Helix Energy Solutions Group Inc (HLX) 2006 Q1 法說會逐字稿

Welcome and thank you for standing by. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I would like to turn the meeting over to Mr. Wade Pursell. Sir, you may begin.

Thank you and good morning, everyone. Welcome to the first-quarter 2006 earnings call for Helix Energy Solutions. Thank you for joining us this morning. With me today is Owen Kratz, our Chairman and CEO; Martin Ferron, our President; Bart Heijermans, our Chief Operating Officer, and Jim Connor, our General Counsel.

Hopefully, everyone has in front of them the copy of our press release, which we released last night, and the slide presentation, which is linked to the press release. If you do not, you can go to our Web site, www.HelixESG.com, then Investor Relations page and then click on the Webcast presentation there. We will be referring to these slides as we go through the call this morning.

If you turn to slide 4 of the presentation, you will see the outline for the call this morning. I will summarize the results and walk through a quick financial overview. Then, I will turn it over to Martin for some operational highlights in our contracting services segment. Owen will then cover the highlights in the oil and gas production segment and then wrap it up with a strategic overview, followed by the Q&A segment. But, first of all, turning back to slide 2 and 3, Jim Connor has an important announcement to make.

Good morning, everyone. As noted in our press release and associated presentation, certain statements therein 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, 2005, filed with the Securities and Exchange Commission.

Thank you, Jim. Now, turning to slide 5, the first quarter of 2006 saw us achieve earnings of $0.67 per diluted share. This is more than two times the results achieved in the first quarter of 2005, despite taking a $20.7 million pretax charge or $0.16 for unsuccessful drilling at the Tulane prospect. Late in the first quarter, we experienced a mechanical failure at Tulane and further analysis resulted in the abandonment of the well. [We've grown] of successful efforts, [mess] of accounting, we wrote off all of our drilling costs relating to this well. We will continue to evaluate the various options with the operator for recovering the potential reserves, and Owen will speak more to this when he covers the oil and gas production segment later.

Now, turning to slide 6, not too long ago in 2002, we topped 300 million in annual revenues for the first time. We almost did that in the first quarter of this year. 292.6 million of consolidated revenues represents an 83% increase over last year's first quarter, driven primarily by significant improvements in contracting services revenues, which is the maroon boxes on your slide, due to the introduction of newly-acquired assets to the Stolt and Torch vessels and improved market conditions across all business lines within contracting services.

On the right, you see gross profit. Gross profit of 102.3 million essentially doubled the 51.9 million achieved in last year's first quarter. Gross profit margin is at 35% or 2 points better than the year-ago quarter, despite the Tulane charge. Without this charge, margins would've been 42%, driven again by the significantly-improved market conditions in contracting services.

SG&A of 21 million increased to 8.2 million from the same period a year ago, due primarily to increased overhead to support the Company's growth over the last year. On a percentage of revenue basis, SG&A actually improved year over year from 8% last year to 7% in the first quarter this year. Equity and earnings, 6.2 million, reflects our share of Deepwater Gateway's earnings for the quarter, relating to the Marco Polo facility, as well as our share of Offshore Technology Solutions Limited's earnings, which is the Trinidadian company to which we contributed the Witch Queen last year.

Regarding the tax rate for the quarter, the effective rate was 34.1%, which is nearly 2 points less than the 36% of last year's first quarter. That's due primarily to the improved profitability in all jurisdictions driving the Company's ability to realize foreign tax credits.

Looking at the full year 2006 and turning to slide 7, our original guidance for 2006 was $2.30 to $3.30 per share, due primarily to the continued strengthening of the contracting service markets. Even with the disappointing Tulane charge in first quarter, we are raising the lower end of our guidance for '06 to a revised range of 2.70 to 3.30. You can see in the chart on slide 7, this reflects growth over 2005, resulting in at least 51% growth up to 85% growth.

On slide 8, you see how these results translate to return on capital, probably our most important metric. Notice, we ended 2005 with 17% return on capital, and we are off and running in 2006 at a 21% ROC pace. As a reminder, we compute this based on after-tax earnings before interest charges.

Looking at the balance sheet, see slide 9. During the first quarter, we completed the second and third phases of the acquisitions from Stolt Offshore and also bought the Caesar. Total debt at the end of quarter was 445 million, essentially the same as that at year-end. This represents 37% debt to book capitalization. With the 425 million of trailing 12-month EBITDA now, this represents about one times trailing 12-month EBITDA level.

