Helix Energy Solutions Group Inc (HLX) 2008 Q4 法說會逐字稿

Good morning and thank you for standing by. At this time, all participants are on listen-only. After the presentation, we will conduct a question-and-answer session. (Operator Instructions).

I would like to inform participants that today's call is being recorded. If you have any objections you may disconnect at this time and I would also like to turn the call over to your conference host this morning, Mr. Tony Tripodo, CFO.

Sir, you may begin.

Good morning, everyone, and thanks for joining us today. Joining me today is Owen Kratz, our CEO; Robert Murphy, our Executive Vice President of Helix Oil and Gas; Alisa Johnson, our General Counsel; Cameron Wallace, our Director of Marketing and Investor Relations; and Lloyd Hajdik, our Senior Vice President of Finance.

Bart Heijermans, our COO, is traveling on Helix business in South Asia right now and won't be joining us on this call.

Hopefully, you've had an opportunity to review our press release and the related slide presentation released last night. If you do not have a copy of these materials, both can be accessed at the Investor Relations tab on our Web site at www.helixesg.com.

The press release can be accessed under recent news and the slide presentation can be accessed by clicking on today's Webcast icon.

Before we begin our remarks, Alisa Johnson will make a statement regarding forward-looking information.

As noted in our press release and associate presentation certain statements therein and (technical difficulties) are forward-looking statements. A number of factors could cause actual results to differ maturely 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 31st, 2007 and subsequent reports on Form 10-Q filed with the Securities and Exchange Commission.

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

The presentation together with the reconciliation is available on our Web site. Tony?

Thank you, Alisa. Moving on to slide 4, obviously our Q4 financial results are messy due to the large non-cash accounting write-offs of $935 million, including writing off the goodwill associated with the Remington acquisition as well as the write-off of certain Oil & Gas properties, due to the reduced commodity price environment.

However, our underlying message in this call is that once we move beyond these matters, the Company has positioned itself to generate positive cash flow and decent earnings in 2009.

Slide 4 essentially summarizes what we have set forth in the press release, so I won't cover it in detail. But I will say that Q4's revenues of $541 million represented another strong quarter for the services side of Helix while our Oil & Gas revenue suffered from production shut-ins resulting from Hurricane Ike as well as much lower commodity prices.

While margins on our Contracting Services revenue were impacted by very low margins on a pipelining job in India, we actually expect on a go forward basis, margins on our Contracting Services business to revert back to historical levels.

Moving to slide 5, in addition to the highlights I've already mentioned, let me point out a couple of other highlights. Our Contracting Services business had another strong quarter as our assets performed at high utilization levels.

Cal Dive, which reported their results last week, is benefiting from increased activity associated with hurricane inspection repair and maintenance work. While Oil & Gas production reached only 6.4 Bs for the quarter, we are now at levels in excess of 90% of pre-Ike rates and we expect to exceed pre-Ike levels once a key pipeline is repaired, allowing our Noonan gas sales to produce at its projected [16] million cubic feet a day net to our interests.

Presently, Noonan is producing at 18 million cubic feet a day. We expect repairs on this key pipeline to be completed some time in March and Robert will get into more details on this later.

I will turn the next couple of slides over to Owen.

The outlook, I'm not sure that our crystal ball is that much better than everyone else's, but we do expect to have a decent year operationally on the service side of the Company. We do expect to be able to generate positive cash and reduce debt going toward -- throughout the year. And that is without any further asset sales and, of course, asset sales would accelerate that process.

We do have good contracting backlog visibility right now. We are, I will say that we, in our preparations for going forward, we are anticipating a softening of the market toward the end of '09? And we are taking steps to be prepared for that.

Switching to the Oil & Gas for just a second, our production range is now predicted to be in the 50 to 60 Bcf equivalent range. This is a reduction from previously stated numbers; and that is primarily a consequence of the hurricane recovery, but even more so because of the curtailment of capital spending, especially on the shelf where capital spending on well operations were -- offsets the decline.

So in '09 we do expect decline on the shelf to be at a more accelerated pace than historically without that investment.

I will touch more on the operations later. But for right now I will turn it back to Tony.

I'm going to turn over to slide 9 now and, given the investor focus on liquidity and balance sheet issues, I would say on a global level and specific to our Company, I will spend a fair amount of time on the next few slides talking about our current and projected situation.

