Helix Energy Solutions Group Inc (HLX) 2005 Q4 法說會逐字稿

Hello and welcome to the fourth-quarter report and investor's conference call. [OPERATOR INSTRUCTIONS] At the request of the Company, this conference is being recorded, should you have any objections you may disconnect at this time. I will now turn the call over to Mr. Wade Pursell. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to our fourth quarter 2005 earnings call for Cal Dive International. Thank you for joining us this morning. This does represent the last quarterly conference call for Cal Dive as we know it. You probably noticed, we announced a change in our name to Helix Energy Solutions earlier this week. This change will take effect Monday, March 6. Owen will discuss that more later. With me today is Owen Kratz, Chairman and CEO; Martin Ferron, President; Bart Heijermans, our Chief Operating Officer; and Jim Connor our General Counsel.

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.caldive.com, then investor relations page and click on the webcast presentation there. We will be referring to these slides as we go through the call this morning.

You can see on slide 3, our format for the call this morning. I will summarize the results and walk through a quick financial overview and then turn it over to Martin for operational highlights in our three business segments. Then Owen will wrap it up with a strategic overview and a discussion of our name change followed by a Q&A segment. But first of all, turning back to slide 2. Jim Connor has a rather expanded announcement for this quarter.

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 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. In November, 2005, our Board declared a two-for-one split of our common stock to all holders of record on December 1, 2005. This was the second such split in the last five years. All share and per share data in this release on the slides have been restated to reflect this stock split.

So turning to slide 4. On a split-adjusted basis our highest earnings per share total for a quarter was $0.53 which we had achieved last quarter. So we certainly sent out the old name with a blaze of glory with this quarter. $0.69 per share for the fourth quarter. Handily beats that previously set record by 30%, and more than doubles the fourth quarter of 2004 results. The strength of the business model was again on display in the fourth quarter, as well over half of the earnings was from the Marine Contracting activities.

You may recall last quarter we reported to you that we sustained damage to certain of our oil and gas production facilities in hurricanes Katrina and Rita, and we estimated total repair and inspection costs resulting from the hurricanes to be in a range of 5 to 8 million net of insurance reimbursements, and that we would record these costs and any related insurance reimbursements as they are incurred. Well, during the fourth quarter, we incurred about 7 million of pretax repaired inspection costs. No related insurance receivables have been recorded to date.

Our effective tax rate fell to 27% in the fourth quarter, resulting in a 33% rate for the full year 2005. This was primarily due to our ability to realize foreign tax credits and oil and gas percentage depletion due to improved profitability both domestically and in foreign jurisdictions, and implementation of the new IRC-199 manufacturing deduction as it relates to oil and gas production. This resulted in a benefit for the fourth quarter for previously unrecognized deferred tax assets. In other words don't count on a 27% rate going forward. However, we do predict that our effective rate for 2006 will be between 34 and 35%, versus the 36% that we had originally assumed in our guidance.

Last quarter, we were making a big deal out of topping 200 million of revenues in a quarter for the first time In the fourth, our a Marine Contracting segments topped this number by themselves. 264 million of consolidated revenues represents over a 100 million increase over last year's fourth quarter driven primarily by significant improvements in Marine Contracting revenues due to the introduction of newly acquired assets and much better market conditions. Gross profit margins of 36% were 3 points better than the year-ago quarter despite the $7 million of repaired inspections cost, due again to the improved market conditions in Marine Contracting. Also, a bottom line margin of 21% for the fourth quarter sets a new milestone for us. SG&A 21.2 million increased 7.1 million from the same period a year ago due primarily to additional incentive compensation accruals as a result of the approved profitability. This level of SG&A was 8% of fourth quarter revenues, which is 1 point better than the 9% a year ago. Equity and earnings, 5.3 million reflects our share of deepwater Gateways earnings for the quarter relating to the Marco Polo facility, as well as our share of Offshore Technologies Services Limited earnings which is the Trinidadian company to which we contributed the Witch Queen.

Looking at the full year 2006, turning to slide 5, our Marine Contracting segments are off to a solid start to the year. Despite the recent pull back in natural gas prices, we are reconfirming our recently announced guidance range of 2.30 to 3.30 per share for the full year 2006.

On slide 6, see how these results translate to return on capital which is probably our most important metric. With the strong performance of the fourth quarter, 22% return on capital, we ended up the full year 2005 with a 17% return on invested capital.

Looking at the balance sheet, slide 7. In the fourth quarter, we did acquire the Gulf of Mexico assets from Stolt Offshore. Total debt as of 12/31/05 was 447 million. This represents a 40% debt-to-book cap, and with 353 million of EBITDA for 2005, this represents 1.3 times trailing 12-month EBITDA. In addition, we had 91 million of unrestricted cash as of the end of the year. Most of these funds will be utilized for the final phases of the acquisition of the acquisition of the assets for Stolt offshore. The debt at 12/31/05 primarily MARAD and convertible notes is virtually all fixed with a blended rate of 3.75%.