Summarizing CapEx real quick, the total capital invested in the first quarter of 2006 was 150 million. 126 million of that related to contracting services with the remaining 24 million for oil and gas production. Included in the contracting services amount was the acquisition of the Caesar and the final phases of the Stolt acquisition, which was the DB 801 and the Kestrel as well as some progress payments on the construction of the Independence Hub. Oil and gas production CapEx related to well work on the shelf and some costs related to deepwater pipes. Projected CapEx for the remainder of '06, excluding Remington, is 442 million, which should be funded with cash flow from operations.

With that, I turn it over to Martin Ferron for contracting services highlights.

Thank you, Wade, and good morning, everybody. I'm going to start on slide 10. In summary, we were extremely pleased with the results for the contracting services business because performance was at the very high end of our expectations, our guidance for the year. Overall revenues more than doubled year over year and increased 9% sequentially. The improvement resulted from a full quarter of contribution from the acquisitions we made last year -- you know, the Stolt assets, the Torch assets and Helix RDS. You might recall that we had two months in contribution from Stolt and Torch in quarter 4 and just one month from Helix RDS. Here, we had a full quarter of contribution.

Turning to slide 11, gross profit margins improved by 15 points year over year and by 6 points sequentially. Therefore, it's pleasing to see that we turned two-thirds of the 9% increase in revenues into profit. So, it shows you the impact of the pricing that we're pushing on a daily basis here. So, margins at 36% are already at the top end of our forecast range.

For quarter 2 and the rest of the year, we expect further improvements in performance, again driven mainly by pricing. This trend should continue for at least the medium-term, as we are already biding well into next year and beyond, gradually increasing pricing.

Looking at each segment of contracting services now starting on slide 12, we present to you for the first time the results of Helix RDS, our reservoir and well technology company. Both revenue and gross profit were in line with our expectations in this first full quarter of business. The outlook is that activity levels are very robust, and we are looking for new opportunities in international markets, e.g., Trinidad. But, our charge we faced in this business --- and I think the same for any people/business right now -- is retention and recruitment of key personnel. So, that charge has to be dealt with, as we look to achieve our earnings expectations of the year.

Turning to slide 13 and our shelf construction business, this is the subsidiary that is now known as Cal Dive. You can see here that revenues reached almost $120 million for the quarter with the Stolt and Torch assets contributing for the full period and gross profit volumes were 42%. EBITDA margins are roughly the same in this business. So, EBITDA is around $50 million for the quarter. You might recall that our expectation for this group previously was around 100 to 125 million, so we're obviously off to a great start.

Utilization levels at 90% in the year's first quarter, obviously benefited from the incremental demand from the hurricanes. We expect our 90% utilization to pretty much be the standard for the rest of the year, as that demand continues. We're also pleased to see the longevity of the hurricane-related work lasting probably well into next year and perhaps beyond. And that's indicated or illustrated by the fact that we've just recently contracted with DSV Kestrel to a major operator for 18 months, starting in June.

Turning to slide 14 and deepwater. Our pipeline asset utilization, [interpreted] and The Express, reached 100% again. The market is extremely strong for subsea tiebacks right now. We are bidding work into next year and beyond. We're also bidding the Caesar, which is going to be with us next year. You know, our pricing is improving all of the time.

On the robotics side, we do see some seasonality in this business, especially in the North Sea and also in the pipe aerial marketplace. So, utilization did drop 40% on a sequential basis. But, you will see that will pick up as the year progresses here.

Turning to slide 16 and well operations, utilization declined by 27%, basically as we lost around 30 days for each of the Q4000 and Seawell during the quarter for unscheduled downtime. However, both vessels are fully booked until the end of the year, with the Seawell in particular like I said to at least achieve a 10 point gross profit increase compared to 2005. We have had a little bit of downtime for the Q4000 here in the second quarter, around 8 days. But we're hoping that we're going to do a lot better obviously in this segment in the second quarter and beyond.

Finishing up contracting services on slide 17, talking about production facilities. Now, as I mentioned last time, we did suffer in the fourth quarter from a mechanical shut-in of the first K2 well and that shut-in lasted well into quarter 1. However, the well is producing again now, and we have other wells producing in the sequence that we expected such that we ended the quarter with around 40,000 barrels of equivalent oil production. We do expect the further five wells to be brought online from K2/K2N and Genghis Khan by the end of the year. An equity income should fall in our guidance range of 27 to 32 million. However, at this point, we are expecting the low end of the range and we will update that at the end of the second quarter.

Finally, the Independence Hub is still on track for mechanical completion by the end of the year. So, we're looking forward to contribution from that next year. So, that's contracting services. Hand it over now to Owen for oil and gas comments.

