Oceaneering International Inc (OII) 2004 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Oceaneering International first-quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Mr. Huff, Chairman and Chief Executive Officer, you may begin your conference.

Good morning, everybody. This is Jack Jurkoshek. I would like to thank you for joining us on our 2004 first-quarter earnings conference call. I like to particularly welcome those of you who may be participating in the webcast of this event. Joining me this morning is John Huff, our Chairman and CEO who will be leading the call, Marvin Migura, our Chief Financial Officer and Bob McGory (ph) our Treasurer.

I would like to bring to your attention that the financial tables attached to our press release now include operating income by segment. We have done this to make our quarterly results more informative. Just as a reminder remarks we make during the course of the call regarding our business strategy, plans for future operations and industry conditions are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. I am now going to turn the call over to John.

Good morning, and thank you for joining the call; it's a pleasure to be with each of you this morning. The financial results for the quarter exceeded our expectations; earnings at 19 cents after the $1.8 million pretax charge for the transaction expenses related to the terminated Subsea 7 ROV acquisition effort was better than the guidance we had given you. Considering the below average oilfield service market conditions particularly in the Gulf of Mexico, we believe our overall performance for the quarter was well done.

As noted in the press release, our above expected earnings performance was attributable to the Stolt ROV fleet acquisition and better than forecasted results by our Subsea Products operation, particularly our Oceaneering Intervention Engineering group. Overall results for the rest of our business segment came in pretty much as we had anticipated.

The acquisition of the Stolt ROV drill support fleet significantly increased our international market presence particularly in West Africa and Angola and the Norwegian sector of the North Sea. Our addition of 34 class vehicles increased our present worldwide ROV leadership position from an estimated 28 percent market share to 36 percent. We're very pleased with this ROV acquisition and its future potential earnings contribution and return on assets employed to Oceaneering.

Our ROV segment with the majority of the vehicles working in the drill support area represents huge leverage in expected future recovery in the use of floating drilling rigs. Year-over-year we reported much better results with a 20 percent operating income improvement in part due to the Stolt acquisition. Sequentially despite the benefit of having the Stolt vehicles contribute to our results for roughly half the quarter, ROV quarterly gross margin and operating income declined on increased revenue. This was attributable to lower utilization and the mix of jobs. You may remember that ROV contribution in the fourth quarter of last year represented a near-term high watermark which we indicated at the time was not sustainable over this quarter.

Our average day rate for the quarter was about $5250 per day on hire, down only slightly from the $5300 a day during last quarter and up significantly, about $400 from the $4850 during the first quarter of last year. Our fleet utilization during the quarter was 69 percent as compared to 72 percent last quarter and only 64 percent a year ago. We anticipate a significant improvement in the profit contribution from this business segment in the remaining three-quarters of this year.

Our Subsea Products segment also had a very strong quarter, and we achieved both sequential and year-over-year improvements in revenue and gross margin and operating income due to the higher backlog at the beginning of the year as opposed to the beginning of 2003. Both Multiflex and OIE had better results. As I mentioned earlier OIE's performance surpassed our expectations. Product backlog at the end of the quarter was $41 million down slightly from the $47 million at year-end 2003 but still at a very respectable level. We believe we are on a track to achieve a major profit improvement from this segment in 2004 and beyond.

As we announced yesterday we just secured an $8 million umbilical order. This enabled us to increase our backlog at the end of April to a level above that at the end of March, and sequentially greater than year-end through December 31, '03. Our steel tube cabling machine is now operational in our Brazilian umbilical plant, and our Panama City, Florida umbilical facility is on schedule to be operational during the fourth quarter this year. As a matter-of-fact, the order that we just received yesterday will be the first steel tube umbilical to go through the plant in Panama City.

Our MOPS visit had another very good quarter as all three of our units were under contract for the entire quarter as they were last year at the same time and we expect them to remain so at least for the rest of this year. Earnings contribution from our Medusa Spar investment which has been reported, which is being reported as equity income from unconsolidated affiliates came in as anticipated at $1.1 million. This was the first quarter we benefited from this major capital investment made in late December last year, and we expect to do so for many more years to come.

