Helix Energy Solutions Group Inc (HLX) 2006 Q4 法說會逐字稿

Hello, and welcome to the fourth quarter report and investor conference call. At the request of the Company, this call is being recorded. All lines are in a listen-only mode until the Q&A session.

Now I'd like to turn it over to our host, Mr. Wade Pursell. Sir, please go ahead.

Thank you. Good morning, everyone. Welcome to our year- end and fourth quarter 2006 earnings call. Thank you for joining us today. With me today is Owen Kratz, our Executive Chairman; Martin Ferron, our CEO; Bart Heijermans, our COO; Robert Murphy, President of Helix Oil and Gas; and Alisa Johnson, our General Counsel.

Hopefully everyone has access to a copy of our press release and the slide presentation which is linked to the press release. If you do not, you can go to our website, www.helixesg.com in the Investor Relations page and click on the webcast there. We will be going through the slides this morning during the call.

So I'll start on slide three of the presentation. You can see the outline there for the call this morning. I will summarize the results and walk through a quick financial overview, then turn it over to Martin for the operational highlights in both our contracting services and the Oil and Gas segments, as well as an update on our capital projects. Owen will then wrap it with a strategic overview and we'll follow that with a Q&A segment.

But before I get started, I will turn it back to slide two and Alisa Johnson has a very important announcement to make.

Thank you. As noted in our press release and associated presentation, certain statements therein and in today's discussion are forward-looking statements. A number of factors could cause actual results to differ materially from those forward-looking statements. For a complete discussion of risk factors affecting our Company, we direct your attention to our press release, our annual report on Form 10-K for the year ended December 31, and to our more recent Form 10-Q filed with the Securities and Exchange Commission. Also during this call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, we will provide on our website a reconciliation to our most directly comparable GAAP financial measures.

Thank you, Alisa. Turning now to slide four, our net income for 2006 was $354 million or $3.87 per diluted share. In December of 2006, we completed a carve-out IPO of our Shelf Contracting business, that's Cal Dive, selling 27% of the business in the IPO. That transaction resulted in a gain of $96.5 million net of tax. In addition, during 2006, we incurred incremental overhead expenses relating to setting up Cal Dive as a separate public entity of about $8 million, $5.3 million net of tax. Therefore, we're moving all of the impact of the IPO in the 2006 numbers; you get $253 million of net income or $2.85 per diluted share.

Now, turning to slide five and looking at the results for the fourth quarter, consolidated revenues of $396 million represents a 50% increase over last year's fourth quarter driven primarily again by significant improvements in contracting services revenues, which are the maroon boxes on slide six, which actually demonstrates this better, and that's due primarily to improved market conditions across all business lines within Contracting services. That's the continued work on the shelf following the 2005 hurricanes last year and secular growth in the deepwater markets.

In addition, Oil and Gas sales increased $54 million -- see the gray boxes -- due primarily to the production added from the Remington acquisition. Gross profit of $151 million was 58% better than the $96 million achieved in last year's fourth quarter. Gross profit margins of 38% were two points better than the year ago quarter due primarily to the improved pricing in all business lines within Contracting Services. This more than offset a margin decline in Oil and Gas, which resulted due to the $11 plus average natural gas prices realized in last year's fourth quarter following Hurricanes Katrina and Rita.

SG&A, $40.8 million increased to $19.6 million from the same period a year ago due primarily to the increased overhead to support the Company's growth over the last year and bonus accruals in the fourth quarter as financial targets were exceeded. This level increased about $10 million over the preceding quarter, the third quarter, due entirely to the bonus accruals. Equity and earnings of $5.5 million reflects primarily our share of Deepwater Gateway's earnings for the quarter relating to the Marco Polo facility, earnings from Cal Dive's investment in OTSL, that's our Trinidadian investment; we're essentially breakeven for the quarter.

Regarding the tax rate for the quarter, backing out the impact of the IPO, our effective rate was a little less than 34%, which is higher than the 27% of last year's fourth quarter which included some adjustments due primarily to the Company's ability to realize foreign tax credits due to improved profitability both domestically and in foreign jurisdictions.

The acquisition of Remington on the first day of the third quarter this year was the main driver behind an increase in diluted shares outstanding to $94.5 million in the fourth quarter 2006 compared to $82.9 million in the fourth quarter last year. This increase was partially offset by the Company buying back $1.7 million shares during the fourth quarter at an average price just below $30 per share. Also, we funded the cash force into the Remington deal, $835 million, with a new Term B debt facility which drove interest cost for the fourth quarter to $14.1 million compared to only $2.8 million in the fourth quarter of last year.

