Helix Energy Solutions Group Inc (HLX) 2007 Q2 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in listen-only mode until the question-and-answer period at the end of today's conference call. (OPERATOR INSTRUCTIONS). I would like to remind all parties today's conference call is being recorded. If you have objections, you may disconnect at this time.

I would now like to turn our conference call to Mr. Wade Pursell, Chief Financial Officer of Helix Energy Solutions. Sir, you may begin.

Thank you. Good morning, everyone. Welcome to the Helix Energy Solutions second-quarter 2007 earnings conference call. 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; Robert Murphy, our President of Helix Oil and Gas; and Alisa Johnson, our General Counsel.

Hopefully, everyone has a copy of the press release with them and the slide presentations, which we are going to go through this morning. If you don't, you can go to our website in the Investor Relations page there and click on the presentation.

I will start on slide 3 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, and then I will turn it over to Martin for some operational highlights in both our Services segment and our Oil and Gas segment, as well as an update on our earnings guidance and the variables. Owen will then wrap it up with some closing comments and a strategic summary, followed by the Q&A segment.

But first of all, clicking back to slide 2, Alisa has an announcement for you.

As noted in our press release and associated presentation, 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 as amended by a subsequently filed Form 10-Ka.

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

Thank you, Alisa. First of all, I would like to make a quick comments on Cal Dive. During the second quarter, Cal Dive announced an agreement to acquire Horizon Offshore in a transaction valued at about $650 million.

I am sure most of you noticed Horizon's quite disappointing second-quarter earnings release yesterday. Cal Dive also released second-quarter earnings last night and will be having its own conference call at 11AM this morning, Central Time. If you have specific questions on their earnings release or the pending Horizon transaction, I would ask you to participate in their call later this morning. Obviously, if you still have questions after their call, please feel free to call us or the Cal Dive management team.

So turning to slide 4, for the second quarter of 2007, we reported net income of $65.8 million or $0.70 per diluted share, excluding three nonrecurring items recorded by Cal Dive. The nonrecurring items were $11.8 million, $10.5 million after tax, for non-cash equity losses and an impairment charge relating to Cal Dive's 40% minority interest investment in OTSL, a Trinidad and Tobago company.

Cal Dive management will discuss this on their call, but essentially, OTSL generated significant operating losses during the quarter, lost several project bids which they were counting on winning and ultimately decided to exit the saturation diving market.

Based on these events, Cal Dive performed an evaluation of the remaining investment balance and concluded it was permanently impaired and accordingly wrote it off. Cal Dive is not required to and has no plans to make additional investments in OTSL.

Cal Dive also recorded a $2 million cash settlement with the DOJ related to the Stolt and Torch acquisitions back in 2005.

Finally, Cal Dive also reported a $1.7 million gain, $1.4 million after tax, on the sale of a portable saturation diving asset during the second quarter. So including these nonrecurring items, after giving effect to the 27% minority interest, Helix reported second-quarter net income of $57.7 million or $0.61 per diluted share.

Turning to slide 5, net income for the quarter of $65.8 million or $0.70 per share before the nonrecurring items compares to $69.1 million or $0.83 per share in the second quarter of 2006. Consolidated revenues of $410.6 million represents a 35% increase over last year's second quarter, with increases in both services revenue and oil and gas production.

Looking on slide 6, you can see contracting services revenues, the maroon boxes, increased about $45 million or 20%, due primarily to improved market conditions, particularly within the well ops and robotics groups. In addition, oil and gas sales increased $61 million, the gray boxes, due primarily to the production added from the Remington acquisition.

Gross profit of $141.8 million was 8% better than the $131.7 million achieved in last year's second quarter. Gross profit margins of 35% were 8 points less than the year-ago quarter of 43%, due primarily to the significant out-of-service days for Cal Dive's vessels and regulatory drydocks, 343 days in the second quarter of '07 versus 235 days in last year's second quarter, and also an increased DD&A rate for oil and gas production due to the Remington acquisition in July of 2006.

The reduction in gross profit from Cal Dive due to the drydocks was offset by a solid quarter for our well ops division, particularly the Seawell in the North Sea, which had its best quarter ever.

SG&A, $33.4 million, increased $6 million from the second quarter of 2006 due primarily to increased overhead to support the Company's growth over the last year. This level represents 8% of revenues, 1 point better than the 9% in the second quarter of 2006.

Equity and earnings -- we had a net loss of $4.7 million in the quarter due to the aforementioned $11.8 million equity loss and impairment taken on the OTSL investment, partially offset by $7 million for our share of earnings for the quarter from Marco Polo and our share of demand fees at Independence Hub. I am sure most of you noticed that facility actually began producing during July.

Regarding the tax rate for the quarter, 35% was a full point higher than last year's second quarter, due primarily to most of the OTSL charges and all of the DOJ reserve being nondeductible. So I expect the rate to return to around 34% for the remainder of the year.