Our Subsea Projects business which is conducted in the Gulf of Mexico is seasonal and extremely competitive. Consequently, the operating income contribution was marginal during the first quarter of the year. The good news is these operations continue to be profitable. In light of the slack season and the market conditions we're pleased with this outcome. The sequential quarterly decline in revenues gross margin and operating income contribution was in line with what we anticipated. Year-over-year revenue was flat. The gross margin operating income dropped. Results for the first quarter last year included a favorable $1.9 million adjustment of earlier cost estimates, facilitated by the completion of an installation project and the settlement of a personal injury claim.

While I don't mean to overemphasize small profits, when you compare our niche market strategy in the projects business to many of the offshore construction companies and competitors, consistent profitability is certainly elusive to achieve. Sequentially the decline we reported in inspection revenue is also related to seasonality. The operating income contribution was essentially unchanged. Year-over-year revenue increased but operating income dropped primarily due to higher SG&A expenses. This was attributable to a weaker U.S. dollar, relative to the British pound which is a base currency for this segment's administrative expenses.

Our ADTECH non-oilfield business had another good quarter. Year-over-year revenue improved with gross margin and operating income were about the same, which is normal for this business due to change in job mix. Sequentially revenue was flat but gross margin operating income improved again reflecting the normal fluctuation in business activity. The sequential and year-over-year change in unallocated expenses at the SG&A line were attributable to the $1.8 million of transaction expenses related to the terminated Subsea 7 ROV acquisition effort.

In summary, given the market conditions our first quarter was better than we anticipated, and we are looking forward to significantly higher EPS performance during the rest of 2004. We believe our earnings performance and what has been a lackluster market for the past two years has set us apart for many service companies involved in the offshore sector. Again during the first quarter each of our operating business segments generated positive profit contribution. I believe this speaks well for our niche market strategy. I think we have created an excellent business model and have executed our strategies very effectively.

Our focus on providing products and services for deepwater and subsea completions is a good way to play the entire offshore life cycle from exploration through production. Offshore and especially deepwater is definitely one of the best frontiers for the E&P companies to lower their finding and development costs. Our balance sheet remains in good shape. We had debt of 152 million and equity of 380 million. Our debt to cap ratio percentage was 29 percent.

During the quarter we invested $67 million including about $50 million for the Stolt acquisition. We had $200 million available for future borrowings under our revolving credit facility. We continue looking for other accretive acquisitions with at least a cost of capital returns. We intend to use our strong cash flows and balance sheet to further grow Oceaneering's earnings. If you add depreciation and amortization back to our operating income we generated $25 million for the quarter.

When you take a good look at the cash flows our technical niche market strategy is generating you should see an excellent business model being well executed. We have a strong company with significant resources consisting of uniquely technically advanced assets and excellent people who have the ability to significantly leverage these assets as offshore markets improve. As we said in the press release we are estimating 2004 EPS of approximately $1.60. This estimate is based on an annual increase in Subsea Products operating income contribution of at least $7.5 million.

An equity income contribution from the Medusa Spar in the $7.5 to $9 million range, an increase in ROV operating income principally due to the Stolt acquisition of $5 to $6 million and finally our expectation that the rest of our business operations in total will have an income contribution comparable to what was achieved in 2003. This estimate is predicated on flat overall markets for ADTECH in four of our five oilfield segments with known market demand expected for our Subsea Products group. Even after expensing an anticipated $1.5 million associated with our moving the U.S. umbilical facilities, we believe the growth and product profits will occur due to increased umbilical sales and more specialty hardware sales from our ROI group including a full year's contribution from the two acquisitions we made in 2003 to expand our product offering.

Umbilical contract awards in 2003 totaled 1145 kilometers according to Quest Offshore. In 2004 umbilical awards are forecast to grow at a rate commensurate with the tree (ph) orders to 1650 kilometers or almost 45 percent. No change from the 2004 outlook we gave you last quarter as apparent to us. Further growth is expected in 2005 and 2006. Seventy-five percent of the market during the 2004 '06 period is expected to be for steel tube-based products and 80 percent of this is forecast to occur in the Gulf of Mexico and West Africa.

Consequently the steel tube umbilical manufacturing equipment we have installed in our Brazilian umbilical plant and will be installing in our Panama City facility will significantly enhance our competitive position to participate in this growing market. We believe the long-term use of subsea completions is definitely one of the secular growth markets in the oilfield. Consequently, demand for related hardware will continue to grow.

