Helix Energy Solutions Group Inc (HLX) 2006 Q2 法說會逐字稿

Hello, participants, and welcome to today's conference call. All lines will remain in a listen-only mode until the question-and-answer portion of our program. (OPERATOR INSTRUCTIONS). At the request of our hosts, today's conference is being recorded. Any objection, one must disconnect at this time.

I'm now turning the call over to Mr. Wade Pursell. Sir, you may begin when ready.

Thank you. Good morning, everyone, and welcome to our second-quarter 2006 earnings call for Helix Energy Solutions. Thank you for joining us this morning. With me today, as usual, is Martin Ferron, our President; Bart Heijermans, our COO; and Jim Connor, our General Counsel. Dialing in from overseas this morning is Owen Kratz, our Chairman and CEO.

Hopefully, everyone has access to a copy of our press release and the slide presentation which we released last evening; it is linked to our press release. If you do not have the slides in front of you, you can go to our website at www.helixesg.com in the investor relations page and click on the webcast presentation there. We will be referring to these slides as we go through the call this morning.

If you turn to slide three of the presentation, you'll see the outline for the call this morning. I'll summarize the results and walk through a quick financial overview of the quarter, then turn it over to Martin for operational highlights in both our Contracting Services and Oil and Gas Production segments. Then Owen will wrap it up with a strategic overview, and we follow that with the Q&A segment.

First of all, flipping back to slide two, Jim Connor has an announcement to make.

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, 2005, filed with the Securities and Exchange Commission.

Thank you, Jim. Turning to slide four, the second-quarter of 2006 saw us achieve an earnings record of $0.83 per diluted share. This is 159% more than the results achieved in the second quarter of 2005 on a split-adjusted basis. It is certainly worth noting that Contracting Services generated 61% of the EBITDA for the second quarter this year, compared to 44% in the comparable quarter last year, further demonstrating the strength of the hybrid model.

Flipping to slide five, for the first time ever, we topped $300 million in revenues for a quarter. $305 million of consolidated revenues represents an 83% increase over last year's second-quarter revenues, driven primarily by significant improvements in Contracting Services revenues, the maroon boxes, due to the introduction of newly acquired assets -- that's the Stolt and Torch vessels -- and improved market conditions across all business lines within Contracting Services.

Gross profit of $131.7 million was well over double the $52.4 million achieved in last year's second quarter. Gross profit margins of 43% were 12 points better than the year-ago quarter, driven, again, by the significantly improved market conditions for our Contracting Services.

SG&A of $27.4 million increased $14.6 million from the same period a year ago, due primarily to increased overhead to support the Company's growth over the last year, and also to incentive compensation accruals this year due to increased profitability. On a percentage of revenue basis, SG&A was 9% of revenues this year, compared to 8% in the second quarter last year.

Equity and earnings of $4.5 million reflects primarily our share of Deepwater Gateway's earnings for the quarter relating to the Marco Polo facility. Regarding the tax rate for the quarter, the effective rate was 34%, which is 2 points less than 36% last year. That is due primarily to improved profitability, both domestically and in foreign jurisdictions, driving the Company's ability to realize foreign tax credits.

Looking at the full year 2006, turning to slide six, our original guidance for 2006 last December was $2.30 to $3.30 per share. At the end of the first quarter, we raised the low end and tightened the range to $2.70 to $3.30. Then a few weeks ago, after we closed the Remington transaction, we raised the range to $3.20 to $3.70 per share, to reflect the accretion from the Remington acquisition as well as the continued strengthening of the Contracting Services markets.

On slide seven, you can see how these results translate to return on capital, which is probably our most important metric. Notice we ended 2005 with 17% return on capital, and that the strong results for the first half of 2006 have resulted in 23% return on capital year to date. As a reminder, we compute this based on after-tax earnings before interest charges.

Turning to the balance sheet, looking at our debt positions on slide eight, now, total debt as of June 30, 2006 was $444 million, which represents 35% debt to book cap, with $502 million of EBITDA for the last 12 months, which represents less than one times trailing 12-month EBITDA. The components as of the end of the quarter were primarily the same as they were at year end, and that is the convertible notes, which is the maroon box, which carries a fixed coupon of 3.25%, and the MARAD debt, which is the green box, which carries a fixed interest rate 4.81%.