Slide 9 shows our Net Debt position after excluding Cal Dive's debt, which is nonrecoursed to Helix. Our cash on hand at 12/31/08 excluding Cal Dive's was $161 million and our cash position today is even higher. As a point of reference, as of yesterday, our liquidity -- which is defined as cash on hand plus revolving capacity -- is slightly under $200 million -- $300 million.

And despite the reduced level of Oil & Gas production in Q4 due to hurricane shut-ins, our Net Debt position remained largely unchanged from Q3. And our Net Debt position is even lower today and we expect to further reduce Net Debt as the year rolls out. That is a combination of having a fair amount of our Oil & Gas production hedged, good visibility on our Contracting Services side and taking a sharp pencil and reduction to our capital expenditures in '09.

So we really feel we are going to generate positive cash flow and reduce debt further.

Moving to slide 10, I think we outlined some of the key steps we have taken to bolster liquidity, including the fact that we have hedged -- as I said -- 75% of our expected '09 production at prices much higher than the current spot or the forward strip. And also we've begun the process of selling our noncore assets with the sale of our interest in Bass Lite which we announced in December and that generated $49 million of cash.

We get a lot of questions about our covenants and whether we are in compliance with our key covenants. So to be transparent here I've listed the key bank covenants or key credit facility covenants and I will go through each one of these and explain where we are at 12/31/08.

We have the three key covenants are collateral coverage ratio, fixed charge coverage ratio and consolidated leverage ratio.

Going to the collateral coverage ratio we are required to have collateral in excess of 1.75 to 1. And there is a basket of collateral that applies to this ratio and as of 12/31/08 our coverage was in excess of 6 to 1. So we were clearly way above our requirements there.

Our fixed charge coverage ratio is required to be in excess of 2.75 to 1. That really measures consolidated EBITDA to consolidated interest; and again, this is another ratio where we are expecting to be at year-end greater than 6 to 1. So again we are clearly way above our requirements there.

And the third key ratio we point out is our consolidated leverage ratio to. We are supposed to have -- which is measured by consolidated EBITDA to consolidated debt we're required to be under 3.5 to 1 and at 12/31/08 we are actually in the mid 2s.

Furthermore, our own internal forecast show that we will continue to maintain compliance with these covenants throughout 2009.

Moving on to slide 12, slide 12 merely lists our debt structure and maturities on our debt. And we have no debt maturities occurring until the middle of 2011 when our revolving credit facility matures and we hope by then to have paid off that facility.

So, again, all of this assumes that we generate cash strictly from internal sources. That is, we sell none of our noncore assets. So the sale of any of our noncore assets will only accelerate debt reduction and improve our balance sheet and liquidity position even further.

I will turn the next few slides over to Owen.

All right, well, slide 13 is just a recent view of the Well Enhancer and it is in the [Joosten] yard in Holland right now undergoing commissioning of the well intervention equipment placed on board. So I will speak to more in a minute, but that is just a good picture of her.

Switching to slide 14 just shows some of the backlog and contracting activity that we have going on. And I think the takeaway from this is that there continues to be demand and strong utilization on the service side of our Company.

On slide 15, this gives you a breakdown of the financials for the service contracting side of the Company. One, I think what you have to notice is the 15% profit margin under the Contracting Services.

If you switch to the next page, slide 16, you'll notice that that primarily occurred in these subsea construction portion of the Company. The rest is operating fine.

As Tony mentioned, we had some issues on the subsea construction side of the Company with some contract that was lost due to the Caesar being delayed, created a cost for us. Some 4 X impacts -- impact on the -- some issues within that part of the Company.

As Tony mentioned, we have a low margin project in India and the accruals have been -- attempted to be conservative here for going forward with that. And then there is also some impact from hurricane downtime contributing to it.

I will say that on the subsea construction side, we have restructured the Subsea Construction Group. And we will be refocusing our efforts on servicing our Gulf of Mexico clients.

Switching to page 17, just reiterates what I said earlier. The utilization continues to be strong and performance is good on the service side of the Company. You'll notice quite a shortfall on the Marco Polo throughput and that is hurricane-related as a result of pipelines been delayed in going back into service.

Switching to slide 18, the major capital projects underway. The Well Enhancer, as I mentioned, is in the commissioning phase of the equipment on the DEC, the DEC equipment. Sea trials have been completed. The vessel actually has been delivered to us and we are in the final insulation of the well intervention equipment. And that should be out operating by the end of the second quarter here.

