization was only 63%. The intrepid had a record quarter, conducting pipeline on a deepwater tie back project . I'm very pleased that this vessel has established itself, extremely well in the niche we targeted for it. Then [INAUDIBLE] logistical support contract with BP [INAUDIBLE] in quarter 3. And is likely to remain off site for much of quarter 4. The robotics group had a third consecutive record quarter with five vessels on charter at peak times. Also during the period we completed a major pipeline burial project in Egypt, involving the burial of 170 miles of pipeline. The outlook, again, is bright. All the assets in the Deep Water group are fully booked for quarter 4. The start for '06 is very encouraging. Also the express will commence work in quarter 4, we're actually only waiting for a final Coast Guard permit before we can set sail for our first job. I expect that to happen before the end of the week. The express will conduct light construction and hurricane repair work prior to an upgrade of the pipeline system which will occur in quarter 3 next year. Also the outlook is good for cannon. Also expect a seasonal drop off in pipe activity in quarter 4. ROB activity is anticipated to remain strong in all regions. Especially in Mexico, Australia, Vietnam, and West Africa. Also, like to point out that we've recently ordered five new high specification work class vehicles to cater for increased internal demand on our new assets, required assets. Plus to take care of some increased external activity. Well operations T4000 had a record quarter on a combination of market well and construction work in the Gulf of Mexico. While the sea will resume work in the Norwegian sector, the North Sea on a project, with [INAUDIBLE] was actually negotiated in late 2003. Therefore, the gross profit margins on that particular Seawell job were only in the low single digits. Which obviously was a drag on the overall earnings for the group. That vessel will reenter the spot market in December probably. And we'll more than likely achieve pricing at the average for the rest of the fleet. So given that the Seawell is a strong contributor to revenue, when the vessel reenters the spot market, I think you'll see a further improvement in our margins. Turning to production facilities on slide 15, as Wade mentioned earlier, our production [INAUDIBLE] was negatively impacted by hurricane-related shut-ins at Marco Polo. We estimated the impact to be around $0.02 for the quarter. However, we did have a sequential increase in equity income because of full contribution from the first well on the K2 fields. Unfortunately, the two hurricanes caused around 120 days of delay to the completion of the remaining 5K2 and K2 north wells. I recall, that we originally expected to have all of those wells on production roughly by the end of this year. It's likely that that won't happen now until around April time next year. However, in quarter 4 we will see a sequential increase in equity earnings because of less hurricane downtime. And hopefully getting one or two of these wells in production. Just a quick update on the independence sub. We are on track for facility installation in the second half of next year. And we expect to achieve mechanical completion in quarter 4. So I'll hand over to you for oil and gas production comments to Owen, who is in London. Owen, are you there?

Thanks, Martin. Turning to slide 16. You can see that we did have a record quarter in spite of the hurricane impact. You can also see the production was down. But I might point out that most of our down production is a deferment. As far as cost production, we lost only one producing well that we don't have plans to reinstate. And that well had approximately half a BCF of reserve attached to it, but everything else is a deferral. You can see from looking at second quarter of the year and the third quarter, production was down from 8.9 BCF equivalent to 8.4. This -- this shows that we were almost able to keep production flat and that's primarily due to the well work and the acquisitions we had been making during the year. But it does fall far below the point where we thought we would be at this time. And I'll get into that further in a minute. The down production was more than offset by the increase commodity pricing that -- we realized net of the hedging. Turning to the next slide, you can see the verbalization about much of what I was talking about. I might point out in the first bullet point, the 5 and 10 days of shut in time due to Katrina and Rita, was a 100% of shut in. Beyond that, we were impacted negatively on getting back on stream. I might -- I might remind you of a press release we made back in September 28, just following on the heels of Rita. We said we would -- we sort of gave an estimate of where we would be coming back onstream with our production rate. 50 million cubic feet by the end of September. We were lagging behind that, I think the whole industry had a little harder time getting going again on the repairs than anticipated. But by the 15th of October, we were back up to the 65 million cubic feet that we were estimating. By the end of October, we had said we would be back up to 85 million cubic feet a day. And we were actually at 86. We are on track recovering at the pace we thought we would. If you remember back on that previous -- or, -- well, let me move on here. Also on the first bullet point you see a negative impact to revenues of $2.7 million. That was incurred in October as a result of our hedging due to mark to market accounting of those. We weren't -- we were negatively impacted. But, Wade, you might explain that a little more in detail in the results going forward.