The debt incurred last July for the cash portion of the Remington acquisition, $835 million, caused interest expense net of interest income and capitalized interest for the second quarter of 2007 to be $14.3 million, which is $11.3 million more than the $3 million in the second quarter of '06. The Remington acquisition also was the main driver behind an increase in diluted shares outstanding 96 million compared to 84 million in the second quarter of last year.

Turning to the capital structure -- see slide 7 -- total consolidated debt as of June 30, 2007, was $1.4 billion. This includes $140 million under Cal Dive's revolving facility -- that is the blue box. This facility is non-recourse to Helix. The other components are primarily unchanged from last quarter -- it is the Term B facility, which is $829 million, the orange box; the convertible notes of $300 million, the maroon box; and the MARAD debt of $129 million, in the green box.

So excluding the non-recourse Cal Dive debt, about half of our debt is currently fixed at a blended interest rate of 4.8%. This level of debt amounted to net to debt book cap of 43% and was $735 million of EBITDAX for the last 12 months. Excluding the IPO gain, this represents 1.8 times trailing 12-month EBITDAX.

Summarizing CapEx, total capital invested in the first half of 2007 was approximately $447 million, with about 63% of that in the Oil and Gas segment, primarily drilling success at Noonan and Danny and shelf prospects.

Contracting services capital related primarily to the well enhancer new build and conversion costs on the Helix Producer 1 and the Caesar.

So I think with that, I will turn it over to Martin for operational highlights.

Thank you, Wade, and good morning to everybody. I'm going to cover the highlights of the rest of the presentation, starting on slide 8. The market for our contracting services is still strengthening nicely. We managed to increase revenues by 20% year over year, despite the very extensive asset downtime for regulatory maintenance that Wade explained during the quarter.

[Canyon] alone lost the equivalent of four key vessels for the entire period. Also, the Intrepid was out for much of the time. This maintenance activity obviously had a negative effect on gross profit and margin. But we expect to get back to 35%-plus margins for the rest of the year.

Of particular note in the numbers provided on slide 8 is the dramatic improvement of well operations profitability, up 14 points year over year, with the Seawell enjoying her best quarter in almost 20 years of operation. Also, Canyon had a record period and contributed over 60% of deepwater construction gross profit. This type of performance bodes well for the rest of the contracting services group. And now the bulk of the maintenance activity is behind us.

Other highlights from slides 8 to 13 are, firstly, the Q4000 had a much better quarter, earning 30% margins on the work she was able to carry out before the major station keeping upgrade, which is planned to start in late August. We also secured a nice 60-day per year over three year well intervention contract for her at good rates.

The Intrepid and Express are fully booked for much of 2008 already. And the schedule for the Caesar is filling up well for Q2 '08, [all moors out to shore rise] in the Gulf of Mexico.

Canyon as well is performing extremely well financially and involved in some very technically challenging projects. During quarter two, they proved their rock-cutting capability as part of a pipe burial job offshore South Africa and commenced robotic coring operations for a deepwater mining operation offshore Papua, New Guinea. This is Discovery Channel stuff.

We connected a very successful well operations project offshore Australia and as of July 1 purchased the remaining 42% interest of SEATRAC, which we didn't already own. SEATRAC will in the future operate as our well operations Southeast Asia group.

Production throughput has grown at Marco Polo and now stands at around 50,000 barrels of oil equivalent a day, with further growth likely by the end of the year. Also know that production has been initiated at the Independence Hub. The operator is expecting a significant ramp-up by the end of the year.

The Helix Producer has taken real shape, as can be seen on the images of the quarter, slide 10, where the transformation from train ferry to floating production system is well underway.

Turning now to slide 14, where for the first time we show backlog for contracting services, excluding Cal Dive -- excluding Cal Dive because their business is mainly a spot market. The backlog includes equity contributions from the production hubs and stands at $1.75 billion. Much of that is external work and we have commitments for 2010 and beyond.

Many of our competitors in the deepwater and served markets like to show these backlog slides. So we have done the same here, because we are very excited about the visibility. And I'd also like to point out that embedded in this revenue is a margin in excess of 35%. So we are in good shape as far as commitments for many of our deepwater assets.

(inaudible) revenue and equity earnings for these segments this year, in 2007, is $530 million. And we already have well in excess of the number committed for 2008. We will obviously take questions on this new slide if you have any.

Moving on to talk about the Oil and Gas division, starting on slide 15, we expected just a modest increase in production during quarter two and achieved that despite output from our interests in the deepwater Tiger field being shut in during May due to a fire on a third-party processing platform. We were also disappointed in the contribution from some of our non-operated properties during the quarter.