The Caesar over in China continues to progress. It is still in the shipyard. We're essentially finished with the mechanical completion of the vessel and we are entering the commissioning phase. We do not have any contributions towards EBITDA in '09 consideration, so -- for this vessel. And we -- it should be out going into the fourth quarter of this year.

The Helix Producer I is in the final weeks of completion in a shipyard in Greece. The work has gone extremely well. We should be heading out on sea trials in the middle of March some time with the vessel departing early April for a transit to the Gulf of Mexico, where it will go to the South Texas yard where all of the production equipment has been completed and is standing by for installation prior to its final positioning on the Phoenix field.

With that, I will turn it over to Robert to talk to some of the highlights of the Oil & Gas side.

If you would please turn to slide 20. You know, our Q4 financials were severely impacted by two events -- the precipitous falling commodity prices that resulted in the previously discussed impairment and Hurricane Ike. They reduced our production volume significantly.

Our post-Ike restoration went much lower than we expected, resulting in Q4 production of 6.4 Bcfe. Prior to Ike we were producing approximately 159 million cubic feet of gas equivalents per day compared to the 70 million we produced in Q4.

Now our current production rate is about 132 million cubic feet equivalent. And the principal reason for the slower recovery was related to third party pipeline repairs that were hindered by a very poor weather -- winter weather pattern in Q4.

But today, most of those pipelines are back in service and operational with the exception of the third party export line that services the Bushwood development.

Those pipeline repairs are near completion. And we expect full restoration of the Bushwood gas volumes by the end of Q1.

With the additional volumes from Bushwood and incremental volumes from new developments being brought on right now in Main Pass, and further restoration of Ike-damaged fields, we expect Q2 rate to exceed the pre-Ike levels back in Q2, Q3. So we estimate for 2009 our production on an annual basis to range between 50 and 60 Bcfe.

If you would, please turn to slide 21. Now our reduced production volumes in Q4 weigh heavily on our per unit presentation of our operating cost. Two categories do stand out when compared to the prior period -- DD&A and work over expense.

Now our DD&A for the quarter was -- for Q4 was impacted by two end of life producing fields that, due to the reduced commodity pricing that we use at year end in our reserve report, it resulted in very high depletion rates for these end of life fields. The high work over expense is a result of costs related to Hurricane Ike repairs in the quarter. $16 million of the $17 million of that work over expense was Ike-related.

So we expect to be fully reimbursed for discharge under our insurance policy. But that comes in at later dates. So we should say that somewhat come up in Q1 and Q2.

In 2009, we will continue to have expense related to the damages from Ike. However, we do feel we are adequately insured to cover all of the remaining Ike-related expenses.

So slide 22 summarizes our 2009 commodity hedge position. Our average realized price expectations, internally for 2009, with our hedges included in place are $64.78 for oil and $7.08 for gas.

Now on an average daily basis, approximately 75% of our estimated 2009 daily production is hedged. So we have a good hedge position in place during this low commodity price environment.

Tony, back to you.

Slides 23 and 24 are non-GAAP reconciliation schedules presented for your reference. I will not go over the schedules, but if you have any questions please call Cameron or myself. Owen, closing remarks?

Just a few. I would just like to say that the end of '08 was certain -- the events at the end of '08 certainly tested Helix. What can only be described as the "perfect storm" with the economy collapsed, the debt market freeze, the hurricane impact, losing our production and the associated repair costs combining with declining commodity prices has really given us reason to reevaluate how the Company operates on a go forward basis.

There is obviously a lot of concern priced into our stock about our survivability. And I can sit here today and honestly tell you survivability should not be -- it should no longer be a major concern. My only comments I think that I have today is just to summarize and reiterate what you should be able to take away from this presentation, once you look beyond the accounting impairments.

First, solvency and liquidity are certainly not an issue or currently not an issue. We've further reduced our capital spending plan. At this point, at this moment in time we have about $300 million in liquidity against $180 million in committed spending on a go forward basis in '09.

Second, there seems to be a lot of concern about us tripping debt covenants. We do expect to remain compliant on all covenants throughout '09. The trailing 12 EBITDA coverage ratio is the tightest one that we have. We do have room on that and that cushion should expand to more comfortable levels with any kind of asset sales going forward.