Good morning, everyone. I will try and speak to slides 18 and 19 to begin with here. There's a lot of moving parts to the picture this quarter with the unexpected well failure cost, commodity pricing depletion, production-enhancement efforts, hurricane impact, and regulatory impact. But, before I try and touch on each of those, let me start out with just a bottom-line statement that other than the charge for Tulane, things are good.

Quarter to quarter, revenues are up 15%, margins up 4% and production rates are up 21%. But, keep in mind that is following a quarter that was impacted by the hurricanes. A little clearer picture shows up when you look year to year. Revenues are up 27%, margins up 5%. But, production rates are down 10% year over year. This is still a good trend, a good result, but the area of focus here for us obviously is the year-over-year production rates.

Now, Gunnison is producing as expected. So, that's really positive news. Our shelf production is the area that's below where it should be. Following the hurricanes, we were very successful at restoring production rates. But, there are knock-on effects that we would need to address over the remainder of this year. Well work that had been planned to enhance the production from pre-hurricane levels that was scheduled for late '05 and first quarter of 2006 has been delayed, and we've not been able to get around to it as fast as we had planned. Some of the reasons for this is just we've had a high allocation of resources on regulatory inspections on non-production impairing repair work following on from the hurricanes; we've allocated resources to insurance claims; loss of -- well, we've been unable to contract some of the services needed to do the well work. Everything in the industry is just a little backed up right now, which we probably didn't fully appreciate back in September when we did our assumptions.

But, having said that, I've got a breakdown of, you know, what has been delayed if anyone is interested. But the largest portion of the impact for the remainder of the year is probably in Tulane, and we had 2 Bcf equivalent scheduled for the fourth quarter coming online, which obviously isn't going to happen now.

So, having said that, we've recovered our production rates, which were down from the hurricanes, and we're working to get our normal production growth rates now back up to normal levels for going forward. The productions there, it's just a timing issue and we will get to it.

Total production for the year was estimated going into the year between a range of 44 and 47, which included some assumptions for some acquisitions and the well timing of the well work that I mentioned. At this time, it's pretty hard for us to quantify what the full year production will look like. But, we -- right now, we'll be able to give you a much clearer picture at the next quarter conference call. But, right now, we would just suggest that you look at the low end of the previously-announced range.

The upside is that the commodity pricing is stronger than our assumptions, which -- they've -- appears that they are going to hold above the levels that we have assumed in our numbers going forward, especially with the hedges that we've got in place. I might say that the way we're looking at things going forward would -- and in my case, it's always looking at the worst case -- but just repeating the first-quarter results at the actual pricing realized in the first quarter and without Tulane, without any further recovery in the growth rate of our well work puts us within the range of meeting the required contribution from production for us to realize the overall earnings guidance that we've provided.

Shifting now a little bit, let me get into some of the deepwater production projects and I believe that's on -- they are listed here on page 20, starting on slide 20. Dawson Deep is scheduled to come online -- the contribution to production is not that meaningful from there; our interest is only 10%.

So, I'll move on, Tiger -- let me get my notes here because I have a little additional information on that. The Tiger was -- well, it's a PUD. The spud date was delayed due to some early flare-up of the loop current out there. We wound up parking the rig in shallow water, waiting for it to subside. The well is spudded. It spudded on April 24th now. That means that the standby costs will add approximately 1.6 million to our total budget of 22 million on that; the project economics are still robust. We should know something when we reach [TD] towards the end of May to announce on that. We did have less than 1 Bcf in the fourth quarter in the budget, which began in June. That obviously will now probably begin sometime around August, and we are still thinking that it is something just less than 1 Bcf for the year there, so no impact to the budget.

Moving on to Telemark, we have a 30% interest -- we had a 30% interest in this as a non-op. We've been a year -- over a year working on this with our partner, trying to move it forward. It just wasn't going there. Around Christmas time, we were granted the operatorship. Just this last week, we have now taken over 100% of this field. So, we are in the process now of filing development plans with the MMS; that will be done around June. This development will require a small floating production system, which we do plan to build. The first production is scheduled for '08. So, again, there's really no impact to the '06 numbers from this. But, it is finally at a point where we are excited about getting on with the work.

Devil's Island is the next one mentioned here. Devil's Island is a PUD that we are drilling. We did drill an appraisal well on this PUD. It crossed a fault line, and this will determine that the sands up at that area did not have -- were not pay bearing. So, there will be a sidetrack required on this. We have temporarily abandoned the well so that we can take the data and more precisely engineer the proper takepoint. We've got 12 million invested in the project at this point. We are under a promote situation on this one. But, we're moving ahead. Now, there's nothing planned or there's nothing included in the '06 budget for returns from this project. We don't believe that we will be able to get it drilled and into production prior to the end of the year and we never did.