We have also included, to the far right, a July 1st pro forma debt picture to reflect the Remington transaction, which closed July 1st. The orange box layered on top is the $835 million Term B facility, which funded the cash portion of the transaction.

This takes our debt to book cap up to 48%, but pro forma debt to EBITDA is still in the two times range, and projected debt service coverage for the coming year is around 10 times. So it's still a level of debt that we're comfortable with.

Summarizing CapEx real quick, total capital invested in the first half of 2006 was about $230 million. $160 million of that related to Contracting Services, with the remaining $70 million for Oil and Gas Production. Just to remind you, included in the Contracting Services amount was the acquisition of the Caesar, the final phases of the Stolt acquisition, which was the Kestrel and DB 801, and also construction payments on the Independence Hub facility. The Oil and Gas Production CapEx related to well work on the shelf and costs related to deepwater PUDs, primarily.

So for the rest of the year, projected CapEx for the remainder of 2006 is about $420 million. That obviously does not include the acquisition amount for Remington. We expect to fund all of that with cash flow from operations.

So I now turn it over to Martin Ferron for operational highlights.

Thanks, Wade, and good morning, everyone. I'm going to start on slide nine with some overall comments on our Contracting Services business. This was another quarter of good continued improvement in the overall market for our Contracting Services. We achieved a sequential 7% increase in revenues and a 2 point improvement in gross profit margins. We have now boosted gross profit margins by 8 points since quarter four of last year. The outlook is we expect further improvement in the second half of this year, driven mainly by pricing, although we will have some added capacity, particularly in our Shelf Construction segment, and I'll come to that later.

This turn on pricing should continue for at least the medium term, as we add backlog on gradually better terms. That's particularly the case in our Deepwater Construction and Well Operations segments, as we have presently undertaken some projects that were bid up to a year ago. Pricing has obviously improved since then, and that will be visible over the next few quarters.

Turning now to slide 11 to start with comments on each of our contracting segments, starting with reservoir and well technology, revenues and gross profits were in line with our expectations for the quarter. But it's notable that gross profit margins improved by 6 points sequentially, mainly due to key contract renewals at higher rates. We expect activity levels to remain at this robust level for the rest of the year, although the recruitment and retention of personnel is a key challenge which we're addressing in terms of meeting our financial goals in that area.

Turning now to slide 12, our Shelf Construction business, we have named Cal Dive. This service unit had an excellent second quarter, following on from a good first quarter. Utilization remained at near the record level of quarter one, helped by the continued incremental demand caused by the 2005 hurricanes. You can see that gross profit margins increased by 7 points to just under 50%. In terms of outlook, we expect that level of utilization to be maintained well into next year, and that longevity of this utilization is illustrated by the fact that Kestrel is due to start this 18-month contract we have been talking about in August. We do anticipate chartering an extra vessel to take on additional projects later in the year.

Also in this earnings announcement, we talk about the acquisition of Fraser Diving, which we have just closed this week. Fraser was very active in the Middle East and Asia-Pacific regions, so that really boosts Cal Dive's activity in that area. Essentially, we picked up six saturation diving systems and 15 air diving systems in this acquisition, and the purchase price was approximately $26 million. Our plans are to redeploy a couple of those sat diving systems to the Gulf of Mexico, and we think by doing that, we can achieve an annualized EBITDA of about $12 million on this acquisition.

Turning to Deepwater, slide 14, pipeline asset utilization was down by 15% sequentially, due to some unscheduled downtime for the Intrepid and the commencement of a planned upgrade to the Express. Utilization in our robotics unit was essentially flat before the start of the seasonal pipe burial markets.

Slide 15, our outlook for Deepwater. As mentioned previously, both Deepwater Pipeline assets are booked well into next year, actually, apart from the planned upgrade for the Express, which will take another 55 days here in quarter three. The robotics group looks set to have a good second half, because of the seasonality of that pipe burial market I mentioned. We have started some pipe burial contracts at the end of quarter two, and we have got a good order book for pipe burial in quarter three and quarter four.