Sure.

Fourth quarter as a result.

Sure, Owen. You know, every quarter we are required to mark to market our hedges. And our hedges are typically highly effective. So the impact goes through OCI. You don't see it run through P&L. This quarter, though, we looked out into October and saw that we weren't going to be able to deliver enough production in October to cover those hedges. So the October portion of our mark to market went through the income statement and reduced revenues by $2.7 million. That's a timing difference. Beginning in November, we are, as Owen said, with the production back to where it is, we are very confident that our hedges are covered from this point forward. So that the $2.7 million will be the only income statement impact from the mark to market.

All right. Moving to the next bullet point. Gunnison. We were very fortunate here in that Gunnison was not impacted directly by the storms, other than the actually shut in time during the storms. To a lesser extent, we were impacted further because of restrictions on the production outlet -- output that we were allowed to proceed with following the storm, due to the pipeline refinery capacities. As you can see from the previous page, Gunnison was not impacted much at all. The overall outlook, though, for the year is -- we're going to have to revise downward our earnings estimate-- or I mean our production estimate for the year to 33 to 34 BCF. But if you remember back on the previous slide, what that -- we've got a -- I'm sorry. If you go forward to the next slide. Number 18. You can see that we have a deferral of 5.5 to 6.5 BCF equivalent. Might point out that being able to hold third quarter production rates at the 8.4 shows the effectiveness of the production that we did add during the year, although a lot of production is down. We were impacted in October by the 1.6 BCF equivalent there that you see on the right hand column. What this means is at the beginning of the year we had given a range of 40 to 45 BCF for the year. We were on track to produce 39.5 BCF. I might mention that this is the low end expectation, that left hand column, of what we were expecting to be able to do. And that means that the deferral number on the right hand side is also a low end number. Which will not -- effect as it comes back on. You'll probably sees this as a minimal amount of production coming back next year. The timing is a little up in the air still for the fourth quarter. Most of the impact to date has been us getting our own platforms back up and running. At this point, though, we're a little subject to the pipeline capacities and how fast they can take our production back online. But, we've been pretty [INAUDIBLE] on the estimates to date. We think our estimates going forward are just as accurate. Let me just check my notes here for a second. I think that pretty well covers that slide. We'll move onto slide number 19 and the hedging. As I mentioned before, we did get a little bit of a negative impact on the hedging in October that Wade mentioned. I would like to say that you can look at the hedges here. But we see no deliverability liability at this time or going forward. If you look at the production levels for December and the amount that's hedged, we're looking at about 40% hedged for December and 25% in January. So that means we're over the deliverability risk area. We actually have room now to look at laying in some additional hedges. I think we should be able to get back up to our corporate policy of having about 50% hedged. But no more than 50. Having said that, I'll move onto the final slide. Having covered production, the objectives that we set at the end of the year, fortunately, most of these had already been met. I'll just run down this report card that we use. The revenue goals, I think, are in the bag. The margins are looking good. We will not make the 40 to 45 BCF of productions as I just mentioned. But we did make PUD acquisitions, in fact, we have five back logged right now to do the developments on. We did make a very large mature property acquisition. That's been successful. The production facilities due to the number of things, including the hurricane impact, the earnings -- equity earnings through Marco Polo will fall short of this goal. Part of that is the timing of the start-up of production from K2 and K2 North. We have identified and progressed our next opportunity. So that's a check on that one. On the financials, the earnings I think we continue to revise our earnings upward. And the visibility going forward looks very positive. I think that will be a continuing trend. No equity dilution and the total recordable incident rate is below 1.8. We've had a very successful year with respect to the report card. I might just add a little bit of color to it. It's been a very exciting year to say the least. I mean, we were in the middle of adding significantly to our service lines depending on where the market was dictating and that was all before the hurricane impact hit everybody. We were adding the shelf deals. -- we added pipeline capacity in the Deep Water. We purchased the lubricators that we use for the seawell from [SlumberJay] took those on board. We've added personnel and created a group around the facilities, business and that will give us a lot greater field development capability. We've set up a deep water Gulf of Mexico ERT group to specifically focus on Deep Water. And we're in the process of setting up the infrastructure and capabilities in the U.K. for a U.K. based ERT production Company. We do have the five fields I mentioned back logged for production. That comes from our production acquisition strategy. Got the independence hub back logged coming up. We've got two boats -- two build slots right now slated for further facility fabrication. We made the mature property acquisitions from Murphy. And we've added all of the new personnel. So. it's been a very exciting and busy year for us. Even without the hurricanes. It has been a little frustrating, I'll have to admit, I think things are moving a little slower than what you might imagine. Quite honestly, in my entire career, I have never seen the construction market as strong as it is right now or with as great of visibility looking forward. I think the market is a little bit shocked and undecisive as to what to do. Some of the deals may not be going forward as fast as possible. Other things are beyond the markets ability to control or impact. That was, you know, one of the big management efforts that we had to spend more time on this year than we thought with the Department of Justice review on the shelf deals. It is a little flattering that somebody thinks we have such a dominant position in the Gulf of Mexico. It did take a long time and slowed things down. We were hoping to be a lot further along than we are right now. I'll take what we've got. It's pretty good. The -- I guess, I don't know. The market could be popping a little bit faster than it is right now. And looking forward, I think it will begin to pick up pace. Most of our services are downstream in nature. So I think we give up a little bit of the immediate impact, although looking at this quarter, you would say this is pretty explosive. So what I'm looking at, more sustainable nature on the impact. I think this bodes really well for our utilization and earnings ability not just now, but for years to come here. As I said, I've never seen the market this strong, pretty excited about going forward. With that, turn it back over and open it up for some questions. Thank you. Operator?

