Helix Energy Solutions Group Inc (HLX) 2006 Q3 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in listen-only mode. During the question and answer session, please press star [Operator Instructions] . Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Mr. Wade Pursell. You may begin.

Thank you and good morning, everyone, and welcome to the third-quarter 2006 earnings call for Helix Energy Solutions. Thank you for joining us this morning. With me today is Owen Kratz, our Executive Chairman, Martin Ferron, our CEO and President, [Bart Heyerman], our COO of Contracting Services, and Robert Murphy, our COO of Helix Oil and Gas and Alisa Johnson, our new 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 do not, you can go to our website, www.HelixESG.com, in the Investor Relations page, and click on the website 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 will summarize the results and walk through a quick financial overview, then turn it over to Martin for some operational highlights in both our contracting services and the oil and gas segments. Owen will then wrap it up with a strategic overview, followed by the Q&A segment.

First of all, if you will turn back to slide two, Alisa has an important announcement to make.

Thank you. As noted in our press release and associated presentations, certain statements made on (technical difficulty) today, discussions are forward-looking statements. For a complete discussion of risk factors affecting the Company, we direct your attention to our press release and to our annual report on Form 10-K for the year ended December 31, 2005, and our more recent form 10-Q filed with the Securities and Exchange Commission.

Thank you, Alisa. Turning to slide four, the third quarter of 2006 saw us achieve earnings per share of $0.60 per diluted share. This is 13% more than the results achieved in the third quarter of 2005 on a split-adjusted basis. Despite a lot of negative one-off type items, which Martin will discuss more when we get to slide nine.

From an EBITDAX standpoint, that is earnings before interest depreciation, and exploration costs, we generated $191 million in the quarter, which is 87% more than the prior year third quarter results. Contracting services made up 46% of the EBITDAX during the quarter and 72% of the operating account.

Now turning to slide five, consolidated revenues of $374 million represent the 79% increase over last year's third quarter, driven primarily by significant improvements in contracting services revenues, just the maroon boxes, due to the introduction of newly acquired assets the (indiscernible) vessels, and improved market conditions across all business lines within contracting services.

In addition, oil and gas sales increased $70 million -- the yellow boxes -- due primarily to the production added from the Remington acquisition.

Gross profit of $130.5 million was 57% better then the $82.9 million achieved in last year's third quarter. Gross profit margins of 35% were 5 points below the year ago quarter, due primarily to the $16 million and dry hole costs during the quarter relating to the two deep shelf wells, and also facility repair costs as a result of last year's hurricanes.

Absent these charges, margins would have been 41%.

SG&A, $30.3 million, increased $14.4 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 was 8% of revenues, which was flat with last year's level.

Equity and earnings, $1.9 million, reflects primarily our share of deep water gateways earnings for the quarter relating to the Marco Polo facility. That is offset by a loss in this quarter on our investment in OTSL, our Trinidadian investment, due primarily to mechanical issues experienced on the Witch Queen.

Regarding the tax rate for the quarter, the effective rate was a little over 35% which is 2 points less than 37% a year ago, due primarily to improved profitability both domestically and in foreign jurisdictions, driving the Company's ability to realize foreign tax credits.

The acquisition of Remington on the first day of the third quarter was the main driver behind an increase in the diluted shares outstanding this quarter, to nearly 97 million, compared to 82 million in the third quarter last year. As we funded the cash portion of the deal with a new due term B debt facility, interest costs for the quarter were $15.1 million for the quarter compared to $2.8 million in the third quarter last year.

With respect to the shares outstanding, you might remember the Board authorized the Company to buy back up to $50 million of shares in the open market. Subsequent to the end of the third quarter, during October, approximately 1.1 million shares were purchased at a weighted average price of $29.22 per share. So about $32 million of the $50 million.

Looking at the full-year 2006, turning to slide six, in our original guidance for 2006 was $2.30 to $3.30 per share. At the end of the first quarter, we raised the low end tightened the reins to $2.70 to $3.30 per share. Then after we closed the Remington transaction in July, we raised the range to $3.20 to $3.70 per share.

Obviously in hindsight, we wish we would not have done that. About a month ago, we were realized, based primarily on production shortfalls as a result of pipeline shortages and production management integration issues following the Remington acquisition, that our earnings would most likely come in between the range of $2.80 to $3.20 per share. And we still believe 2006 earnings will fall in this range.