Well operations, on slide 16. Our utilization increased by 12% over the first quarter, but we did have another period of unscheduled downtime for the Q4000, which limited our utilization to 83% for the second quarter from the two vessels. Both vessels are fully booked again into next year, with the Seawall experiencing a much improved pricing environment.

Turning now to production facilities, on slide 17, the K2 and K2 North wells are coming online slowly but surely, such that four of the six wells were producing by early July, bringing total throughput to around 48,500 barrels of oil equivalent. We should see the remaining two K2 and K2 North wells start production during quarter three. However, the completion of the two Genghis Khan wells has been delayed to quarter one of next year, as the operator has elected not to use a moored rig close to the facility during hurricane season. All in all, our recent guidance of $20 million to $24 million of equity income is the right number for this [market pull] facility.

Our second production facility, the Independence Hub, is still on track for mechanical completion by the end of 2006, subject to the absence of knock-on delays from other projects at the fabrication yard, where the hull and top sides are due to be integrated.

Turning now to Oil and Gas Production, starting on slide 19, in summary, we ramped up production on our shelf properties by 11% in the quarter, as we recovered from the impact of the 2005 hurricanes. Production from Gunnison was down sequentially, although that was largely due to some shut-ins resulting from Dawson Deep construction activity at the spar. Production from the quarter average 94 million cubic feet of gas equivalent for the year per day for the quarter. 53% of that was gas. Realized commodity prices were down by 7% sequentially.

We exited quarter two with overall production level up to around 100 million per day. I can report that Remington's production was at a similar level. We anticipate that during the second half, our combined average daily production -- that is, with Remington -- will be in the range of 220 million to 250 million a day, in line with our previous guidance.

Turning now to an update on our deepwater projects, I would like to mention here that these are only the Helix deepwater projects. Next time, we will certainly introduce several key Remington projects that we're working on, but for the time being, just want to give you an update on what we talked about last time in terms of the Helix deepwater projects.

Starting with the top two, Dawson Deep and Tiger, production from Dawson Deep actually has started in quarter three here. We have started the construction work in relation to bringing Tiger onstream. We expect Tiger to contribute to production in quarter four, and the overall impact of bringing those two projects online to us will be about $15 million a day. So that will be part of the ramp-up that I talked about earlier.

The next one, Telemark -- you can see there that we sold our interest in Telemark early in quarter three. I'd just like to give you some background on that. During the second quarter, we did work up a very viable development plan for Telemark and two or three other fields in the area. However, we did not have operatorship of those other fields, and we had a difference of opinion over the type of production facility to be utilized. The operator of the other fields then made us a very satisfactory offer for our Telemark-related interest, which involved cash at closing in excess of our cost basis and a nice override, which will [obviously] cash flow when the field is brought into production. Given that we had no reserves booked against Telemark, and we believe that post-Remington we have better projects to pursue, we decided to accept the purchase offer in take one challenge off our plate. So that's the background there.

Devil's Island -- we will be drilling a new sidetrack later in the year. We are in discussions with our partners on the commercial terms in relation to that activity.

That wraps up the operational highlights. We have got a slide on hedging, which we will take questions on during our session. So I'd like to hand over to Owen for any other comments.

You covered everything pretty well there, Martin. I apologize; I'm joining everyone from Asia over here. It's a little late. But on the heels of closing the Fraser acquisition, and Bart and I have been over here just assessing some of the opportunities that we're seeing. So I'll be back soon.

But just a little color on everything -- things are going really well right now. In fact, it's hard to imagine them going better, but I really think that there's even better things to come. But looking back for the second, over the last year here, we have accomplished a lot -- probably confused a few people with the amount going on, but it all had a purpose. The Stolt asset acquisitions, the Torch acquisitions, OTSL acquisition down in Trinidad -- we also acquired Helix RDS, changed our name, acquired Remington and switched to the New York Stock Exchange.

So it was a packed year. But I think the results, as you can see from this quarter, are already beginning to become apparent. One thing that I'm very pleased with is how well the integrations have all gone. We truly have a great company of employees, and the management team now that has resulted from all of this is just top-notch, and we're all on the same page and have a very clear vision of exactly what we're creating.

