Helix Energy Solutions Group Inc (HLX) 2007 Q1 法說會逐字稿

Welcome to the first-quarter report and investor conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host, Mr. Wade Pursell, Chief Financial Officer of Helix Energy Solutions.

Good morning, everyone. Welcome to the first quarter 2007 earnings call for Helix Energy Solutions. We appreciate you joining us this morning. With me today as usual is Owen Kratz, our Executive Chairman, Martin Ferron, our CEO, Bart Heijermans, our COO, and Alisa Johnson, our General Counsel. And joining us from Dallas on the phone is Robert Murphy, President of Helix Oil and Gas.

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 Web site right now, at www.HelixESG.com; at the investor relations page, click on the Webcast presentation there. We will be referring to these slides as we go through the call this morning.

You can see on slide 3 of the presentation an outline of the call this morning. I will summarize the results and walk through a quick financial overview, and then turn it over to Martin for operational highlights in both our Contracting Services and Oil and Gas segments. Owen will then wrap it up with some closing comments and a strategic summary, followed by the Q&A segment.

But before we get started, turn back to slide 2; Alisa has an announcement for you.

As noted in our press release and associated presentations, certain statements therein and in today's discussions 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 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, 2006, filed with the Securities and Exchange Commission.

Also during this call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The presentation, together with the reconciliation, is also available on our Web site.

Thank you, Alisa. Turning now to slide 4, net income for the first quarter of 2007 was $55.8 million, or $0.60 per diluted share. This compares to $0.67 per diluted share in the first quarter of 2006. The primary reasons for the $0.07 decline was the increase in shares outstanding and interest expense as a result of the Remington acquisition in July of 2006. In addition, we reduced our consolidated earnings for the first quarter of 2007 by 8.2 million for the minority interest in Cal Dive following the carve-out IPO sale of 27% of that Company in December 2006. Finally, 5.2 million of profit was deferred during the first quarter of 2007 for services performed on our own Oil and Gas properties, compared to zero deferrals in the first quarter of 2006.

Turning to slide 5, consolidated revenues of 396.1 million represents a 36% increase over last year's first quarter, driven primarily again by significant improvements in Contracting Services revenues -- the maroon boxes on the slide -- due primarily to the improved market conditions across all business lines within Contracting Services. In addition, Oil and Gas sales increased 46.9 million -- the gray boxes -- due primarily to the production added from the Remington acquisition.

Gross profit of 136 million was 33% better than the 102 million achieved in last year's first quarter. Gross profit margins of 34% were virtually the same as the year-ago quarter of 35%, due primarily to higher margins in Oil and Gas, due to the $20.7 million write-off of Tulane in last year's first quarter, offset by lower margins in Contracting Services this year, due primarily to the Q4000 downtime because of thruster problems.

Looking at SG&A, 30.6 million, increased 9.6 million from the same period a year ago, due primarily to increased overhead to support the Company's growth over the last year. This level represents 8% of revenues, comparable to the 7% in the first quarter of 2006.

Equity and earnings, 6.1 million, reflects primarily our share of Deepwater Gateway's earnings for the quarter relating to the Marco Polo facility. It also includes $900,000 of earnings from Cal Dive's 40% investment in OTSL; that's the Trinidadian investment.

Regarding the tax rate for the quarter, 34% was essentially the same as last year's first quarter.

The debt incurred last July for the cash portion of the Remington acquisition $835 million term loan caused interest expense, net of interest income and capitalized interest for the first quarter of '07, to be $13 million, which is 10.5 million more than the 2.5 million in the first quarter of 2006. The acquisition of Remington was also the main driver behind an increase in diluted shares outstanding to 94.3 million, compared to 83.8 million the first quarter last year.

Looking at the capital structure on slide 6, total consolidated debt as of March 31 '07 was 1.45 billion. This does include 172 million under Cal Dive's revolving credit facility; that's the blue box on top. This facility is nonrecourse to Helix. The other components are primarily the Term B facility, 831 million -- the orange box -- convertible notes, 300 million -- the maroon box -- and the MARAD debt, 129 million in the green box. Excluding the nonrecourse Cal Dive debt, about half of our total debt is fixed at a blended interest rate of 4.8%. We ended the quarter with 203 million of cash and liquid investments on the balance sheet, so this level of debt amounted to a net debt to book cap of 43% as of the end of the quarter. And with 691 million of trailing 12-month EBITDAX -- and that excludes the IPO gain in the fourth quarter -- this represents 1.8 times trailing 12-month EBITDAX.