On slide seven, you can see how our annual results excluding the IPO translates to return on capital. As a reminder, we compute this based on after-tax earnings before interest charges. You see the 2006 number of 15%. I expect looking at the projections to see a nice improvement in 2007 and beyond as earnings from the Remington acquisition improve and we begin to generate the returns from all the Contracting Services capital projects, which are included in the capital; example, the Helix producer well enhancer in the Caesar.

Looking at the balance sheet on slide eight, total consolidated debt at December 31, 2006 was $1.5 billion. This includes $201 million under Cal Dive's new revolving facility and that's the blue box. This facility is non- recourse to Helix. The other components are primarily the Term B facility, $833 million in the orange box; the convertible notes, $300 million in the maroon box; and the MARAD debt, $131 million in the green box. Excluding the non-recourse Cal Dive debt, about half of our debt is fixed at a blended interest rate of 4.8%. Cal Dive IPO in December resulted in $465 million of total proceeds after expenses. That includes both the equity sale and the debt pushdown. Total related taxes are about $125 million, which will be paid in March of 2007.

As a result, we ended the year with $492 million of cash in liquid investments on the balance sheet and the current plan is to use that cash to fund the tax payments in March and also our 2007 capital program. This level of debt amounted to a net debt to book cap of 38% as of year end, and with $665 million of EBITDAX for 2006, that excludes the IPO gain. This represents 2.2 times the trailing 12 month EBITDAX.

So, summarizing CapEx for the year, 2006 saw us invest over $2 billion into the business. In July, we paid about $1.4 billion for Remington. Other capital investments in 2006 totaled $613 million; $331 million of that, over half related to Contracting Services with the remaining $282 million for oil and gas production. Included in the Contracting Services amount was the acquisition of the Caesar, final phases of the Stolt acquisition early in the year, the DB 801 and the Kestrel.

Construction payments for Independence Hub, the SEATRAC acquisition and the Fraser Diving acquisition. The Oil and Gas CapEx related to drilling and well work and the costs related to the deepwater PUDs. In December, we provided 2007 earnings guidance in a range of [335] to [475] per share and stated at that time that that included 100% of Cal Dive's results. Our outlook for the year has certainly not changed. However, we are able, along with Cal Dive now, to provide specific guidance on that business. We estimate Cal Dive's net income for 2007 will be between $118 million to $136 million. Accordingly, we are adjusting our guidance to [302] to [437] per share to reflect the minority interest, 27%, in Cal Dive's earnings. By the way, they will be discussing this guidance along with their fourth quarter results in a separate conference call at 11 o'clock this morning Central time.

Finally, with respect to our guidance, I would like to reiterate that we estimate about 40% of the earnings will be generated in the first half of the year with 60% in the second half. Within the first half, I expect the 40 to be split around 18% to 19% in Q1 and around 21% to 22% in Q2.

Slide nine simply shows that by just about any metric 2006 results reflect a very nice continuation of the growth story at Helix. I might also alert you to our 10-K, which will be coming out in a couple of days. For those of you who want to dig into the numbers deeper, we've made an extra effort this year to expand the disclosures, particularly adding a lot more tabular information to help you with your analysis.

With that, I now turn it over to Martin Ferron for operational highlights.

Thank you, Wade, and good morning, everyone. In the interest of full disclosure, we have again provided a lot of operational information in this presentation. Before I cover the main points, I would like to reiterate, as I did in the press release, that as well as achieving 69% increase in net income for 2006, we also set a strong foundation for future growth by announcing several important organic investments in key service assets and by the acquisition of Remington Oil and Gas and the Phoenix property to greatly enhance our Oil and Gas business unit.

Those investments are highlighted on slide 10. The Remington acquisition is already making a real difference and we are excited that the Independence Hub and the Caesar pipeline asset will start contributing earnings this year, followed by the Helix producer, Phoenix, and the well enhancer next year. Updates on all the key service capital projects are included for information at the back of the presentation and we'll take questions on those if you have them.