I think it is important to note that, as you can see on slide six, that even at the low end of this range, the results reflect a 70% increase over 2005 actual earnings.

With respect to 2007 guidance, we are in the middle of a budgeting process. The Board should approve it in December, and as is our practice, we will release guidance to you probably the week of December 11.

On slide seven, you see how these results translate to return on capital, probably the most important metric. Notice we ended 2005 with 17% and the strong results of the first nine months of 2006 translate to a 19% return on capital annualized for the year.

And as a reminder, we compute this based on after-tax earnings before interest charges.

Looking at the balance sheet, slide eight, total debt as of September 30, 2006, was $1.3 billion. This represents 47% debt to book cap, and with the $593 million of trailing 12-month EBITDAX, represents 2.2 times the trailing 12-month number.

The components are primarily the new Term B facility, which is the orange box, at seven-year maturity, 1% annual amortization, floating interest. The convertible notes, which is the maroon box, and the [Merad] debt, which is the green box. Subsequent to September 30, we did swap $200 million of the Term B debt, locking in interest at around 7.2% all in for that facility.

So with that, that puts about half of our total debt at a fixed interest rate -- at a blended fixed interest rate -- of 4.83%.

So summarizing, finally, CapEx real quick, total capital invested in the first nine months of 2006 was about $1.2 billion. $830 million of that was the cash portion of the Remington acquisition. Of the remaining $390 million, $220 million related to contracting services, with the remaining $170 million for oil and gas activities. And included in the contracting services amount that was the acquisition of the Caesar, the final phases of Stolt acquisition, which was the DB 801 and the [Kestrel], construction payments on the Independence Hub and the acquisition of Fraser Diving. The oil and gas CapEx related to Remington drilling, wellwork on the shelf and costs related to the deepwater [spuds].

As far as the full year, projected CapEx for the remainder of this year is about $200 million for the fourth quarter, which should be funded from cash flow from operations.

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

Thank you. I am going to start on slide nine and say that although we have almost doubled net income year over year, and produced record EBITDAX for the quarter, we're obviously disappointed with our earnings performance in quarter 3 and will not attempt to sugarcoat that.

However, this was a quarter when a number of temporary issues coincided to detract from our results. These are shown on this slide nine -- an amount to $0.04 of earnings.

I am not saying that we expected to make $0.60 plus $0.40, because of $1 per share in quarter 3. As we anticipated that some of these factors would arise, we would agree. But our earnings potential for the quarter was certainly around $1 per share.

I will add more color to these issues as I proceed through the presentation, but I want to reassure you here that we have no fundamental problems and are working hard to get our earnings growth back on track in the coming quarters.

As Wade mentioned, we are maintaining our earnings guidance for 2006 at $2.80 to $3.20 a share, implying that we will produce between $0.71 and $1.11 of earnings in quarter 4.

Turning to slide 10, and an overview of contracting services, we are pleased to improve revenues by 6% sequentially, although that improvement would have been greater than 10% without extended repair and upgrade time for the Q4 [1000 express] in Kestrel. The revenue increase was mainly given by the price in escalation we predicted last time, especially in the deepwater and well operation sectors.

BP margins were up eight points year over year and flat sequentially despite much higher vessel downtime costs in the quarter. I will also point out here that we did eliminate around $6 million of pretax profit in quarter 3 due to work on internal production projects. That profit will flow back in terms of reduced DD&A in the coming quarters.

Contracting services outlook, we expect better financial performance in quarter 4, due to both gradually improving pricing and significantly less vessel maintenance activity. We also now anticipate that very good market conditions will prevail for our contracting services during 2007 and beyond, and we are particularly pleased to announce two very noteworthy awards recently.

Firstly, a $250 million term contract for Seawell, that we announced in September, and secondly, a $150 million project letter of intent we received last night for the Express and the Eclipse. All this work will produce greater than 40% gross profit margins, which bodes well for the spot price environment in the medium term. Also, usually when contracts are structured on a term basis, they are done at lower than prevailing spot market rates. So this is a great pricing indicator in our view.

So in a nutshell, the market for our contracting services has improved pretty much exactly as we predicted, and we have further investment plans which will lead to further growth. I will again highlight those plans as we go through this presentation.

Taking you quickly through the contracting segments on slides 12 to 20, starting upstream with our well and subsurface consulting business, quarter 3 pretty much as expected, with revenue down slightly due to vacation season for our consultants. We expect similar (indiscernible) performance in quarter 4.