Summarizing CapEx real quick, total capital invested in the first quarter 2007 was nearly 200 million, with 64% of that in the Oil and Gas segment, primarily drilling success at NOONAN and shelf prospects. Contracting Services capital related primarily to the Well Enhancer newbuild and conversion cost on Helix Producer 1 and the Caesar.

Looking at the full year 2007, you might recall last quarter I said our earnings this year would be quite back-loaded, due in large part to production ramping up, particularly in the second half of the year. I think the second quarter will be similar to the first quarter. Back in December, we gave earnings guidance for the year and laid out the significant variables in the ranges and achieving the guidance range. We've gone through those variables and assessed where we believe present trends are taking us, and have accordingly narrowed our range to $3 to $3.90 per share for the year.

So, starting with slide 7, Martin will take you through that assessment and also cover the operational highlights.

Thanks, Wade. Good morning, everybody. I'm actually going to start on slide 10 and go through the segment reporting first, and then come back to the guidance.

So, looking at slides 10 to 12, we hope you like the new format showing all the main statistics on one table.

On slide 12, the commentary is that overall profitability was up by 16% year-over-year, due to asset additions and continually improving market conditions. Sequential decline in overall profitability was, therefore, nothing to do with the market, but mostly due to seasonality, a planned write-off (inaudible) Seawell and unplanned downtime for the Q4000 caused by a reoccurrence of thruster issues. We're going to be limping along with the Q4000 until she goes into drydock in Q3.

The improved profitability of Cal Dive was particularly pleasing, as it takes our profitability well beyond the peak of the underwater activity caused by the hurricanes of 2005. Profit margin improved sequentially in deepwater, although we have not yet fully worked through the backlog of lower-margin work [bid] in 2005. Especially during Q1, the Express worked on a low-margin job.

Our robotics group, Canyon, had an encouraging start to the year, with both hourly support work and early season pipe barrier projects. And finally, on Contracting Services, we continued to have downhole safety valve issues at Marco Polo, which impacted production, but we were pleased to achieve mechanical completion of the Independence Hub, and still expect first production in Q3.

Turning now to Oil and Gas reporting with slide 13, overall production of 15.6 Bcfe came in in the lower third of our guidance range for the quarter, with an improvement in deepwater and a slight decline on the shelf. Commodity prices were essentially flat sequentially, with the natural gas prices down by 20% year-over-year. A big drop there.

We had a heavy quarter for expense maintenance work in Q1, which cost us $6.6 million, or $0.42 in Mcfe. Dry hole expense was minimal for the second successive quarter. In fact, we were extremely pleased with our drilling success in the quarter. Since the closure of the Remington acquisition, we've now gone 14 out of 16 successful wells, with the last 14 all being successful. And we added around 100 Bcfe of proven reserves during the quarter, which is well in excess of our production guidance for the whole of 2007.

Just a quick update on NOONAN. We've just about finished the completion of the well, including setting the tree. We will be moving the rig to the second exploration target in the adjacent block.

Moving to slide 16, what we show here is an illustration of our production profile for the whole year, and this reinforces the importance of the PUD conversion Wade talked about earlier in the second half.

Other key points to note on this slide are the previous guidance range of 85 to 95 Bcfe included 3 Bs from Camelot in the North Sea. This is now very likely to be deferred to 2008, due to low current natural gas prices in that area. The range of 85 to 95 also included a 10-Bcfe exploration wedge, and the good news is that we have made the discoveries to fill that wedge. So you can see that on the new discoveries block on the chart.

In the high case, we expect to achieve around 6 Bcfe from a potential acquisition that has been in the planning stage for several months. The new low case of [semi 5 Bs] factors in the potential impact of hurricane-related delays to both existing production and PUD conversions. In that (inaudible), around 8 Bs would be deferred into 2008.

Okay, that's the segment highlights. Now let's look back at the guidance slides of 7 to 9.

On slide 7, the present trend for Contracting Services is at the middle-end of the range, although both revenues and gross profit margins could trend higher, mainly depending on uptime for the Q4000 before her planned drydocking in Q3. Equity earnings from production for the facilities are likely to be nearer the lower-end of the range. Gross profit deferral, as Wade mentioned, was $5 million higher than we expected in the first quarter. And that was likely to be at the high-end of the range for the year.