Okay, moving on to operational highlights starting with Contracting Services on slide 11. Quarter four saw a 14% increase in contracting revenues due to the introduction of new assets and existing assets like the Express returning to active duty. Margins improved by 5 points year-over- year and we're up slightly sequentially mainly due to seasonality in both the Gulf of Mexico and the North Sea.

On slides 12 and 13, for deepwater construction, we are very pleased with the way the markets for our Pipelay and Robotic Assets are still improving. We expect pricing to continue to firm in 2007 and also international work will be a key contributor to backlog.

On slide 14, as Wade mentioned, we put the results for Cal Dive there, but there will be a separate call at 11 o'clock this morning, which should be well worth listening to.

On slide 15, well operations had a very solid quarter four, the gross margins rising to 35%. This is especially noteworthy given the high level of third party services involved. Both the Q4000 and the Seawell should do even better in 2007 due to improved pricing. Although each has a dry-dock planned, the Seawell in this quarter one, 30 days, and Q4000 in quarter three, 75 days. The drilling upgrades for the vessel will be completed at that time.

On slide 16, we have included a slide showing the timing of our dry-docks in 2007, and that sort of underlines the ramp-up in earnings that we just took you through.

On slide 17 for production facilities, we expect more tariff income from Marco Polo and the first contribution from the Independence [seven] 2007. Mechanical completion of this second hub is on schedule for late quarter one, while production and therefore tariffs should commence in quarter three.

On slide 18, we're very pleased with the performance of Helix RDS, our reservoir and well tech services group in 2006, the first full year of our ownership and expect a similar 2007.

Moving on to our Oil and Gas business unit covered on slides 19 to 25, and no, I'm not going to jump straight into a Noonan update as we actually have more highlights to discuss here. Firstly, our year-end reserves increased by over 300 BCFe from end of 2005 levels, representing a reserve growth of 137% and a reserve replacement rate of over 650%.

Secondly, we also drilled six out of six shelf exploration wells since the last earnings announcements and now have a sequence of 11 from 11 successful exploration wells including Noonan. During the sequence, we've added over 160 Bcf a year reserve potential, which is about 60% of the total reserves Remington had when we announced the acquisition. Although quarter four production was disappointing, mainly due to bad weather hampering operations and the repair of pipeline shut-ins, the [latter impact] is now largely behind us and it's actually down to less than $10 million a day equivalent.

We're making steady progress on production ramp-up. However, the bulk of that ramp-up will occur from April onwards with improving weather and slides 23 and 24 illustrate the projects that will make a meaningful increase to our rate. You can see over $50 million a day there coming on. We expect quarter one production to be in the range of 15 to 18 Bcf. I still estimate that our production for 2007 will be between 85 and 95 BCFe. I would also like to point out the 26% sequential decline in our LOE costs that can be seen on slide 20.

Okay, now we're at Noonan update. As covered in a separate press release yesterday evening, we have made a commercial discovery. While it is too early to finalize the reserve estimates, we encountered sufficient pay in three well bores to believe the potential reserves should be at least 100 BCFe. We are still in the evaluation stage and could drill more wells in our three leases to target additional potential reserve. We're also screening development options and believe that production can commence as early as the second half of 2008 with a fast track approach. We are obviously extremely excited about this discovery as it points to the overall value of our deepwater portfolio.

As mentioned in our recent earnings guidance call, deepwater success was not factored into our growth projections. It's also very important to note that we may sell down some interest in Noonan and any subsequent discoveries to cover finding and development costs, to reduce debt or retire equity, and also to boost earnings as any sales will lessen the impact of profit deferrals on project contracting work and will also create positive earnings events that will be an integral part of our business going forward. It should be apparent that this -- it will not take too many Noonan type successes to make a very meaningful enhancement to the market value of Helix; a very pleasant prospect, indeed.

That's the end of my remarks. I'll hand it over to Owen for his.

I'm going to reiterate in broader terms some of the detail that you guys have pointed out so far, starting with the fact -- on page 10, you can see the growth in 2006 was just plain outstanding. Net income went from $150 million to $257 million. Earnings per share, which is not on there, went from $1.86 in 2005 to $2.85 adjusted for the minority interest in Cal Dive and that's 53% growth year-over-year; and all of this, even as we were transitioning the Company, rationalizing our assets towards a maturing of the business model.