Sorry. Thank you. At this time, we are ready for the question-and-answer session. [Operator Instructions] Our first question comes from Roger Read.

Good morning, gentlemen. I guess good afternoon to you, Owen.

Good morning, Roger.

Can you guys give us an idea of what the impact of the torch vessels was or were during the third quarter? Just trying to maybe understand how much of the increase sequentially was that versus just general improvements driven by first the underlying business and secondly the hurricane impacts?

Roger, torch had no impact on the quarter 3. We didn't close until the end of the --

August.

We didn't get the assets. So no impact on the quarter 3. Also the hurricane barely had any impact on quarter 3. Because we only just swung back to work as the quarter finished. So I think you will see the impact from both in quarter 4.

Ok. Well given that then why such a -- I know you're expecting Q4 to be a little bit better, or at least sequentially better than the third quarter. What specifically occurred in the third quarter that doesn't repeat in the fourth quarter that would keep you from being, you know, maybe highly optimistic on a revenue and profitability in the fourth quarter?

The production shortfall, you know, the biggest thing, Roger.

I'm speaking maybe specifically about Marine Contracting.

I don't know see anything that is negative compared to quarter 3. I see positive. We got these extra assets coming to work. Plus we've got the extra demand from the hurricanes. I think the main thing is the general market in quarter 3 was strong anyway. And we were pretty much flat out busy at rates before the hurricanes hit.

Roger, I might add, you know, if you divide it up. I think going forward we're looking at an improvement in every segment in the long-term. Near term quarter 4 you have the positive impact on the acquisitions, that's a plus. The Marine Contracting will be a plus. And the commodity pricing is a plus. Although, our -- our estimates looking forward always takes a -- view on the commodity pricing.

Sure. I can understand that.

On the downside, we've got the cost of the repairs still facing us on the hurricane. And the uncertainty of actually getting all of our production rates back up to where we need them to be. So that tends us to be a little bit conservative on Q4. But then looking forward in '06 and I might as well say it before somebody asks me, we're pretty positive about our outcome for '06. Although, we don't come out with our earnings guidance until we finish our budgeting process, which we're in the middle of. I would be say that I would be disappointed personally if we didn't reach the consensus number that's out there right now.