And I think, very importantly, we have no covenants, we have no debt covenants that ties to share price and I think there have been a few attempts of -- this is basically for the short sellers out there that have been trying to find some kind of a trigger in our stock.

There isn't one.

Third, there appears to be a high debt discount price into our stock. Our debt levels right now, which are recourse to Helix, are is $1.56 billion. To put it in perspective our PB 10 on production alone even at these low commodity prices is $1.9 billion.

We have around six times coverage on our debt service. We have no near-term maturities or rollover issues. Our operations will be positive cash flowing through '09 and the free cash flow will go towards debt reduction.

Our go forward strategy is to monetize noncore assets primarily the E&P production facility in Cal Dive. We are not in a for sale situation right now and we don't perceive being in one.

We will accept some value loss in this current market in exchange for strengthening the balance sheet, but we are not forced to sell at just any price.

We will continue to improve the balance sheet, lower our operating costs and improve our performance. We -- in short, we plan on being around for a long time.

We feel that we are making the proper changes to assure our ability to operate profitably with sufficient liquidity even through a prolonged softening in the service market and the continuing tight credit market.

We are not going to issue earnings guidance at this time. I think, given the uncertainties surrounding the market in commodity price, the strength of the service market going forward, and the potential impact of the anticipated asset sales, there's really just no reason to put an earnings number out there.

However, there are some key parameters that you can apply. Without production sales our production for the year should be 50 to 60 P/CF.

Robert has mentioned the hedge positions which are outlined on the preceding pages. I think it's significant to note that we are hedged at pretty high levels. And one thing to watch for is the Sea Robin line coming back on, as Tony mentioned earlier. We do expect it back on some time in March. And that would be a significant increase and take us above our pre-storm levels on production.

So with that summary and reiteration of those points, I will open it up for some questions.

(Operator Instructions) Jim Rollyson.

Good morning. Owen, Tony had mentioned on the construction side you obviously have backlogged visibility at least kind of going through the first half, but I think you mentioned you are expecting that to weaken a bit in the second half. I think, Tony, you said margins kind of going back from the fourth quarter levels towards the more historical normal. Can you talk about hat you say that margin picture in the first half and contrast that in the second half, just given your view of the market?

I think typically in this industry, you have about six-month visibility. So we have good visibility for six months. And that is, I would say, what we normally experience, but again our margins suffered in Q4 because of the pipe lay job in India. It inherently is a low margin job because it's got a lot of pass through expenses that go through it.

But we were also taking a fairly conservative stance on our percentage of completion accounting.

So all in all, based on what we know is in our backlog and the type of work in our backlog, I think we could -- we should expect margins to return to more historic levels on the services side.

Back half of '09, we are being conservative because it's what we don't know. Certainly we have sufficient backlog to carry us through as we normally do in the first half of the year.

Just by more historical normal margins, are you thinking more -- you've ranged from kind of the low to mid 20s overall to the upper 20s pushing 30%. I remember last year, Owen, you were shooting for 30% as things were pretty strong. So I'm just trying to get where in that range you are targeting as a realistic view (multiple speakers).

I think realistically we've got some carryover in '09 on this pipe lay job in India which will tend to keep margins slightly down from the higher levels you might have seen in the past. But I think the low 20s is a good place to be here.

Yes, I think you should expect low 20s. But it should not be as bad as Q4. Only because again we booked some accruals. We took some conservative stances on some of our jobs. And I think that will play out to our favor in the future.

Helpful.

I would just -- I confirmed what Tony just said. We always strive for 30% margins on a full cycle basis. We've got the India job continuing in the first half of the year and we are expecting some softening in the second half of the year. So the low 20s would be a reasonable expectation.

Okay. And as a follow-up here, Owen, you had the one piece of the convertible preferred stock that got redeemed in the early part of this quarter. There's still one piece left out there. Can you maybe just talk it, what might play out with that?

I will turn this over to our preferred stock guru here. Alisa.

Yes. There is a second theory that is redeemable or convertible, and that is the $25 million tranche. The current conversion price is either -- what, $15 or $15.27?

This one is $15.

This one is $15. It's also redeemable pursuant to formula based on stock price over a 40 day period. And that's the way the last series was redeemed, based on that stock price.