We did suffer, in my opinion, some on our share price and just for grins I looked it up. In January 3 of 2005, we were trading at [3680] and January 3 of 2006 we're trading at [3125]. And I just started to ask myself what was going on? And being critical of ourselves, I could say that we could arguably have done better, a better job on earnings guidance. Contrary to our policy of providing only initial annual guidance, we tried to provide a refreshed look at guidance following the Remington acquisition in July.

We probably understated the impact of the commodity pullback in price that subsequently followed that. We probably overestimated our production rate recovery from the hurricanes, and we did suffer some management integration issues. We basically got a little bit ahead of ourselves on the positive impact that the transaction would bring to the Company, but the fact that we were ahead of ourselves doesn't lessen the fact that the positive impact is there and we're starting to see it.

Another point probably is investor perception probably shifted following the Remington transaction to view us more as an EMP company, but you can see from what Wade was covering -- in fact, quarter four, only 31% of our revenues were Oil and Gas and only 35% of gross profit was from Oil and Gas. Debt following the transaction with Remington did significantly increase, but we feel like it's easily manageable and could be reduced if we want to.

As recently as September 30, debt to book cap was 47% and by the year-end it was at 38%. EBITDA to debt service, which is the metric that I really look at, is greater than 12 to 1 going forward and on a trailing 12 basis, it's nine. So we're very comfortable with our debt service.

And then the last point I think I can make here is that all of these issues I think are easy to see through, so I don't know that they're really that much of an impact. I think basically the second half of the '06 was just a little weak time in the marketplace, so it's not something that really concerns us.

As we move into 2007, you are going to see, I think with a little more clarity, the systematic application of our business model and I would like to spend just a minute here to walk you through what it is that we do. We started off at the front end of the business model with generating prospects. Following the Remington transaction, it was a core skill that we wanted to add. We felt it was very important given the previous couple of years' history that we had in trying to get into the deepwater end of applying our model. So we're going to -- we generate prospects. We then drill them. We will bring on partners on a promote basis when possible, and that generates some revenue right there. We then create the development opportunity from the drilling program. At the next step, we will look at potentially selling down all or part interest in the value created in setting up that development. That, again, becomes another revenue stream.

We do seek to provide the facility on these developments as well as facilities to the open market, so that produces another revenue stream. We then execute the development with our deepwater construction group. That, again, is yet another revenue stream. We produce the fields or our interest in the fields generating more revenue and we service the fields on a [live] field basis with our well intervention assets, both on a contractual basis and servicing our own fields, creating yet another revenue stream.

So we have a very diverse number of revenue streams that cyclically through the industry cycle may provide varying degrees of contribution to our overall revenues. But it does mean that we have a fairly smooth and highly visible stream of capital coming into the Company for -- the use of capitals is also diverse. We do intend to keep adding service assets, funding our share of our drilling program, funding our share of our development program and, as Martin mentioned, potentially retirement of further equity.

The model is self funding. We have contracting revenues, production revenues and sell-down revenues. It's a very flexible model that we're able to react to the market's cyclicality, but we intend to do so only on an opportunistic basis when the market values allow us to capture the value that we're creating.

As we add assets, this model is scalable, both domestically in the Gulf and exportable to international areas and we've already targeted the North Sea and Southeast Asia for expanding our model into. This model provides long-term sustainable growth and with very superior returns.

For closer to home, I'll give you a little forward look at 2007. The focus is going to be on capital project execution. We're adding service assets as well as doing some developments. We want to prove the value in the deepwater prospect portfolio through drilling success, which I think we are well on our way here. We want to prove our own drilling capability and concept of knowing these fields with our own Q4000.

We are going to -- just a further word on proving up the prospect portfolio in drilling. We've now, as Martin said, gone 11 for 11 in drilling these prospects that we acquired from Remington including Noonan, the first of the deepwater prospects. There's still over 20 deep prospects to go. These prospects were the primary reason for putting the two companies together. We do have a rig on favorable rates for one more well, and we've -- but I might say we've already added more reserves than we budgeted to do so in 2007, so we're not under any gun to keep drilling, but we do plan to drill another well with the rig. We'll continue a prudent shelf shallow water drilling program, but then our focus will turn towards the end of the year and drilling two wells with the Q40000, and this will prove up our drilling concept capability and clear the way for committing to building the Q4500.

And keep in mind that just in the current Remington deepwater prospect portfolio, there's something like a five-year backlog of drilling to provide a hedge for the utilization of a significant new asset like that. In between this next well and the Q4000 wells, we will focus on getting our production rates up, but we are being prudent in forecasting what we're going to produce in 2007. I believe you'll notice that we've sort of curtailed our expectations back to the 85 Bcf level.

