Helix Energy Solutions Group Inc (HLX) 2010 Q1 法說會逐字稿

Good morning and thank you for standing by. Welcome to the first-quarter earnings and investor conference call. (Operator Instructions). Today's conference is being recorded. If anyone has any objections, you may disconnect at this time. And now I'll turn the call of your first speaker for today, Mr. Cameron Wallace. Sir, you may begin.

Thank you. Good morning, everyone, and thanks for joining us today. Joining me today are Owen Kratz, our CEO; Tony Tripodo, our CFO; Bart Heijermans, our Chief Operating Officer; Johnny Edwards, Executive Vice President, Oil and Gas; Alisa Johnson, our General Counsel; and Lloyd Hajdik, our SVP of Finance.

Hopefully you have had an opportunity to review our press release and our related slide presentation released last night. If you do not have a copy of these materials, both can be accessed through the investor relations tab on our website at 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 prepared remarks, Alisa Johnson will make a statement regarding forward-looking information. Alisa?

Thank you. During this conference call, we anticipate making certain projections and forward-looking statements based on our current expectations.

All statements in this conference call or in the associated presentation, other than statements of historical facts, are forward-looking statements that are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual future results may differ materially from our projections and forward-looking statements due to a number and variety of factors, including those set forth in our slide two and in our annual report on Form 10-K for the year ended December 31, 2009.

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 reconciliation, along with this presentation, the earning press release, our annual report, and a replay of this broadcast, are available on our website.

Tony will now make some remarks.

Okay. Good morning, everyone. Moving on to slide four, which summarizes our first-quarter results. I will focus the commentary here on Quarter One's results as compared to the fourth quarter of 2009.

Revenues increased from the fourth quarter, primarily due to higher oil and gas revenues resulting from higher production levels. Contracting services revenues remained at approximately the same levels as Quarter Four and reflect the factors we have previously discussed -- continuing weakness in the contracting services market, coupled with relatively high levels of vessel utilization for internal oil and gas projects.

Our earnings of minus $0.17 were impacted by two large nonrecurring items which I will discuss later. When stripping out the nonrecurring items from both the first quarter of 2010 and the fourth quarter of 2009, our recurring earnings actually reflect a slight sequential improvement.

Moving over to slide five, with respect to EPS, we recorded two large nonrecurring items in our financials. First, a significant decline in natural gas prices from year-end 2009 caused us to re-examine the carrying value of our oil and gas properties for impairment purposes, and such analysis produced an impairment of $11 million associated with four separate properties. This is simply an accounting exercise and a mechanical exercise.

Had natural gas prices not declined, there would not have been an impairment. This impairment, $11 million, was net of a $6 million gain associated with the transaction involving our UK oil and gas property.

Secondly, we settled a legal dispute associated with the termination of a 2007 pipelay contract in Southeast Asia. This was a situation where we felt the settlement made sense in light of the projected legal costs associated with litigation and the risk inherent in such litigation. We recorded a $17.5 million charge in the first quarter associated with the settlement.

I'll turn the next few slides over to Owen.

Good morning. On the service side of the business, as we previously commented, Quarter One represented a continuation of the market weakness that we saw in Quarter Four, combined with relatively high utilization of key assets, such as the Express, the Intrepid, and even the Q4000 for infrastructure buildout on the Danny and Phoenix oilfields, as well as well intervention work on our Noonan gas field and elsewhere.

That being said, the buildout of the infrastructure needed to bring Danny online was completed, and Danny first oil came on in early February, contributing to our oil and gas production increase from 9.7 BCF in Q4 to 11.3 BCF in the first quarter.

The infrastructure buildout for Phoenix is nearly completed, and thus the high level of intercompany revenues and profit elimination should tail off greatly in the second quarter.

On the good news front, the Helix Producer I completed the installation of its production facilities in the first quarter and is now on location in the Phoenix field awaiting final commissioning and hook-up to the Phoenix wells. Production is expected to start up later in Q2. In addition, the Caesar completed sea trials in early April and is expected to operate in pipelay mode in May.

As I mentioned earlier, the onset of Danny production led to a sequential quarterly production increase from 9.7 BCFE to 11.3 BCFE in Q1. On the other hand, mechanical issues on key production platforms curtailed about 1 BCFE of production during the quarter, and this was primarily oil. These mechanical issues have now been resolved, and then I'll let Johnny discuss them in a little bit more detail later.