Shelf production, that is Cal Dive on slides 13 and 14, utilization levels dropped by 4 points as we caught up on vessel maintenance and completed the upgrade to the Kestrel three weeks later than expected. The revenues increased by 3% sequentially due to better pricing. The gross profit margins fell by 4 points due to a higher level of vessel downtime costs.

As Wade also mentioned, we lost $4 million on our investment in OTSL in Trinidad, mainly due to an engine failure on the Witch Queen.

Quarter 4, an outlook, we expect similar to better financial results in quarter 4 in this segment, with the Kestrel compensating for its seasonal shutdown -- a slowdown, sorry -- in-service diving activity. Also, OTSL should return to profitability in quarter 4.

A potential IPO update -- we have completed preparation for the potential IPO of a minority stake in Cal Dive and continue to monitor the valuation environment before proceeding.

Deepwater construction on slide 15 -- our two deepwater [pipelines], all the two [pipelines assets], the Intrepid had an excellent quarter of utilization and performance, while the Express spent the whole quarter in the shipyard for the planned upgrade. This was delayed due to a minor switchboard fire that occurred early in September.

I am happy to say that the vessel has now we turned to active service in October. Obviously, the market is very good for her as indicated by the letter of intent we received last night.

Our robotics group, Canyon, had a record quarter due to strong utilization and pricing in all geographic regions, and we had the expected seasonal pickup in pipe [aerial] work in the North Sea.

As I mentioned, in terms of outlook, very strong indicators for pipelife for the Intrepid and Express, excellent backlogs, and the LOI last night was very pleasing for the Express and also for the Eclipse, Intrepid, which will be involved in our project in India. I think that demonstrates our ability to participate in the fast-growing deepwater pipeline segment internationally.

Again, we expect the robotics group to have a strong quarter 4, although there will be a seasonal slowdown in pipe (indiscernible) work late in the quarter. I would like to point out to you that our Board of Directors also recently approved a $30 million investment program in new robotic assets to further boost our strong position in deepwater construction support and pipe burial.

Turning to well operations on slide 17, the Seawell had a record quarter of financial performance, due to the anticipated improvement in spot market pricing in the North Sea. However, the Q4000 thruster problems persisted into the quarter such that we had a thruster removed for rebuilding. This caused around 12 days of downtime, but more importantly limited her to mainly low-margin filling work.

Turning to the outlook for Q4, Seawell has an exceptionally strong backlog, especially following the announced contract with Shell that will start in January of 2007. However, due (indiscernible) Q4, the vessel will work almost exclusively for the same operator on all the contract terms. Just to add a note here that we expect only a marginal impact on our Q4 performance with the Seawell from the recently announced diver strike in the North Sea. We have enough divers (indiscernible) work to take us into the New Year.

Also during Q3, we announced the kickoff of a second vessel for the North Sea at a cost of $160 million, and we expect that vessel to enter the market in late 2008. The Q4000 should have a much better quarter 4, especially after the rebuild thruster is reinstalled. And following that, she has a backlog of high-margin well operations work stretching out several months.

Also in this well operation segment, I wanted to mentioned that we completed the partial acquisition of a company called SEATRAC in October. This Company is based out of Perth in Western Australia and Specializes in subsea engineering, and well operations. We acquired 58% of the Company for $12 million' and we anticipate picking up the rest of the Company depending on future performance. We also intend to use SEATRAC as the foundation on which to build our operating presence in the area as we regard this as a very exciting future marketplace for our sub-sea well operations business.

Turning to production facilities on slide 20, on Marco Polo, well performance continued to disappoint. Throughput and, therefore, our targeting should continue to improve gradually over the coming quarters. On the independent sub, that asset should be installed by the end of the year with mechanical completion and production following in late Q1 and early Q3, respectively.

That takes me on to oil and gas highlights on slide 21, 22 to start with. I would like to point out on slide 21 that we made gross profit of $44.5 million in the quarter, and that profitability was negatively impacted by a net $6 million charge due to one-off Remington acquisition costs and hurricane repair costs, net of a gain on the sale of the telemark property. So we had a net hit there of $6 million due to one-off issues.