Okay. So, I guess I should assume to 5 to $8 million of repair and inspection costs probably disproportionately in the fourth quarter.

Yeah. Only, doing as much as we can and have to immediately. I would assume anywhere between 3 and $5 million in the fourth quarter, and the rest spread out over the first half of next year.

Okay. I'll let somebody else go. Thanks.

Our next question comes from Marshall Adkins.

Obviously a phenomenal quarter. Let me drill down a little deeper and the stuff Roger was asking. On the hurricane impact, Wade, you mentioned $0.12, I believe, from production. Is that right?

Correct.

Now what about -- I mean, obviously on the marine side, your vessels are down for awhile. In the presentation you had a lot of little pieces like you lost some stuff from Marco Polo and lost some stuff from the hedges. If you add it all together in addition to the production, how much -- just ballpark. How much do you think we lost this quarter due to the hurricanes? In addition to the $0.12 from production?

Well the $0.12, Marshall, actually includes the production facility downtime.

So that includes Marco Polo.

Yeah, $0.10 production, $0.02 from Marco Polo.

Okay.

I don't believe we lost much on the Marine Contracting side. Because our vessels went on standby for certain periods. Not on paid standby. We lost some because they weren't working. But, we didn't lose much.

So then the only other thing is the hedges.

Yeah. So you could add back $0.04 there.

So maybe all in the number was 15 to $0.20? Is that fair?

Yeah. That's fair.

Okay. Well, then that gets back to the other part that Roger and most of us trying to drill down to. It seems like given this phenomenal quarter, that your guidance for next quarter -- I might have heard wrong, $0.82 to $1.02. Is that right?

Correct.

That seems awfully conservative. You know, especially given how much downtime we have from the hurricanes. Am I reading it right? Are we just trying to be conservative here in the guidance or are you really thinking, wow, we are really going to have a lot of lost production and what not?

This is Owen. We are trying to be ultraconservative, of course. But if you look back on slide 18, I think you'll see that for the deferred production, you know, there was relatively minor impact to the third quarter.

Right.

Until you look at where we could have been, you know, if you put in the full 10 BCF equivalent. It starts to get below major. If you look at the fourth quarter, that's where most of our production negative impact is. We're looking at coming in right now, it's too uncertain to be able to quantify, you know, in our view. It's too early to give up the conservative stance.

If you apply the same math to those numbers on slide 18, marshal, that is $.030 to $0.35.

Okay.

Of production deferral.

That gets you there then.

Yep.

Okay. One last question here. Margins on the marine side. You know, absolutely phenomenal. Martin, are we going to be able to maintain those? Or, in fact, from a commentary and activity sence, maybe get even a little better as we go through '06? Is that a fair assessment?

Yeah. As I mentioned in the presentation, Marshall, I think the sea well will have a big impact on 2006. We have only earned something like 6 to 7% gross profit margins in '05. I expect to get up to the average for the rest of the fleet in '06. So you know that's a big impact plus I think we'll see another pricing step-up from the hurricanes here. I would be disappointed if we don't get well into the 30% gross profit margins.

Wow. Phenomenal, guys. Thanks.

Thank you.

The next question comes from Bill Herbert.

Good morning, guys. Owen I think you touched on the key point with the rate of change for your business model at the end of your discourse. That was you've never seen basically the offshore construction market stronger than it is now. I guess what I'd like for you and Martin to do -- we've touched on the fourth quarter guidance. We've touched on the specific vessels such as the Seawell rolling off a very anemic sort of contracts with stat oil and rolling on the spot market and rolling into the fleet average. Unless that's added it. But elevate, if you will, and walk us through in terms of your -- the step change we've witnessed with respect to demand for offshore construction equipment. The market was already tight pre the storm. The storm accentuated a very tight market. Now you're talking about visibility stretching out for years as opposed to weeks. So, walk us through what you're seeing and why so optimistic?