Furthermore, we incurred an unusually high level of workover expenses in the first quarter to fix issues associated with the Noonan gas well and in our Main Pass 233 field. This pushed workover expenses up to $12 million for the quarter, which is unusual.

Finally, on slide six, I'd like to mention that our liquidity remains at a strong level, roughly $600 million.

Moving over to slide seven now, the good news is that activity levels are rebounding. We see that both in building backlog and customer bidding and inquiry levels. Coupled with the winding down of internal oil and gas infrastructure work, we expect to show a decent increase in the contract and services revenues in the second quarter with a lot less going to intercompany eliminations.

Well intervention activity has already picked up significantly with the Seawell out of dry dock and all three of our vessels experiencing high levels of utilization now. The Caesar has booked a significant pipelay project in the Gulf of Mexico, and we expect her to start contributing in Q3.

Bart will get into the contracting services business in more detail later, but for now I'll turn it back to Tony who will give us a 2010 outlook -- update and some guidance.

All right, thanks, Owen. On slide eight, we've updated the guidance we provided in our last conference call, and really there's two notable differences, one being our production range and the impact that it has on EBITDA.

Because of the mechanical problems we suffered in Quarter One with oil and gas production, and assuming a more gradual ramp-up of Phoenix production, we have lowered our oil and gas production range to 45 BCFE to 55 BCFE for the year. The big variable in this range is represented by whether significant disruption occurs with hurricanes in the Gulf of Mexico. If it's a quiet year, we should reach the upper end of the range.

And Johnny will talk about how we ramp up Phoenix here soon and why we're taking a more cautious approach in terms of the Phoenix production profile.

Reducing the production guidance has a knock-on effect to cash flow, and thus represents the reasons we have lowered our EBITDA guidance now to $400 million to $500 million, compared to our previous guidance of $450 million to $550 million.

We are now projecting CapEx at $220 million for the year, as we have increased oil and gas CapEx by $20 million to develop a good-looking PUD at an oil and gas property that is primarily oil.

Again, we see the key variables affecting our overall numbers as highly dependent upon what we're able to do on the oil and gas side. We think we have a pretty good handle on what's going to happen in contracting services.

And with that in mind, I'll turn the next few slides over to Bart.

Thanks, Tony. We're on slide 10. Contracting services produced a gross profit of $38 million for the quarter, which represents a 23% increase compared with the previous quarter and a 19% decrease compared with the first quarter of 2009.

Margins improved 400 basis points to 24% quarter over quarter and year over year.

Moving to slide 12, Q1 utilization. In a trough year in the contracting services cycle, our main focus is to keep our assets utilized. We've been pretty successful in achieving that objective in the first quarter of this year. Only our North Sea base well intervention vessels experienced low utilization caused by the regulatory dry docking of the Seawell and the seasonality of the North Sea markets. This is offset by the Q4000 that experienced another great quarter of 100% utilization and strong contribution.

Turning to slide 13, our large subsea construction vessels achieved 99% utilization in the quarter. The Intrepid's worked predominantly on our Phoenix project and the Express completed the Danny pipe-in-pipe project and worked on the high-profile Petrobras Chinook Cascade project in the Walker Ridge region of the Gulf of Mexico. We received very positive feedback from Petrobras on the performance of the vessel and our crew.

The Caesar completed her sea trials and is currently working as a floatel for ATP on the Mirage project. In May, we plan to install the 12-inch trial pipe, and on July 1, we are scheduled to mobilize for the 46-mile project for enterprise products in the Gulf of Mexico. We are bidding on several other projects for 2010 and many other projects in the 2011-2014 periods.

The highlights of our ROV robotics division on the Canyon offshore are shown on slide 14. As you can see, this base is doing well and we expect second quarter and third quarter of this year to be even stronger.

Our trenching backlog for this year is stronger than I've seen in recent years. We're also looking forward to all our well intervention assets contributing in the second and third quarter of this year. We expect high utilization of these assets.

I want to point out the award of Statoil for a FEED study for a new well intervention semi-submersible in Norway. This study should be completed in early fourth quarter of this year and we expect that Statoil will award a long-term well intervention contract to one of the three companies who have been awarded this FEED work.