Turning to slide 22, shelf production was 17.3 Bcfe, higher sequentially, but was around 3.2 Bcfe lower then our expectation due to pipeline variance mainly third-party pipelines, and some production management issues late in the quarter. Natural gas made up 50% of the overall quarter 3 production.

Just to explain the unexpected production margin management issues a little better, we had hoped that the integration of the ERT and Remington would go as well as the merger of (indiscernible) Torch personnel earlier this year. Initial indications were also very positive. However, in September we had a parting of the ways with four senior managers at ERT over compensation.

This caused some production deferrals at that time at exactly the same time as we were experiencing the pipeline shut-in issues. Gunnison production was off 0.2 Bcfe sequentially, again, mainly due to a period a pipeline downtime.

Q4 2006 and outlook -- we (indiscernible) two senior personnel to head up our shelf production management in the Houston office. We've already replaced people that have left in an area. We are still suffering from the impact of pipeline shut-ins, but expect that problem to diminish during the quarter based on repair schedules.

Also in quarter 4, we expect to bring on production from the deepwater Tiger Fields and at least three new shelf discoveries. Our overall production estimate for quarter 4 is therefore 16 to 19 Bcfe.

On the next three slides will help me update you on our drilling status, and the progress on development projects. Turning first to slide 23 and an update on Q3 drilling performance, by the time we closed the Remington deal, they had several wells and progress, including two high-risk, high-potential deep-shelf probes. Unfortunately, both of those wells were classified as dry holes in quarter 3, which led us to exceed our dry hole allowance for the quarter. We have since reprioritized the drilling program to focus on low-risk conventional shelf plays and the initiation of the deepwater program.

Also shown on this slide 23 is a four out of four success rate in the quarter on this conventional shelf program. Here, we added about 15 Bcfe of reserves, which matched our production for the quarter. Additionally, we are encouraged by the outcome of the deepwater Huey well, but plan to further sidetrack possibly with Q4000 next year.

Slide 24 shows an update on drilling in progress. We plan to drill three conventional shelf wells in quarter 4 with combined reserve potential of around 40 Bcfe. Also, we have kicked off the drilling of (technical difficulty). We have equally good (indiscernible) prospect that is shipped to follow early into next year.

Finally, slide 25 shows the expected timeline and productivity of development projects and progress over the next few months. As I mentioned earlier, we will bring on around 40 million a day from development projects in this quarter. Two of them are shown on this slide, and four on the previous slide 23. And also, we have the deepwater Tiger project hopefully coming on in mid-November.

Longer-term, we are excited to have acquired Phoenix during quarter 3, and are on track to commence production in the second half of 2008 by our first mobile production units.

So with that, I will turn the back to Wade for some comments on hedging, maybe.

The final slide just simply shows the hedge positions we have in place currently as of the end of October. Our strategy stays the same; we try to look at it year, year and a half, and hedge up to 50% of our PDP, and these are the positions we have in place currently.

I will turn it over to Owen for a strategic overview.

Good morning, everyone. My role in the Company now is to try and work with Martin and the management team on where we are trying to go with the Company and then, also, work together on the tactics for how to get there. From my perspective right now, I would characterize the Company by saying thing that things are great. They are just not as great at this specific point in time as I think we had hoped they would be, but I do see it as an anomaly.

If you start looking at beyond the details that Martin has outlined with what happened in the third-quarter and ask yourself is there a fundamental issue in the Company right now, I would have to say no. The first thing you might notice is that we do have an awful lot going on. We have a number of new service assets in the works coming into the market and then the yards, we've got a beautiful list of developments backlogged to be done, and we have an exciting drilling program.

But this much activity is pretty much normal for us, given our historic levels and the growth rate that we typically post. And given the fact that we have such a strong management team now working with Martin, we've got Bart, Alisa and Robert on board, and we have a strong management group in each of the service sectors of the Company, as well as each other production sectors. So we are very much on the same page about where we are trying to go, and I will get to that in a little bit.

I categorized our greatest sin this year though, just being in the fact that we probably mismanaged our guidance. We had just done a poor job this year. Typically, we are very disciplined about giving guidance only at the beginning of the year, at which time we share with you our budgeted outlook for what we think the performance of the Company would be.

In that outlook, we do risk-weight it for typical fluctuations and events both negative and positive that would have included things like happened in the third quarter here.