The market is expected to show good annual improvement this year, and now is (indiscernible) on us to get our fair share of the market. We did not accomplish this in 2003 and have taken what I believe is the necessary actions to insure improved profit performance by our Subsea Product segment. We made a senior management change in hiring Phil Gardner. We recognize the sales teams needed to increase its personal accountability, and I have never been satisfied with mediocre results, and I'm not going to make any exception on our core performance.

Given the overall market tightness for steel in general and recent and potential steel price escalations we have taken action to assure that we have an adequate supply of raw materials to manufacture steel tube based umbilicals and protect ourselves against steel cost escalations.

In summary given the ambiguity surrounding the general 2004 market outlook for oilfield services we really like our position. Earnings growth in 2004 of 30 percent appears to be well within our grasp. For a specific quarter two guidance we're projecting earnings of 40 to 45 cents per share for the second quarter. The sequential increase in the second quarter from what we just reported for the first quarter is expected to come from higher operating income contributions from our oilfield business segments with the exception of MOPS which should be about the same.

An increase in equity income from Medusa Spar in the absence of first-quarter terminated acquisition transaction expenses. We expect a quarterly contribution from our ROV business to increase as a result of an increase in business from foreign areas of operation. Revenue gross margin and operating income are expected to increase on the strength of higher umbilical value and BOPs (ph) controlled sales in our Subsea Products segment; for our MOPS business the financial effect of our ownership in the Medusa Spar as reported as equity earnings on consolidated affiliates.

In the second quarter we are anticipating this contribution will be about $2.4 million to pretax income as there will be production from the first three wells for the entire quarter and we anticipate some benefit from two more wells that are expected to commence production during the quarter. The market outlook for our Subsea Project segment is difficult to forecast due to the short lead time nature of our customers' demand requirements for mostly production phase remedial work. That being sent, the market outlook for the second quarter is (inaudible) seasonal. Summer time improvement over what we experienced during the quarter. The first quarter.

Consequently, we are forecasting recovery in revenue and income contribution from these operations. Overall market conditions remain very competitive for the diving and vessel based project jobs we perform in the Gulf of Mexico. And these conditions are anticipated to continue throughout the balance of 2004. We are adding new, modern diving support vessel at the end of the second quarter equipped to support 24-hour inspection operations in the Gulf of Mexico diving business. We expect inspection revenue to be in $35 million range comparable to the second quarter of last year but anticipate a year-over-year improvement in both gross margin and operating income. This is based on our forecast of selling more technically advanced inspection services, which have higher margins and by achieving further cost consolidation savings from the acquisition of OIS we made last year.

Our ADTECH revenue for the second quarter is expected to be up from the first quarter but profitability is forecast to decline slightly due to change in job mix. These business operations outside of the oil (indiscernible) continue to be a steady source of income and cash flow contribution to our overall results.

In summary I would like to just give you my thoughts on the current status. Our results for the first quarter again demonstrated our ability to generate good earnings in a tough market. Our cash flow is strong. Our niche business market strategy is clear and is working very well. I believe our hidden assets were those untested operating leverages which we can easily convert into EPS and as well as our immediate financial resources and balance sheet strength where we found opportunities to invest these cash resources.

We have clear objectives to improve our operations. Outstanding people to execute our activities, and we will not be satisfied with mediocre results. We are focused on offering our customers more value added solutions for their offshore needs and in some cases the only solutions available for deepwater operations. We intend to profitably grow our company to help our shareholders increase their returns. We believe 2004 will be a very good year, and 2005 even better.

When you compare us to large, diversified services and products companies we do extremely well on virtually every financial metric except for having modest valuation multiples for our earnings and cash flow. We anticipate, we appreciate everyone's interest in Oceaneering and I would now like to open up the call for questions. Just as an aside, we would encourage you to speak up quickly as it is my intention to go to the OTC. Dick Frisbie, our Senior Vice President of deepwater operations is being honored as a distinguished lifetime achievement award. Dick may not have invented the ROV but he was certainly instrumental in making it reliable and practical for everyday use in the oilfield. He is the centerpiece of many of our technologies.

We are very proud that he has been given this recognition and want to be part of it. I would be happy to take questions. Thank you.

(OPERATOR INSTRUCTIONS) Justin Tugman from Simmons & Company.