Summarizing CapEx, total capital invested for 2005 was about 544 million. 155 million of that related to contracting services acquisitions, which was the Torch assets, Stolt's Gulf of Mexico business, and the Helix RDS acquisition. 233 million of that related to oil and gas production, primarily the Murphy acquisition, as well as the Deepwater PUDs and some well work, and 112 million related to production facilities. 40 million for the Independence Hub, our share of that, and also 72 million for the retirement of the debt on the Marco Polo facility. Then the remaining 44 million relates to vessel dry docks and canyon robotics additions.

So turning to 2006 CapEx real quick, assuming the Remington deal closes, we will invest over $1.5 billion in 2006. 300 million of that will be in Marine Contracting, including phases II and III of the Stolt acquisition, the new pipelay vessel Caesar and Q4000 drilling upgrades. 250 million for well work and deepwater PUD developments, and then 44 million for the completion of the Independence Hub. The remaining 950 million would be the cash portion of the Remington acquisition, plus additional Remington CapEx the remainder of the year. I now turn it over to Martin Ferron for operational highlights.

Thank you, Wade, and good morning, everyone. I'm going to start on slide 8 with an overview of Marine Contracting. Overall revenues for the fourth quarter more than doubled year-over-year to well over 200 million as Wade pointed out. The sequential increase was 40% over above what was an impressive third quarter. Around 45 million of the sequential increase resulted from the introduction of new assets that we acquired from Stolt and Torch for just two months of the quarter. The rest of the sequential increase came from continually improving market conditions. The integration of the Stolt and Torch resources was a major challenge that our people overcame during the quarter. They should take great credit for the way it went. How smooth it was.

Gross profit margins improved. Slide 9 now. Gross margins improved by 14 points year-over-year and by 1 point sequentially due to better utilization in pricing. The sequential improvement would have been better still without one off integration costs linked to the introduction of the new assets and the integration of the new organization. At 30% the gross profit margin is at least 10 points better than the next best company in the Marine Contracting peer group. The outlook for quarter one and beyond, we expect financial performance to improve further over quarter four due to a full quarter of contribution from most of the acquired assets and further pricing increases. We're hoping to beat the 2005 gross profit margin of 26% by around 10 points for the whole of 2006.

Turning to slide 10. Before I get into the Marine Contracting segments we thought we would show the actual vessels in the two segments of shelf and deepwater. So you've got a list there spanning slides 10 and 11, and I'm not going to go through these in -- one by one, so you can see the pipelay vessels and the diving vessels, and the shelf group, and also the pipelay vessels and the subsea intervention vessels in the deepwater group. And then we put some notes there just to accompany the table. So if you have got any questions on that, we can take it at the appropriate time.

Turning to slide 12, talking about the shelf Group. This is a group that's going to take the name of Cal Dive in the future. Utilization reached a record level due to the incremental demand caused by hurricanes Katrina and Rita. I think utilization for the active fleet was actually around 90% compared to 85% shown in the table there. For the outlook, we expect this level of utilization to be maintained at least through the remainder of this year as hurricane related inspection and repair work continues. The demand is so strong that we've negotiated term contracts for several assets, in what traditionally has been a very much a spot market. The longest of these term contracts so far is 18 months from quarter two this year, so hurricane-related work will last well into next year.

Strategic acquisitions update on slide 13. We did acquire the derrick lay barge 801, from Stolt in January, and promptly mobilized that to the Mexican markets. We actually sold 50% of it to a local company named Oceanografia and chartered the other 50%. They then have the option after thee years to buy the remaining 50%. The DSV Kestrel is expected to complete it's work with Stolt and Trinidad at the end of quarter one and then she will be acquired and deployed on a 12-month plus contract from a major operator here in the Gulf. During quarter four we also placed an order for a new portable sat system, which already has a contract, which will start in quarter two. We also purchased a sat -- an existing sat diving system from outside the region, and already placed that on contract.

Turning to Deepwater on slide 14. You can see there the split Deepwater utilization numbers in the pipelay, well operations, and robotics in the transparency regions. Pipelay actually utilization increased by 14% year-over-year, due to improved market conditions, particularly for tie-back projects. Intrepid had a full quarter of utilization and the Express worked nearly every day after entering service in late October. Both well intervention vessels had near full utilization, and robotics group rounded off a great year with a record fourth quarter.