This year, I think we became a little bit victims of our own enthusiasm for what we were doing with the result that we raised guidance mid-year after the Remington transaction closed and changed it from the beginning of the year. In hindsight, we should have stuck with our traditional role of staying with that guidance, and if things turned out better than that, it would just fall into the reporting side of the Company.

This year, our original guidance was $2.60 to.$3.20, and our current guidance is still $2.80 to $3.20. So that puts into perspective what I had just been talking about.

Going into the first half of this year, things were going well, even though production recovery post-hurricanes was lagging our expectations. We did not see it as a major issue. The Remington transaction went very smoothly, or so we've got, up until we closed, and for a period beyond that, things were fine. Then we had sort of a management personnel issues arose that were unforeseen.

We were required to restructure the management groups within the production companies, and that had a significant effect on the recovery of production rates, as well as putting new production online. It also was compounded by the fact that it came at a time when there was commodity price pullback. But this was an impact experienced not just by the Remington side of the production, but also by the ERT side. So it was across the board.

In addition, we had two wells that had been spud prior to the close that we were obligated to finish. They were in the deep shelf, and as many of you know, we had told the investment community that we were not fans of the deep shelf. They did turn out negative, but at this point, I would just like to reiterate that we are still not -- obviously we are still not fans of the deep shelf. And it would be our -- I think Martin and Robert have suspended the deep shelf drilling aspirations there, and that is still our position at this point.

I think all of the changes that have occurred in the production group have been very positive, and although it was a disappointing third quarter, the value is still in the ground. The value is still there, and it is basically a timing issue.

The service side of the Company remains as strong as I have ever seen. I said that at the last conference call, and I would just reiterate it. I think from what you have heard from Martin, things continue to improve there; a lot of exciting things. Bart just got back from signing up a contract with Reliance, a huge, huge positive.

We have an aggressive but an achievable organic growth initiative in progress for all the service sites. And those have been mentioned in detail, but I will mention it in a bit where it fits in the overall strategy. The drilling on the whole has been exit -- successful despite the few negatives that we have incurred this year, and I do believe that we are going to become much better at managing our dry hole allocations in the years ahead.

We have a strong list of developments that will add significant value, as I mentioned. And the international expansion is going ahead at a measured but prudent pace, with a lot of positive results, that positions us well for transplanting this model in other regions.

Things did get a bit messy in the third quarter, but things are certainly not broken. Year over year, revenues are up 81%, and I might just mention the balance for all those that think that we are now an E&P company -- the service side of the Company contributed 63% of the revenues a year ago and 60% this year.

Gross profit is up 94% year over year, with services at contribution 50% last year and increasing to 60% this year. Net income is up 92%. Earnings per share is up 78%. And I know stock price is roughly where it was the year ago, but this Company is delivering on the strategy and the model is producing on the value that it is capable of.

And the return on capital actually increased from a 17% level last year to a 19% level this year. So it's not by any tricks; it is by putting our capital to work in places that make sense.

Our strategic plan going forward -- I might just point out up until now, we have been adding to the Company by bits and pieces within our balance sheet over the years, trying to assemble a group of services that can have an impact on funding and development costs and LOE -- LOI costs. In 1990, we were just a diving service provider. '91, we became an (indiscernible) contractor. '92, we started acquiring production. '95, we moved into the deep water. 2000, added robotics and well Ops. 2001, deep production. In 2002, we moved into providing facilities. 2005, increased our reservoir technology group. 2006, added exploration and sometime during this next year, we will actually start to drill.

So that brings us to the point that we have all of the tools in the toolbox right now. People are recognizing us as what's been called a hybrid company, both a service company and an E&P Company, people's perception of which one we are seems to differ. But I have to say that our goals have been constant. We constantly assess the mix of services and production that we have, with the outlook that we are trying to achieve long-term sustainable growth with a model that is hedged to the cyclicality of the energy sector.

So that begs the question, what are we and what are we going to be? Our ultimate goal is to be an offshore production developer with a focus on marginal fields. So if we are a hybrid now, what do we do to make that final transition? What you will see us doing over this year, the remainder of this year and the years coming up, is refining the mix of our services; and by that I mean we are looking to monetize non-core services, those that do not contribute significantly to lowering F&D and LOI costs, such as our announced intention to spin off-the-shelf group.

In addition to that, we are going to be adding to the core services. We have already mentioned the assets that we are adding, the new pipe lay group -- the list goes on. But they have been mentioned in detail.