Moving on to the next page then, we get to Tulane, which is probably what everyone wants to really hear about. Tulane was a -- we paid a two-for-one promote to get into Tulane with Amerada Hess; it was an exploration play. It was in a producing area, but it was a new sand. Therefore, it qualified as exploration. When we were drilling it, the -- every time that we pulled out of the hole and tried to run casing, the hole would collapse. After multiple attempts at trying to get down through it, it was decided that we should temporary -- we should abandon the well and try and figure on what is going on here because we were really eating up a lot of money. Unfortunately, when the operator P&A'ed the well, the casing strings were cut below the mud line, which means that we could not re-enter the well.

For those that are not real clear on the accounting treatment of these things, there is a difference in -- Wade, jump in and correct me when I am wrong because I'm sure I will be -- but my understanding is that for exploration wells -- there is a difference between an exploration well and a development well for a PUD. A PUD, if you have a mechanical problem, which we do from time to time, you simply add the cost of that well, like the Tiger, 1.6 million. You add that to your cost basis and you get on with the project. When you are in an exploration well, if it's deemed that the well bore cannot be reused and in this case, cutting the casing string sort of was a fait d'accomplis on being able to reuse that well bore. The accounting rules require you to take the write-down.

Now, we are on a successful efforts basis accounting. So, that means we have to take the full write-down in the first quarter, and that's what we did on this. That doesn't mean that the prospect is not still there. We just never got down far enough to be able to look at it. We are in the process of trying to assess what happened on that well; look at the geology; either pick a new well site, a new well design.

The downside is it caused a big write-down here. The upside is that the reservoirs are still there unburdened on a cost-forward basis for taking a fresh look at it. So, we're going to take our time and look at it and assess along with Amerada Hess what we want to do there going forward. There is -- there were -- like I mentioned before, there was 2 Bcf in the fourth quarter in our budget assumptions of our numbers. We obviously won't be making that. So, that's what's contributing most significantly to the guidance towards the low end of production rate for the year.

Moving on, we do have another exploration well in process. And again, it's a promote. It's a much less expensive promote, and our interest is only 20% and that's Huey. It is drilling now. It is fairly well on, and we are not having any problems on it. So, this is our only other promoted exploration well. So, we can just hope we can get through this, and I don't think we're going to have any problems on this one.

Moving on to Bass Lite, Bass Lite is sort of still in the future. It's scheduled to be spudded by the fourth quarter of '06 year and with production coming on in '07. But, there's nothing in the '06 budget. Right now, we are just in the engineering planning stages of that. That is a -- we are the operator. No, I'm sorry; we're not the operator on this one. But, we have a very clear idea about what the development plan is going to be on it going forward.

So, that basically wraps up a summary of the deepwater prospects that we have. I will mention it a little bit later. But, by June, we should have a lot more clarity on this. We've got the tough one behind us, and things are looking pretty rosy going forward.

Next page is 22, our hedges. You can peruse these at your leisure. But, we did benefit significantly over the recent months from having these hedges in place with the volatility and the commodity pricing that we've seen. Having said that, I will mention that our actual price realized for quarter 2, we're not expecting it to be as strong as quarter 1. But, it's still higher than our assumptions in the guidance that we've given.

Moving on to page 23 is our report card. I'll just give you -- it's very early in the day to start putting x'es and checks on this, but I will try and do a few. Under contracting services, I think pretty -- with a great deal of confidence, we're going to be well above the revenue targets for the year. Margins also are outperforming by a significant amount. It's hard to imagine where we're going to fall short of those.

Equity earnings, this is one -- this is basically Marco Polo. It's not exactly something that's within our control, and it disappointed last year. All indications we are receiving is that the guidance here is still valid. The mechanical depletion on the Independence Hub Martin has mentioned, building of the next construction facility. I think we can put a check by this because it's more than likely going to be the Telemark facility. So, we are in control of our own destiny here.

Moving to oil and gas production, I've mentioned the production rates. Beginning production from at least one of the acquired PUDs, I do believe you'll see Tiger online this year. I'm going to go out on a limb and say this is going to be the year that we're going to do our first North Sea acquisition. So, just put a check there but make sure it's pencil.

Then, on the financial, the earnings guidance, we did raise the lower end. Without Tulane, I think you would've seen us raise the entire range of this. We are very, very confident with the lower and. We're still trying to assess where the upper end is going to be. Hopefully, by the next quarter, we will be able to tighten this up a little bit for you. Safety wise, we are trending well and working hard to continue that trend.