Looking at the financial stats on slide 16, our cost structure is still negatively impacted by the hurricanes of 2005 and the allocation of much of the Remington acquisition value to their proven reserves. The former factor cost us around $5 million during the quarter, net of insurance proceeds, and the latter increased our DD&A rate by around $1 per MCFE. Both factors will diminish over time as we bring on new production.

On the subject of new production potential, let's firstly turn to look at slide 17, which shows our exploration report card for the first half of the year. We drilled another six successful wells during quarter two, including the deepwater Danny test. And we now have built a sequence of 19 out of 19 successful wells, with 12 out of 12 occurring this year.

In the first half, our estimated 1P and 3P reserve additions are 140 BCFE and 330 BCFE, respectively. Remember that Remington had 280 BCFE of 1P reserves when we bought them. Robert Murphy tells me that this level of success in exploration is unprecedented, in his experience. I'm sure he will echo that sentiment in the Q&A session.

On the 2007 production fronts, our modified range for the year is now 70 to 80 BCFE, and since last time we have removed the acquisition wedge due to the further exploration success and lowered expectations for output from non-operated properties in the Main Pass area in particular. See slide 18 for full details there, and again, we will be taking questions on that.

We are still expecting a significant increase in production over the remainder of the year as we bring on new operated shelf developments. The major ones are shown on slide 19. And I would like to point out that this ramp-up requires an almost Herculean effort to bring on 19 new wells and involves the setting of five new platforms, 11 subsea trees, and the laying of 16 new pipelines. So we are busy -- there's a lot of effort going into this ramp-up.

Next year, we are looking forward to reaping the fruit of our deepwater exploration and acquisition efforts, and can be seen from slide 20 that following the addition of Danny, our deepwater interests will deliver an upward step-change in production when all on-stream. And around 80% of our incremental production will be oil.

As we have created considerable wholly owned value in several of these deepwater PUDs, we may yet sell down some interests on the right economic terms, as set out in our initial guidance given in December last year.

The current status of our hedging program is shown on slide 21. And it is important to note that we are looking to add positions as the start dates for the deepwater projects come into closer view, especially at the prevailing oil price strip.

I would like to conclude my remarks by providing an update on full-year 2007 earnings guidance. And again, we've put in a pretty detailed analysis on slides 22 to 24.

Overall, we expect contracting services and corporate performance to be near the midpoint of our initial guidance range. And the shortfall from lower production will be at least partially offset by lower exploration expense. We haven't had any dry holes and our exploration program is pretty much behind us. And as I mentioned previously, we might sell down some minority interests and create a deepwater production value.

Barring a significant decline in natural gas prices, we are comfortable with the present consensus estimate of around $3.26 of earnings, with contribution over the next two quarters being around 45% and 55% of the remaining second-half number, respectively.

It is too early to talk about 2008 numbers as we have just started our budgeting process. However, our takeaway from this presentation is that we have the contracting backlog, new marine assets coming, and hopefully incremental production. So that should make 2008 a very exciting one.

With that, I will hand over to Owen for his remarks.

Thanks, Martin. I've got relatively few comments. I think following the Remington transaction, I've got to admit that we got ahead of ourselves on the timing of the value realization that we saw in the transaction. But since then, I think we have corrected the timing errors that were inherent in our guidance. But it doesn't diminish the ultimate value potential of what that deal meant for the Company.

I think it should now be apparent, following the drilling success that we have demonstrated, that the value of the transaction was truly in the prospects that came in the transaction -- 12 for 12 on drilling, two for two in the deepwater, and additionally, 140 BCF booked is significant reserve growth.

Our cost to produce already is the best in class and it is heading lower as production increases and discoveries are matured, which proves the model of being able to lower our F&D costs. Unfortunately, all the focus of these significant events over the last 18 months on the production side has sort of clouded or fogged over the perceptions of Helix and distracted from the attention on the surface and contracting side.

As slide 6 shows, we are still 60% services and 40% production, which is in the same range that we have been for over a decade. I think it is important to note that we opportunistically grow both sides of our business model. One may get ahead of the other, but we are very focused on growing the whole model. In many ways, the two sides of the Company are interdependent and mutually supporting.

Currently, we've got around $1 billion in capital expansion in progress, of which more than 50% is dedicated to contracting. I think it is very exciting when you start -- I like the pictures on that one slide in the presentation -- it gets very exciting when you start looking at the well enhancer coming on for well ops, the Caesar coming on for the deep pipe lay group, the Q4000 being converted for drilling, a new spool base in the works. We've got additional subsea lubricators for well ops being manufactured, seven new ROVs, two ROV drill units that are out, and we have successfully proved the concept, ROV rock cutter on a 200 horsepower deepwater plencher, which is a new technology and pretty exciting. We've got the Helix Producer well along on being ready for deployment on the Phoenix field. We have got the Shiraz, sitting down in Southeast Asia, waiting to be developed as an FPSO. And we've got the exciting news of the Independence Hub just coming on.