On slide 8, for Oil and Gas production, we needed $8 natural gas for the whole year to get to the high-end of the range, and the present commodity price environment trends towards the middle. Production for the year could trend lower, with the new 75 Bcfe lower estimate. But that at least will be partially offset by lower exploration costs, due to our drilling success in the early part of the year. Then both lifting costs and DD&A costs will trend towards the high-side numbers as production increases.

On slide 9, on the corporate front, there are no real updates, with an overall trend towards the middle of the range.

So, in conclusion, based on this assessment of the key variables, as Wade mentioned, we narrow our range to $3.00 to $3.90 for the year, and we expect Q2 performance to be similar to Q1, with some potential upside from a modest increase in production.

So with that, I'll hand over to Owen for his remarks.

I don't have too many this morning; I think Martin and Wade have covered everything pretty well.

Just reading the message board this morning, which I do, I just thought I'd have a comment that we do try hard to provide as much explanation about our model and guidance as we can. Perhaps some -- maybe we -- it's made difficult because of the number of variables that we do outline in our model.

Having said that, let me just tell you that going into this year, our primary goals for the year were really two things. One was to demonstrate the value that we believe that we purchased in the Remington portfolio; and two, to successfully control the execution of our capital projects that puts this production into service; and then also the other component, which is adding significantly to our service assets with Caesar, the Helix Producer, the Well Enhancer, the Shiraz, and the Q4000 upgrades. Quite a big program for the year. So our focus is on executing those. We've added a lot of value to the Company in the last year, and we're continuing to add it.

Following the Remington acquisition, we perhaps got a little ahead of ourselves on the timing, speaking more about the potential of what we had just done rather than really being focused on what was going to happen in the near-term. This year, though, as Wade mentioned, we did give guidance for the year, which is our custom. We don't give quarterly guidance. Martin has gone through the list of variables, including the commodity price assumption. And really, I'm guessing that a large disconnect from what you might read in analyst expectations on our company versus what our internal expectations are results as a function of what commodity price is being applied to the number.

Having said that, Wade did mention that our internal expectations were that this year was going to be very back-loaded. And that's due to the large amount of production due to come online during that time. We did have a slow start, but we're not -- we're within the range, and we're not that far off of where we expected to be internally. But given the slow start and the deferral of the Camelot project, we have narrowed our range. We narrow the range each year, which is our custom, giving annual guidance, and then each quarter we'll narrow it. In this case, due to the slow start and the deferral of Camelot, it narrowed to the lower-end of the range, which historically is unusual for us.

Just to recap what they've already covered in detail, the services were solid in the Company -- really great performance; hats off to the service side of the Company -- except for the Q4000.

On the production side, the focus of the group -- and given the amount of stuff that was on their plate following the acquisition, my hat's off to them. The focus was on reserve replacement. And to that extent, Martin touched on it, it was a very, very successful quarter. The downside to that, though, is that we had to forego our usual well enhancement programs because of the focus we were putting on the exploration. As a result, the normal decline that's inherent in our PDP impacted production rates, and they came in at the low-end of our expectations, but within the range that we had provided earlier.

I think key slides that Martin mentioned are worth reviewing, if everyone's got the time -- 7, 8, 9 on the variables. There's an awful lot of information in those slides, if you really read between the lines and look at them. I think given the strong performance of service, and the rather weaker performance on the production side, normally in our hedge business model these would have been offsetting. And you hear us say that quite often when we come in at expectations, that one is weaker and the other one is stronger. In this case they probably would have been, except for two issues.

One was we did not anticipate doing a lot of internal work for ERT in the first quarter. And we did $5 million worth of work, in fact, and that translates into $0.03 of deferred profit. And then the other one was the Q4000. As you might remember, last year we had some maintenance issues on the thrusters of the Q4000. We went through an extensive engineering, and have come up with a plan to completely redo the drive system on the vessel, eliminating the problem. Given the fact that we had a large backlog of work to work through, and the fact also that some of the drilling equipment items needed for the upgrade were delayed in deliverability, the drydock was postponed. The downside is the thrusters bit us again. And that was probably the biggest hit to the quarter. That was a $10 million hit, which is another $0.06 in earnings.