Having said that, I will give myself and my own introduction into the color segment of the call here. Bottom line, things are good. Now, as I go through this, bear in mind that even when things are great, I tend to focus on the areas that need work. I'm not exactly the greatest hype person in the world. So, bear that in mind as I go through this.

But, I will say that this is the strongest market I've ever seen in my entire career. It also has the longest legs and most visibility -- knock on wood. We're executing well. If we can catch a break without further surprises in drilling or vessel time, things should even improve from where they are here going forward. January is typically one of our weaker months. That may be a little bit of an anomaly this year following the strength of the hurricane work coming late in the year.

But, we do now have the confidence in the way things are unfolding to raise the lower end of the guidance range. The lower end of the guidance range does include unforeseeable negative events. We've been pretty critical about what could possibly happen, and it would take quite a bit to get us down there.

On the service side, we're executing well. We did encourage significant time as Martin mentioned on the Seawell and the Q4000 in quarter 1. Going forward, the Q4000 downtime is extending into the second quarter. We do have the Uncle John going into scheduled dry dock and the Midnight Express going into the yard for upgrades later during the year. We're adding another ROV support vessel on charter. But, that vessel is already contemplated within our numbers.

But, a few things outside of our numbers are the addition of the Kestrel going onto a long-term contract. The Star coming online, another vessel, and a new built portable sat system that will be going online at various times over the remainder of the year.

We are, as Martin mentioned, we are dealing with other companies approaching our people as well as rising costs. But our model is relatively insulated from major impacts from these because we're not volume driven and we're not EPC driven. So, the cost and the people have less of an impact on us. But, barring any significant incidents going forward, the service side of the Company should continue at at least the current levels.

I would like to mention something on the service side. I get questions all the time, especially lately, people who have read other sites and seen backlog. We do not treat backlog the same way as other contractors do. To us, in high demand periods here, backlog is a high risk, even in the high demand period. Because you've locked in on these EPC terms you know during a previous era and you may not be able -- right now, we're seeing a lot of cost increase on materials, availability of components. Scheduling right now, it is impacting our well service work -- is just a little bit beyond your control. So, backlog can actually be a detriment at this point. And, we don't need it. We've got -- all of our assets are booked up basically for the next year, and that near-term rate is priced appropriately.

The way we add backlog is by building up our portfolio of development projects for us to put our assets on at a time of our choosing. Having said that and that has a little bearing on what I will say later here under production, which I will move into now, I mentioned that we do expect commodity pricing to be slightly weaker in Q2 versus Q1 but still stronger than our assumptions. Going forward in the year, we do expect commodity price to strengthen through the year and we will be laying in additional hedges.

We're behind on getting our well work back up to expected levels, as I mentioned. But, we do think that we will see a ramp-up throughout the year from the current roughly 97 million cubic feet a day equivalent to an excess of 150. We will have better visibility on the timing of that ramp-up by the time we talk with you at the end of the next quarter.

But, now I want to get into another issue. As proud as we are of the model that we've created, along the way, I've made some decisions that have resulted in some pretty hard lessons. The Q1 here, first quarter included a few decisions of that kind. Tulane was a two-for-one promote that we paid to get into an exploration project. Now, if you think about it, if our goal is to lower F&D cost and lower risk in order to produce marginal fields, then what in the world are we doing paying a promote, especially on an exploration well? Well, I have no excuse, other than at the end of '04 and '05, deep development projects were very hard to get into and I basically just wanted it too much. We've learned a hard lesson that should have been avoided. The result was the write-down in the first quarter here. But, I can pretty confidently say that you're not going to see us doing anymore promotes on exploration plays. So, that sort of gets into the whether or not you treat this as a one-off or a recurring event.

The other lesson that we've learned is on the non-op interest. I think we're going to be very shy about taking any non-op interest going forward unless there is a very clear contractual agreement as to what the development plan is going to be.

Helix has a -- we have unique methodologies for development of marginal fields that can reduce F&D costs, but the operators have to be open to using them. On Telemark, we spent $10 million in over one year, trying to influence the development plan. Now, we went into this project as a trial. We wanted to see if we could influence the plan, being a 30% partner. If we couldn't, then we -- sure, we're not going to be successful in trying to set up a business to sell our concepts to the open market. So, what it has done is it's confirmed that our model is the right one. We have -- we are in control of our own destiny, and we will go out and do these things for ourselves. We do now have 100% ownership and operatorship of Telemark, and now we can just get on with the job, assuming that the MMS will allow us under the remaining time of the lease to get our plan in place.