Slide 16 shows the process volumes on our production facilities. Marco Polo volumes have stayed constant quarter over quarter and Independence volumes have increased because of less downtime. Our subsea construction vessels will be tying in a new deepwater field to the subsea Independence hub infrastructure in 8,000 feet of water, which, in addition to contract revenue, will also generate incremental processing revenue on the Independence Hub floater.

Last but not least is the significant progress we have achieved on the Phoenix project. The Helix Producer I is on location and has recovered the buoy and risers. We will have to demonstrate the quick connect and disconnect feature to the U.S. Coast Guard and MMS for final acceptance. Once connected, it won't take long to commence production because the input flow lines and the export pipelines have been hydrostatically tested and the gas export pipeline has been dewatered and packed with nitrogen and is ready to accept products.

Now for our oil and gas business, I will turn it over to Johnny Edwards.

Good morning. Please turn to slide 18. As mentioned earlier, the first quarter production was positively impacted by Noonan and Danny production.

The Noonan gas wells were able to begin full production rates in January after the repair of the third-party gas pipeline. The Danny oil wells started first production in early February.

However, full production from these wells in the Bushwood field was not realized in the first quarter due to two separate events. First, one of the Noonan gas wells required an intervention with the Q4000 to complete water shut-off in the lower sandstone. Due to our access to the Q4000, that operation was successfully completed in the first quarter, allowing both the Noonan wells to return to production at a rate of over 50 million net to our interest.

The second event occurred on Helix's East Cameron 346 platform, which processes the Danny oil as well as production from other Helix leases. In ramping up the production through the 346 facility from 2,500 barrels a day to over 8,000 barrels a day, the facility's experienced some vibration issues, causing piping failures. We experienced over 30 days of downtime and restricted rates before the vibration problems were completely resolved. 346 platform is now processing over 8,000 barrels a day, of which 6,000 barrels comes from the Danny well.

The two production events in the first quarter caused production to be lower by a little over 1 BCF. Currently, the Danny and Noonan Wells are producing 60 million a day of gas and 3,700 barrels a day net to Phoenix.

On slide 19, $7.3 million of the $12 million workover expense in the first quarter was related to Noonan well intervention with the Q4000. Additionally, we incurred $1.7 million of workover expense associated with our Main Pass 233 flowline due to paraffin problems.

We're looking forward to the Phoenix field startup in June. Once we've received all our regulatory approvals, we'll begin the process of bringing first oil aboard the HP 1. The wells have been shut in since the Chevron-operated Typhoon platform was destroyed in Hurricane Rita in 2005. We will be bringing on four wells. We'll bring them on one at a time and ramp up the production across the HP 1.

We also had an additional well that was drilled and cased by BHP prior to Hurricane Rita and we'll be completing this well at a later date.

Initial ramp-ups across the HP 1 will be about 13,000 barrels a day and 18 million cubic feet. ERT has a 70% working interest in the Phoenix field, and with no hurricane disruption, we should be able to maintain this type of rate throughout the year.

Since this is the first floating production unit in the Gulf, we have estimated our production assuming higher-than-normal downtime rates on the wells and the facilities. And depending on operational performance, the Phoenix fields should add 8,000 to 10,000 barrels a day net to our production.

On slide 20, it summarizes our 2010 commodity hedge positions for the remainder of the year. Our average price expectations for 2010, with our hedges that are currently in place, is approximately $78 to $80 for oil and roughly $5.80 for gas. We currently have hedged approximately 36.6 BCF equivalent of production for the remainder of 2010, and thus we have a significant portion of our forecasted production for the remainder of the year hedged.

I turn it over to Cameron.

Thanks. Slide 21 represents the synopsis of our debt and liquidity position. We project 2010 to be another year in which we expect to bring down our net debt levels and for us to continue to maintain relatively high liquidity levels, which stand right now at about $600 million.

Slides 22 through 24 are the non-GAAP reconciliation schedules presented for your reference. We won't go over those slides.

At this time, I'll turn the call back to Owen for his closing comments.

I'm sort of known as being a perpetual pessimist, and with the results of the last two quarters you might expect a continuation in that vein, but I honestly don't feel that way with these -- at this point in time.