We're going to be focusing on execution of our capital projects. We are adding 10 new service assets and we've got another -- a number of developments underway. So we're going to assume a more prudent measured pace. As Martin said, you'll see us opportunistically sell down interest in production assets as we create the value in them. Of course, that's assuming that the market conditions are favorable to achieve the economic returns that we are looking for. We will then take those funds and reinvest them in creating further developments as well as continuing to add to our core service fleet. As the fleet grows, we will then seek to apply them to new prospects and we will broaden the application of the whole model to select international areas.

I would like to just maybe close with a word about earnings. We try to refrain from guiding on earnings quarter by quarter. We do give an annual range as a baseline. However, what we really focus on is long-term sustainable growth. Ours is a very flexible model, as I've mentioned, multiple sources of revenue and multiple uses of capital. This allows us to react opportunistically to the market variations. Our revenue flow is very visible and that allows us to be very aggressive on growing the Company.

The earnings guidance that we give is on an annual basis and it's provided in a range as a base guideline. But I think what you'll see through 2007 is what's going to become more and more a common occurrence for us, which is periodic onetime gains based on divestment capturing the value that we're creating in these developments.

For example, once a development has been created from a prospect and we've secured the work as utilization for our assets, we'll seek to sell down an interest to fund further growth. On mature fields, when we feel like we've fully exploited a field and they have no further upside development opportunities, then those also will become candidates for divestment.

It may be a bit confusing, but it's difficult to be a differentiated business model without being different. Helix is more than a service contractor. We're more than a service contractor and a production company. The Helix model is one that's proven itself over the years of being able to put steady earnings growth to the bottom line. We've got a talented group of people in the Company right now that fully embrace the model and know how to use it to produce those earnings. We're excited now to clearly show the value of the model going forward. The next couple of years should be really exciting.

With that, I'll turn it back over to Wade.

Okay, [Monica], are you there? We're ready for Q&A.

(OPERATOR INSTRUCTIONS) James Stone, UBS.

Congratulations on Noonan. I just want to dig in a little bit on Noonan and talk about sort of what your plan is right now. You talk about drilling another well on one of the three leases. Is that another exploration well or is it a second development well that you are looking at to fast track the development? And what sort of -- I don't know if you can give us any information on flowrates or anything related to the well additional to give us some ideas to bracket the values there.

Well, I think for your first question, that we did -- oh, I think back last fall after the merger, we did put out a net risk potential for the project, not this well that we drilled. So there were multiple wells, multiple different blocks; there were three blocks in the area. Those wells, the additional wells that need to be drilled, do make up that overall number.

However, what we've seen being somewhat remote, it's not like being out in the middle of the Mediterranean in a rank Wildcat Basin, but where Noonan is located, it is quite a distance from, in the Gulf of Mexico terms, from nearby production. And what we've seen out here and what we've gathered, which is proprietary to us at this point, we have lessened the risk of the additional wells that we need to drill to get to that ultimate number that we estimated prior to drilling.

As far as the testing of the well, that hasn't happened. I think we, in our press release, stated that we just finished our second sidetrack late last week, so this is very, very new information and I know the -- everybody was very anxiously awaiting the results. However, we, ourselves, just got the results and I think commenting any further on it, one, would be premature on our part; two, I think that with the information that we've gained, I'd love to share it all with you. I really would because it's an exciting area. It's an area that there haven't been that many wells drilled in, but we do have proprietary information that we've gathered here and we want to use that for our future exploration and development in the area for the Company and not give up any competitive advantage that we have gained by the drilling of the wells.

So just to clarify then, if we go back to some of the pre- drill estimates, the risk pre-drill estimates you guys are giving out, what you've seen from Noonan so far does not diminish your view of the pre-drill potential of those area, of this prospect?

Again, I think without a flow test that, again, we would be premature, but obviously, I think as our press release states, we have put out I would say a positive result for what we have seen in the original well and the two sidetracks. Commenting on the future potential reserves that we would find on the other projects, it's really too early to tell. It's new information. Again, I've got to go back to the press release that says we just got the data late last week.

So, I think as time moves on, we'll be more disclosing with our information, but right now, we've got to digest it and get a flow test on the well. But we're encouraged. Very encouraged.