Slide 15, the outlook for Deepwater Contracting. Very strong deep water pipelay market will likely result in both the Intrepid and the Express being near fully utilized in '06, apart from the 60 day upgrade program for the Express. Around 100 days of our utilization will be achieved on internal projects. On well intervention both the Q4000 receiver will have very strong order books, and we should see a lot better pricing from the Seawell this year in the North Sea. At least a 10 point improvement, as she works in the spot markets. The outlook is very bright too for the robotics group with near-term prospects boosted by continuing hurricane-related repair work. That's it for Marine Contracting.

Turning to Production Facilities on slide 16. Fourth quarter results from Marco Polo were a little bit disappointing in the quarter. That's because of the first K2 well was shut in for mechanical reasons for part of the quarter. Output from that well will likely be resumed in February, following the fix of a downhole safety valve. So there will be some further impact in quarter one due to that issue. However, the outlook remains bright, the first K2 North well commenced production in mid-January as planned, and the further six wells will be brought online by the end of the year, from the K2, K2 North and Genghis Khan fields. Despite the slight shortfall of tariff income in quarter one, we still expect equity income for the year to fall in the range that we issued in December of 27 to 32 million. The Independence Hub is still on track for mechanical completion by the end of the year with an enhanced production capacity of 1 Bcf per day, up from 850 million a day. This higher capacity will lead to accelerated cash inflows, and therefore a better MPV on the project.

Turning to Oil and Gas Production. The fourth quarter story was one of lower production caused by the hurricanes, partly offset by higher commodity prices caused by the hurricanes. Our people did a great job, again, in restoring production, much quicker than most other impacted companies, and therefore, we enjoyed the higher commodity prices with higher production.

As we had mentioned on slide 17, we did spend $7 million in bringing our production back, and if you take that into account our gross profit margin would have been 61% for quarter four which is in line with what was achieved in 2004.

Slide 18, production was 1.7 Bcf less than the previous quarter and around 2.5 Bcf below our expectations prior to the storms. Realized commodity prices were 17% higher than last quarter and 52% higher than those achieved in the fourth quarter last year. Natural gas made up 54% of the third quarter production. Gunnison production was actually pretty flat to 2.1 Bcfe and oil made up 55% of that production. The outlook for oil and gas is approximately 90% of our pre-hurricane production is currently back on-line, and we estimate total production for quarter one to be between 8 and 9 Bcfe, and reconfirm our guidance for the full year of 2006 to be between 44 and 47 BCFe. So obviously the production is back end loaded during the year.

Turning to slide 19. We ended 2005 with 225 Bcfe of proven reserves, that was up from 116 Bcfe at the end of '04. That's after producing 33 Bcf during 2005. Therefore, we actually replaced well over three times our '05 production during '05. So a great year in terms of reserves. 45% is proved, 55% is PUD. 60% natural gas, 40% oil, and we value the PV10, those reserves at about $1.1 billion. So at that point, I'll hand over to Wade to talk about the hedges.

Yes, slide 20 simply shows our positions that we have in place as of yesterday. As you know, we attempt to try to hedge out at least a year, trying to hedge up to 50% of our proven developed production. This simply shows those positions. I will tell you that these positions equate pretty close to 50% of our proven developed production as it currently sits. As Martin said, we'll be adding production throughout the year and as we do that, we will layer on hedges from that point. Turn it over to Owen for name change and strategy.

Well, I'm going to try and be brief today by just combining the discussion on name change with the strategic overview, because the two go hand-in-hand. Let me start by restating again that this in no way a change in direction for the Company that we're taking right now. We are not becoming a typically E&P company, which are some comments that I've gotten. I think that sort of discounts the fact that our strategic plans, this was a $1.4 billion acquisition of Remington here, but to counter that, we also have plans for in excess of $1 billion on the contracting side, adding services and assets.

Now, before I go any further, to make Jim here happy, I'll throw in my own disclaimer, because I'm going to give a lot of forward-looking comments here that have been discussed, and are a part of the model, but have not received Board approval. But I do want to be open with everybody about what we are trying to do with this Company. We're basically continuing the development of a vision and a model that was set out well over a decade ago. It's taken us this slow path of development, because we've tried to work within our balance sheet but as aggressively as the visibility of our cash flow allows us to.

What we are is a hybrid between a service company and a production company, with a focus on the desire to be a marginal field developer. As opposed to more traditional service contractors that have a focus on single-service niche, we have and are accumulating a set of services with two common characteristics. First, there has to be an open market niche for them to be applied to, with some competitive advantage and for sales directly to the market. And second, they have to make a material contribution to unlocking the value from marginal reservoirs when applied with the right methodology. The reason that we want these services is because of the critical nature of that right methodology. We need to be in control of how to apply these in order to lower the cost. And the objective here is to achieve at least a 20% reduction in F&D costs relative to what's possible through a typical E&P model.