So over the next few years, we will be doing that. We will be shipping capital, by monetizing non-core and investing it into core assets. We will continue to develop; we will continue to develop prospects. We will continue to develop those and put those into service. But then the production assets, I would also say that we will probably -- you'll probably see us start to look to divest or monetize non-core assets and put the capital into core production assets -- same philosophy.

Along with that, Wade mentioned that we have been in the market -- we had an authorized stock repurchase plan of $50 million, of which we have repurchased $32 million. We will be continuing to purchase under this existing plan in the market and under the previously announced authority limits.

We may go back to the Board for a reauthorization and additional limits to the plan. And we would consider and we will consider continuing to buy stock in the market opportunistically, whenever we feel like the share price is undervalued.

Given that, I hope that clarifies at least from my perspective where we are, and with that I will hand it over to Wade for Q&A.

Okay, Rebecca, are you there?

(Operator Instructions). Bill Herbert, Simmons.

Martin, could you give us a sense in terms of what else you are bidding on from a large project standpoint -- nice contract with regard to the work in India, but can you give us a sense as to similar projects and scale that you are looking at and just the general visibility in the marketplace for those kinds of longer term contracts and bigger contracts?

Bill, this LOI we announced last night is kind of one-off in terms of size. But we are kind of looking at many $10 million, $20 million, $30 million type contracts for our pipe lay assets. As I mentioned, we see a sequence of these type projects over the coming years. I think we will be able to build our backlog with smaller projects, but also with this large one.

And can you give a sense as to what the anticipated margins are associated with this latest contract?

I mentioned in the presentation of around 40%. (multiple speakers) 40%.

And then thirdly and last question from me, with regard to the production guidance, I think it is 15 to 19 Bcfe for the quarter from the shelf. Where are we on a run rate basis right now?

The pipeline issues are still persisting right now, so our October run rate is at the lower and. But we are hoping that the pipeline repairs will get done; we will get more access to those pipelines and also we have production coming on potentially of around 40 million a day by the end of the year. So we are hoping that our operating run rate for the quarter will certainly be in that range.

But specifically, when do you anticipate the pipeline issues to be resolved?

Sometime by the end of November, hopefully.

Jim Rollyson, Raymond James.

It looks like -- just looking through the $0.40 of shortfall versus what you could have done, looks like 30, 40% at that was tied in in some way, shape or form to the Remington acquisition integration, all those kind of issues. And you kind of talked a little bit about things you have done to fix those. Some of those things take a little bit of time and some of them probably get fixed immediately.

Can you just talk about where you stand on Remington today and how that might reflect in the Q4 numbers, and then going forward, just as far as where you are?

Jim, I will turn that over to Martin and Robert with their more intimate knowledge.

As we mentioned on some of the slides, we did have some personnel turnover in Q3, which caused us some issues, especially the production management. But since then, we have actually strengthened the team, in our view. We have new people in place. Obviously these guys have to climb a learning curve.

But we are hoping that during quarter 4, we will get back up to speed as long as the pipelines allow us to produce. We are capable of producing 220 million a day right now. But we are probably down about 40 million due to pipeline issues.

So we are going to get back on track, hopefully quarter 4 here in terms of our team.

So timing-wise, I guess you'll make up probably some of that in the fourth quarter and then, hopefully, the rest of that when you get into next year. Is that fair?

Yes, absolutely.

Remember, it is deferred; we did not lose it. We are going to take a quarter to be low, the third, based on commodity price is pretty good.

Sure. And just simplifying also what you said, the four construction assets that were out this quarter for longer shipyard times than expected -- do you know what -- you may not have the numbers, but do you know what the utilization was in Q3 for those four specifically and maybe what that looks like in the fourth quarter?

The Express had zero utilization in Q3; and it should have about 90% in Q4. The Kestrel had only 15 days utilization in Q3, and that should have full utilization in Q4. The Q4000 actually had reasonable utilization; we lost 12 days of downtime. But the key thing was the utilization was on low-margin work because we had some thruster issues.

Once we repair the thruster, we should get back on track with the high-margin work, which will make all the difference. Then the fourth asset was actually Witch Queen down in Trinidad with OTSL. That had about six weeks of downtime in Q3. We only expect maybe ten days in Q4. So a much better picture in terms of utilization of those four assets.