These are all really exciting growth initiatives, largely overshadowed by the focus on the big production deals over the last 18 months.

Incidentally now, the timing of the assets coming to the market on the service side will be over the '08/'09 period, which is during the same timeframe that production developments are scheduled to come on. So it should be pretty exciting to watch what the results are. In fact, some of these service assets have their first utilizations scheduled on deployments to do our own developments. So again, it shows the synergy of the model.

With this kind of visibility, Helix is perhaps a value play this year, but it is my hope that during '08 we would be able to be recognized as a growth play as well, which is after all what we truly are. We are first and foremost a growth company. There has been tremendous performance in the Company over the last year and things are going well and bode well for long-term sustainable growth here.

And with that, I will turn it back over.

Okay, operator, we are ready for the Q&A.

(OPERATOR INSTRUCTIONS). James Stone, Cambridge Investments.

Owen, I hear what you are saying about the growth that is out there and the improving visibility that you have. It is hard to price that in when you go four quarters straight with missing or lowering production numbers. And I think that is the frustration that is out there in terms of trying to understand how you can build a long-term model on the production side without the confidence that the numbers -- that you're going to make the production numbers.

And so my question is -- was more of a comment, but my question is, how do we get comfortable that once you move into the execution of these production projects that things are going to get done on time, that the flow rates are going to be there and that you're not going to be held up by continuing third-party problems?

First of all, let me say that I do -- we had a lot of transition in the Company last year with the acquisition of Remington, and we got overly excited about the potential of what we were doing and got into a habit of overpromising and underdelivering.

With that recognition, and I think you have seen over the years where this isn't the first time we fell into that trap. It probably won't be the last, but it is certainly not going to be in the near term going forward. We have more than learned our lesson. Hopefully, we've got the production -- there were a lot of moving parts, a lot of new things for us to try and get our hands around on the production. And we just plain didn't have it right.

We have done a lot of soul-searching and a lot of digging down in depths, and hopefully we have got the numbers right. The impact -- you are right -- right now, on the shelf, I would say the biggest impact to the production rates on the shelf, the shortfalls, are coming from the consequence of our participation in the non-op party in some of the fields. That is probably the biggest impact. Historically, we have always looked to be the operator. And I think we're just going to have to discount greatly the potential of any non-op interest in our future projections and start talking about what we know we can do and that we are in control of our own destiny.

Going forward now, it is a challenge. I mean, I think we have got the number right here. I think it is a number that is easily doable as opposed to what we have been guiding in the past. I think guiding in the past, we have been trying to communicate the potential of what we have. And going forward, I think the difference is we are going to be expressing what we feel we can definitely achieve.

Having said that, a lot of this production ramp-up is based on executing the development projects. By now, we've got them all scheduled with the new assets coming on. But I will say, assets and [somehow the guards] late. Weather can have impacts. Hopefully we have built enough contingency into our scheduling here to accommodate that. And if anything, I hope that we're a little more on the conservative side than is necessary.

And then my second question is this $1.75 billion backlog number -- can you frame that in some context for us? What kind of ballpark would that have been a year ago or a quarter ago, to give us a sense of what kind of magnitude of improvement you're seeing in the contracting business.

I will take a shot at that. I think we put this slide in because we are excited about the contracts we have booked recently, over the last year, both internally and externally, booking work for assets that are not even in the water yet, like the well enhancer and Caesar, Helix Producer 1. And we just wanted to point out that like other similar deepwater contractors, we do have commitments. And those commitments are at good margin. So this situation is improving nicely, and we will update the slide if it is helpful after future calls.

But no venture to guess as to what kind of order of magnitude change you've seen in your backlog in the last year?

Well, I would say we have certainly seen a 30% to 40% increase, easily.

Roger Read, Natexis Bleichroeder.

I guess we could -- slide 18 with the production targets for the third and fourth quarters -- you highlighted, Martin, the number of things you have to do. What is the over/under? I understand what you're trying to do to get to the numbers, but if you look at your experience over the past year that you have been with Remington and what you are attempting to do, how do you handicap beyond picking a midpoint between the high and the low case in terms of the likelihood of making those numbers, both in terms of the exit rate for Q3 and the exit rate for Q4?

And if there is a hurricane that comes through the Gulf and causes everybody to go to shore for a week or so, should we definitely assume that the low end is the right place? Or is it something you can recover from between, say, end of this month and end of the year?

I will start and hand it to Robert. You try to frame this range now of 70 or 80 Bs in terms of our low- and high-case expectation. As I mentioned, we have taken some non-op production out in Q3 and Q4. But given what we are doing with Cal Dive assets and with Helix's assets on these shelf development projects, we have tried to build in some contingency time there. But obviously if a hurricane comes through that dramatically impacts operations in the Gulf, that could hamper us and push us towards the low case.

Robert, do you want to add to that?