As I said, I still think that there's better things to come. We have a lot of growth initiatives ahead. I won't eat up time going through them all here; I've mentioned a bunch of them in the past. But basically, overview -- our model is basically complete and, I believe, proven at this point. The challenge for us now is to increase the scale of the model. Our next move following the integration of Remington will be to make some further additions to the service lines -- geographically, obviously, with me sitting here in Asia, but adding to the service lines in a way that we can then accelerate organic growth from there, but basically just applying the models more intensively now in the Gulf of Mexico, North Sea and Asia-Pacific.

I think where we are now is trying to work on increasing our market recognition, and as that market recognition increases, so will our opportunities and our value. So all I can say at this point is things are going really well, and we are looking really good right now with a lot of good growth.

I think just an anecdote -- because the integrations went so well, it gave me a lot of comfort in the fact that I don't believe that we're growing too fast. We're handling everything that we are doing in stride, and the results are coming very rapidly on the heels of closing each one. So all in all, I'm very pleased.

With that, I'll either turn it back to Wade, and Wade, you can just take questions here.

We will go to Q&A now.

(OPERATOR INSTRUCTIONS). Jim Rollyson, Raymond James.

Q4000 drilling package, supposed to be installed early 2007, you mentioned. Have you had any talks or interest in producers on looking at interest in that, once that gets on and gets tested?

We have certainly had a lot of interest. But I think our plan is to drill the first few wells on our own prospects, because we've got some great prospects we want to address, plus it will show the industry what we can do with the Q4000. At that point, I think we will be ready to take on external opportunities.

I presume that would play into your potential decision to build a second one, which you mentioned last call?

Absolutely.

I'll jump in and add the blue sky here. If you remember, when we built the first one, it had always been our intention to ultimately build three of these units, because we really believe that this is the future for marginal fields. Following a successful drilling with this one, we would start building another one, the second one being a little more biased towards the drilling, allowing this one to go back to the intervention work, where it's fully booked up. Then, following on from that, with the proper interest from third-party producers, then it even could pave the way for a third one.

You also mentioned in the slides here on the Seawell a 10 point margin increase and looking that way through the end of this year. Can you talk about how sustainable you see that going into next year and beyond?

It's very sustainable. We're actually talking about working for some of the key operators in the North Sea well into 2008 and 2009 right now. So I think these prices are going to last obviously at least that long.

Wade, not much change in the hedging this quarter relative to a couple weeks ago, when you gave guidance. Given that the strip is now pushing $10, any thoughts to layering in some hedges for the later part of 2007?

We have obviously noticed that, and we're looking at it as we speak.

Nice quarter, guys.

Roger Read, Natexis Bleichroeder.

Just one follow-up question on the Q4000, just to clarify that whatever the issue was that put it in the shipyard unplanned in Q2 is not something that will have any impact on converting it to the drilling mode?

No, no, no. It has no impact at all on our drilling conversion.

Your production volume guidance, Martin, if I heard correctly, 210 million to 215 million?

No, I said 220 million to 250 million for the second half of the year.

Okay, that's my problem there. Apologies for that. That includes the two deepwater fields that you said, Tiger and Dawson Deep?

Absolutely.

That's correct.

What would be the impact -- and that's, from my perspective, a fairly wide range -- what would leave you at 220 million versus what would take you to 250 million? Is that timing of getting the Gulf of Mexico shallow water hurricane damage production back online -- although it looks like you must be pretty much there -- or is that something else?

It's part of that, but it's kind of the impact on well work, bringing new production on.

So both new and the old?

Correct.

My final question, maybe more towards you, Owen -- you do this acquisition of Fraser. You're talking about geographic expansion. Is this something where you think you'd be more likely to buy an entire company, a la Fraser or Helix, when you bought them in the North Sea in the last year? Or is this more of an asset expansion opportunity, where you would rather just buy the vessel but not buy the associated business alongside it?

Well, the Fraser acquisition we actually did as an asset sale. But to answer your question strategically, our preference is to grow organically. I like the returns, and I think we're more comfortable with organic growth. But to accelerate the implementation of the model, it has been helpful to look for small acquisitions of entire companies, but of the size that are easily integrated and that then give you a proper base to grow organically. It's sometimes just a little faster to buy a seed startup company than it is to start up yourself from scratch. So we would be open to looking for small company acquisitions.