Then last one, for Owen, I guess. Your first attempt at getting into the Asia-Pacific market was the acquisition you announced or the partial interest. Can you talk about your strategy for the developing out that market? Is it going to be somewhat similar to what you did in the North Sea, kind of slow and steady, and are you going to buy a house out there?

As far as the house, no. We are going to take everything slow and steady at this point. We have done a lot. We have got a lot to digest, and we are going to comp things down and make sure that we get our new assets working like they do before we start looking at adding a whole lot more.

I am very excited about the addition of Fraser Diving and SEATRAC in Australia, and Fraser out of Singapore. I think they are very complementary and give us a really strong base for establishing relationships that ultimately could lead to development partnerships and provide us a presence in the area that will also springboard the larger pipe lay assets to gaining contract work in the area. So I do not think we have to add a whole lot. I am very happy with the starter set that we have in the Southeast Asia region.

In the North Sea, the North Sea I think is the time for well Ops with their new vessel coming on. As far as production in the North Sea, we have a big way of prospects to drill and prospects to develop. Our appetite is not that great to go out and look for more production deals at this point. It is more on executing what we've got.

Great. And just for reference, exactly a year ago we were at about 238 for this year and $3 for next year. Your stock was $1 higher.

Thanks for that.

Martin Malloy, Southcoast Capital.

On the marine contracting side, can you give us an update on what you are seeing as far as margins and pricing for both the shelf and the decontracting, deconstruction market, and then what you expect to see in the next couple of quarters going in next year?

Yes. Starting with deepwater and well operations, we have said for the past few quarters that we expect pricing to gradually improve, and I think you see that in these results, despite some extra vessel downtime. And I think you will see that improve over the coming quarters. The Reliance job in India is greater in the 40% margin, which is higher than the stock rate right now. So that is encouraging.

On the shelf, I think in quarter 4, you will see some seasonal slow down in surface diving work which might have a minor impact on margins. But that will be offset by full utilization of the Kestrel on a term contract.

And then for next year, I see us improving slightly on margins. I think we were up about 3% in this quarter, and I think there is still a percentage or two to come next year.

And then on the Newnan prospect, what is the time frame as far as reporting some results from drilling there?

We have literally just started. We had 75 to 90 days on the wells. So it is probably going to be first quarter next year.

Roger Read, Natexis Bleichroeder.

I guess kind of a follow-up on one of the earlier questions. Martin, looking at the Reliance contract margins, 40% there, you are now getting your assets obviously somewhat more aggressively outside of the U.S., outside of the Western Hemisphere. What does it say about where margins could go as you look out back part of '07 and even 2008? Is this the margin level that would be sustained, or should we see it go higher?

We could see it go higher. Certainly, our intention to start bidding higher on this type of work. I would say, though, that our competitors are not earning this type of margin, and we are in a competitive situation on this type of work. I think it is the special nature of some of our services technologies which win us the higher margins. So where we are able to apply that, we will get the better pricing.

So I certainly think there is room for improvement. I am not willing to stick my neck out in terms of specific numbers at this juncture.

No, I think direction is fine. I was just trying to understand what the metrics were that were moving around out there.

And then I guess the other question I had, looking specifically at this diver strike in the North Sea, sounded like the divers overall had voted pretty overwhelmingly against whatever the first offer was. You indicated you get enough backlog to take you through the fourth quarter. Can you give us, if there is any history or if you are aware of it -- what typically has happened when divers have struck in the UK sector of the North Sea -- do these tend to be short, long-lived? What would be the ultimate impact on Helix if there is a significant increase in diver pay?

Firstly, I am from that area, and I am not really aware of any previous severe diving strike. I think this is a situation that has built up over the last few months. We were on a diving job with Seawell, but we came in and we are going to switch to a diverless job, which will take us through Q4, as I mentioned. So very little impact there.

In terms of what impact it will have on our costs, we certainly took a stab at what we think the outcome would be in terms of the divers' pay escalation, and we built that into our future contracts. So hopefully, it will be sheltered from the escalation.

And then one final question. I did not see anything on Dawson's Deep. I assume that has come online, it's included in Gunnison and has been producing okay, or is there any other update there?

No update came on Q3.

Andrew O'Connor, Wells Capital Management.

Aware that Helix Energy is targeting 30% of offshore contracting services to eventually be used by internal exploration efforts, so wanted to know what percentage of contracting services are currently used internally, and when do you think you'll have reached 30%?