Quick question on the ROVs. You mentioned the sequential decline in operating margins was partly due to a decline in utilization. Can you give us a sense, though, of the type of margins that the Stolt ROVs were earning compared to what your core Oceaneering ROVs were earning previous to the acquisition?

Let me try. In Norway they were not doing as well as we were. So we looked for some upside from that opportunity. And I that over the next three or four quarters we should bring that in line. First of all, I guess the fundamental part of that is that the equipment was excellent equipment. We were very pleased in due diligence that the equipment had been well maintained and well-designed, well operated. And in Angola Stolt had a joint venture through their ETPM (ph) group and they were very ingrained in Angola and we had really knocking up against them down there, and they were a very, very strong competitor. And this gave us a great opportunity and in fact their margins were a little better than our margins were in Angola.

So we were very pleased that all this came together for it. The third thing was an important aspect of that is it really gave us a strong position in Brazil. We are not the leading provider of ROV services down there but this really strengthened our ability to be a big part of the Petrobras (ph) market.

If you were to look at your historical business in the ROVs you were running 25 to 27 percent gross margin. Where would you say Stolt were?

I can't, we didn't look at it like that. We just looked at straight cash contribution.

Okay. You had mentioned steel costs. Can you give us a sense in terms of the total cost of manufacturing steel tube umbilical, what percentage of that is related to steel? And then also are you implementing surcharges are seeking price increases to help offset some of the increase in steel cost?

Yes, just enough to -- that is an excellent question and I apologize, I do not have the component of cost of sales of the steel tube, of the steel component part of it. I will ask Jack to get back with you on an answer to that. But it is a significant part. And the answer to your question really is both. We've got firm fixed costs from our suppliers with some contingency built-in, and we have started using some surcharge marketing techniques. I don't feel that stainless steel tubing is going to be a constraint for us. I don't think we are going to see this huge run-up. So I'm okay with that. I mean I feel like Phil has done a good job hedging this situation for us.

And final question. You talked about you expect to see improved profitability by your Subsea Products business. Can you give us a sense in terms of how high you think that eventually these margins can go?

If I could do that, I think I would be on your side of the call. I would be making bets on the equity stocks. I don't know. Damn sure higher than what we got. I think the go to phrase here is we only have to make $7.5 million more this year than we did last year. When you look at that in return of what we did in '02, I mean hey, we're not even talking about recovering to '02 levels yet where we made over $20 million. And so given the acquisitions that we made, the capacity increases in umbilicals, and I would not want to speculate but speculation would be in order of magnitude more than $20 million.

Okay. Thank you very much.

George Gaspar from Robert W. Baird.

Good morning John, good morning Jack, and congratulations and good complete review. I just want to drill a little further on this ROVs situation, John on the margin in the slippage in the quarter you indicated it was something to do with mix and so on. And you got about half of a quarter of Stolt acquisition. Can we see that margin top back right here in the second quarter to more historic levels, or is Stolt going to hold you back from getting back up on the near-term basis?

I think we are going to have a little bit of a bounce back, George. That is my feelings. I want to -- let me kind of as you say drill down a little deeper on this job mix. I don't want to gloss over it. Part of it is job mix and part of it is just utilization. Part of it is just the fact that we don't have as many operating. When we, next quarter when we have all this equipment available we will actually have more ROVs available than the total number of floating rigs. So we are going to have to continue the kind of marketing that we did in the last half of last year and put more equipment to work in the non-drill support activities. And you probably recall from the calls that we had last year, I was very, very proud of our folks for doing that. They did a really outstanding job. Now there is a seasonal drop off in construction activity during the winter months. And so generally I am very bullish that we are going to probably snap back hopefully more than forecast.

And then on subsea again drilling down a bit on the margin situation in the first quarter relative now what measure was there that of cost that might not be there going forward on the first part of my question? Second is it is mostly thermoplastic this year until you get to the steel side. Once you get to the steel side are we expecting some lesser gross margin there than on the thermoplastic side? I believe we talked about that in the past. Can you give us some insight on that?

I'm going to let Marvin follow-up on this, let me just give you some background. First of all, let me say we have been in the steel tube market for the last two years through our plant in Scotland. What we haven't been doing is we haven't participated in the real growth of the market because we were stocking out in Scotland. So that is really sort of the fundamental premise I think that you got to have.