If you look at the services that we will have here when our toolbox is full. We start very upstream with reservoir technology this last year saw us increase the capacity of that through the acquisition of Helix RDS and Remington as well. This gives us prospect generation, reservoir modeling, and well design at the upstream levels. We are now in the process of installing slim bore drill equipment on board the Q4000, which will then give us an upstream element of drilling to go after our own prospects with. We then bring reservoir technology service group back in with appraisal, the ability to do our appraisals. We do our own development engineering in-house through the facilities group. We then have the ability to provide the facilities. We intend to add a fleet, actually of small floaters to apply to -- and I'm talking long term here -- but to apply to our own prospects, as well as making them available to the open market. We obviously have the construction side, which includes the robotic diving, pipelay, moorings, risers, and manifolds. Everything that you need to do what is typically referred to as surf for subsea tie-backs.

We then do our own field operating. We -- through our ERT group. We have then the life of field services through our construction assets to maintain the fields. We also have the well intervention. We're the global leader in rigless well intervention for subsea wells, and that allows us to use well intervention as a proactive means of enhancing production rather than just a remedial service. And then we have the reservoir technology entering back in here as the fields age with our reservoir management, and we've got a long-standing track record of being able to enhance and prolong the production. And followed finally by the abandonment, which we're well known for our ability to manage the abandonment costs.

Basically, we've put together a series of services here, cradle to grave. The next -- in the next two years, you'll see us with the addition of more drilling capability, and as I mentioned, the smaller floating production systems to either be made available to the open market, or on our own field. We're also planning some expansion of the services that we currently have in the North Sea area in Southeast Asia, which could possibly mean new assets in those areas as well. It boils down to a lot of growth ahead on the service side of the Company.

To help facilitate this growth, we are looking at likely spin off of the -- of a minority interest in the shelf group. And the reason for that, I'll get to in a second, but first let me turn then to the production side of the Company. As opposed to a traditional E&P company, we have a more broad array of skill sets to be applied to our production than most -- than a typical E&P company. We have a more subsea reservoir technology, the varying skills that can be applied compared with most producers our size or smaller. And we have the more downstream development capacity by far. We have the key significant development assets, and we control the costs of the development then, as opposed to the cyclical rise and fall associated in the marketplace. We also control the scheduling, and most critically, we control methodologies.

We do focus on marginal reservoirs, and by marginal, I'm talking about small fields, stranded fields, mature fields, or when existing producers are constrained for one reason or another on access to assets, technology services, or capital. We believe that our advantage lies in these marginal areas because of our capability to control the visibility of the costs, and the relative level of F&D costs. Like I said earlier, we do believe strongly that we have the ability to lower F&D costs by 20% or more compared with a typical E&P model.

Following the Remington acquisition, what we now have is a very solid portfolio. Other contractors and service companies talk about the backlog that they have. This is our backlog, and I think as Martin mentioned last time, just the Remington portfolio alone is over $1 billion in services backlog. That does not count the portfolio that already existed in Cal Dive at the time of the acquisition.

We are now establishing -- well along in establishing further deal-making capability. Setting up the infrastructure in both the North Sea and in Southeast Asia, and basically, we're at a point where we have no pressures going forward. We have a good portfolio. We've got the infrastructure being put in place. It's a high commodity price environment right now, and we have no pressures to have to do a deal. So we're able to sit back and take prudent action in assessing which deals we look at, and which ones we get into from here on.

I did mention the spinoff on the shelf group. The shelf group has its own growth potential, but that growth potential lies along the path of capturing greater market share on a global basis through either organically or through consolidation. We'll retain critical -- we'll control, I'm sorry, we'll retain the controlling interest in this group, but we also don't want to constrain its growth. And by that I mean, our focus with our other service lines is to provide less rather than more services on unlocking the value in the reservoir.

We don't seek to grow individual service lines volumetrically beyond a point that can be -- have a sustained utilization rate of between 30% and 40%, solely from our own portfolio, and that's in order to avoid the cyclical downturns that are always present in our industry. For that reason, we don't really feel like constraining the growth potential of the shelf. The difference in -- because of the difference in the growth methods. In the parent company, the growth is achieved through cumulative application of the services to our portfolio, whereas on the shelf model, it's the more traditional service contractor growth, which is to expand, volumetrically capturing market share.

So with that in mind, that explains why we're doing the spinoff of the shelf group. The name change occurs for two reasons. One, it's appropriate that the Cal Dive name goes with the traditional core business that we've been known for through time. And the parent company, it's time for us to try to gain the recognition for the way that we do generate the growth that we've seen over the last two decades. We do believe that the name Helix is appropriate because of the nature of the -- it's a double-stranded structure, and we have a double-stranded structure in Cal Dive being production and services. Helix also is the structure of D&A at the beginning, and hopefully, this is the beginning of something not only unique in the industry, but will become an industry standard over time.