Other than that, the Company is performing as we planned. The capital projects that I mentioned before, the other big target for us this year, are running along fine. $1 billion worth of CapEx programs is a lot of value being infused into the Company. We have no significant overruns that are apparent at this time. Timing of the actual completion of those projects, as with all shipyard projects, is a challenge. And we will stay on top of that and keep everyone abreast as things go along. But right now, we're sticking with the timing that we have been assured by the shipyards will occur.

I think, as we look forward, just to help investors as much as I can, some keys to the future expectations with regard to our company center around four things, I believe.

First and foremost is the commodity price assumption that you apply to our model. That has a huge impact to the earnings that you might expect quarter to quarter. It has a -- it creates a big variance between the analysts that cover us.

Second would be the timing of the new production. Martin mentioned slide 16; I think that's a very important slide. That is one of our big focus areas, is trying to meet the timing of the production coming on.

The third is the uptime on the Q4000. And until we get through the drydock, we're just going to be doing the best we can. But we're fixing this latest incident. And typically once we fix it, it holds for at least a little while. So we'll see what happens, and see if that can get us to the drydock.

And then the fourth is the intercompany profit deferral. We did budget in the year for intercompany profit deferrals, starting in the second quarter. So that should not be a recurring event. And hopefully, the amount of work that we do will be in line with what we've estimated in our own budgeting process.

So having said that, I hope I provided a little clarity on how maybe better to read some of these slides and apply them. And with that I'll open it up for questions.

(OPERATOR INSTRUCTIONS). Bill Herbert, Simmons & Co.

Martin, first of all, I thought that the extra detail that you guys provided on your presentation was really good stuff. So thanks for the hard work on that front. With regard to the production guidance going forward, what is current run rate production, as we speak right now?

Right now we are, as the graph shows on slide 16, we're bouncing between about 178 to 195 on any given day. What we see on Q2 on that graph is that we're pretty much running flat, and offsetting the decline of the PDP by adding some PUD volumes and PDNP. So the second quarter, we're looking at a range above what we did in the first quarter. But really, the takeoff is in the late second to early third, when a very large number of installations and pipeline installations and platform installations take place. So we're looking at flat to high for Q2. But the installations that we're doing in the summertime; that's really a good time to be doing it versus in the first and early second quarters.

So if I did my math correctly, you're currently at about 17 Bs on a run rate for the month, but you think it's going be lower than that?

We think between 16 and 17. And if you look, we've been very, very disclosing with that slide. We pretty much said we're looking between 16.4 and 17.3.

Fine. And then, to that point, with regard to the ramp in the third quarter, especially focusing on the high-end of the case, which seems pretty ambitious right now, bridge that for me. How do we do that? How do we make those numbers?

To take that graph apart, the majority -- I would say about 50-50 of that increase in Q3 is what we call pipe conversion, which is going on right now with more than half of the rigs we have working. And the other half of that is in that new discoveries category, where the installations of four platforms will take place, and then the subsequent production coming on later on in that third quarter.

So we have all the assets, people and resources basically contracted and ready to be marshaled to meet that range in Q3?

Yes we do. We have the rigs lined up. We have the installations lined up. I think, from Martin's discussion, between the low and the high case, there's a couple key variables. One, the hurricane season really kicks off, historically, late August through September. So, just to kind of comfort that installation schedule, most of this is going to occur between June and July. So that's the plan right now. But I think when we put a low side out there, you can see on that low side dotted line that really the impact that could really bring us down there is a very, very active hurricane season.

Yes, sure.

If I could, a couple of comments on this slide, because it's a very important slide, and I had a couple of confusions when I first saw it. When you're looking at the third-quarter ramp-up there, the yellow there is well enhancement of our current PDP. So obviously, that wedge is widening. So that means we, obviously, have to get back to focusing our attention on our well works program, which we have not done in the first quarter.

The next tranche going up is the current backlog of PDPs that are ongoing right now. So that's looking pretty good. It's just a matter of timing on materials; can we get the umbilicals, etcetera. The blue one that's titled new discoveries is a little misleading. That's a wedge that would have required new discoveries prior to our first-quarter drilling efforts. That blue is now -- you might call those -- what do you call them, Robert?

We'd call (technical difficulty) unbooked PUDs, because most of that that's coming on in the new discoveries category was not booked at year-end.

That's helpful.

That new discoveries is actually hard realized discoveries that are now PUDs. The one that I would question is the acquisition wedge. If there is a weakness in this ramp-up, it's mostly in that acquisition wedge. Acquisitions are opportunistic. You sort of have to budget something in there. But when or if they occur will, obviously, just be market-driven by opportunity.