I think the hurricanes, that is the variable that is very hard to model in. But we do have some downtime built in with natural decline. But the step rate change that Mark mentioned during the presentation, he went through really the laundry list of ingredients that make up the step rate change going to the number of wells. But the real key factor in execution here is we have most of the wells drilled and completed. Out of the five platforms that you mentioned, four of them are set. One is being set right now.

The real item that we have to execute on is getting our pipelines laid. And I think we are at a great advantage here because we have a great shelf contracting unit here in Cal Dive that has been executing pretty well for us. So if you to handicap it, it is at the pipelines. And I think this is a company that lays pipelines pretty well. So hopefully, that will give you a little more insight on what the actual work to be done is.

That is helpful. An in terms of having the pipeline sizes available, there's no material problems here in terms of acquiring the materials?

No, and I think there's one thing I do need to mention that the MMS, the governing body in the Gulf of Mexico, they're really backlogged on their permitting process. And what we have seen post hurricanes is this has been a time period that has been extended. I think if anything, we have come to realize that if we expect to get a permit out of the government to lay a new pipeline in 50 to 70 days, I think we need to actually count on that being more like 70 to 110. And that has had a big impact.

Materials, we are fine. In fact, most of it is just getting these permits and getting the routes shot in a timely manner.

That is very helpful. The other question I had sort of unrelated to that -- the Helix Producer I, you have the picture in there about it leaving the shipyard. Can you update us what else has to occur to that vessel to get it ready to go on the Phoenix field next year? And what the timing in terms of installing that vessel and ultimately hooking up the field to it would be?

This is Bart. The picture shows the vessel but it doesn't show the vessel leaving the shipyards. It is still in the shipyard. If it would leave the shipyard now, it probably wouldn't survive the transatlantic crossing because there's still a lot of work left -- it left drydock. That is what the picture shows.

The vessel -- the conversion is going to continue on schedule. We expect it to leave the shipyard in the first quarter of next year. Then what is going to happen is the vessel is going to come here to the Gulf Coast and it is going to go to Corpus Christi where [Keywheats Offshore] is fabricating all the production modules. Those production modules are then going to be installed on the vessel and all going to be hooked up.

That is in process. That is going to take probably three to four months. And we expect the vessel to sail out to the Phoenix field on its own power in the third quarter of next year. It shouldn't take long to hook the vessel up to the wells that are already there. The flow lines will have been pre-installed. The buoy will have been pre-installed. And they will pull the buoy into the vessel and we should be on production.

So everything goes pretty well. It goes at the moment in accordance with plan. And we have got a very good team working on it. And so, we feel pretty positive about the whole development.

One comment I wanted to make also on the backlog slides, a question was asked earlier -- we show around $1.75 billion in backlog. If you go back a year -- go to August of last year, I would say probably $1 billion of this backlog have not been contracted. So it is a very big change from a company where historically the backlog was maybe three to six months. We go now -- we are transitioning into a company that has a very extensive backlog and that shows the market that our contracting services are working in. But it also shows the interest and the confidence our customers have in our services.

[Walter Keane], EBS Financial.

Good question for you regarding the Noonan and the Phoenix deals. First of all, could you give us some kind of a ballpark number? Is there any contributions from these two fields? And secondly, would you comment on what potential there is for increased production from these two fields over time?

Well, we have got a slide which shows details on both Noonan and Phoenix -- slide 20. If you take a look at that, we have given some reserve estimates and some first production estimates. I don't think we want to talk about earnings contribution at this point. I mentioned we haven't done our budget yet for '08. But I think you've got enough information there to take your own stab at it.

What potential is there to increase the production, especially from the Phoenix field which should be a pretty big production right away? But can you increase that beyond the current production estimates?

I think the trick will be on maintaining production at that level. We do have other wells, explore a few opportunities to bring on. So we're hoping to keep this production level flat for several years, is our objective.

Philip Dodge, Stanford Group.

I want to first ask you about the 140 BCFE of reserves that you've added with the encouraging exploration results. Would you be in a position to book that at the end of 2007? And then would the arithmetic be that if nothing else happens, you would add 60 to 70 BCFE for the year to the December 31, 2006 number?

Well, we typically -- I think it was mentioned that most the -- the meat of our exploratory program has already taken place. So we don't have a lot of exploratory wells left to drill this year. It is principally development/pipe conversion programs. Is that what you were asking?

Really asking whether you are going to be able to book -- the overall period of time you are going to be able to book the 140?

We are pretty confident that we can. We have an investment out there. But yes, out of the 140, we're saying, yes, we are pretty confident we will see that number.

And then on the current production level, what is the decline rate before you spend any money to temper the decline rate? And how much money are you spending to temper the decline rate?