So having said that, I'll move on to slide 23, which is the objectives for '05. The report card is actually -- you would think that this would all be just checks on this year, consistent with the report cards of the past years, when you'd look at the amount of growth achieved and the results that have been generated, but it's actually a mixed bag. Starting with Marine Contracting, we did achieve both of those goals pretty handily. Under oil and gas, though, we fell short. You can see 33 Bcf versus the 40 to 45, and that was basically hurricane impacted. It was also impacted by a delay in the planned well work that was scheduled to be done, and that was caused of course by the need to focus our resources an repairing existing production. We did make a mature property acquisition of course, and we made several PUD acquisitions. Like I've already mentioned, the portfolio that we have now.

On the production facility side, we missed the first one. Again, that was hurricane impacted at Marco Polo there, the 11 million in equity earnings, versus the 22 to 27. That's a timing issue, and Martin has already covered that. The next two bullet points we achieved the start-up for production from K2 did occur. Of course, it was slow in coming, and the ramp up is limited, again, because of the hurricane impact. And the last one identifying to progress the next opportunity, we are in the process of building the Independence Hub. We're looking at a facility for the Telemark development, and as I mentioned earlier, we are looking at building a floating production system for application to either one of our other portfolio objectives or in the open market. So that is accomplished.

On the financial side, the earnings, of course, we met. The equity dilution, we did not. I will say, though, that I treat equity as the most precious currency to use. I -- we don't use it lightly. We do not use -- we do not consider using equity as our currency just when we have an accretion -- a positive accretion in a deal. We have to go way beyond that. It has to actually increase our growth rate over the long-term before we would use it, and this year we saw the opportunity to significantly increase our growth rate potential over the next few years, and that's why we used the equity here.

And on the safety side, it's -- I'm pleased with the trend. We did have an unfortunate incident this last week but '05 was a continuation of the trend that we have seen over the years and we are dedicated to making sure that that continues in the future. So having said that, I will turn it back over.

[OPERATOR INSTRUCTIONS] Our first question comes from Marshall Adkins, Raymond James.

Hey, guys. Owen, maybe I missed it, but do you have the '06 and '07 projected slides in the presentation?

No, actually, Marshall, I don't, and I apologize.

I'm just kidding, Owen, I'm not going to pin you down on that one. So here's -- a couple of just quick ones here, and I'll turn it over to someone else. The acquisition of Remington, can you give us kind of an update of how that is going? Any second thoughts? Obviously, gas prices have come back a little bit. What's the latest on that?

Well, Marshall, no second thoughts at all. Obviously, didn't buy Remington for short-term gas prices. Everything is going smoothly, as far as the acquisition is concerned. We should close in quarter two, as expected. So no change. Everything is going fine.

I think I would just ad in conjunction with Remington, if you remember, we did have part of the deal to lay in hedging. We have been successful in laying in some hedges.

And they agreed in the deal to -- we can't layer the hedges in, but they agreed. Remington agreed to help us lock in our economics by putting some in, and we can't speak to any specifics on that, but we can tell you that they have been doing that, and you can query them on their conference call if you want more specifics.

Right. That's what I remember and obviously the hedges you put in place are proving to be very wise at this stage. Huge return on capital invested. If you go back to '02 where you were mid-single digits and now you're 22% plus. With the international expansion and the growth you've seen there, where do you see that return on invested capital going? Is it going to keep drifting up or are we going to flatten out here in the low 20% range?

Well, Marshall, if you go back to that '02 period there's lessons learned. We were very aggressive on buying construction service site assets in the period prior to that. Thinking that the big party was going to kick off, and of course, nobody showed up on time. I'll just tell you, it is a lesson learned. Another 20, 30 years, I'll get this down on the timing of the capital expenditures to try and smooth that a little better.

I do see it leveling off here. In fact maybe even retracting a little bit as we get some of these development projects up and going. We have got one to two-year time periods before we start seeing the results. So it definitely is not -- I would say is not going to continue to climb like that and it's more likely to either level off or retract slightly. As you know, our corporate goal is -- stated goal is greater than 10%, but internally, we look for 15% as being the normal level.

That's why I had asked the question, obviously performance pretty stout there, and it's good to hear you're going to be around for the next 20 or 30 years running the Company. All right. Guys, great quarter. Thanks.

Thanks, Marshall.

Our next question Roger Reid, Natexis Bleichroeder.

Good morning, gentlemen. A couple questions. You mentioned impact of integration costs in the fourth quarter, did you give a specific number there? Or at least an -- we talked about sort of a 10% margin at one point. I just wanted to see if we're talking about the same thing or a different thing here?

It's not a real material number, Roger. It's well over $1 million, but I would just point out that it slowed things down a little bit, too, putting 10 vessels to work in a short period was a major challenge. For us to achieve similar margin as we did in the third quarter, I think was a great achievement.