And when do you anticipate moving the rig off to the next project?

We are in a completion mode right now and it would be very difficult for me to estimate that with any high degree of accuracy because we are setting a wellhead, but I would say it won't take more than two months.

My next question is on slide 24, where you guys talk about your estimated initial rates of production based on the various projects, are those numbers net to Helix or are those the gross numbers for each project?

Those were net.

Those are net. Okay. And then --

And again, they're estimates, because --

Right.

I think one thing we've been very consistent with since the merger is one, we've been very disclosing I think down to the well level, which sometimes can be double edged, but the bottom line is we are sharing the information and those are initial rates. As far as the project reserves for the exploratory projects, those are project reserves, they're not individual well potential reserves.

And then, going to the contracting side, did you guys push back the dry-dock for the Q4000? And if so, for what reason? And is the time -- I'm just trying to remember if the 75 days is what your initial estimate was on the unit.

Yes, we did push it back slightly based on having a great backlog of work in front us this year. Plus we wanted to give ourselves a bit more breathing room to get some long- lead items. We'll be putting the drilling upgrade on at the same time. The 75 days I think is about maybe 10 to 15 days longer than we originally anticipated but we're building some cushion into that, hopefully.

But as a result, even with 10 to 15 days additional, the work that you had lined up in front of it makes its fairly revenue neutral.

Yes.

That's all I had and again, congrats on Noonan.

Jim Rollyson, Raymond James.

Just one quick follow-up on Noonan. Obviously, a lot of work yet to be done there, but any thoughts on a ballpark timing of when you might actually get to start working on the Marine contracting side of that job? Is this an '08 type event? Or late '08? Just ballpark when that might happen?

Yes, you know, we've said we expect production in the second half of 2008, so clearly we're going to swing into action, laying pipe, et cetera, probably early next year, I would think.

On your quarterly production, obviously still having some impacts from the pipeline shut-ins which sounds like have gotten a little bit better. What are you producing today? I think in the context of this, you've said before, Martin, that 2007, 85 to 95 B is going to be very back half weighted with all these projects coming out that you've laid out. Just trying to kind make that transition to where you average about 164 a day in the fourth quarter, where are you today? And then kind of -- so we can figure out where to go forward.

As of exactly today, we're between 195 and 200.

Which should be about the higher end of your first quarter estimate?

We didn't get to that point until recently, though.

And then just last question for me. On the production facility side, you talked about roughly 46,000 a day was where you got to at the end of the year on total throughput and you laid out all the different projects that are ongoing, hopefully all which work out. But if everything works out as planned today, what's your exit rate 2007 on throughput for the Marco Polo facility?

Maybe 70,000.

Thanks, guys. Nice work.

Martin Malloy, Southcoast Capital.

On the well op side, you demonstrated pretty strong increase in terms of gross profit margin in the fourth quarter versus the third quarter. Where can that gross profit margin go to if both the Q4000 and Seawell are working?

I mentioned in my prepared remarks that we do have a very high proportion of third party costs in this activity -- maybe up to 50% of our total cost. So that will put an upper limit on profitability but I certainly think 40% is doable or maybe slightly higher than that.

Did you give out a CapEx number for the fourth quarter? I didn't hear one.

A summarized CapEx for the full-year, but I didn't give you a quarter. It's probably around a couple hundred million. I can double back with you on that. The total CapEx for the year was $613 million not counting the Remington transaction.

Philip Dodge, Stanford Financial Group.

Thanks for the comments. Could you discuss in a little more detail the major variable between the top end of your 2007 guidance and the bottom end of the range?

Commodity price is certainly a big part of it.

Yes, we'll refer back to, I guess, the table of variables that we presented in December. I haven't got that right in front of me, but off the top of my head, production was between 85 and 95 [D's]. We had commodity price is between $55 and $65 for all and $7 and $8 for natural gas. We had some dryhaul expense baked in -- $35 million at low end and $30 million at the high end. And then on the contracting side, we said revenues between [$1.60 billion] and $1.2 billion, with margins between 35% and 40%. That includes Cal Dive. Correct? So you've have to back out the numbers we gave you today. I think those are the main drivers.

The other question I had, could you comment on the timing of the contract with Reliance offshore India and which units will be committed there for what portions of that contract?

Yes, it will be -- we'll be mobilizing vessels starting in the second half of this year with the bulk of the work taking place late this year or next year. The main two assets involved are the Express and the Eclipse.