So, again on Tulane, is it a onetime event? We think so. We certainly will not enter a similar situation again. Having said that, we do have Huey to finish, which I've mentioned. But, I might point out on Huey that it is a 20% interest. The promote paid was not anywhere near as high. The dry hole risk is $6 million, and things appear to be going very, very smoothly and well on it.

Devil's Island is a non-op promote, but that is a PUD. There are always issues with PUDs as there are with construction contracting. But, these are the kinds of issues that we deal with every day, and the accounting treatments are something that we are more familiar with and I don't see issues going forward. We've got a tough quarter behind us. The results were spectacular, even in spite of it.

Tulane was probably the biggest risk that we have over the year facing us for, impacting the '06 results. We've learned a hard lesson, and it is now behind us. Going forward, we will continue to execute our long-term strategy. And, these actions that we plan on -- take are not being dictated by the current strong demand cycle in the market but by longer-term growth goals. But, I will say that the high demand cycle right now certainly makes it a lot easier, and the returns are going to be a lot better as we go through implementing these things.

But, there's basically 10 things we're looking at getting done here. We're going to drill up the current prospects that we have, while we have reasonable rig rates assigned to them. We're going to add drilling to the Q4000 to progress our program for '07. We're going to complete the conversion of the Baron for export pipe lay. We're going to complete the upgrade to the Midnight Express for the infield float line laying. We're going to close the Remington deal. We're going to divest a minority interest in Cal Dive. We're going to continue to seek maturer production acquisitions. We're also going to penetrate the North Sea production market. We're going to expand our presence in Southeast Asia and finalize the detail engineering on the next Q vessel.

It's a lot, but the rationale of what we do and what we plan on doing is fairly straightforward. By July, we will have progressed most of this to the point where there will be a lot more clarity on the picture of what the Company is and what the model is. At that time, we're looking forward with excitement to being able to show you what the future growth and returns might look like out of this model.

So, having said that, again, we are really excited and we will talk to you next quarter.

I guess we will move on to the Q&A segment. Marla, are you there?

(Operator Instructions). Bill Herbert, Simmons & Company.

Martin, you mentioned that the profitability and gross margin associated with the construction business was now at the high end of your guided range from 2006 and that what was witnessed in the first quarter, 36% margins, I believe the guidance was roughly about 35%, mid 30s for the year.

25 to 35, yes.

Yes, and maybe trending towards kind of 40% towards the end of the year. Given that we sort of reached that threshold if you will in the first quarter and you've got pretty good visibility in terms of where you are bidding your offshore construction business for the remainder of the year, give us a sense as to where leading-edge bids are from a gross margin standpoint on average for your fleet and what we are likely to witness as the year unfolds in terms of margin evolution.

Well, I will you can see in the results that margins improved by 6 points quarter to quarter. I'm not sure we're going to see 6 points every quarter; I can tell you that. But obviously, we're continuing to push pricing. One impact is that certainly in deepwater and well intervention, we're doing work now that we sort of bid last year. So, some of that backlog was priced last year. But, we are bidding for next year at improved pricing. So, you will see an improvement during this year, getting up to the 40% level that I talked about before. I think it's next year where you see another step up.

When you talk about another step up, can you bracket that for us in terms of numbers?

Well, yes, obviously beyond 40, you start looking at 45 and then perhaps 50. But, I think it's too early to start talking about that sort of margin.

Owen, you've mentioned this a couple of times on the most recent conference calls and you made the statement once again that business fundamentals are really the best you have ever seen. Obviously, you've been doing this for a while. Give us a sense in terms of the sustainability of current offshore construction fundamentals. A couple quarters ago, we were all excited about the post-hurricane work and elaborate with respect to the core foundation for the prosperity that you are witnessing and expected to witness for the foreseeable future.

Well, staring off, we're now talking about something different from most of the past cycles that I'm familiar with, and that is that we really don't have a bubble to speak of. Having said that, the hurricane work that's got knock-on effects, you have seen shortages all over the world. I think that's in all areas of the globe as opposed to last cycles, where you have one area that will heat up well and then you see a transfer of assets.

What I'm seeing right now is a heating up of all of the global arenas, so there's less transfer of assets between the two and therefore all of the assets. It's allowing rates to be moved up a lot more aggressively. The knock-on effect of the hurricane work, first of all, the hurricane work is prolonged in nature because it was so extensive. We were working on Ivan when these hit, and that was a good year later. I could see this hurricane work continuing on certainly through this year and possibly halfway into next year, and that's assuming that there's not another hurricane.