There also is a trigger and this is the all a trigger that is not a debt covenant trigger, but it's the only trigger that is based on our stock price. If our stock price, if the daily weighted average of our stock priced on any day is around [277] -- but we do have to make an election and that is something we are thinking about internally.

And would that be one that you -- I mean, last time you settled that in shares. Was this something you would settle in shares or cash or how do you think about that?

It's something we are -- Tony, you can speak to this. It is something we are discussing internally if we do (technical difficulty) that trigger.

Right now under our bank covenants we are not allowed to redeem preferred stock in cash.

Okay. Perfect. Thanks for all the information.

Bill Herbert. Your line is open.

Good morning. Couple of questions here, some which were touched on by Jim. The low 20% margin guidance for the Contracting Services business, is that for first half 2009 or for all of 2009?

I would just say all of 2009.

Great. And then secondly, Owen or Tony, with regards to the backlog that is attendant to the Contracting Services business, what exactly does that mean? Does that mean firm contractual obligations between yourselves and your clients or indications of interest? Are there any outs on their part which would render that backlog illusory?

There are firm contractual contracts. There are cancellation clauses. Some have penalties, some do not, but we don't book -- we don't state backlog unless it is under firm contract.

And with regard to the new builds that you have underway, are there any additional penalties or potential margin impairments as we saw with the Caesar in the fourth quarter that could come into play in the event that these are not delivered on time?

No, I believe we have incurred --

Yes. We've taken our medicine on the Caesar. Okay?

Okay, good. And with regard to -- Tony, you had specified where you stood on the collateral coverage ratio 6 to 1 and the consolidated leverage ratio 2.5 to 1? Where do we stand on the fixed charge coverage ratio today?

First of all, let me clarify. If I said 6 to 1, I meant we are about 3.5 to 1 on collateral coverage (multiple speakers). yes. 3.5 to 1 on collateral coverage. So we are about double what our requirements are.

Okay.

Okay. On fixed charge we are 6 over 6 times.

Sorry, I got those confused. Okay, 6 times is what you did say on the fixed charge. And the collateral coverage, you are 3.5 times to 1?

Yes, about 3.5 to 1. I think we are a little better than that actually and it's based on a basket of collateral and including our E&P business some of our vessels, accounts receivable, etc., etc.

So we are pretty comfortable on that particular coverage.

And with regard to the targeted asset dispositions, I'm not going to ask you on the call nor would I expect to receive an answer with regard to the specificity of expectations on your part. But just give us a general update as to how things are progressing.

And, realistically, should we expect to see some of these assets, some of these transactions to get consummated by midyear this year?

I think the best way to talk about that is to say we are working hard at that effort and that, we will know more I think as the next couple, three months rollout. Is it logical to conclude that all of the non-core assets we discussed in our December 11th press release will be consummated? I think it's unlikely in today's market environment.

I'll only say we are working hard at it and the process is ongoing.

I think we can be a little more positive than that. We are well along on the process. But we are not quite at the point of having indicative offers or anything concrete on the table that would give us the basis for making projections with.

Got you. And I appreciate that. Would you care to rank what is most likely to least likely with regard to the different buckets of assets?

That is a hard question to answer because you have to look at -- the positive side is we have a population of buyers for each asset and -- which is better than we had anticipated. But then again you have different motivations by different buyers.

But I mean would it be safe to say that probably the best capitalized buyers you -- attendant to this overall process would probably be found in the production facilities? Maybe deepwater E&P? And maybe even the Caesar which you mentioned in your slideshow?

I think that is a fair conclusion, Bill. The logical lookers would be in categorized, as you have, but I think in the end, it is a difficult environment.

But I will just say we are making progress on the process.

No question. Okay. Thanks a lot.

Joe Gibney, your line is open.

Good morning, everybody. Robert, I just wanted to circle around a little bit more. I certainly understand there's a lot of moving parts relative on a per unit basis for some of the costs. But if you could help us a little bit for expectations on DD&A and LOEs as we move through perhaps a post-Ike recovery?

I know you are on your run rate with Bushwood where it is here in 2Q. Could you give us a little color their?

Right. Once we do get the increased volumes that will have a downward effect on DD&A, because that is bringing in some low [S&D] cost gas. And then the two fields that I mentioned in the presentation, they are end of life. And they did not hit the impairment trigger. So the low volumes are depleted at a high rate. We should see them pass here soon.