The results for Q1 were in line with our expectations, but they're not where we want them to be. However, there's a lot of positive things that are occurring. Service margins were up quarter over quarter and year over year in spite of the slow market. Our people are operating well and have created a momentum for further improvement in operating efficiency.

An increased focus on sales generated better-than-anticipated utilization with greater improvement to come, especially in areas like the well ops North Sea where utilization was extremely slow due to the soft market and the Seawell drydock.

Going forward, we expect operating efficiencies and utilization to continue to improve, resulting in higher margins. This may be somewhat offset by a ramp-up in infrastructure as we anticipate a strengthening of the market ahead. Net net, I do believe expect to see improving margins going forward.

Our major capital projects are finally coming to their conclusion. The Enhancer is in the market. The only thing outstanding is the installation of the coiled tubing capability that should be outfitted by August, and we already have a backlog of coiled tubing projects which will add utilization to the North Sea assets. Both vessels in well ops in the North Sea have a strong backlog going forward, beginning with the second quarter.

The Caesar is ready for work. It's awarded projects already with strong bidding backlog and interest from clients, as Bart's outlined. Outstanding there, though, will be to add additional thrusters that we anticipate to be added over this coming winter, once the long lead items finally come in. I'm cautiously optimistic about the Caesar for the remainder of 2010, but I'm very confident that this new asset will add significant contribution in 2011.

The Helix Producer I picked up the riser buoy, as Bart mentioned, and this next week, it will demonstrate the disconnect capabilities and with production following shortly after that later in this quarter. And the Q4000 is actually booked up all the way into 2011. So that's showing a really strong backlog.

Johnny Edwards and the ERT team have had their hands full. But they've overcome most of the production issues and have production back into the 140,000 -- or 140 million cubic feet equivalent a day range. Phoenix coming online should increase our production upwards toward the 200 million cubic feet a day equivalent range. Production and services should see a significant improvement throughout the rest of the year.

2010 will be the final year of recovery and transition for us. We'll continue to work towards a divestment of the oil and gas business. This will reduce net debt, giving us a strong balance sheet and lower interest as we turn again to establishing long-term sustainable growth.

Going into 2011, it's our goal to be a pure deepwater service contractor, occupying the very attractive niches of well ops, subsea construction, and facilities. It's our goal to see a restoration of our historic service multiple.

Areas where we see significant opportunity for capital deployment in the services include, beginning with well ops. On the heels of a recent award of the Statoil FEED study, it's obvious that our intent would be to secure a contract for a new semi, which would be the next generation of that vessel, evolving from our experience in well ops and operating the Q4000. We expect to have the balance sheet to make this a reality.

There are also organic and M&A opportunities for us to build on our current leading position of role in the light well intervention market.

On the construction side, our new assets, such as the Caesar, as they penetrate the market we believe there will be additional opportunities to add further assets as -- at attractive prices going forward.

On the facility side, a lot of interest is being shown in the HP 1, and this leads us to believe that there is an attractive niche that exists for innovative assets such as the HP 1. But I think this is something that we'll be looking at more over time.

I believe the market will be right for the timing of growth capital allocations, and the opportunities to leverage off of our existing credibility will be there. And that's over the near to mid term. Events of the past years -- past several years will also mean that the wisdom does exist to pursue these opportunities at a prudent pace with a focus on continual improvement and operational efficiency.

In summary, the remainder of 2010 will see us build balance sheet strength and capacity, continually improve operating margins, and set up future service growth. I'm very pleased with the direction of the Company. I'm also pleased with the effort and focus of the people in Helix in getting us to where we need to be. Things are so much better, and I'm optimistic that they will keep getting better and better. I truly feel that the first quarter here was the turning of the corner that we've all been working towards.

And with that, I'll turn it back over for some questions.

(Operator Instructions). Marshall Adkins, Raymond James & Associates.

Good morning, gentlemen. Owen, last week we had a couple of data points on the offshore Gulf of Mexico E&P side that -- if you apply those type valuations to your E&P business, I come out at $2 billion, $2.5 billion of value for those assets. Obviously, that's not priced into your stock. Update us on the plans. I know you've mentioned that you want to try to do something to monetize that. Update us on those plans, interest level you've seen. Would you look at going public? How much debt would you attach to that, etc. etc.?