Well, the maintenance capitals we will call it, the graph's pretty illustrative of our decline rate. You can see we add three categories on that graph, the PDP reserves, the proved undeveloped reserves and then the new developments. But in general, it is 25% to 35% on shelf Gulf of Mexico reserves.

Is that before or after maintenance spending?

That is before maintenance spend.

Finally on the Phoenix production rate, is that the total of the production that Chevron had before the hurricanes plus the discoveries they made? Is that the process for getting to that estimate?

Right when the Typhoon field encountered the Hurricane Rita, there were two wells that were in progress that Chevron was -- one had just been completed. The other had just been cased. So when you look at the last month of production prior to the hurricane, you need to add that plus the two new wells, PUD, yes.

Stephen Gengaro, Jefferies & Co.

Really one main question -- can you walk us through in as much detail as you are willing to -- when you look at your step-up in earnings from the second-quarter actuals to the third quarter, what the pluses and minuses are we should be thinking about sequentially over the next quarter or two?

Yes, if you take $0.70 as a starting point, taken out in non-recurring items, obviously we've got all of our asset base going to contribute in Q3 except for the Q4000 which is going to be out for September. So [call it of top all their three] part working, so you'll see a major difference in utilization and therefore contribution from contracting services.

Also, we are showing our production increasing. So you should see an extra contribution there. Those are the main drivers as well as contribution from the Independence Hub.

There's nothing you see that is sort of a negative sequentially?

At this point, I don't see any major negatives. That is for sure.

Then just to be sure your comfort with the consensus is based off of -- between sort of the $0.70 number for the second quarter?

Yes.

Travis Anderson, Gilder, Gagnon, Howe.

I was just wondering given the wonderful successes you have had in drillings with all [aspects of data], how much of the team that was with [Renaissance] when they did all that is still with you?

It is pretty well in tact. We had very little loss from the exploration production [SAS] that came from the Remington acquisition.

(multiple speakers) I might add though Robert -- and this is kudos to you and your team -- even though production has been a problem for us to accurately forecast and get back up to expected levels, if there is another company in the Gulf that has actually increased booked reserves on the shelf this year, I can't think of them, whereas you guys have.

As active as we are, yes, that is correct.

In terms of prospects that you are developing then, is it more or less on the same pace that Remington was at on acquisition (multiple speakers) sales, etc.?

Right. The team is continuing to farm our data sets looking for more prospects. It is a proven team. Also, it is just a proven process but it has been held together.

Jim Rollyson, Raymond James.

One question, Martin, just following up on something you said. You were talking about the production issues which obviously everyone is talking about. It sounds like a lot of the issues have been third party related. And you took out the acquisition wedge, etc. Can you just talk about how your own operated production has been doing maybe relative to what you guys were planning at the beginning of the year?

I would like Robert to handle that if you don't mind.

Sure.

Just from again referring to the slide, we have obviously scrubbed this down pretty well. When we look at our projection from late last year through the proved reserve category, we have had some fields that have not performed as projected and others that have performed. So when you put it all together, we are right on our projection for our proved reserves.

The shortfalls we have experienced is we have some non-operated fields that we projected to perform better than they have. Now, it is not a matter of performance. It's a matter of execution of the work. These fields that we have seen some lackluster performance on, the reserves are still there. The operators just aren't getting to it and the operators are much larger companies than we are. So you can kind of put two and two together there.

The other thing that has become a shortfall for us is we have had an interest in some main past properties that we are non-operator of that have been on the market for sale. And they are pretty much drilled, completed. But the infrastructure has not been put in yet because of this pending sale process. We see that coming to a close here. But those main past properties have also contributed heavily to the shortfall.

So from our own proved reserves, our own operated properties, we have seen exactly what we projected.

Just a follow-up question on cost, obviously you, Martin, mentioned kind of recurring hurricane issues that have been showing up in the cost. How much longer you expect those to carry forward? And I presume as the production starts to ramp, your unit costs ought to come back down. Is that fair?

It is fair. The unit cost from a DD&A perspective because we are a successful efforts company, it is on an individual field basis. It's not pulled. So there will be ups and downs as far as which fields come on. But we're bringing on so many that we should see a lower unit reduction cost there. From the abandonment due to hurricane damage that we experienced in 2005, we still have some more to do. We are working on it diligently. But the government wants it done and we want it done.

And Jim, this relates to P&As and Wade said they are not going to produce anymore.

Last one for Owen. About a year ago, if I recall, you were a little bit concerned looking into later part of this year as it related to diving assets coming into the market. Given how strong the market has maybe gotten since then or held up since then, just wanted to get your current view of how the market is shaping up looking into next year.

I would really like to avoid getting into Cal Dive's business with their call coming up. I would take questions after I let you all hear their impressions of it. I will say that historically, Cal Dive's business is to a large extent IRM work, which is pretty steady-state versus the cyclicality of development work. And beyond that, I will let them talk.