Secondly, there is a -- there is going to be a reduction in the margin because the steel tubes as a percentage of the cost of sales is going to be higher than it has been. And so that's a large buy in item for us and I'm embarrassed that I don't have that right off the top of my head, but so the overall gross margin should retreat some. As far as any real cost to us, I know I've been kind of whining and I apologize to everybody on the call the last few quarters. I don't think we have any major cost problems. We've got some effectiveness problems and efficiency problems in operations but we don't have any major cost bust. This is not like we had several years ago in Jurasaw (ph) where we just had a huge cost overrun on one job down there.

The problem has been our marketing. I haven't been satisfied with and many of you may recall that we got more involved in that last year and I started going through the jobs that we were going through internally and trying to reinforce that with our folks. I am very comfortable now that we have organized in a way that we will be able to see the market better. We will be effective in being able to make components in different plants. We really have been moving towards an integrated manufacturing segment where everybody saw all of the market and we could manufacture in whatever place was most convenient. We could have a little creativity in our business, our manufacturing business. I wasn't real satisfied with that. It wasn't a major cost disruption as much as it was we were -- I think it was an opportunity. So I think that's the best way to say it. I don't know, Marvin, you might add some.

No, John, I think the only thing I wanted to say is that consistent with what you said where we expect slightly lower margins on steel umbilicals, we expect higher margins on some specialty products like through the rotator and Reflange acquisitions. And as far as guidance, I would think that year-over-year Subsea Products is going to be flat at the gross margin line, percentage wise. Significantly improved numbers but as a percentage steel in the high teens, mid to high teens. Likewise on ROVs while Stolt acquisition increased our depreciation, we think the improved utilization margins are going to be gross margin percentages or again going to be similar to last year's. Better numbers, similar margins. So I think that answers both of those questions.

And just a quick follow-up on that steel umbilical plant. About the cost structure associated with startup, is there going to be -- have you allocated or reserved for that already or is there going to be some cost structure going into the third, fourth quarters that you are going to experience and you are going to run through right across the board?

It would be expensed.

Its already in the forecast, George. What we are saying is we are forecast about $1.5 million of expense in addition to the capital that we are putting into the facility (multiple speakers). In the old days you just kind of capitalized and it disappeared and in the new days you really do a better job of expensing it.

Okay. Thank you.

Andrew O'Connor from Strong Capital.

Just wanted to know if you could give me kind of a qualitative sense. How do you see offshore exploration activity trending here through the second quarter maybe from year-end '03 in the first quarter -- we are about a month into the second quarter. How do you see activity trending, and how do you see pricing of offshore services and products trending going ahead? Thanks so much.

Well that is an excellent question. And I don't think there is any -- there is certainly no inflection point in the second quarter in terms of up or down. I think it is just kind of moving along. I don't see any positive news but certainly no negative news. As far as pricing offshore, I think that any time there is inflation there is really an opportunity to increase margins along with that. And my guess is that whatever inflation that we do see should be a positive for Oceaneering.

Okay, I don't know, John, any other explicit comments related to pricing again as we are now into the second quarter maybe relative to the first quarter?

No, I don't want to sound just wishy-washy about it, but as I said there's really no inflection point that I can say to you that there is a going to be a big increase in offshore deepwater type drilling.

Lastly how would you characterize capacity again for Oceaneering and competing service providers? Would you see capacity increasing as we head through the second quarter relative to the first and year-end '03?

No, I don't see any capacity increases. All of us have got sufficient capacity for what we are doing. The only capacity increase that I see is that we are going into the steel tube umbilical market with both feet.

All right, sir. Thanks very much.

Tom Escott (ph) from Prichard Capital (ph).

Two quick things. One just kind of bowl (ph) around this issue about the Subsea Products, opening the new plant, you are going to charge off $1.5 million of expense in the I guess in the June period, and if my Michigan math is correct that's like 4 cents a share after tax, which implies that with your guidance of 40 to 45 cents that is even after taking a 4 cent charge for a new plant startup. So real operating earnings would seem to be awfully strong. The accelerations are more than double from March to June. Am I doing that right?

I think the 1.5 million, Tom, would be more like a flat deal, and it would be over second, third quarter maybe some slop into even the fourth quarter. So it is not quite as strong as you think there.

You are not taking it all in the same period.