I've got the corporate counsel shaking her head at me here, so I've got to watch what I say.

At $2.5 billion, where do I sign? I guess that would be the first comment. We're very optimistic by the recent events in the Gulf, and I think it does demonstrate that there is interest and there are buyers out there. Beyond that, Marshall, I really can't comment on a whole lot, other than to say that we've retained Credit Suisse and Jeffries to co-manage the process going forward, and the process will include looking at all divestment options.

That being said, I've just been told that's enough.

Okay. All right. So all divestment options, obviously, includes either an outright sale or going public and things like that. Is that fair?

I'd just repeat all.

Okay. On to -- it seems like you're certainly a lot more upbeat than we've heard you in, I don't know, a couple of years. Is your optimism based on, particularly for the marine side, based on bidding activity or margins or the fact that all your assets are now more or less in place? Just give me a little more color on the optimism I sense in your tone.

Well, let me give Tony a chance to give his input first.

Yes, I think, Marshall, it's not any one thing. It's all of the above. Number one, our backlog has increased since year-end. We had backlog of $250 million on contracting services at 12-31-09. That backlog is well over $300 million, and this is an expectation comment that we expect that to grow even further based on bidding activity, inquiring activity, and just the general behavior of our customers. They seem to be getting at it.

On the well intervention side, we see very high utilization of our well intervention assets from this point on. As Bart mentioned, the Q4000 is booked into 2011 and that's a good sign. And the well intervention and the Seawell have healthy backlog, and I think now with the Caesar coming online and getting her first external job, we've got another earning asset to put to work. The HP 1 is going to go to work here pretty soon, probably this month, on the Phoenix field.

So, there are a number of factors contributing to our more positive outlook for contracting services, Marshall.

I'll just comment on my own personal optimism. Coming back in in 2008, I think there was a lot of work to do in refocusing the direction of the Company.

And then, having come so close to a near-death experience following Ike and the financial crisis, my big concern was could we affect a turnaround of the Company and position it in a proper timeframe to take advantage of the credibility that we have in the market in the niches that we occupy, which -- we are not the typical deepwater contractor. We occupy some pretty favorable niches right now, and the window of opportunity to build on our capabilities there I believe is now.

We're also at an upturn in the marketplace, which is where the growth opportunities are for a service company, and again, the question of whether or not we could position the Company balance sheet wise, credibility, and operational efficiency in order to really take advantage of that, and I really feel that the Company is on the threshold of being in a position to really make hay while the sun shines in the next couple of years ahead.

Last question for me. Reading into the hedges that you have out there, it appears certainly on the oil side that realized pricing next quarter should be modestly higher than what we saw this last quarter. Is that -- am I reading that properly? And secondarily to that, it also appears like we ought to see a nice bounce in production. I just want to make sure I'm reading those correctly.

Marshall, this is Lloyd. On our oil hedges, we're pretty close to being fully hedged for the kind of our lowercase production model on the [45 Bs]. It was 78, 80. If production is a little bit higher than that, we're going to be selling at the spot prices, which are around the $85 range, so there is a little bit of a bump there. But it's priced in around $80 a barrel right now.

Right. So if you average $70-ish this last quarter, then we should see a modest bump next quarter.

That's right.

And our production should go up. It's already up on average in April, as we mentioned, over the first quarter. And depending upon when Phoenix comes on, and right now we're saying about June 1, it could be sooner, it could be later, it's just you would never know because you've got governmental agencies involved. But, it sure looks pretty good that it's going to be up notably in Quarter Two.

And at least so far, workover expenses, etc., should be lower.

Should be. I mean, you always have some workover, Marshall, but I think Quarter One was an unusually high level.

That's why I read it. Great job, guys. Thanks.

Stephen Gengaro, Jefferies & Company.

I guess two things. But what I'd start with is just a clarification. On the contracting services side, subsea construction, is it just the three construction vessels, and do the ROV and the well interventions fall in the -- how does that break out? You have a good utilization slide. I just want to make sure we understand what goes where.

When you look at the actual financial table on subsea construction, that includes the pipelay vessels, as well as the ROV business, Stephen.

So, all the ROVs, not just the trencher support vessels?

Everything. Everything involving the ROV business, including the trenchers, is under subsea construction.