Is that mostly -- what is the main thing? I think about a number of US construction companies that have tried to go internationally, and then have faced a number of challenges. What do you see as the largest challenge there that you can mitigate through this strategy, in terms of local relationships, et cetera?

Well, I think you have to start looking at each area individually, because the regulatory environment and the commercial environment is different for each country. The North Sea right now, I think we have a very strong base. Our turnover actually is quite good there. I do see opportunities to expand on our well intervention in the North Sea, and then to begin to acquire the properties. We're all geared up with the Helix RDS acquisition last year; we are geared up and ready to move into that phase.

Asia is a little newer for us. We have less of a presence there, but we have robotics there already. We already have the subsurface group with Helix RDS out of Kuala Lumpur and Perth. The Fraser acquisition gives us our first entree into the region from a construction aspect. Beyond that, I think there are opportunities in the region, in the well intervention area as well.

James Stone, UBS.

With the kind of margins that you're now posting of the shelf business, approaching 50% gross margins there, how much more incremental upside are we seeing there, based on the pricing trends? Or should we see that margin level sort of flattening out over the next four quarters or so?

I think you'll see further improvement there, but I think you'll see the main improvement in the other segments. I mentioned deepwater and well operations as being the two main ones, because of the lag between bids and actually doing projects. So we're expecting continued improvement over the next several quarters for Contracting Services overall.

Can you just give us sort of a ballpark as to where the deepwater margins are right now, and what you're expecting off of that?

They're in the sort of mid-30's.

Deepwater is in the mid-30's?

Yes, and well operations is kind of in the high 20's. So we certainly have got some headroom to move prices up there, and that is what we have been doing in terms of bidding work this year for projects in future.

Just going back to on the production side, can you give us some sort of update as to what -- are you seeing anything on the cost structure side, either within ERT or within Remington's business, that gives you some cause for concern, either on the cost structure or on the equipment availability side, that makes you concerned about your production forecast or your margins for the second half of the year?

The equipment availability, in terms of getting well done, has impacted us in the first half. I think we have addressed that in our go-forward guidance. In terms of cost, it's within what we expect in our guidance also.

I know in the quarter there was a fair amount of ongoing repair and maintenance costs that impacted the operating costs on the E&P side. What do you expect the trend for that to be, or should that number repeat itself or come down quite sharply in the third quarter? Where are you in that program?

The second quarter, we had -- that's a good point. We had, I think, $5.3 million of R&M expense hit the cost side for the production company. There was no insurance reimbursements reported in the second quarter to offset any of that. You might recall in the first quarter we had, I think, $2.7 million of insurance recognized. We have been submitting more claims; we just weren't to the point where we were able to recognize in the second quarter.

So, to make a long story short, I think you'll see that number tailing off. You'll also see some insurance reimbursements recorded in the probably third and fourth quarter.

So you actually could have a reversal from a P&L standpoint?

Yes. Correct.

When I look at the way you're now running the oil and gas business, how much integration is going on between the Remington side and the ERT side? Maybe you could just kind of explain how that business now is structured, from an operational standpoint, to kind of clarify how you have done the integration.

Remington only had about 30 onshore people. So it hasn't been a huge integration issue for us. But essentially, what we have done -- Remington is obviously -- their key competence is exploration, where ours is production. So we moved all of Remington's production to Houston to be managed by our people. We have left the Remington people in Dallas to really focus on, as I said, what they are good at, and that's finding prospects and drilling them. So we think we've got a good functional differentiation there between locations.

So from an operations standpoint, in terms of operating their production assets, you have fully integrated that into the Houston group?

Yes.

Bill Herbert, Simmons.

Martin, a question for you here, getting back to margins. Specifically, I know that they are trending up, but I'd like to get some specificity around the numbers, if we can. Deepwater 35%, margins well up, high 20's versus a blended margin for Contracting Services at 38%. Specifically, where should we be thinking about Deepwater? In other words, where are you bidding your Deepwater assets on a leading-edge basis from a margin standpoint?