Will they both be there the whole contract?

Express will be there for the duration of the contract. The Eclipse will be there for five to six months.

Joe Agular, Johnson Rice.

I was wondering if you could tell us what the cost of the Noonan well or wells was.

We will disclose that in our K and that should be Thursday. But I recall the number through December 31 was approximately [$28 million]. That's through December.

Just to clarify, I guess kind of pre-drill estimates that were out there were anywhere in the mid to high 200 Bcf range to maybe even over 300 Bcf. I think it's a three block area, you've only kind of been in one block so far, and in your press release, you did, though, give a number of $100 million of service-related revenues at current market rates regarding the field development work, and I was just wondering if that sort of is an estimate that encompasses the drilling in these other two blocks in the total development scheme?

No, there's no drilling in there. That's pure development.

No, I don't mean, what I'm saying is, is the $100 million after you drill in these other two blocks?

No. There would be additional capital for drilling in the other blocks.

Maybe I'm not -- I guess what I'm asking is the $100 million a good estimate for the total field development cost that you -- of Noonan?

It would get the product to the beach from this one particular well. Further development of other reserves would be incremental from drilling and completion, but not from tieback to the beach.

That's what I was asking. Okay, thank you very much. If I could ask one other question on the Marine contracting side. Could you maybe just give an overview if you would on sort of third party demand for contracting assets today versus, I guess, maybe the last time we talked, which was - - it wasn't that long ago, but has there been any significant change there? Is the outlook still pretty strong in most of these areas?

Yes, outlook is extremely strong. By third party, you mean working for other contractors?

Yes, Well, no, I mean actually -- (multiple speakers)

(indiscernible) the outside market. Well, yes, I mean the outside market is extremely buoyant as I mentioned for deepwater contracting on the Pipelay side and Robotics, and our well intervention assets are (indiscernible) for the seeable future. So yes, I mean, the market is extremely buoyant.

I just wondered if you had any other customers try to lock up assets for longer periods of time considering some of the maybe plans that have developed recently or anything like that?

Yes, we continue to add days for our second well intervention vessel well enhancer for example, despite the fact that that's not going to hit the water until the back end of next year. So the indications for all of our new assets are very positive.

So backlog continues to build, it sounds like.

Sure.

Bill Herbert, Simmons and Company International.

Just to once again go back to Noonan and to clarify, the timeline that was provided, two months was the amount of time. Is that two months to complete the existing well or is it two months to more fully drill out the play?

No, that's just the work related to the existing well.

And then, with regard to plans for the [Amarante], how much longer do you guys have that rig?

We have a two well contract. This is the first well and then the second well will follow after the completion.

And remind us what you're paying on that again -- like 120, 140, something like that?

It's less than 140.

Is that going to be used to drill the more adjacent target on Noonan or is it going to be used to drill Bishop?

We're considering that -- both of those options right now.

And remind us what the targeted risk reserve potential is for Bishop?

Bishop in the presentation, I think we had --

What page is that on? Because I was looking for it and I didn't see it.

I didn't put it in because --

It wasn't in there.

It's not in the (indiscernible).

It's in excess of 100 BCFe.

I will remind you that the last time you disclosed it, it was 180. Is it still 180?

Right. Yes. It hasn't changed. And I think I'm going to go back to an earlier comment that I made; that's total project reserves. And on the Grand Canyon 250, which is the Bishop, that includes 250, 251 and block 295, so it's a three block complex. And just for clarification, when we put the project reserves out there, it's all under the Bishop name, but that's multiple wells. There are multiple targets on that particular project.

Fair point. In then, Martin, finally, with regard to the key variables for 2007 guidance that you guys laid out in mid-December, recognizing that essentially the guidance hasn't changed, but within the different categories that you presented, has there been any significant movement one way or the other vis-a-vis your leading edge expectation?

No, I think we're too early in the year to get into that. Nothing much has changed since we gave the guidance.

The one that sticks out to me is the expectation for equity in earnings from I guess the production facilities business, $35 million to $45 million. Are we still comfortable with that?

Yes, we are, based on Independence Hub progress.

Right. I guess what I'm getting at you said that towards the end of the year here we're at 46,000 barrels per day, Marco Polo and K2 complex, which seem to me to be encouraging. I'm wondering if the $35 million to $45 million is not a conservative estimate now.