Well, I think what I'm seeing all areas in the -- you know, in the past you've had some areas get hot and others cool off. Right now I'm seeing a global increase in demand for assets. So I think there is going to be less likelihood of assets, you know, jumping markets. And, therefore, artificially depressing margins. So it's strong demand globally that I've never really seen before. In addition to that, I think we're in a much better position with all of the new assets that we've just acquired to take advantage of the presence that we've just started in the North Sea for instance and southeast Asia, plus leverage up the Gulf of Mexico and even move into Mexican waters. So I'm seeing more opportunity for expansion for Cal Dive with less competition basically. And then I think the capabilities that we've added recently give us much broader capabilities. Therefore a broader market to participate in than historically we've been predominantly known as a supporting roll contractor and right now I think we've -- we've grown to the point where we have about as good as capabilities as any contractor in the world. So all of these combined are what really lead me to believe that we've got a bright future ahead. Then on top of that, add our model. Our model is completely focused on hedging the cyclicality of things. I think you've seen it here. It wasn't that long ago that we were being called a production Company and the construction side was nothing. Now in the last month construction actually added more than the production side of the Company. If you go back multiple years, you've seen this swing two or three times. People have short memories. Our model, our cash flow is going to be very strong going forward and we've got so many different areas to choose from. It's not a matter of just am I going to allocate capital, I now have real high quality choices as to where we want to allocate the capital.

And walk me through in terms of the dialog you're having with customers right now, given the step change in demand and the globally tight environment. Walk me through the dialog you're having with customers with respect to exercising your pricing leverage, if you will. What kind of pricing increases should we expect to witness in this new world of very tight offshore construction and fundamentals?

Want me to take that one?

Go for it.

Okay. Well, you know, I mentioned earlier that one of the things I've talked about on road shows, the $1.20 from the Existing fleet of earnings. You have also heard me talk about sort of 35% gross profit margins. That's the next step we want to take. I think we can get there maybe in quarter 1 next year.

okay.

And obviously, we want to push it further beyond that. I think, you know, 40% isn't out of the question.

Okay. So we're -- so we -- we basically generate 29% gross margins in the third quarter.

Yeah.

As a realistic possibility to call it 35% in Q1. Maybe, hopefully, beyond that North of 40% for '06 as a possibility. No guarantees, of course.

No guarantees. Possibility.

Okay. And then the second question relates to with respect to the consolidation here of the Gulf of Mexico continental shelf construction market here with the acquisition of Stolt and torch. Now selectively on a pro forma basis, you are going to have 30 vessels. Ultimately, what market share of the Gulf of Mexico shelf construction market does that represent?

Well, we're -- Owen, you go ahead.

Just not enough from my perspective. [ Laughter ]

Too much on the DOJ, perspective.

I guess what I'm trying to get at, historically a relatively undisciplined sort of competitively a rational market. And now it has become much less fragmented. And I think that is also another element to the story. where you're going to have a much easier ability now to control your destiny as it relates to that market.

Bill, if I could back jump in here. Don't mean to be flipping. I'm pretty excited about that. We sort of felt like we had a stewardship of the diving industry in the Gulf of Mexico for quite some time. This move is motivated not just because of the near term market share that we can capture and the rate increases and the profitability. That's part of it. But, I think one thing that the few clients that might have objected to it and the DOJ was not able to fully appreciate the benefits to the industry from this kind of a move, the Gulf of Mexico has been dominated by very, very old asset base.

Right.

Most of which were built back in the 1970's and early 1980's. We've looked from time to time at asset improvement programs. And have been unable to do it because you just cannot keep compete with these assets. You just commercially you can't do it.

Right.

The extra profitability that results from this will lend itself well for an asset rejuvenation program over time. I think the HSE improvements that can result from a -- let's call it a market segment that's no longer on its knees and unable to do anything can be greatly improved. I just see a lot of positive things coming from -- if we do have a -- I wouldn't call it a dominant role. I would be hopeful that we have a leadership role now in the Gulf of Mexico where we can start effecting positive change.