But, the knock-on effect is that assets have been diverted to hurricane repair work and remediation work, and that has created a backlog of projects waiting to be done. So, to those extents, it's hard to see when we will play enough catch-up to get back to a situation that is normal. I will throw in a caveat though, and I'm always a pessimist. I do think that there's a potential artificial bottleneck in the downstream sector perhaps at the end of '07 as a result of drilling rigs potentially being allocated towards exploration rather than development, the cost of rigs causing the cancellation or delay in projects. Availability of rigs is making it a little hard for projects to get scheduled as they want right now. Components are scarce. Steel is scarce. Shipyard is scarce. So there is a -- at some point, there's a natural limit to growth in what our industry can realize. Personally, I think we're near that point right now.

Then the last question, while you sort of caution that you would have much better clarity with respect to I guess production on the next call, Q1, we generated about 8 b's in change overall, so annualized at about 32. We're still sort of comfortable with at least the low end of your range at 44 b's for the year. Just broadly speaking, how do we get there from the 32 to the 44 guidance for the year?

It's primarily through a ramp-up in the well work. You know, how fast we can get there and how solidly we can get back into that range depends on how well we can overcome the shortage of services and reallocation of our resources in the near-term. That's why I say by the end of the second quarter, we should be able to give a clearer view of that. Because if we don't have it sorted out by then, then we've got an issue.

But the fact is that at this juncture, given the fact that you stress that you feel comfortable with the low end of the range, seems to imply that you are relatively confident that that well work is going to be consummated in time to reach that target.

The guys have been well-motivated towards that goal.

Roger Read, Natexis Bleichroeder.

I guess following on with that E&P question, what would be your current production volumes if you look today?

You mean, what are we producing today?

Yes, today or last week, the month of April, however you'd look at it?

Around 100 million a day right now.

Then moving on from there, any change or expectation in the date at which you would close the Remington transaction?

I guess I will give an update there. We're waiting on the SEC still. We filed the S-4 March 31, and we've heard that they're doing a limited review. So, we're waiting on their feedback. Once that occurs, which it should or any day now I would think, then we will get the S-4 effective. Then the Remington -- Remington has to give their shareholders 20 days before their meeting. So, we're looking at June.

Then, Helix RDS, obviously, the first time you've broken that out for us. Is there an integration process going on there? Are they fairly stand-alone? Will they stay that way? What is the plan their, Owen?

They are fairly stand-alone. The way that Helix RDS works is that when they get a client, they form a core team around that client's specific needs. We're sort of just copying that model to the extent that we need Helix RDS on our own production requirements. We're basically becoming an internal client and creating a core team.

Then, a final question, just following up on the margin issue. As you indicated, maybe growth gets a little bit limited with the rig fleet the way it is. In terms of the margin expansion, as the hurricane work fades away in '07, should we expect to see margins also sort of plateau? Is that your feeling, Martin, or is it something that as long as the market remains fairly tight, you can continue to push the margins higher? You know, I think Bill indicated 45, 50% or maybe that was your comment.

Yes, that was my comment. I would say that Owen mentioned that there's a tremendous sort of backlog of things that haven't been done because of the hurricane work. That's all repair work right now. There's a whole bunch of projects that have been delayed. So, assuming that the hurricane runs out sometime next year, I think it will be the end of next year looking at the Kestrel contract for example. Then, we should have a whole bunch of shallow water projects to address.

Then, for deepwater, it's more of a secular growth story. We've got full demand from our assets well into next year already, and we're bidding work beyond that. So we're just pushing pricing with every bid opportunity. Well operations only produced 13% margins in quarter 1 because of the delays or downtime we had. So, obviously with full utilization, we're going to do better there. So, that's background to where we are on margin.

I might just add something to that. There's a little anomaly to this cycle versus the previous cycles. In the past, you've always seen -- there's always been a discrepancy between Gulf of Mexico rates and let's say North Sea rates. In the past, you've seen North Sea operators bringing assets in but basically trying to buy their way into a new market, so the rates haven't been that different from Gulf rates.

The anomaly is that this time, you've had a lot of very large sophisticated vessels brought into the Gulf of Mexico. We've been a little reluctant to just add capacity. But, there have been producers putting these larger vessels on long-term contracts at substantially higher rates than anything the Gulf has ever been able to sustain before. Because they are long-term in nature and the fact that they've done so many of them here is sort of creating a new plateau in the Gulf of Mexico for the expectations of where rates should be. I think that's a real positive thing for us.

[Allen Gary], Raymond James Associates.

I just wanted to get a little bit more clarity on you all's guidance range. Is that net of the complications with the drilling at the Tulane prospect?

Yes, yes.

In looking forward to get another update on the shallow water spin-off of the Cal Dive unit, what is the timing there, what can we expect there?