So that should also brings the DD&A rate down. So without -- we really, again as Owen said, we are not putting out any earnings guidance. But I can tell you those DD&A rates will come back down into line as we move through the hurricane repairs and some of these end of life fields.

Okay and in terms of your guidance here for 2009 on your production, could you give us what is the Oil & Gas within that production guidance range of 50 to 60?

Yes. It is probably about 1/3 and 2/3 gas.

I just wanted to follow up relative to the last question there on the interested third party there on the Caesar sale. Curious, relative to your expectations for this vessel being core, non-core certainly seems to be on the deepwater stand-alone marine side where you wanted to be on the robotics and the long-term strategic front.

Just curious. Your stance there? A little bit more color on entertaining the possible sale of this vessel and how that fits in with where you want to be here once all is said and done in the next couple of years?

The Caesar is a little departure from our normal -- I mean, historically, we are a surf contractor doing infield, small diameter flowlines. With the -- arguably, the strongest demand cycle we have seen in our lifetime, it makes sense for us, given the opportunity, to acquire a pretty intact high-quality engineering group to build a vessel to go into a new market niche which would be the longer length transmission, large diameter deepwater lines.

It made sense at the time, but now is a different world and with a contracting, softening market we feel that it is better for us to instead of -- the idea was that we could (technical difficulty) low-risk contracting style in the face of a strong demand market with the transmission pipe lay vessel. Given the fact that the market is softening, it is less likely that we would be as successful with our contracting style. It is more probably an asset more conducive to some of the epic contractors.

And given the risk in penetrating a new market, we dispel it was prudent to recoup the capital versus trying to grow into a new market at this time.

Fair enough, appreciate it. Thanks.

[Mark Landy].

Good morning. Can I ask you on the covenants when and to what level are your next stepdowns?

Sorry, can you repeat the question?

Your presentation and you discussed the covenants as they stand today. Wondering when they step down and to what levels?

Step down in terms of -- I'm not sure what you mean by step down.

When does your collateral coverage ratio go up, your fixed charge ratio go up --?

No, these ratios stay fixed throughout the term of the credit facility.

Thanks. In terms of your expectations for the second half, I understand it is certainly reasonable it is difficult to give guidance today, but you -- as you said you have six months out and we are at a point now where six months takes us mostly through third quarter. Do you have any view on third quarter you can give us qualitatively?

I think that we are assuming the market is going to get a little softer in the second half of the year, but again, as I mentioned earlier, you typically don't have visibility in this business beyond six months. So we have no concrete evidence to say what is likely to play out in Q3 and 4.

So we are just going to assume it is softer only because commodity prices are so depressed.

Let me -- I will give my opinion, but that's not worth a whole lot in this market with all the uncertainties. But what I'm preparing for is trying to structure the Company to be able to operate profitably through the worst? And to me what I think might be the worst case scenario we are facing here is a continued soft commodity price through '09.

I think decline at some point the demand issues or the supply issues start to overwhelm the demand noise that is currently in the market, but and when that happens, I'm not sure. But when it does, it then depends on a second uncertainty. And that's the unfreezing of the capital markets.

Because without a restoration of the capital markets, I think the producers are going to be left a little short on being able to react to a spike in demand or a drop in supply whichever way you want to look at it. So I think that has [knock on] effects to what could possibly be a prolonged softening in the service market.

But that is all dependent on when supply overcomes demand issues and what the state of the capital markets are when that happens. That's why it is hard to pick a time, a point in time as to when this happens.

Thanks. I appreciate that.

The expiration expense in the quarter of $27 million was a little higher than we expected. What was driving that?

It was driven principally by two wells that were in a suspended well category from 2.5 -- about 2.5 years ago that were drilled in deepwater that have a future use so they can be re-enter to both of them found reserves. But we never put them on the books. So those are wells from a prior period. They weren't in 2008.

So the economics of them are such that we do not have capital allocated for those wells to be reentered in our sidetrack this year. So we to the charge against them.

Lastly, you mentioned in terms of the asset sales that you are willing to accept some value loss. I just want to clarify, is that loss against your basis or loss against current value as calculated either in your collateral ratio or current market value of Cal Dive Stock or what have you?

What I was referring to was a relative value versus what the market may have historically applied to those assets. I think the actual mix, relative to book value will be mixed.