That's very helpful. Thank you. How should we think about the repair and maintenance expense line? Was what happened in the first quarter, is that unusually high? And what's sort of a reasonable assumption for a run rate R&M expense going forward on a quarterly basis?

It was unusually high. I would look, from a run rate standpoint, to have a number more like 3 million, frankly. Do you agree with that, Robert?

Yes. It was unusually high. It was leftover hurricane work that we had.

Switching gears. Martin, with regard to the Q4000, I guess if I recollect correctly, we brought -- we had repaired the thruster issues, back online, doing well in the fourth quarter, and looking forward to prosecuting a pretty high-margin backlog with the repaired thruster. Is the ability of the Q4000 to do that higher-margin work now -- does that get deferred because of the thruster issues?

Yes, to an extent. You're right that we had these issues previously in quarter three last year, and we repaired them and had a good quarter four. So during quarter one, unfortunately, the problem reoccurred. We have fixed the problem, except that we're running five thrusters instead of six, which compromises our [well station] capability. That doesn't matter so much in quarter two perhaps, but it does matter for well intervention work. So we're working on lower-margin stuff until we get it permanently fixed.

Last question. Just qualitatively, you made some very constructive -- no pun intended -- commentary on the Shelf Construction work going forward. You didn't provide a whole lot of qualitative commentary with respect to deepwater. And to that point, are there -- give us a sense as to what the visibility is for that business, and what the appetite is on the part of customers for multiyear contracts.

Bart, do you want to (technical difficulty)

We're not at the moment looking at any multiyear contracts in the deepwater fleet. I mean, we've got a lot of big contracts that we received in the deepwater fleet, like the one on the Reliance project in India. We announced a couple of weeks ago that we have a big contract for the Caesar in 2008. We signed a couple of big contracts for our robotics division. And so (inaudible) multi-million-dollar contracts. But they're of a shorter duration then the multiyear contract.

Roger Read, Natexis Bleichroeder.

I guess kind of following up on Bill's question about the Oil and Gas margins, you said, I believe, 3 million of additional kind of R&M costs related to the hurricane. Is that now behind you? If we look at sort of fourth-quarter margins, assume sort of a flat price environment on the commodity front -- I know oil is up, but let's just assume that -- would we expect to see your gross margin in that mid-40s range in the second quarter?

Regarding whether the R&M from the hurricanes is behind us or not, I can't say definitively that it is, because there's still some subsea work that's going on that until you get down there, you really don't know for sure. We still have insurance proceeds to come in to offset some of that. I don't look for another quarter like the first quarter, but I'm not going to say that it's completely behind us.

As we look into the second quarter with the offshore construction business, can you walk us through the Seawell? Obviously the planned drydock in Q1, but can you kind of enlighten us as to what that vessel does through the remainder of the summer season out there in the North Sea?

The Seawell drydocking is behind us now. It was completed in quarter one. So we've got a full backlog for the rest of the year for the Seawell. So we will have nine months of good utilization at good rates there.

Can you give me an idea, Martin, of the rate improvement on a year-over-year basis there, since it's mostly contracted anyway?

We should see about a 10% margin increase year-over-year.

And you said you're moving on now to the second well there around the NOONAN prospect. Can you give us an idea of what you think you might do with NOONAN in terms of -- you've mentioned before selling down the 50%. Do you drill the second well first, and then we find out about that? Or do you think that happens simultaneous, contemporaneous, that sort of event?

I think it's wise to probably drill the second well first to find out exactly what we have in the area. Then we'll be able to define the development plan better and know our F&D cost expectation. So selling down part of the interest is still an option, but we are looking at other ways of raising capital for the developments. Example, maybe selling some production forward. So, there are other ways of getting value out of this particular asset.

Your expectation for the timing of bringing that production online?

Still Q3 next year.

Jim Rollyson, Raymond James.

Owen, you talked about -- or actually, Martin, you talked about the Marco Polo issues that have kind of been continuing with the safety valve. Can you kind of give us an update on where that stands today, and maybe walk us through how the year progresses from your production facility standpoint, now that Independence Hub is also at mechanical completion?