From our perspective at Helix, if you look at the assets that we have and the assets we're bringing on, these are not me-too-type assets. These are all specialty niche assets and that's for a reason. And I don't want to put panic in anyone's mind, but you know me I am always planning for the next downturn. For that reason, we had specialty assets that are not as sensitive to an oversupply situation that may be coming out of Norwegian shipyards.

Having said that, to the extent that an oversupply does occur or a weakening of the demand in the market, then that creates opportunities for us that we will certainly jump on. For that reason, I think over the next 12 to 18 months creating some balance sheet strength is not a non-prudent thing to do.

[Steve Pounds], Paul Capital.

Martin, maybe you could give us some flavor of what the current contracting environment is like for your big assets up here and what the visibility is like. You put up $1.75 billion backlog number. You alluded to the fact that visibility is better. Can you give us some color on what it is like now versus a year or two ago?

There has been a dramatic improvement. I think the backlog slide we put in shows that we have visibility into 2010. I mentioned Intrepid and the Express are booked through '08 pretty much. We do have commitments in the following units -- the Caesar's order book is filling up nicely. Then the Seawell is probably committed for at least a couple of years. We are taking orders for the well enhancer.

So visibility has dramatically improved since last year but at good rates too. I would like to point out that we are bidding higher. And hopefully, we will be able to achieve superior gross profit margins on our work.

And I realize this question has already been asked, but as your production comes on, what kind of reductions could we expect in this DD&A rate? You're bring on a fairly significant amount of production. Are we going to bring that DD&A rate down $0.50, $0.75, some other (multiple speakers)?

If you look at the estimate at finding the development cost for the prospects that we drill this year and the exploration success we have had, even at one fee, we are predicting well less than 250, an MCFE of F&D cost.

So once that comes on, you will see a dramatic reduction in our DD&A [roots]. I would like to see it get nearer $2 -- get down to that sort of range. That is our objective. Don't forget; we want to be 25% below industry norms. That is our aim.

If you turn to page 28 and you look at guidance for the rest of the year, there is just some enormous swing there between what the revenues are from now to year-end and what the potential income from operations could be. If you take that incremental number, it turns out to be $108 million or something over $140 million difference in revenues. Is that anything in particular that is out there or just some jobs that need to get finished to get up to the $1.2 billion revenue number?

No, it is just vessels returning to work. If you get the opportunity to listen to Cal Dive's call, you'll see that their revenues were way down this quarter because so many assets are out for regulatory maintenance. We also have the Intrepid out for a long period during the quarter. These assets returning to work will make (inaudible).

And what we are presenting on the slide is our initial guidance. Right now, we're saying we're trending toward the middle of that guidance.

And finally, maybe this jumps the gun also, but Horizon reported a surprisingly -- maybe a surprising number last night. And given the fact that you're in the middle of this deal with them, what is the status of that? Are you expecting any change in the status of that merger?

I think you would have to put that question to the Cal Dive management.

Joe Agular, Johnson Rice.

I was wanting to refer back to the backlog page that you all had in your slide presentation and the equity and earnings numbers that you gave in that first slide. Could you -- what does that represent?

The equity earnings number represents our earnings out of our equity investments in Marco Polo and Independence Hub based on the man charges and volumetric payments based on the most likely case of the existing fields that are producing.

So this goes out for years then?

Yes. But it doesn't include any other fields that in the future are going to be tied back to these hubs.

I was trying to figure out that being in the contracting backlog, whether that was additional work that needed to be done for whether it was just the equity in the earnings.

No, no capital has to be spent. And also remember it is equity earnings, so it means is revenue minus expenses. So it is really -- if you talk about margins here, it is a 100% margin number.

But that represents the flow-through you expect onto the Helix income statement?

Correct.

Yes.

Second question is in the next slide, there is a number given for production facilities as well, which I would assume is work that you're going to be doing on -- what is that new production facilities? Does that include both your own and others or is it -- could you just help me understand whether that's--?

(multiple speakers) the next slide. The next one is about oil and gas.

I am sorry. Not the next slide but the next chart in that slide that breaks it out between deepwater pipe lay production facilities and so forth?

Yes, the difference between the equity earnings in the first chart and production facilities in the second chart is the revenue that we have contracted from the Helix Producer I.

So this is work that you all are doing on the Helix Producer installation?

Yes, it is. (multiple speakers) revenue from the Helix Producer I.

Marshall Barnett, Capital One South.

A quick question for you regarding the backlog slide. You are showing about 600 million that you have expected for '08. I was wondering what you have in terms of remaining capacity for backlog additions during '08. Would you say there is still a lot of room left?

Mainly with Caesar, I think --

I think there's room left on the Caesar. There is room left on the Canyon fleet. There is room left on the Q4000. We have got the Shell contracts. And of course, Q is going to drill internally. But we still plan to get some of other third-party well intervention revenue. And we are bidding on a lot of jobs for the Q and it is going to be high-margin opportunities.