Well, I think we also have to cover robotics. I didn't mention that; that's kind of in the mid-20's, too. So that contributes to the overall mix you talked about. We're obviously increasing our bid pricing all the time. We gave some guidance just a couple of weeks ago, and we sort of pitched conservative margins for next year. I'd just like to stick with that for the time being. Obviously, as the year progresses, we will be maybe refining the range and giving you some more information there.

Well, if you could refresh us on those metrics that you gave us, I think you said sort of overall, Contracting Services by year end, a 40% margin, something like that?

Yes. So we've got 2 points to go, basically, for that projection, to hit the high.

The low end was 35, and the high was 40%. It's what we gave in our key variables.

Well, I mean, clearly, the low end probably is a distant probability here, so we will focus on the high end. Other than to say higher, better, you are not willing to give us in terms of where these assets are being bid?

Well, I don't want to get into specific percentages in each segment.

How about Noonan? Any update as to the timing of that prospect being drilled?

It's probably going to be in the kind of late September/early October timeframe for the spud of the well, hopefully just outside the hurricane season.

With respect to production facilities, you may have covered this. If you did, I'm sorry, but I missed it. In the slideshow, $4.6 million in equity earnings the second quarter, yet on the income statement, $4.5 million. Is that a loss on the Witch Queen, or what accounts for the difference?

That's what is. We had a $100,000 loss in our investment in OTSL for the quarter, which is the Trinidad company that the Witch Queen is involved in.

Philip Dodge, Stanford Group.

A question for Martin. In the slides, it shows the Shelf Contracting utilization in the June quarter 87%, 90% in the March quarter, which is sort of contraseasonal. I think it's probably because the capacity increased rather than the activity declined, but can you just confirm that?

That's probably it, plus we had a little bit more drydocking timeout in the second quarter.

Can you give us an indication of where it is right now?

We're going to be around this 90% for the rest of the year, hopefully. We are going to be catching up again on some drydocking in quarter three, but we do have some additional capacity coming on. So I'm pretty hopeful we can keep this 90% going for the rest of the year.

It's pretty much full utilization.

It's pretty much full utilization, given that some assets are out for maintenance in every quarter.

You never get to 100%?

No.

Jim Lewis, Citadel.

It seems like most of my questions have been answered. The one question I would have is, the Kestrel has not contributed anything to date? Is that correct?

Correct.

Correct.

So once the term charter with the customer in the Gulf of Mexico starts up, that's going to be purely incremental over what you've reported so far?

Yes. I would caution a little bit. In quarter three here, the cash flow is going to start working, but the Uncle John is going to go into drydock. So from quarter four onwards, when the Uncle John comes out, that would be the case.

Martin Malloy, Southcoast Capital.

I know this is looking out a little ways, but on the Caesar, can you give us a ballpark idea of what that might contribute in terms of EBITDA?

It is looking out there, and I don't think we want to talk about particular assets there.

(OPERATOR INSTRUCTIONS). James Stone, UBS.

You talked about picking up some additional assets in the second half of the year, in the shelf business. Can you just give us a sense as to what that incremental capacity -- what sort of percentage incremental capacity that would be? In doing so, if you pick up some additional vessels, should we think about that as really just adding incremental revenue at some sort of equivalent day rate or dollar per day that you are already generating revenue off the existing fleet?

It will be an incremental contribution for particular projects. As we just covered, we've got the cash flow coming, which we own. We are going to be chartering probably another DP2 vessel, and maybe a couple of (technical difficulty) vessels to address the demand that we see out there. We've also acquired a sat system, apart from the Fraser acquisition. I mentioned that the two sat systems would probably redeploy here from Fraser. So you will probably see a nice pickup in the EBITDA for the Shelf Construction business in the second half of the year, with all that extra capacity coming on.

I believe there would be a --

Just in terms of like percentage capacity increase, what do you think that represents?

Percentagewise, we have got 23 vessels working in the Shelf segment. So we're talking about maybe two or three more vessels, to say 10%.

Jim Lewis, Citadel.