It's not all bad news at Marco Polo. These safety valve issues have been going on for a while, and the operator is trying to overcome them. Present production is running at about 37,000 barrels a day, and that will increase during the year, with new wells coming on from Genghis Khan and (inaudible). So, production will ramp up; I think we're just being a little bit cautious in sort of guiding our range down there because we're not in control of that situation. You did mention the Independence Hub. We've got mechanical completion, and the operator tells us that first production will occur in Q3. So again, we're sort of relying on that happening. But at this point, I think, it's wise to say that that lower-end equity earnings income is the right mark.

Let me just add that historically, we've sort of just been transparent in passing on what the producers have told us would be happening, for instance, on Marco Polo and Independence Hub. I think we're going to be taking our own destiny in our own hands here and discounting that to a certain extent, given past performance.

That makes sense.

But I will say that Marco Polo is a very valuable asset, and it sits in the middle of a very prolific field. So again, it's not a value question; it's a timing issue. And unfortunately, it's one that we have very little control over. Independence Hub is in the same category.

Understood. Martin, you had also talked about, in the first quarter, still working off some of this older-priced backlog that was at lower margins. When do you start to run out of that and get to all the good stuff?

Hopefully very soon. There's just one or two jobs that are a hangover from 2005 bidding. And that's normal. It takes us a while to get around to some of these jobs that get deferred, and that's what happened with this Express job in quarter one. I think we're largely through it now, and we're working on jobs bid in 2006; so, obviously, higher margins.

From my perspective, all current margins are low margins.

It sounds like second quarter you've got a little bit of that left over. You've got the Q4000 that may be hindered at least a little bit. So it sounds like second half of the year is when we can kind of expect that to kick in to a greater extent. Is that fair?

The second half of the year is important on the production side and on the contract side. We'll have all our assets working in the second half. We'll have better contribution from the production facilities. And that's why the guidance was always back-end-loaded. We expected this to happen.

I know you haven't given '08 guidance, but just switching gears to the production side, you've obviously got a pretty big ramp in production, as Bill went through with you earlier. What's the thought -- looking at the exit rate you're kind of looking at, or even the range, it implies some pretty hefty growth as you go into '08. And you mentioned a couple deferrals, with Camelot being one. Any thoughts on kind of how '08 growth, with what you've got on the plate today, looks relative to what '07 will be from your range?

I think we've learned from the past not to get ahead of ourselves. I will just say that we do have some nice projects coming on in '08. First we have the (inaudible) PUD, which is being developed right now. That's probably going to come on in quarter one next year. I mentioned NOONAN coming on in early Q3 hopefully. Then we've got Phoenix coming on, and we've talked about production potential there. That will come on also in quarter three. And then we have some other projects potentially coming as well. So 2008, at this point, should be better, for sure. But we're not going to get ahead of ourselves this time.

Philip Dodge, Stanford Group.

First, on page 9 of the slides, you say that CapEx Contracting Services -- some discretionary items deferred or canceled. It looks like the first quarter annualized is much less than the lower-end of the range. So, can you give us some details on that, what were the items, what was deferred, what was canceled?

I don't want to go into specific details, if you don't mind. Any budget, we have items that might happen in '07 or might happen in '08. And there's some timing slippages, some minor things we decided not to do in the present circumstances. It's just normal.

Should we assume that the quarterly rate will ramp up over the balance of 2007?

Yes it will.

The first-quarter rate is just the initiation of a lot of these projects, and they will ramp up fairly quickly.

I'm having trouble figuring out why the June quarter is not going to be up from the March quarter, because some favorable things have happened. It sounds like your production run rate is higher. Oil and Gas prices are certainly higher. The Seawell is back on. What are the things that offset those?

We do have other vessels in drydock. For example, the Intrepid is in drydock right now. Also, Cal Dive has several vessels in drydock. So we're not through the maintenance activity on the marine side yet. The ramp (multiple speakers)

So the vessels that were working in the March quarter, they're not going to be in the June quarter?

Correct. Then, you see on the production profile, slide 16, the increase in production might only be 0.8 B, at the low-end. And we always said that 18 to 19% of our earnings would occur in Q1, and maybe 20, 21% in Q2. And that's likely to be the pattern. But we think 20% is kind of similar to 18 to 19, and that's what we're holding to right now.

And on the commodity prices, 60 or 70% of our production is gas, and I don't expect the gas price to be much higher the second quarter than the first quarter.

No, that's right.

Fair enough. Thanks.

[Robert Leah], Sandell Asset Management.

I was just wondering if you can give me some more color regarding the Bishop prospect, and timeframe and details on that?

Sorry; which project?

Bishop.