Okay. And maybe looking a little more forward, then. You're substantially upgrading the Caesar, you are talking about as you move forward once the Remington transaction closes, potential for deepwater projects in terms of building platforms, et cetera, and then the Q4000 switches to a drilling mode from a typical construction and you've mentioned before also like a Q4001 or something along those lines. Owen, are you comfortable at this point, or do you need to go out and do something in order to get enough management skill internally engineering-wise to take on that much at this point?

No, I feel pretty comfortable right now with the infrastructure additions that we've made on the service side of the Company. We do have the team in place right now doing the engineering on that, and feel pretty comfortable going forward. And I will say that the engineering is all we're doing right now. Of course, the trigger that would kick off the building of the next Q-type vessel would be the extent of the success of the first one in the drilling mode. So that would probably come sometime next year.

Okay. Thank you.

Our next question.

James Stone. Hi, guys. Good morning. I'm wondering if, Martin, you can just talk a little bit about the magnitude of price increases that you've been seeing in the Gulf of Mexico for contracting services, and perhaps if you could maybe split it out a little bit between the shelf business and what you're seeing in deepwater? If there's a difference between the two?

Sure. We went into 2005 expecting gross profit margins of 13 to 15%, and we achieved 26% for the year as a whole. And then in the third and fourth quarter, we got up to 30% across the total Marine Contracting segment. Obviously, margins were higher with the shift in shallow water area, because of the impact of the hurricanes. So it was probably nearer the 40% mark there overall. We mentioned a few times during the year that the Seawell was a bit of a drag on the deepwater segments. We only achieved single digit numbers there. I'm talking in this report about the Seawell's numbers increasing by at least 10%, up to around 20 during 2006, which will be a big help. Deepwater overall, we are seeing increases, but not on a step change basis, more on an incremental basis. We're pushing pricing project by project. So overall, I'm expecting a 26 to get to 35, 36 during 2006.

So -- but it sounds like the big delta in '06 then is really bringing the deepwater margins, including the Seawell, bringing the deepwater margins up closer to where the shelf is already running?

Yes. Correct.

And when you -- just to get a little bit of clarity. You said that the shelf ran around 40% in the fourth quarter. How much of that -- I know maybe it's a little hard to figure out, but you not only had better pricing in the year, but you also had extraordinarily good utilization, particularly in the second half of the year. So just trying to understand how much of that is price versus absorption because you had such great utilization.

Yes, we did have good utilization in the third and fourth quarter, but -- and it is a little hard to differentiate between utilization and pricing because of the new asset additions. With ten new assets coming into the mix. All I can say is that normally, in the shallow water, margins rarely fall below 25, 30%. So with the increased utilization and the better pricing, we managed to get up -- our pricing up by 10 to 15%. I think you'll see that go up higher in the first quarter.

Okay. And then I know that the Seawell, you should have had some experience, I guess, in the fourth with the Seawell post its previous contract. Did it live up to your expectations after it came off contract?

It sure did. Obviously the North Sea is a seasonal area, so the fourth quarter is never really strong. But the Seawell did come off its term contract in December and did very well. So yes, we are seeing the impact that it has moved to the spot market already.

My next question is on the Q4000. Correct me if I'm wrong, but it seems like, as good as that vessel has been for you guys, that it seems to have an awful lot of repair time year-to-year, thruster problems and things like that. Is there something about the vessel that requires it to have so much down time year-to-year? Seems to have a lot more down time than a standard semi-submersible drilling rig. Which I would think would have similar drilling conditions.

I can't really comment on semi-submersible DP vessels, but the Q4000 has no more down time than any other vessel that we have on DP basis. We did have a scheduled dry dock last year, and unfortunately from coming out of that dry dock, we worked every single day for about 7 months.

Right.

And developed a thruster problem, which unfortunately with very sophisticated vessels happen from time to time. But that thruster is repaired now and we're getting back to work this week. So hopefully we'll have plain sailing through the end of the year. Unfortunately, we do have some down time, and therefore, we never plan for 365 days utilization of these assets.

Just to add a little aside here, Jamie, on DP vessels in general, and I don't know if it's Q4000 or rig versus other vessels, but just thrusters, just as a point of interest, there's two types of thrusters, one is variable pitch that runs at a constant speed, and the other one is AC. The Gulf of Mexico has a high turbidity and therefore, a lot of sediment which wears out seals in a hurry. Variable pitch thrusters have seals that are suspectible to that. ACs are less, but AC thruster technology was very undependable. About the time that the Q4000 came about, the AC technology was increasing but we decided to go with the lower capital cost and the greater dependability of the variable pitch system. But they do -- not just the Q4000, but any variable pitch thruster system has a little more trouble in the Gulf of Mexico than an AC-type thruster does.