And then the well ops is just the three assets, then?

That's right. Three assets plus our well intervention assets in Southeast Asia as well.

So, as we try to get a handle going forward, because you have a lot of pretty new high-quality assets, trying to get a handle on sort of the revenue potential out of that business, and I'm looking at the utilization levels. The construction did not include the Caesar, I assume, in the first quarter in those utilization numbers. How should we think about sort of the annual revenue generating capability of your contracting services business in a good market?

Well, I'll just say higher because it doesn't include the Caesar and the Caesar will be a high revenue-generating asset.

For example, in the first quarter, as Bart mentioned, the Seawell was in regulatory drydock for a quarter. And you've also got to remember that we had a fair amount of intercompany eliminations and that were netted in the number, too. In fact, intercompany eliminations in the first quarter, I'd say, was about as high as it's going to get, and it was $45 million.

So, assuming those assets can be put to work in a third-party market, that also -- you can add that to your contracting services revenues as well. And then, of course, you've always got the day rate effect of an improving market, too.

Yes, this is Bart. On the Caesar this year, we really don't expect a significant contribution from that vessel based on the bidding activities. We expect this vessel to become a significant contributor in 2011, and this is a type of asset that on average in the -- [over five] key periods could should generate $40 million, $50 million of EBITDA a year. So, this year it's -- we expect it to break even. But next year, we expect a significant increase in contribution.

That's helpful. So, and then, Tony, knowing that -- I'm looking at a revenue number of $154 million, pre-eliminations. Could -- is $1 billion realistic in 2011?

(Multiple speakers) $154 million was after the eliminations. So it's net of eliminations. Before eliminations, it would've been closer to $200 million, right? (multiple speakers) I'm sorry, you're right. It's pre-eliminations.

But as your question, is this $1 billion revenue-generating base? Yes. I think the answer to that question is yes, but that assumes a static situation. That assumes that we don't add assets over time, but yes, I think the existing asset base can definitely generate $1 billion-plus in revenues.

Is 2011 too early to think you can do that?

I think it depends on our success in capturing work in 2011 in the next six months. We have bids outstanding with a total value in excess of $500 million, and so if we are successful in getting our fair share of that, then I'm pretty optimistic about 2011. So the next six months is going to be interesting.

(Multiple speakers) I'm sorry, I think there's also, like Tony said, this is off of existing assets, and depending on the divestment process of the oil and gas, it reloads the balance sheet, and there is both organic and acquisition opportunities there that have the potential to add.

And then, just one final follow-up to that is when we look at the margins in that business, excluding price benefits, should margins trend higher from here on utilization? Do you think 1Q is a trough margin level for the contracting business or do you think you dip from here before you go higher?

I think the 24% in the first quarter was pretty good in a trough year. I mean, I think in a trough year you could see margins lower, but I think the first quarter, especially because of well intervention assets in the North Sea didn't contribute, is probably -- it was probably a relatively weak quarter. So I think the rest of the year with the well intervention assets contributing, I hope that we can maintain this margin.

I think the only caveat to that would be how quickly the penetration of the market with the Caesar will be. That would be the only drawdown to improving margins, potentially.

(Multiple speakers). The focus this year is on utilization. And it's like an example of the Caesar [army], she's working as a floatel now, and so keep her away from the dock and she's making a contribution while we speak.

Roger Reed, Natixis Securities.

I guess kind of going along the same lines there on the margin questions, I mean if you look at Q1, relatively low revenue level for the kind of margins we've seen. Kind of saw a similar thing in Q4, but we had a lot more I guess you'd say challenges Q3 of last year in the contracting side. What has been the change in sort of the near term? I understand how activity goes higher and pricing will improve, but what occurred over the last, say, six months that allowed you to do better on the margins? And what can you do beyond simple things like utilization and, obviously, ultimately, pricing to get margins higher as we go forward, or is it just that straightforward?

Roger, I'll chime in here. Our margins actually increased from the fourth quarter to the first quarter, as Bart mentioned, from 20% to 24%. I think part of that has to be better margins we enjoyed on the Q4000. I think the Q4000 hit a trough margin period in Q4 and also had some utilization gaps.