Nothing has been determined yet. It's -- one of the reasons for this divestment of that minority interest is to recoup capital and recover from debt incurred as a result of the Remington transaction. So, we're sort of viewing the timing as sort of a connected event.

Okay, so it's somewhat contingent upon the timing of the Remington acquisition?

Yes, we haven't kicked anything off.

Just the last question here, you mentioned in your goals going forward that we might see -- there was a high probability of seeing the much anticipated move into the North Sea. Could we get a little bit more clarity as to maybe even the timing, more so the size and the scope as to how you plan on penetrating that market near-term?

We're taking a long-term approach to the North Sea. The penetration that you'll see us make here is a relatively minor move. The North Sea has a lot of bureaucratic and regulatories and tax issues that need to be sort of worked through with the DTI, which is their equivalent of the MMS here. Our strategy or our tactics for our long-term strategy is to at least become a player in a small sense and through that small participation then to work proactively to introduce new models for how to handle things, such as securitization issues of the abandonment. So, if we -- when we make the deal this year, it will be a relatively small, mature property likely with a step-out opportunity that we will then drill and complete.

[Preston Dickerson], Guggenheim Partners.

I just wanted to reconcile the cash burn during the quarter, looks like it was at 91 million as of December now to at about 38 million. Wondering if you guys -- there's no cash flow provided. I was wondering if you could just sort of highlight the main items that would be drawdowns in cash.

Sure. Obviously we'll be filing our Q in a couple of days, and you'll have a full cash flow statement there. But, as I mentioned, we had $150 million of CapEx during the first quarter. Most of that was on the contracting services side through the -- I guess the culminating Stolt acquisition final two phases closing on the Kestrel and the DB 801 that was nearly 80 million by itself. Then, the remainder was some more -- I think 11 million are capital calls on the Independence Hub construction. Then, the rest -- we also acquired the Caesar in the first quarter. That was 28 million, and then the rest was well work and deepwater PUD cost on the oil and gas production side. That's the real reason.

Going forward, have you all provided I guess any guidance or expectations of CapEx throughout the rest of 2006? Would it be safe to assume that Q1 was especially heavy?

As I mentioned, our CapEx for the remainder of the year is in the 440 million range and that excludes anything from Remington.

I'll add a little forward-looking -- following Remington, we do expect our debt to peak and it will peak up at the high 40%, almost 50% range. That's partial thought behind the divestment of the Cal Dive interest to bring the debt back down. I mentioned 10 actions that we have planned going forward. The timing and pace of those capital spending programs will be sort of managed. Our intent is to pay our debt back down and then manage our debt in the 30 to 35% range you know of book cap. That's a range that we're comfortable with, and that's where all of our cash flow is sort of targeted for.

Yes, and we're not -- just to add to that, we're not uncomfortable at that debt level. But, as Owen said, 35% is more where we'd like to be because -- we're comfortable doing this because we're very comfortable with our cash flow visibility, even when we close and raise that debt level, that will be a two times debt to EBITDA level, which is not unreasonable.

The reason I like that level is I'm trying to fund the capital that supports long-term sustainable growth. But, I would also like to have at least enough in there to take advantage of opportunistic moves, such as the Remington transaction, which we then recover from very quickly and get ready for the next one.

[Jim Lewis], Citadel Investment Group.

One topic that we used to talk a lot about on these conference calls and I noticed that we -- you didn't touch on at all. There's been a lot of discussion of the P&A market in the Gulf of Mexico relative to some other companies. I know that you're not very directly involved in that as a service line. But, I wonder if, given the amount of P&A work that's out there right now according to some other people, whether there might be opportunities to do good old-fashioned ERT-type transactions or whether there is some other benefits to your shallow water business that you are just not highlighting?

Well, as far as us moving stronger into P&A work and abandonment work, I think we have enough on our plate right now and I wish all the others well. I chased that hockey stick for a while. Right now, there's an awful lot of wreck removal work going on, which is keeping all the abandonment assets pretty busy following the hurricane work. So, when people get around to abandonment again, I'm not really sure -- I will say though that I think the mature property market is actually going to become sort of a buyer's market here potentially over the next 12 to 18 months. But, that's primarily -- it may be partially driven by the abandonment liabilities and the costs of the abandonment-scaring people these days. But, I think it's even more driven by the new insurance renewal terms.

(Operator Instructions). Sir, at this time, we have no further questions.

Okay well, thanks, everyone, and we look forward to reporting to you next quarter. As a reminder, our shareholder meeting is next Monday, May 8, at the [Greenspont Club]. We hope to see some of you there. Thanks.

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