This is probably for Martin and/or Owen. When you're looking at the order book globally for the different types of vessels that are utilized in offshore construction broadly and in the segments in which you are concentrated, can you kind of talk through how the new supply coming on looks, and how that stacks up versus visible demand in the delivery schedules? Because I've noticed some of the Europeans have been, if not aggressive, at least active in terms of adding some capacity, and just wanted your thoughts on that.

Do you want me to take that one?

You can start, and I'll chime in.

Okay, let's talk about pipelay, where we are running capacity with the Caesar. We've talked for many quarters about the increasing orders for (indiscernible). What we see in the pipelay area are that other competitors are adding capacity there, but we think along with our move, that's justified. I think, certainly, the internal market with our own projects for pipelay, gives us added comfort that that's the right move for us. So that's where we are [riding] capacity next year, and elsewhere, we are seeing new vessels coming out for ROV support and for diving support. The market in those areas is obviously improving, and competitors are deciding to add capacity in those areas. So far, we have elected to charter additional ROV vessels, because we regard that as the best thing to do in that segment. So, Owen, I'll let you add any additional comments.

I'll just add that if you go back and keep in context the purpose of our model is to avoid some of the violent cyclicality that has historically been in the construction service industry, we are a bit hesitant to just jump in and add a lot of capacity during a strong demand cycle like this, for fear of what happens during the downcycle. We are adding capacity, like Martin said, but it's in more of the unique type vessel and unique capability aspects, rather than going out and adding the same kind of vessels that we see the other competitors adding. I think that's consistent with our model.

I might also add that right now, I think we're sort of past the best buying opportunity. It's not a buyer's market out there right now for these assets. They're coming in pretty high, with a high cost basis. Our preference would be to add on a leased basis near-term. It would probably be at a lower margin, but you add leased vessels to cover near-term demand, and then you're in a lot stronger position for a future softening of the market.

That makes perfect sense. Let me just follow up with a question. I've talked to at least one of the other participants in the diving business, and they highlight the fact that while having more vessels is great, they have a real shortage of qualified dive personnel, and have talked about bringing in people from places like South Africa and Malaysia to work in the Gulf of Mexico. Is the personnel and the expertise sort of an additional barrier, beyond just getting boats in the water and having diving systems?

It absolutely is. Also, I would not -- we have a really great group of divers and good employees right now. I would hate to start diluting that just for the sake of trying to capture a little bit more of a demand cycle. I would rather maintain the higher quality going through.

But I mentioned we are adding -- the Caesar has been mentioned, the high-spec pipelayer, but also upgrading the Q to drilling. Then, I think I mentioned earlier that I see some opportunity in the well intervention side. So it's in these more specialty niche areas that I think we can add capacity without facing a future potential downside and a softer market.

If I may, I just wanted to ask one more question on the competitive dynamics. I've talked to most of the European companies over the last several months, and they are all talking about how great business is, and how much work there is to bid and how much backlog they have, and they all highlight the same regions. None of them even mention the Gulf of Mexico unless prompted. Is that a sign that we can feel pretty comfortable that they are not going to be doing what they have done historically, when things have gotten good in the Gulf of Mexico, which is sort of come in and often bid too aggressively, just to keep working and kind of spoil things for people like you, who are all about the Gulf of Mexico or mainly about it?

All right, but you have to keep in mind that historically, the Gulf of Mexico has always been a spot market versus the rest of the world, where you can actually book backlog. So it's hard to discuss backlog in terms of the Gulf of Mexico. But I think it's a misnomer to say that they are not in the Gulf of Mexico. I believe -- correct me if I'm wrong here, Martin, but I believe there's at least 16 North Sea or international vessels that have come into the Gulf in response to the hurricane work.

So there's quite a bit of competitiveness with all of the players in the Gulf right now. I think on the last conference call, I mentioned as being one of the upsides, though. Because with the North Sea vessels that have come in, it has also established a pricing plateau that is new to the Gulf of Mexico, and has closed the gap between the two regions. With that, I think even after the hurricane work tails off, which could be a year or 18 months out, we're not likely to see the Gulf of Mexico go back to its old historic rates because of this influx of the higher price plateau.

At this time, we show no questions registered. I'd like to turn the conference over to our host.

Thank you and thanks, everyone, for joining us this morning. We look forward to talking to you again next quarter.