I just think, as Owen has mentioned here, in 2010, utilization is going to drive margins, and as utilization improves on pipelay in particular and how we -- successful we are with the Caesar, that will have a big impact on margins. I think with the Seawell going back to work, I think you're going to see well intervention margins also improve. So I think we have the potential to book some higher margins for the rest of the year.

I'd just add that if you look at the full cycle, our service business, our contracting business has the potential of generating margins anywhere from high teens to mid 30s. That's over a full cycle.

I think if you go back a few conference calls or -- we were actually talking about how bad could this get, and we had projected high teens to low 20s, which is what happened. Actually, we're a few points better than what we probably would've thought would occur at the low point here, and we're definitely on the climb back up now, driven mostly by utilization but also by internal cost efficiencies.

Right. I guess, in kind of taking that long-term view, if you go back to 2008 kind of revenue levels, and I know we're not necessarily back to peak here anytime soon, but you've also added two significant vessels since then, the Well Enhancer and ultimately the Caesar when it starts fully contributing. Did those vessels materially change the kind of margins you've seen historically? It wouldn't appear to be that's the case, but I'm just interested.

I think during the initial penetration of the market, they detract from margins. Over the long run, they will benefit margins.

So I mean, maybe by mid-2011, they should be past that initial sort of penetration contribution issue?

I would hope going into 2011, we are past the market penetration issues and we have a full strong 2011.

Now, having said that, let me put my pessimistic hat back on. We are in an extremely slow period for service companies right now. Some are doing better than others, but in general it's a pretty significant downturn, especially when you consider where we were in the bubble. There's an awful lot of capacity in the market.

It's my belief that the market is going to have to start to strengthen in 2010, but it's going to take continued strengthening through 2011 before all of the capacity becomes utilized and you see a return to sort of normalized full cycle margins in 2012.

Then switching gears just a little bit, as you look at the production on the shelf, obviously been dropping fairly significantly the last several quarters, is that at any point going to start to moderates, do you believe, or are we just looking at -- maybe not quite as significant a drop as Q2 to Q3 of last year, but it's like the drop has continued as we've gone on, or is moderation in the cards here at all, especially with maybe the development of that PUD? I don't know if that was a deepwater or shallow-water development. Talking about the incremental $20 million.

This is Johnny Edwards. Yes, that PUD we're developing is a shelf PUD, and it's an oil PUD, but you saw it drop from 9.2 to 5.3 on the shelf. Part of that was we had some shelf downtime. 346 is a shelf property, and we had some rate restrictions and some well down time there. 5.3 is not a normal decline, and, for example, I think in 2010 we expect the following three quarters to average five Bs or better, so -- on the shelf, so you won't see that continual decline on the shelf here the rest of 2010. That was not -- that's an anomaly in the numbers.

Philip Dodge, Tuohy Brothers Investment Research.

Appreciate the comments. Let me circle back to the improving outlook that you were discussing compared to what we heard at the beginning of the year. Take the Caesar as a poster child here. At that time, the outlook for 2010 for the Caesar was uncertain at best, and may be negative, and now it has several items to look forward to, and I'm curious how long the enterprise project lasts specifically, but is it $80, $85 oil or is there something else going on?

This is Bart. Yes, I mean, overall we see opportunity. I mean, our customers. I mean, increasing their capital budgets and, I mean, slow bidding activity and so-so near-term bidding activity, especially in the Gulf of Mexico.

And of course, I mean, on the -- all of our fleet is refocusing on supporting inspection repair maintenance projects or well B&A projects, well intervention projects, and so it's more OpEx related than CapEx.

On the Caesar, the enterprise project will last around six weeks for the Caesar, but we also have a trenching scope, so we use one of our Canyon trenchers to bury that line, and we are in discussions with several of the customers for work following that project. But the key focus on these -- for this vessel is 2011, 2012, 2013, and that's something what makes us optimistic that this vessel can be a contributor in that period.

I think I'd like to add I'd like for -- to think that we could take credit for getting this one strategically correct.

We announced earlier that we were bringing all of our construction assets back and refocusing our efforts on the Gulf of Mexico as defined by U.S. Gulf, Mexico, Trinidad, and potentially Brazil. As the market picks up on a global basis, it obviously means that there's less competitive pressure of being shown on the Gulf of Mexico as the assets are being utilized elsewhere.