Sounds like too modest. But anyway, the last subject is with respect to the I guess production numbers that you quoted, Owen. I think if I heard you correctly, the end of October you're at a run rate production of about 86 MMCFD.

Correct.

Okay. I guess we averaged about 92 in the third quarter, if my math is right? Without the hurricanes, you were expecting to do something approaching 120 for the fourth quarter?

Yeah.

Correct. Correct.

Call it 40 shut in. Walk me through -- you sort of expressed some uncertainty as to the pace of recovery. But what do you think is a realistic expectation for that 40, which is shut in to come back on? What should we expect, what should we be modeling?

I think the missing one -- I do think there will be back over 100 million per day by the end of the year.

okay. That -- that is helpful. All right, guys. Great job, thanks.

Thanks.

The next question comes from Will Foley.

Good morning. First question was -- I was trying to get a sense of what -- if you could give us a sense of what the revenue contribution from I guess on all of these Marine Contracting acquisitions are finalized on a quarterly run rate at current pricing? What the kind of rough revenue contribution would be from the acquired assets?

Will, again I think what I've talked about previously these assets. is, you know, EBIDTA. I think we can generate an additional 50 million of EBIDTA on an annual basis in '06. Maybe that's a little conservative now with the hurricane demand. But I was expecting $50 million of EBIDTA.

Okay.

That will probably translate into about $28 million in operating income. $0.45 of earnings.

Okay. Then with respect to the storm repair work, how long do you guys anticipate that the storm repair work or storm-related work will last?

At least until the start of next year's hurricane season. I think certainly through '06 from what I'm seeing now.

We were -- we were -- I might give a little profile after Ivan. The first couple of months is spent inspection, then you have a period of 3 or 4 months of intense repair work. Then you have longer jobs that linger for as long as eight months. Then you have a mandatory regulatory driven inspection program you know for the hurricane path that has to be done. We were still involved with that when these hurricanes hit. So the impact from these is going to be at least that and I say at least because, you know, you have two hurricane paths. So the inspection work for sure, if not the repair work, will be, you know, well -- well into next season.

Okay.

If not into '07.

Okay. And last question would be, could you talk about your priorities in terms of use of free cash flow over the next 12 months?

Some I can't really talk about right now, because they are still in negotiations and not announceable. I can give you a generic run through of what our model requires. Around $50 million in CapEx. And that's $20 million for the construction fleet and $30 million to maintain the production rate from mature properties. And then we're looking at facility deals $50 million per year with a deal every other year. So the deal size around $100 million. That's another $50 million. And I might say the maintenance CapEx is 50 to $70 million.

Yeah.

And then on the production acquisition and field development side, I think we're looking at 150 to $200 million a year there. So we're looking at a total of 300, $350 million a year.

Okay. That's all I have. Thank you.

Thank you, will.

Our next question comes from Derrick Wenger.

I just want to elaborate on those capital expenditures. Was that 300 or 350 million, is that for calendar year '06? And what was the third quarter this year and calendar year '05, what does that shape up like?

The numbers that Owen was just quoting is '06 and beyond. That's kind of an annual generic capital budget that we are setting for ourself. For 2005, the third quarter was about $111 million. We expect the total for the full year to be about $624 million. I think I I went through the components in the opening. You can listen to the recording.

And then calendar year '06 would be roughly what?

Well, you know, it depends on what types of deals we get done. but I see it being in the $300 million range.

okay. Thank you.

Right now I'll say that some of the timing is a little up in the air because of the hurricane work. We have five fields that we acquired this last year, you know 30% in Telemark. We have got Devil's Island, Tulane, Bass Lite, and Tiger more recently. Those are all fields that are up for development going forward. With the loss of the rigs, though, some of the scheduling of the drilling programs and therefore the knock on effects of the development are a little up in the air, a little too early to be able to pin it down right now.

Okay. Thank you.

All of those fields are planning to come on, I believe, what Martin -- correct me if I'm wrong. Three of them in '06 and another one in '07 followed by a final one in 2008.

That's about right.

Total development costs on those is somewhere between 300 and $350 million.

Okay. Thank you very much.