Okay. That is pretty helpful. And just -- I just lastly want to talk about the performance that you're seeing out of the Express in the first two months that you operated it, as well as, how you see that vessel post the additional upgrade that you're going to be performing on it this year? And maybe give us a little bit of details to what you're planning to do with the vessel.

We were very pleased with the vessel for the two months it operated in the fourth quarter. We actually did some pipe and lay with it when we were expecting just to do hurricane-type repair work. It's capacity is limited right now. Therefore, the type of project that we can target are smaller ones. We do plan to increase the capacity of the pipelay system here probably in the second or third quarter. And therefore we would be able to take on bigger projects than the Intrepid currently does. So I am very pleased with it as a marine vessel. Once we improve the pipelay system, it will be a great addition to the fleet.

But are you using the pipelay system that was designed on it, in terms of being able to spool offshore or you--?

No. No.

--using it conventionally with a spool base?

Conventionally with a spool base.

All right. Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question.

Martin Malloy, Hibernia Southcoast. Good morning. Congratulations on a good quarter.

Thank you.

Could you update us on the timing if there have been any changes in terms of the timing of the deepwater projects with the impact of the hurricanes on the Gulf of Mexico? If they shifted to the right at all?

No. There's been no major shift than we reported last time. We're on the Chilean project right now drilling, and we expect first production from it in the fourth quarter. Then we move on to Devil's Island drilling, probably at the start of the second quarter. Production from it will be first quarter next year. And then the Tiger project will be third quarter '06. Just to complete the list, Telemark, we're looking at problem probably second quarter '08, and Bass Lite, second quarter '08. So I think that's the five projects, yes.

And then on the cost side for the oil and gas production, can you give us any guidance in terms of LOE and DD&A rates as well as impact of higher insurance costs?

Well, you can see from looking at the fourth quarter results, our DD&A rate is now running above $2 in Mcf up in the $2.30 range. Look for that to continue. On the LOE side, running about -- looking at just a blended LOE rate, because it can be quite different between certain fields, but blended rate around $1.50 to $1.75.

Thank you.

Thanks.

Out next question.

Phil Dodge, Stanford Group. Good morning, everybody. I have two questions. First, somewhere in my notes, I have your expectations for EBITDA and -- EBITDA on Torch and Stolt in 2006. I gather they are probably going to be better than that. Can you give us an idea the order of magnitude of how much better they are than you had in the original expectations?

I would say around 25 million better. Our original EBITDA estimate for the total shelf group was sort of around 85 to 100 million. Now, we think in terms of 100 to 125. So between 15 and 25 better.

And that would be on the Stolt and Torch assets that have come in?

Correct.

Okay. And the other question is just, a little hard for me to size up the timing of the post hurricanes repair work. Clearly, it's running much longer than in past similar experiences. Will that related to the 2005 hurricanes tend to wind down during 2006? When would you expect to reach that inflexion point?

That's a good question, and it's a little early to say, because we are still doing a lot of inspection work. I mention in the prepared remarks that we are see some term contracts. One of the vessels is going to go on 18-month contract with a major operator starting in the second quarter. So certainly that operator sees repair work from the two storms of last year running to the end of '07. And I see some other operators with similar issues. But obviously the level of activity that we saw in the fourth quarter probably won't be sustained beyond the end of '06. It will wind down to an extent.

Yes. You're not expecting much fading in '06?

No.

Okay. Thanks, Martin.

Our next question.

Jason Selch, Magnatar. Yes. Could you repeat what the year-end debt level is?

Yes. It's 445 million.

Okay. So when you do the spinoff of the shelf group, you're going to apply that to paying down the bridge on the Remington acquisition? Is there a range of what you expect to generate from that? And what's the timing on that offering?

Yes. We really can't speak to that. We haven't -- we're not into that process, and once we are, we'll announce that, so I don't think I can say anymore about that.

Okay. So it's not a final deal.

Oh, no.

It's ust your intentions?

Correct.

Okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

While we have a break here in the questions. If I could just go back for second to the one that Marshall asked referencing page 6 on the return on capital. I would just like to make a point that I think it's real apropos for why this Remington acquisition made so much sense for us. Following the IPO in '97, we did go on a big capital spending period building the Q4000, the Intrepid, the Eclipse. A lot of that was trying to be ahead of the market, or raise us up to a global level at the time when the deepwater was just kicking off. Unfortunately, the cycle when we came out to the market with these assets, we were in a down cycle, and we did not at that time have the portfolio of projects to support the utilization internally, and you see the impact of the return on capital in '02 and '03.

This time around, we do have some pretty ambitious plans on growing the service side of the Company. Obviously, the drilling on the Q4000, the next Q vessel floating production system, et cetera, and we've added some vessels here lately. Instead of relying on the market, it was prudent to us to go ahead and build the portfolio ahead of the assets, and that's just to give you a flavor, that's one reason why the Remington acquisition at this time makes so much sense in our overall strategy.