The Caesar is a very unique -- there's not very many assets of her kind in the world and to have one permanently deployed in the Gulf of Mexico, along with our other vessels, allowing us to sort of guarantee scheduling, I think is playing into a competitive advantage for us, which we've historically seen in the Gulf. We're just re-emphasizing it.

My other question is on the FEED work for the interventional vessel, the new build in Norway which you're sharing with two other companies. Does that mean that there could be more than one company involved in the ownership of the vessel or is it more likely you're certain to be awarded just you or someone else 100%?

We should put some clarity on this before everyone gets too optimistic. This is a FEED study that has been awarded separately to three different contractors. So it's basically a design competition.

At the end of the FEED study, then, each of the contractors will be allowed to present a commercial proposal for their design, and based on which design Statoil likes the best, combined with the commercial terms, the new build contract will be awarded to one of the three.

Would you notionally have less than 100% or would it be all or nothing? All or nothing on that?

As it stands right now, we would be bidding 100% of our design. Now whether or not we bring in other partners upon award, that remains to be seen.

Michael Marino, Stevens Inc..

My question is for Tony. Just a point of clarification. You mentioned that the backlog has increased from year end to over $300 million from $250 million. Is that just contracting services and excludes well ops?

No, that's all of contracting services, including well ops.

Okay. Is the majority of that increase coming from well ops?

No, the majority of that is coming from the subsea construction group.

Okay, but it does sound like the Q4000 has added some work and you're also adding some things on the well upside as well, right?

That's correct, yes.

Also, too, Owen, you mentioned that the goal was for you guys to head into 2011 as a pure deepwater contractor. Should we imply from that that you would hope to have a sale completed by year end?

Yes.

That's our hope and expectation.

(Operator Instructions). Stephen Gengaro, Jefferies & Company.

Just a quick follow-up. Tony, we had expected net interest expense to rise. But it rose more than we thought. Can you help us thinking about the next couple of quarters?

I think the projections there were driven off of an estimate of how much would be capitalized or not. Our gross interest expense is not any higher than it has been. It's a matter of what the accounting rules require us to capitalize associated with capital projects.

I would expect our interest expense, Lloyd, going forward to be about the same or even slightly higher because the Caesar now is wound down, and -- for example. So it's going to be, I think, slightly higher than Quarter One. On the other hand, I think don't read too much into it because our gross interest expense really hasn't changed because we haven't added any debt (multiple speakers). It's really an accounting exercise that's involved here.

But that $21.2 million of net interest expense and other, the other -- there's not a lot of other noise in there. So you're talking off that number, it should be about (multiple speakers)

No, the other does have noise. It adds about $6 million of foreign exchange losses in there as well. We suffered some ForEx losses associated with the appreciation of the dollar against the pound, and that was, what, about $6 million, Lloyd?

That's about half of that. That's about $3 million and the other $3 million is just a re-measurement of the balance sheets, of non-USD balance sheets.

So there is noise there in the ForEx line, and that -- obviously that's something that's difficult to project quarter to quarter. But the strengthening of the dollar actually hurt us.

So your comment, then, should come off of an interest expense line which is closer to $16 million, moving up a little.

Yes, that's right. And then with the unknown being foreign exchange.

Okay. And anything on depreciation and amortization in the tax rate going forward? Particularly (multiple speakers)

Yes, we expect, just on a tax rate standpoint, we expect -- we've done some structural stuff here that should lead us to a better tax rate than we've enjoyed historically. So we expect taxes to be in the 30%, 35% range. I think we were at slightly over 30% in the first quarter. When you strip out the nonrecurrings, and I'm sorry, I missed the first comment.

If I thought about D&A, just -- even if I thought about just on the contracting services side (multiple speakers)

It will go up because of putting the Caesar and the Helix Producer I into service in Quarter 2. So it will go up slightly in Quarter 2.

Would you know what -- do you know what it was 1Q just for contracting services, ex-oil and gas?

Why don't we call you back, Steve, and get you a good number?

Great. All right, thank you, gentlemen.

It looks as though there are no further questions at this time.

Okay. In closing, thanks for joining us today. We appreciate your interest and participation and looking forward to the Quarter 2's conference call. Thank you.

This will conclude today's conference call. You may now disconnect.