It is less than 5% right now. I think we have always maintained that we would get to 30% in a downturn situation. This is a cyclical business for contracting services; and you will see us turn our attention to more internal work as we see a fall-off in utilization in the open market. We are not seeing that right now, but certainly we have the capacity to do internal work, as any market correction comes about.

And then secondly, did I miss -- was there an indication of CapEx for 2007?

We will get more specific on that in our December announcement with respect to our '07 guidance. Previously, we had said, I think, a range of $600 million to $1 billion. I expect it to fall within that range, probably close to the middle, actually.

James Stone, UBS.

Just wanted to follow-up on [Newnan and Bishop]. The numbers that you put in the slide in terms of net risk reserves seem a little bit lower than previous slides. I just want to know if that is a change in how you are reporting the number? Or if there is a downgrading of the prospect?

I think it is more of a most likely what we would see if we were successful, what we could see possibly in a proven probable case. It is not be the entire project. There are multiple wells with both projects and we are just trying to hit it down the middle of the fareway with a number instead of having it way out there way low.

So the previous number would have included the impact of additional wells beyond perhaps the first two or so that you're going to drill?

Exactly.

And then I want to get a little bit more clarity. Martin, you said that you've got $40 million a day a coming on this quarter. I guess that would put you at -- would that then put you at a 260 million a day exit rate if the pipelines come back on and all this production gets up and running by the end of the year?

No. The 40 million a day again from the slides when you have it all, that really comes on over the next two to three months. And if you look at our exit rate for the third quarter or just your average run rate during the third quarter, it is about 170 million a day. I would expect it's over 200 million, but I don't think we are going to be at 240.

If I had to guess, we will be 205 to 220. And that is on December 31. We cannot exactly pin the timing of these new developments coming on, as you probably have experienced with other companies. But with that 40 million in our current rate, we should be ramping up to the numbers you were talking about some time near the end of the first quarter.

I am just trying to get a sense for how comfortable you are with the previous '07 production volumes.

That was, I believe, between 90 and 105 --

We have given specific guidance on Q4. We were saying 16 to 19 (multiple speakers) --

I got that. I am just -- in terms of what you've got coming on, in order to get to the 90 I think you had 90 to 110 Bcfe in the range for '07. I just want to get a sense for how comfortable you are in getting that.

(multiple speakers) running between 250 and 270 million a day.

On one of the slides there, we are showing three conventional plays that we are drilling in Q4 here, which will be very quick to come on. We've also got (indiscernible) contributing next year, Devils Island, Kiwi. We are kind of going through that in our budgeting process right now, and shed a lot more light on it in December.

Dan Barrett, Fortis Bank.

Most of my questions have been answered, but one quick question on the Fraser Diving and SEATRAC. When do you think that that might contribute materially to your revenue line? Is there something coming in in '07, or is this more an '08 type story?

Fraser is already contributing. We are using (indiscernible) Systems in support of our diving effort here in the Gulf and in the Far East. You're seeing that come through already. SEATRAC will be more of an '07 story obviously, since the acquisition is late in the year here.

Any kind of guidance on how much revenues those two combined will contribute in '07?

$25 million, $30 million. We've talked about $12 million of EBITDA on Fraser.

Then one last question -- on the Q4000, looks like you repaired that thruster, but over the last few quarters it seems like there has been a lot of issues with unexpected downtime on that. Can you assume that most of that is behind us? Or is there something sort of inherent in the design of that vessel that we can kind of assume that there will always be a few days of repair work or design modification (technical difficulty)?

Owen Kratz is dying to answer this question, so I will turn it over.

Actually, I was going to turn it over to Bart. But there is a design issue, and I think we have a good plan for addressing it.

There were three issues where we were lagging, and all three issues have been addressed. One issue was the onshore marine support. We have upgraded the quality of people better now looking after the vessel. The same with the offshore marine operations. We have also upgraded the personnel there. We're very comfortable with personnel in both two areas.

And then there were a couple of upgrades that we had to make to the vessel and to the marine systems, and that is being done. And we are going to make sure that this vessel next year when it is also drilling our own prospects and working on some high-margin projects with third parties, that we will have (indiscernible) time. And that this vessel is going to be the success that it was designed for.

That is the last question.

Thanks, everyone. We look forward to speaking with you again, I guess, in a little over a month, in December, when we go through our '07 guidance. Thanks.

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