Roger Read.

Good morning. I guess the question I have, Owen, your comment during the overview, $300 million of current liquidity and $180 million of committed spending for the rest of '09 -- how does that $180 million compare to the $300 million full year capital expenditures excluding Cal Dive?

The $180 million does not include everything that is in the $300 million. I think it is about $70 million short of that which, if we had to, we could -- we still consider that as discretionary.

Our plans are to spend the $300 million, but if we had to we could pare that back.

And, Roger, we expect to generate positive operating cash flow. So no, we are not looking to fund CapEx out of our current liquidity. We are looking to fund CapEx out of our current liquidity and operational cash flow. So we have a lot more to deal with than just the $300 million.

I think the takeaway on the $300 million is if you contrast that to the $163 million cash on hand reported at the end of the year. Our liquidity picture is improving.

And other things on the liquidity front, kind of talking a little more about the oil and gas operating cost environment. Insurance recoveries, I mean clearly you had some repair and maintenance expense that is higher than normal. How does the insurance recovery picture get in -- or how does that impact the production costs as we look into the first half of '09 or second half? Whenever that should come in, if any?

We end up being out of phase. The work is done. We submit the claim, the claim is paid. So you are about 60 days out of phase with -- from the work to -- so work that was done in December, the claims are put in and we should see reimbursement in Q1.

And we are starting to see reimbursements now.

Right.

I might point out the way that we plan this is we allocated a certain amount of capital to hurricane repair ahead of the insurance proceeds rolling in. And then at a certain point, we are going to govern the pace of the repairs to be in line with the receipt of insurance proceeds.

And so does the total CapEx number include the repair and maintenance expenditures or is that netted against the insurance recoveries you expect? In other words, does $300 million understate what will be spent because of the insurance recoveries?

Yes, the insurance recoveries at this point with them rolling in should net out to 0 going forward, but they are not a capital expenditure. It is a repair and an insurance expenditure. So it is not included in the $300 million.

Yes. And just to clarify, Roger, as Robert mentioned we booked about $16 million of operating expenses in Q4 related to hurricanes, even though we know we are going to recover that in quarters 1 and 2. So there's a timing lag.

But net net is -- as Lloyd and Owen mentioned, net net we don't anticipate a net P&L expense other than what we booked in Q3 when we booked a deductible in Q3 related to the policy. But there may be timing differences, but net net on a go forward basis is 0 P&L impact.

And the final question along the oil and gas front, 50 to 60 Bcf equivalent range, what impacts the high and the low end there? I mean it's a relatively wide percentage change even if the absolute number is not that big.

I think the high and low if I could take this, Robert, and maybe you can help me here, the high and low is dependent on you can call it Gulf of Mexico storm disruption is part of it. Part of it is due to really the timing of when the Noonan well comes on. But we are assuming some hurricane disruption in the hurricane season and, frankly, we had an estimated date for Noonan recovery so that could impact the high and the low.

And just to add to that, there is a significant amount of the downtime put into the 50 to 60. So that's why the range is great for the percentage. The percentage range is great.

Okay, and if I understood correctly, the Danny Field is now 2010 start date not an '09 impact?

Correct.

Okay. Thank you.

The 50 to 60 has no Danny production in there.

And you are not scheduling it for '09 either in this point? I mean it is not only not in the numbers, it's not even in -- (multiple speakers) .

It's not in our production numbers, correct.

All right. Thank you.

Roger, also, the 50 to 60 number has no contribution from Phoenix as well.

Okay.

Michael Bodino, your line is open.

Thank you. My questions have been answered.

Vance Shaw. You line is open.

This is Vance Shaw from Credit Suisse on the buy side. Just a couple of housekeeping questions.

Was there capitalized interest in the quarter?

Yes, there was.

Do you know roughly how much or how much your fully loaded interest is?

The full year cap interest was $42 million (multiple speakers) spread pretty evenly over the quarters. It starts to it accumulates during the year as you are increasing your basis in those assets which are capitalizing interest, but the full year was $42 million.

I got you. Now on your potential for asset sales, when you make those asset sales, are you required to pay [down] on your term loan? (multiple speakers).

It depends on the -- it depends on the type of asset sales. Certain asset sales -- certain assets are in the collateral basket. Certain are allowed to be sold up to X amount.