The next question comes from James Stone.

Hi, I have a couple questions for you guys. First of all, Owen, can you talk a little bit about the schedule that you've got on those five PUD developments in terms of when you plan on bringing them into production and secondly related to that, can you just talk a little bit about the asset swap that you did -- that you announced this week?

Yeah. Martin, feel free to jump in here. I'll just tackle Tiger real quickly. We -- we had an interest in Bass Lite. We basically traded part of that interest for an interest in tiger. What that does is -- it's a value equal swap really. But it allows us to accelerate the timing of production coming onstream and it also allows us to diversify our production risk out of one reservoir and split among two. That was the thought process behind it. On the timing issues, correct me if I'm wrong, Martin, I'm going off your list here. Which is showing Tiger would be Q2 '06, Tulane Q3 '06, Devil's Island Q4 '06, Telemark would be the third quarter in 2007, Bass Lite the first quarter in 2008. Just bear in mind, those are real tentative numbers. Everything up in the air right now. I don't want to speak for some of the partners in these fields. Those are very, very loose timing numbers.

Okay. Just -- I mean, do you have a sense of what the initial production rates or the plateau production rates from those are expected to be?

We have some acquisition economics we've run. I don't think we've finished the detailed development plan and reservoir model. We can give you those if you want. I don't have them right here. We can give you better guidance on that.

Okay. Is that something we can get offline?

Yeah. Yeah. We'd have to. I don't have access to it right now.

Okay I don't want to pick away too much at the, you know, the hurricane impacts and stuff. When I look at the numbers -- when I look at the pre-hurricane numbers that you provided on the slide 18, it -- it looked like production was still going to come in at the bottom end of the range for the year anyway of the 40 to 45 range. I'm just wondering if you could -- you know, just kind of us give us a sense as to why that was going to be the case, what was causing you to come in at the bottom end, as opposed to middle or top end?

primarily -- you know the Murphy acquisition was a large acquisition for us and took a lot of our resources to get closed. Put us a little behind on our well work. Murphy had a relatively -- or a smaller component of proof producing. Yet there was a lot of production that can be brought on. And the hurricane now has compounded the delay in our well work program even further. That's where we were starting to fall behind a little bit. Total reserves were going up. But we had gotten a little behind on the well work.

and can you just -- since this is, you know, all of the rage on [INAUDIBLE] -- talk to us about what's going on in your cost structure on the E&P side in terms of your well work costs and how that's affecting -- how that's affecting your work with the lack of equipment, and things like that, how that might be affecting your programs?

I -- I don't really have enough information. I know on some of the field developments availability of rigs and the canceling of rig schedules that's going on right now has had some impact. I know Tulane the rig rate was higher than the original acquisition and economics. But still very, very commercial prospect. Beyond that I don't think that we were having as much trouble finding access to the assets, the third party assets to do the fieldwork that we're talking about. More of a constraint on our internal resources to get it done on top of closing these other acquisitions.

Okay. All right. And just -- when you look at the -- again, going back to this issue sort of third quarter and fourth quarter. You know you had sort of a record quarter here with the Q4000, is the outlook for the Q4000 and for the Intrepid in the terms of the mix of work they've got booked up going into the fourth quarter and perhaps going into '06 similar in terms of the profitability, revenue generation and profitability as you experienced in the fourth quarter when they both had such phenomenal results?

Yes, that's true, Jamie.

No real change there. It's not like you are going to be going off anything that was great to something that's less great.

No.

Okay. Well, you guys had a terrific quarter, thanks very much.

Once again, if you have a question, please press star one. Our next question comes from Jim Lewis.

Good morning.

Hi, Jim.

One question I had as it relates to the acquired assets. In the shallow water construction, diving, pipeline market, it's pretty clear that having the assets alone doesn't guarantee anything? Because I think two Companies with the same set of assets could generate wildly different results based on their bidding discipline, estimation skills, risk tolerance, et cetera. And, you know, candidly the Companies that you acquired the assets from clearly didn't have the same level of skills that you have in those areas. What is the bottle neck in terms of personnel in putting people who are good at those things, which is a strength of your Company, on a whole bunch of new assets? Imagining having that discipline, having the experience to be able to make those kinds of sound bidding decisions, risk controls, that kind of thing. A skill that is, you know, not universally available. So do you have enough managers, estimators, people who do that kind of thing to staff up that number of new vessels and be able to achieve the kind of results that we're used to seeing out of your operations?