We are not taking it all in the second quarter for sure. Just saying that probably the big amount will be in the third quarter, and it will be some amount of it in the second quarter and minuscule amount in the fourth quarter.

My second question is more of a stepping back and looking at this from 30,000 feet; going back a few years ago we had Oceaneering producing very sloppy variable and unpredictable earnings from period to period. Very, very difficult to forecast one quarter to the next. And in an environment in which the Gulf of Mexico rig activity was very strong. Now today Gulf of Mexico rig activity a near ten-year low and yet Oceaneering is producing earnings near record high earnings this year. Is it fair to say that your own visibility, your confidence in your visibility is dramatically improved now from where it was two and three years ago as the Company has been repositioned?

Absolutely. I think that summarizes it well. I think the whole point I was making about products is just that. We've got a good strategy. I think mixed market position strategy, technical services is a great market strategy. But a lot of companies have got good strategies; I mean this execution on strategies is what sets you apart.

It does indeed. We all remember Gerisol (ph) a few years ago and execution was very important and I guess probably a couple people got executed over that.

(inaudible) I wasn't one of them. Seriously there are things that you learn along the way, and when I -- I do not want to take too long a ride down memory lane here -- but the facts when I came to Oceaneering it was the largest diving Company in the world. Today a minuscule amount of our business is associated with diving. I do think that diving gives us a core group of people with lots of unusual capabilities, and we've leveraged off of that. We've leveraged off it. I do not anticipate that we are going to get out of the diving business, even though it is not a great business. It's a huge training ground for a lot of people. Having said that, you know, I mean 10 years ago I do not think anybody could have imagined Oceaneering as a product company. And we approached it as a project type of thing with products that are designed for specific activities, and we are slowly moving into more of a mainline product, things that while I don't see us building for inventory and ultimate sale on sales forecast at least in the near-term, we are kind of headed that way and we are getting better at it. That is the main thing; we're getting better in our ability to integrate ROV services with AOI products. Our ability to integrate both of those with Gulf of Mexico projects puts us on the threshold that when Brazil becomes a callout market, when Angola becomes a callout market, I mean we're going to have the skill sets that we need to compete in those businesses. So I think the future is really, really terrific.

I think that was noted, and when you put out earnings guidance for '05, which is a year and a half from now, by the end of '05 and you put out a number that is higher than Street consensus right now without reading too much into it, that would seem to imply a level of confidence and enthusiasm that we haven't seen in a long time.

Well, I wouldn't read too much into all this now. I want to be conservative, and I don't want to get too far ahead of the train. I just feel good about our business. I have got a good feeling about our strategy. It is well accepted now. Our employees know how to make money from it. And I think our execution is just getting better almost on a daily basis. So I am comfortable that with any kind of increase in the market -- I think one of the things I am trying to say to everybody is this.

What you haven't seen is our ability to operate in a highly charged environment. And I think the prior question is an excellent question. If I could tell you there was an inflection point in offshore deepwater floating operations, positive inflection point, I mean this thing is going to take off. That sort of the what I am trying to say. Now, we don't have quite as much leverage as offshore drilling companies do. And those of you have known me a long time know that I have a fair knowledge of that business having been in that business. So we don't have quite the same position.

But we've got a lot more leverage to improve the activity levels than I think people are giving us credit for. I don't think we've got quite that same built-in anticipation that when the market really does improve like it did in '97 for deepwater, and the fact is, Tom, we probably were not ready in '97. We've really didn't have the same organization in '97 we've got today. Just look through the whole company and those of you that visited our facilities both in Louisiana in the North Sea and Brazil or Houston, you are going to see people that really do understand what the needs of our customers are. And I don't want to wax along here, but I am just saying that I think that if anything the market probably underestimates the ability that the Company has to make money in a better environment.

Guess we are all going to find out. So with that I will turn it back to you.

That's what I'm hoping for.

George Gaspar for Robert W. Baird.

Could we get some color here on a few things quickly, like the trend of share count beyond the first quarter, it was pretty good leap from 4Q to 1Q, John. Can you give us some guidance as to what we might look for to the last nine months?

Well, we did anticipate that question, and the share count jumped. Obviously there were a lot of options that were exercised in the first quarter. And then the higher price of the stock also brought the average up the number of options that were in the money. So I think it's going to go up; I don't think it will jump like it has though, George. This was really a kind of a onetime phenomenal jump to me, it kind of surprised me, as well. I would use 25.5 for the full year.