Express and Intrepid are getting pretty -- the schedules are getting pretty full. But what we're doing is we are using some of the Canyon vessels. Remember with Canyon, we have a pretty large fleet of vessels we have chartered. We are using some of those Canyon vessels to support the deepwater fleet. We're removing some high-margin work from the deepwater assets to the Canyon fleet. So I think on the Canyon side, there is going to be significant upsides compared with the backlog that we show in this chart.

If I could jump in here though, I would just like to mention -- the backlog slide, I think the greatest value there is to show a step-wise change in the Company. It is starting to speak more towards potential than perhaps what I am comfortable doing. That is why I have never been a fan of other contractors that hype the backlog. I want to make sure that we don't get into that trap.

This is intended to show that even though we have a lot of new assets come to market, the volume of our work is visible and greatly expanded. So we don't have a utilization risk on these new assets to come to market. But I would stop short of trying to infer anything from the backlog slide as to the potential for beating future numbers.

If you notice, we have avoided talking much about '08 other than saying we that we have got a lot of developments coming online at the same time that we have assets coming online. The potential there is big. I want to make sure that we don't fall into the trap of -- I think the potential of what is going to occur here. We have got between now and the end of the year to accurately really dig down and come up with guidance that you can take to the bank.

Just for instance on slide 18, that production ramp-up, I think that is a continuation of the format in trying to show you how we are thinking in the Company. As Jamie mentioned -- or he pointed out, there's a big difference between talking about your potential and talking about what is expected, and talking about what you can take to the bank. And I don't want to see you guys slide into again over-hyping potential. But at the same time, I don't want to see us falling into being known as a sandbagging company.

In the perfect world on those production graphs there, I probably wouldn't have the 80 BCF on there. I think that is kind of a potential number. But then again, it would be wrong to just say 70 because that is probably on the sandbagging side. But I think the 70 is a number that we are doable. And we are taking an honest effort at showing the yellow line there which is what is expected.

We think.

Just take all that with a -- for what it is worth. We are trying to get this accurate going forward.

[Greg Cools], Brencourt Advisors.

I had a couple of quick questions. First on slide 9 when you talk about -- and forgive me if this question has been asked already; I didn't hear it -- the utilization of pipe lay versus robotics, what sort of percentage of deepwater is the break-out pipe lay versus robotics? Because I saw there was a pretty significant decline in asset utilization in pipe lay versus robotics.

Well, in deepwater pipe lay, we only have two assets at present, the Intrepid and the Express. The Intrepid was out for a long period for maintenance. That is what brought the number down to 70%. Whereas in robotics, we do have many ROVs working. So we were able to improve utilization dramatically over 2006 levels. In 2007, we have been improving logging conditions and seasonality.

Yes, if the Intrepid had not been in drydock -- and of course, this is a regulatory drydock, so you have to do that every couple of years -- if the Intrepid had not been in drydock, the second-quarter number would have been better than the first-quarter number from a utilization perspective.

Actually you are saying then, pipe lay would have been higher than 93% utilization versus 70?

Yes.

And then going back to slide 8, when we look at the significant decline in utilization or the revenue decline in terms of percentage from deepwater and shelf, was shelf primarily due to the ownership in Cal Dive and deepwater was just as you had said here with Intrepid, had Intrepid been in service, we likely would have seen deepwater construction revenues higher than the first quarter sequentially.

The declines in revenue are purely due to maintenance activity -- no difference quarter-to-quarter.

So then that is just overhead absorption when we see the compression in margins as we move down to gross profits?

Yes.

And I think also on the margin side on deepwater construction, I think what is also mentioned is that there was a legacy contract that Express worked on for quite some time in the second quarter. There was a contract that was paid in '05 at pretty low margins. And we don't have any of those legacy contract left.

You don't. So those are burned off.

Then just a general question, maybe for you Martin, are you seeing any change in terms of scarcity of labor, crew, with fuel costs, etc, whereby you are seeing just an inherent compression in gross profit margins? Or should we expect that when utilization rates are sort of 90% above, knowing what the historical possibilities are? Is that something we can look forward to? And then also, are the types of assets coming on in the upgrades will inherently lead to higher margin business?

That was a pretty wide-ranging question. I think we are seeing pressure on labor and our material cost just the same as everybody else working in the industry. But our predictions for gross margin, 35% the contracting services take that into account. I think in certain segments, we might see higher margins from the specialty assets that we are bringing to market over the next couple of years. So our earnings guidance reflect current cost pressure in the marketplace.

(OPERATOR INSTRUCTIONS). Sir, at this time, I show no further questions in queue.

Thanks, everyone, for joining us today. We look forward to reporting to you again next quarter.

Thank you. At this time, that does conclude today's conference. All parties may disconnect.