That was a drilling prospect that we have potentially on our agenda for this year. But since the first well was successful at NOONAN, we're going to drill the second well in that area. So we're likely to do the Bishop with the Q4000 when it comes out of the shipyard. We have got several wells that we can drill with the Q, a couple in the Phoenix area, and we're trying to decide the best timing right now. So, you know, Bishop might get deferred into next year as a drilling effort.

Just to give a little more color on that, if you remember, we had the [Amerate] rig for a two-well program. With the success of the first well at NOONAN, and the potential to explore selling it down, or other alternative financing means for developing NOONAN, it was important for us to go ahead and drill the second well there. It's lower risk. And now, on the heels of a successful reserve replacement drilling program in the first quarter, it's less important for us to move on to drilling new reserves, and it's more important for us to prove up the rest of NOONAN.

[Michael Samuc], Wolverine Asset Management.

First question. Do you have any recourse to the contractors on any of the Q4000 setbacks, number one? And number two, if you could just talk about what risk to the forecast a [cat] season that was, say, worse than last year's might be, versus better.

Firstly, unfortunately, we do not have recourse to any providers of equipment on the Q4000. Hurricanes impact the Company in two ways. Firstly, production might get impaired, and we covered that in our production profile discussion. But counter to that, commodity prices usually increase. So, net net, we learned after the 2005 hurricanes that we actually had a positive from the hurricanes on the production side of our business. Obviously, hurricanes really help the contracting side, in terms of increased price in particular. And you'll see that in Cal Dive numbers especially if we have an active hurricane season.

I think there's another aspect to it as well. When you're in the middle of an aggressive CapEx program like we are, where you have to be mindful of the impact to your potential liquidity at any one moment, hurricanes can, like Martin said -- hopefully will offset it. But as a producer, you have sort of a choice; you stay small and hope it misses you geographically, or you get larger and spread your geographic production. And therefore, the impact is less significant on your overall cash flow. That was one of the rationales behind making the Remington acquisition. We now are quite a large producer on the shelf, and it extends the width of the Gulf of Mexico. So that sort of mitigates the hurricane risk in and of itself.

One last question, if I may. Can you just talk about international opportunities versus domestic opportunities here, given that some of the assets are moving out internationally, and what you see in the competitive landscape, either pricing-wise or capacity-wise?

That's a pretty wide-ranging question. I'll give it a shot. Our assets, especially the pipeline assets, are fairly mobile. The Express and the Caesar, when it comes onto the market, are going to be assets we work on a worldwide basis. We've already secured work for the Express offshore India, as Bart mentioned, and we are bidding other international work. There are some very large projects that are potentially good contracts for the Caesar and the Express. Obviously, Canyon do a lot of their work internationally. We have many pipe burial projects going on with [pipeline] in South Africa right now, for example. So we are doing a lot of international work as a contracting unit.

As far as new capacity coming on, obviously, during Q1 we read with interest about some new vessels for construction and well intervention. But we certainly think for construction, those vessels will be needed, given the project backlog. And for well intervention, the number of trees is going to increase dramatically. And it was only natural, I think, that the customers would entice perhaps new capacity into the marketplace. So no real surprises there.

I might just add, strategically, we're a couple of years into international expansion. One of the reasons for the aggressive CapEx program on adding service assets was to create the capacity to service international markets. I think we're close to 150 million turnover in the North Sea now, and probably approaching 100 million in Southeast Asia. And then, out of the blue, we've been very successful on the East Coast of India with a very large contract. So things are going very well. It will absorb the capacity that we're adding right now. And like Martin said, we'll be looking for future capacity increases.

How would you guys characterize your scheduled downtime for 2008 versus 2007? Will a lot of scheduled maintenance be out of the way, or is it going to be more or less consistent with (multiple speakers)

That's an interesting question. The drydocking we have planned for the Q4000, hopefully, we solve the thruster issues finally. That should last us for five years, which will be great, given the backlog we have for her. Obviously, we have a drydock for the Intrepid this year, which won't occur in '08. No Express and no Seawell in '08. So '08 is going to be a relatively light year for maintenance, which will make a big difference for us.

Jamie Stone, [Cambridge Investment Partners].

I'm just a little confused about whether or not you just don't have enough people, or it was poor planning, in terms of pursuing the drilling program at the expense of the well intervention program. Was that intentional on your part, or are your resources just not sufficient to manage both simultaneously?