That's a great question, Jim. And on the bidding and pricing, and risk management, those are the sort of things we can sort out immediately with the new assets it's more the performance of those assets in doing the work. Yeah. You're right in saying we have to bring in new personnel into our offshore population. And with this expansion going from 16 assets to 30, you know, mining 14 assets, the Stolt assets have come with pretty much full crews. And then the torch assets we managed to get most of the people we wanted to from torch to man those assets. But, I think the key is to make sure that the culture we have on the operating side of Cal Dive translates to offshore performance as soon as possible. And that means, you know, mixing the teams up a little bit across the fleet. So, you know, I think we'll get there, it will take a few months, but certainly I think by mid next year we can be there. On the sort of EBIDTA numbers I've been talking about reflect that ramp-up.

I was going to ask that. Because it seems like based on my back of the envelope calculation, in discussing the EBIDTA and EBIT numbers that you said might be a reasonable expectation for the required assets. Those clearly reflect margins that are substantially below what you've historically achieved in the shallow water, is that a fair assessment?

Yeah, that's fair. It does take into account getting into work achieving the right level of performance.

I'd like to add, Jim. I think the timing of these transactions is a bit [pertuative]. So if you remember, we had a very rough performing year in '02. And in 2003, we started over at Cal Dive and from the bottom up revamped and redesigned all of our systems and training , et cetera. I think the guideline that we have in place now for risk management and contracting principles, while they are flexible enough to allow a lot of creative thought, they are pretty clearly stated and easily adopted by new personnel. So -- hopefully with that strength, you know, the assimilation period here won't be that long. Plus, a lot of people that we are picking up, especially in the Stolt transaction, although they have -- they're very familiar with Cal Dive. In fact, a lot of them have already worked at Cal Dive. So that should make the transition a little smoother as well.

Okay. Well that's very helpful. Thanks a lot.

Thank you, Jim.

Our last question comes from Joe Agular.

Thank you. I was going to ask that question on the margins. That was good clarification there. The other question I had was, Owen, your comments. I don't to read too much in it. It made it sound like you were -- I think you said you were frustrated a little bit with where we were in the cycle. Almost reading between the lines sounded like you may be having some pause from the customer standpoint maybe? Is that -- is that what's going on? Are they trying to figure out how they're going to proceed with projects, either because of lack of vessel availability or pricing or something like that?

I -- it's a combination. I do see it on the side of producers in the divesting fields, for instance. Maybe that's because that's because I'm here in the North Sea which is going through a transition period in and of itself, but then Compounded on top of that, you've got a relatively high commodity price cycle. With some uncertainty how long it will hold up. You know do you settle now, do you divest now. Or do you hold on to it. You know there just seems to be an awful lot of very little decisive action. I think the regulatory environment over here in the U.K. is going through a transition period. Which has sort of been set back recently by some failures of small start up DNC Companies that have caused the regulatory environment to have to be sort of re-thought a little bit. But then on a broader scale, just getting deals done this year has been a little frustrating, the Department of Justice inquiry was a huge distraction from where we thought we would have been. We hoped to have the shelf deals done in Q2 and moved on to be able to focus a lot of management effort on getting some of these other things done, and to that extent, it is a little frustrating. Keep in mind also that I'm always frustrated. [ Laughter ]

Understand. I was just trying to put into context your frustrations with what, you know, such obvious optimistic comments regarding the overall state of the, you know, at least the contracting side of the business.

No, actually bottom line things couldn't be going better. I just wish they would.

That's great. Thanks. [ Laughter ]

We have no other questions.

Well thanks, everyone. And as I said before, we'll be issuing our formal guidance for '06 in a little over a month in December. And we look forward to sticking with you in the new year.