Any more questions, Keith?

Yes, sir. We have one more question from.

Joe Agular, Johnson Rice. Thanks. I wanted to actually follow up on that comment you just made, Owen, because it sounded like from your description of where the Company is headed, one of the things that you mentioned was the net effect of lowering the F&D costs. On particularly, I guess marginal fields by having the full suite of services, and I was just wondering maybe if you could tie that back to some of the return comments you just made? Guess that's the ideal way I guess that you could boost your returns.

I'm trying to think this through. The way that our returns are generated are pretty straightforward on the application of our asset, except when they apply to our own projects. Which is where we have to do an elimination on -- of the profit, and then that lowers the cost basis of the development, and then it flows through the P&L over time through a lower DD&A rate. But not trying to confuse the issue. Where we're talking about lowering the F&D cost is in a direct comparison, not through any kind of an accounting change. By having the assets, number one, we know what our costs are to operate the assets today. We know what they're going to be five years from now, roughly. So we're not subjected to cyclical rise in demand. Like right now the demand in the market has got all of the assets very high for developments. You're actually seeing develops being canceled or not sanctioned because of the development costs going up, the drilling costs going up. We won't be subject to that.

Therefore, during -- especially during high cyclical periods, our costs should easily be greater than 20% lower than typical F&D costs. Second tranche of where we control the costs is in the methodology. We do things a little differently than what has over the decades become industry standard. For instance, we will lay single wall line and bury it, rather than laying pipe and pipe to get the same thermal flow assurance characteristics. We use well intervention vessels to proactively work subsea wells rather than just remediating them.

If you look at DRT's track record over the last 17 years, we've increased the economic return from the reservoirs something like 40% over the acquisition economics and that's through working the reservoir harder through well work. One of the reasons we fell short on our production rates this year was the delay in the well work. So you take all of the little special methodologies, and the difference of philosophy of applying these critical assets to fields and the result is lower F&D costs, enhanced production and longer longevity, pushing out the abandonment liability. All of those cumulatively is where it generates the high return on capital.

I had another question regarding the deep water market in general. The -- given some of the recent announcements of the expansion of the drilling rig fleet, the major commitments that are being made to new exploration programs. Have you all done any analysis on what the market for construction vessels might look like in the next five years or so? Whether we're short vessels? How many short we might be? That type of thing?

Well, let me--.

And if I could--.

I may say some things here that the investment community may frown on, or the industry players would disagree with. But I tend to become cautious during demand -- high demand cycles like right now. I think there's a lot of vessels being built. There are certainly a lot of vessels that have changed hands. The price spec for acquiring vessels is at a very high level right now. I never underestimate our industries ability to oversupply, but that's just because we manage for the downturns.

I will say that we probably lost out on the -- on some opportunity during this cycle, and we knew we were going to. There were vessels available and work that we've actually turned down just because long term we didn't think that that level of assets was sustainable. Given a view of the overall market, one thing that does concern me, there's an awful lot of downstream assets coming to the market. And the broader picture, I would say that it's still not enough. There needs to be more capacity. But if you then -- and that's just on a supply and demand basis in the oil and gas. But then if you start looking at the potential bottlenecks, I get a little concerned. There are drill rigs being drilled, but I think drill rigs stay constrained for quite a while. With the cash that producers are generating and the tax environment, I could easily see the drill rigs being allocated towards exploration rather than development, which would then cause a bottleneck for downstream service contractors. Given that, we're tending to error on the side of caution, rather than going out and just over adding to our asset base. We are letting our own portfolio dictate the level of asset that we hold. Appreciate that response.

I appreciate that respond. And I guess one more question, if I could, and that is -- if the Remington acquisition plays out as you hope it does over the next few years, how would you -- I don't know if this is a fair question or not but how would you see sort of your assets that you have in-house right now on the contracting side split out between working for sort of the in-house projects versus third party? Is that a fair question?

Yes. On a full cycle basis -- that's a very fair question. We size the portfolio and the number of assets we've got to a level consistent with a full cycle 30% utilization rate. That's not to say during times like right now high demand, we won't shift, and we're working probably less than 10% of the time on our own projects with our assets. But if you go back a few years during a slow period, that same level reached approximately 35, 40%. So depending on where we are in the demand cycle, and this is one of the things about our model that it's designed to do is to smooth the utilization and smooth the cycles for us. It will swing high and low, but overall, a blended 30% is what we shoot for.

Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] I am showing no further question and would like to turn the call back over to Mr. Pursell.

Thanks, everyone, for joining us this morning and we look forward to talking to you again soon.

Thank you for participating in today's conference call. Everyone please have a great day.