We had planned to deemphasize the well enhancement and focus on the development -- or the drilling and the development side of things. We probably did less of the well enhancement work than what we had anticipated. And it was a combination of we had a big personnel change within ERT at the end of last year, so it's taken a while for the new people to get ramped up and familiar with all the reservoirs. But I think a larger impact was the services required. On the shelf -- in the deepwater, we do all of our own well intervention. On the shelf, we have to hire third parties. And sourcing the third-party services has been a real challenge.

Historically we don't do a lot of well work in Q1, because the weather is poor for getting people to and from platforms. You know?

Right. But then that shouldn't -- it sounded like when you were talking before that the lack of well intervention early in the year was one of the reasons why the production volumes were on the short side, and why you're not as confident in that portion of the wedge.

That is the reason the production was on the short side during the first quarter. It was within the range, but it was at the very low-end of the range of what we expected to achieve. And the shortfall was the lack of well enhancement work that was done, without a doubt. And that was a combination of redirecting the people and lack of being able to source the services required.

I guess I'm just concerned about the ability to fill that wedge in going forward, whether or not you now have access to the services that you require, whether or not your people are sufficiently trained or knowledgeable on the asset base. You still have a fairly aggressive drilling and you have a very aggressive development program in front of you.

There is a wedge that, obviously, shows a ramp-up in well enhancement, and it's something we've got to focus on. With the reserve replacement going as well as it did we, obviously, can now deemphasize the drilling side of things, and transfer people back over to focus on the well enhancement. Plus, this pause has given all of the new people the opportunity to become familiar with the reservoirs.

As far as sourcing the services, that's probably going to be an ongoing concern. But with the ramp-up in volume, perhaps we can have a little more leverage on enticing the services to be made available to us.

Just to put it in perspective in a real-time situation, we've got five rigs right now that are operating. One of them, obviously, at NOONAN. But three of the four rigs on the shelf are doing this PUD well work conversion program that we're talking about on the slide that you see. So when you look at the going-forward plan, for the majority of the rest of the year, the rigs are going to be working on PUD volumes, non-producing volumes, bringing them to production. So, versus the first quarter, right now, the majority of our shelf rigs are working on that conversion program.

Hopefully we've been conservative enough in our estimates this time, but I wouldn't say that it's not going to be a challenge.

I guess the complaint out there now is it's like six months of kind of constantly ratcheting down expectations. And why -- what confidence -- what confidence should we have in the current forecast, just after what we've seen the last six months? It just seems like you guys have had a lot of -- have been hitting a lot of stones as you walk down the (multiple speakers)

Jamie, you've been with us a long time. If you remember, going back about five years ago, we got into a period where we were overestimating. And we did take it in hand and get it under control and became a lot more conservative; then the complaint was that we were sandbagging all the time. I prefer that to where we are now. Following Remington, we just have -- we had a very aggressive year with a lot on our plate, and we got ahead of ourselves. And we're not going to make any excuses, but you know our character is one of wanting to be conservative. And we're going to get back to that just as quickly as we can.

You still have a very aggressive capital program. What I guess I'm concerned about is with so much focus now on kind of getting the E&P business fixed up, that with all the work -- all the stuff that you've got shipyard ahead of you this year, with the Caesar, with the Q4000, and with the tightness in shipyard stuff, that we run into a problem of either those vessels don't come available at the right time, or the programs aren't executed properly. I guess (multiple speakers) really on the stick there.

Two different teams.

(multiple speakers)

But I won't discount what you're saying. Believe me, the biggest goal for us this year is execution. I'd like to see us focusing more and more and more on execution. I feel bad about the management of the expectations over the last year. But going into the first quarter here, I think, we've made some adjustments, and we're giving it our best shot. But from here on, it's all about execution. It's a challenge, but it's one we're fully committed to. Capital projects-wise, if you remember, in the past we've always run our capital projects out of operating. And with Bart coming on board here, he's taken it in hand to set up an infrastructure specifically dedicated to managing capital projects. So it's not something we're just hoping that we can -- a challenge that we hope we can take on; it's one that we're paying a lot of attention to.

That's great. Thank you. That's very helpful.

(OPERATOR INSTRUCTIONS). There are no further questions.

Thanks, everyone, for joining us today. And as a reminder for those of you interested, our annual shareholders meeting will be next Monday afternoon. That's May 7 at 3:00 at the Greenspoint Club here in Houston. Hope to see you there.