It is fairly complicated. And I would say it is so complicated we shouldn't get into it in this call, but it depends on which asset gets sold.

I understand. So as I recall, you can sell Cal Dive stock and that doesn't trigger it, right? Even though it's a -- I guess it is theoretically a collateral asset on a (multiple speakers).

Correct.

Doesn't trigger it. But like the assets that we have, where the lenders have the PP&E, you know -- plant, property and equipment. So like the oil and gas properties and that kind of thing probably would trigger a paydown, no?

Yes, there's -- like Tony said there are certain basket limitations on the different asset groups that we are looking at selling. Like you said on the Cal Dive proceeds they are -- that does not trigger a mandatory prepayment. Certain others do. And then we have a license to make under those mandatory (technical difficulties) (technical difficulties) paying down debt or reinvestment for CapEx or light con assets.

I got you. I'm a lender, so I apologize for the question on an equity call. I apologize for that.

Also, just finally on the assets under construction, are these assets being built on spec or do you guys have these things contracted up? Or, how does that all work?

It is a little bit of a mixed bag. We don't do anything purely on spec. The Well Enhancer has a partial utilization contract commitment underlying the decision to go forward with it. And then that's for X number of days each year for I believe it's --

It is 180 days with (inaudible).

For two years and that underpins the construction and then we fill in the rest of the utilization on the open market.

The Caesar, we had a backlog but due to the delay in the vessel, we basically have lost that backlog. Caesar would be the closest thing to being a spec vessel right now and Helix Producer I was being built specifically for deployment on our Phoenix field. And that would be a three-year deployment.

And these contracts are with, I would assume, sort of larger clients just given the specialized nature of these vessels?

Yes. The Well Enhancer is with majors.

I got you. Okay, thank you very much.

Anthony [Gigul].

Good morning. I wanted to see if you could quantify -- I understand some whale's have occurred as a result of restructuring the Subsea Construction Group, including the closing of some international offices. I'm just wondering if you could quantified that and if that is part of this renewed focus on Gulf of Mexico clients?

It's an ongoing process. So I don't think I will get into trying to quantify it. I will say we had some disappointments on the international subsea construction efforts. And quite a while ago we curtailed any further bidding and until we were able to assess lessons learned as to what was going on and we have made adjustments up.

I will say that the layoffs that we have incurred were not specifically to remedy that. We -- the layoffs were an ongoing process of lowering our operating costs which we feel is prudent, given trying to set the Company up to be able to operate profitably in a softening market.

And as far as the Caesar, can you give us some sort of idea the level of interest at this point as far as third party interest in acquiring the vessel? And would you expect that you could possibly close the deal this year? And how much of your construction costs would you be able to recoup from selling the Caesar?

I would be hopeful that there is enough interest that we could make an arrangement this year. What form that takes is quite varied, depending on the party you talk to. And there are multiple parties with interest in the vessel.

As far as what we're able to recoup, it depends if we sell 100% or 50%, but I think either way, we should be able to get out of the Caesar whole.

Lastly, the spool base, the property in Ingleside, what are your plans going forward for that?

When the Express returns, one reason why the Express is over on the international pipe lay job in India is because the draft requirements for it to be able to spool in the Gulf of Mexico, there just simply wasn't the spool based with deep enough [drag]. So we are timing the completion of our spool base in Ingleside to going side with the return of that vessel to the US. And this precise timing of that depends on how the backlog shapes up.

First of all, when -- how long does the contract in India go and is there work to be done on the way transitting back to the Gulf?

Okay, but then whenever the Express returns, you would expect that it would be more active in the Gulf of Mexico as opposed to any more international deployments?

Yes. We are really going to focus on our core markets again. Gulf of Mexico clients have been very good to us in the past and, hopefully, it has been reciprocated. We probably would have thought long and hard about sending the Express anywhere if we could have spooled it in the Gulf of Mexico. But there just wasn't the spool base.

So as soon as we can get it back here, our primary focus will be back on the Gulf of Mexico.

Not that's -- when I say Gulf of Mexico though, I am talking about the extended geographic region which would include Mexico, Trinidad, for instance.

[Sindrae Filbray], your line is open. Please check your mute button. Sir, there is no response and we show no further questions.

All right, well, thanks for everyone join us this morning and hopefully we've enlightened you as to the state of the Company. And we look forward to seeing you all through the year and talking at the next conference call.

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