Well, these numbers are not in our control because they're largely due to production, controlled by others, so we tried to be conservative this year on this number. So we can stick with it until things change.

And finally, just a word of praise. I thought the disclosure that you guys had was much improved and Wade, I thought that your sort of sequencing the percentage of earnings to be expected by quarter was very helpful. Thank you.

Thanks, Bill.

Thank you, Bill.

Travis Anderson, Gilder, Gagnon, Howe & Co.

I just wanted to clarify the cost of Noonan development then of $100 million is to complete the well and the two sidesteps so far; however, if you do drill another well, you're going to have increasing costs. Will that hit this year?

That drilling of another well on a separate project is under consideration, and that would be in addition to the costs we talked about.

Separate project, not Noonan?

No, on the three block complex. But every well we add, remember, it's just incremental. The $100 million really is relating to tieback to the sales lines -- tieback to infrastructure. So that's like -- we could consider that a facility cost.

Secondly, though more of a Cal Dive question perhaps, all the low-end jack-ups moving out of the Gulf have to have an impact eventually, but I assume that that's not anything that's going to matter for the next 12 months?

No, I don't believe so, but I think if you post that question to Quinn at about 11 o'clock, you get a detailed answer.

Dan Barrett, Fortis Bank.

Congrats on the Noonan discovery. Quick question about your -- the DP floating production units, the Helix Producer 1. I'm kind of wondering, what kind of internal rate of return are you calculating on that vessel or a production facility like that? And I assume that this is one of the types of vessels that can then move on to another field after it leaves the Phoenix field. Is that correct?

Yes, absolutely. The whole idea of the Producer is to move it from one field to another. So, initially, on the first reservoir, we'll be targeting an internal rate of return around 15%, but obviously that will get better as we redeploy it on subsequent reservoirs.

That's good. All my other questions have been answered. Thanks, guys.

[John Olson, Keystone Energy Partners].

Wade, what do you think the effective tax rate is going to be for 2007?

I think it will be -- I think if you model it around [between] 35%, you'll be close.

35%. And any idea what the mix is going to be between domestic and international earnings?

We haven't broken that out (indiscernible). I figure it wouldn't be far off for international.

For services revenue.

For the services, exactly.

Fair enough. And do I detect correctly that you are paying a whopping tax rate on -- put a whopping tax rate on the gain on the sale of subsidiary shares and DBR?

Yes, I think the way you have to look at that is we received $465 million of proceeds, total proceeds, on the transaction, and we're going to be paying about $125 million. Unfortunately, that business had very little tax basis in it. So that was the result.

Ship yard inflation, everything seems to be going straight to the moon in everything else -- gas to liquids plants, tar sands and so forth. What's happening there? Are you guys capped out with your shipyards?

You know, as Owen mentioned, managing the capital projects is a key challenge for us this year. We are watching our shipyards cost very closely. We have taken considerable time, for example, to negotiate the Caesar upgrade. We have taken time on the second Q4000 (indiscernible). So we're trying to get as firm of pricing as we can and build contingencies into the budgets and then it's a question of managing to those budgets.

I will add to that. We've just recently added -- Bart's added the infrastructure team to directly manage these capital build projects which we've never had before. We've also gone through the exercise of re-evaluating the cost expectations of them that we've recently revised in our cash flow models. And then on top of that, I believe we added like a 10% contingency on top of that just for cash flow modeling purposes, just to make sure that we don't get caught in any kind of a liquidity crunch. So we -- I think we've been about as prudent as we can be.

Looking at the H4500, any ballpark number as to what that would cost you now?

We're getting the firm prices from the shipyards in later this week, and we also placed some long leads (indiscernible) orders and in the next couple of weeks we also should get firm prices for the drilling equipment. So we're going to be in good shape later in March to figure out what the delta costs of this asset is going to be.

I do need to point out that we have not taken the Q4500 to the Board for final approval yet.

And one last question. What, given all the dynamics in your businesses, what is a good capital spending number for this year now? I believe, I may be fuzzy on this, but I think you, in your last presentation, were talking about $1 billion or so this year and $1 billion next year?

I think that's a good estimate. About $1 billion with about 55% of that being on the services side and 45% on the Oil and Gas side.

Thank you very much.

Thank you. We have no further questions.

Well, thanks, everyone, for joining us and we look forward to talking to you again next quarter.

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