25.5, okay. All right. Then on the interest expense side, can we get some guidance relative to 1Q now? I assume that obviously its going to go up because of the payout for the Stolt acquisition which was partially in the first quarter. Would it be in the range of 2.5 million let's say in the second quarter and then kind of going on up to 2.9 million by the end of the year, or can you.

I will defer to Marvin or Bob on that one. One thing is that's happened, it depends on our investment profile. (multiple speakers) If we produce the kind of cash that we expect to even with good investment opportunities we may be reducing debt.

I would expect it to go up a little bit because you'll have a full quarter of the Stolt acquisition in there as opposed to 40 days. But then after that really depending upon our investment profile I would expect interest to level off close to what it was in the first quarter. But again, and it is going to be more impacted by acquisitions that we hope to make than it would be by change in interest rates or because so much of our interest cost is on 100 million fixed. So I would expect a small increase in maybe a 10 percent, or 15 percent increase in the second quarter then tailing back down third and fourth to being the fourth-quarter pretty flat with the first quarter totally subject to change if we make some additional acquisitions that we hope to.

Thank you on that. And then on unallocated expense outlook relative to the first quarter, which was 5.3 million, what might we be looking at in the second quarter?

George, that's always -- I mean we are influenced dramatically by the stock price because that includes the incentive compensation that is predominately restricted stock. And I would think that somewhere in the $5.5 to $6 million gross margin line.

If I could just drill down on Medusa with John there, John you mentioned give us a format for completions that are going to take place. What can we expect in the second quarter on completions beyond the third well that's now on stream?

I think there is a fourth well that will be on stream and then the fifth and six wells are going to straddle the end of the second and the sixth well obviously be in the third quarter.

And quickly on Brazil's steel opportunity, how are you going to do there on the front end here? You got any orders in the plant for steel?

We don't have any in Brazil. In Brazil will be largely an export opportunity to both Angola and Nigeria for us. We do have that one order that I mentioned earlier in plant in Florida.

Okay. Thank you.

Joe Agular from Johnson Rice & Company.

John, did I hear you say that you expect 2.3 million in equity income in Q2?

Right.

Is that -- is that sort of on track with what you all expected for Medusa all along?

Yes, pretty much.

Okay. Would it ramp from there in Q3 and Q4?

Yes, it will ramp up.

Okay. What if I may ask this question, I know that you all are using the cash flow, that the LLC is using the cash flow to repay the bank loan. What is your anticipated schedule of paying down that debt? How long will it take?

I tell you right now we're probably not the best guy to ask that question to, Joe, the best guy would be Murphy. They are running that side of the deal, and the overall thing is we are not counting in any of our numbers this equity income is cash. This is not accounted that way.

But will you all show as equity and income Marvin, I guess in traditional just net after-tax your share of the net income of the LLC.

We are showing pretax.

Okay.

We tax affect in the tax line to have a better, a cleaner effective tax rate. Since it is an LLC and we pay the tax using it as pre-tax we think is the preferred method. Let me follow up on the cash side. It really depends upon the production profile how these wells level off as to what the third and fourth quarter is going to do and the tiebacks as to how quickly we can pay off LLC's debt. I think John is right about checking with Murphy, but LLC does have benefit of the Calan (ph) piece of cash flow. First we had to establish necessary reserves for LLC but we should see a small amount of cash coming to LLC partners later this year.

Okay. I guess you made me think of another question here. In terms of the project returns that you expect from Medusa, your return internal rate of return analysis, I guess is just based upon the Medusa field?

Right.

Just a couple really quick questions on some other things. Marvin, is total debt at the end of the quarter what you show as long-term debt or is any short-term?

There is no short-term debt.

Okay. Could you tell us what is in the other expense line in the quarter, the 622,000?

Yes, what we have -- mostly currency.

Okay, so you all are hurt by 600,000 in currency losses in Q1?

Right.

And G&A going forward is that where you took the.

$1.8 billion there is in G&A in the fourth quarter, right - I am sorry, in the first quarter.

Right. Very good. Thank you.

Let me thank everybody for being on the call, and it is my intention to go out to the OTC now and witness a spectacular event with one of our employees really honored by our industry. Thank you for joining us.

This concludes today's conference call. You may now disconnect.