Global Industries Ltd. Q3 2008 Earnings Conference Call Transcript

Global Industries Ltd. (GLBL)

Q3 FY08 Earnings Call

October 30, 2008, 10:00 AM ET

Executives

John A. Clerico - CEO

Jeffrey B. Levos - Sr. VP and CFO

Peter S. Atkinson - President

Analysts

James West - Barclays Capital

Karen David-Green - Oppenheimer & Co.

Ryan Carlson - Advantage National Bank

Joe Agular - Johnson Rice

James Rollyson - Raymond James

Presentation

Operator

Welcome to Global Industries Third Quarter Earnings Conference Call. At this time all participants are in listen-only mode. After the presentation, we will conduct we will conduct a question-and-answer session. [Operator Instructions]. Today's conference is being recorded and if you have any objections you may disconnect at this time.

On the call this morning with John Clerico, Chairman and Chief Executive Officer, Peter Atkinson, President and Jeffery Levos, Senior Vice President and Chief Financial Officer.

I would now like to turn the meeting over to Mr. John Clerico. Sir, please begin.

John A. Clerico - Chief Executive Officer

Thank you. Good morning everyone. Welcome to our third quarter call and our format today will be that Jeff will provide a brief financial overview of our results. Peter will provide operational comments and I'll finish with discussing plans to improve our performance.

But first if I may, let me say that I personally together with the management, employees and Board of Directors of Global are very disappointed with our third quarter performance. The loss is a large one, even larger than we expected when we pre- announced, an estimated loss of $0.45 to $0.50 a share two weeks ago.

Since we were announcing an important management change at that time and we are also aware of then that results would be disappointing. We felt obliged to alert investors to the fact that we expected a large operating loss for the quarter. Even though at that time we had not fully completed our review of our Saudi Arabian and Brazilian projects.

The increase in our quarterly loss to $0.90 per share was primarily caused by adjustments we made to our execution plan to the Saudi project during the week following the last conference call. These adjustments involved recognizing additional productivity losses, extending our project execution schedule through the winter, adding additional allowances for weather downtime and increasing some material and service cost estimates.

The result of these adjustments is we believe a realistic execution time for the project and an adequate estimate of the total cost to complete it. Our project team was instrumental in making these adjustments and they are fully committed to executing the plan.

Now I'd like to proceed with the rest of the call and will turn this over to Jeff Levos for an over all financial summery for the quarter. Jeff?

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

Thank you John, good morning everyone. As in previous call, I would like to open it to our earnings conference call for the third quarter 2008 and remind you this call is being recorded and will be available on our website.

The primary objective of this conference call is to discuss the earnings for the quarter ended September 30, 2008. Certain of my comments and responses to questions may include forward-looking statements. These forward-looking statements are subject to a number of uncertainties which are discussed in detail in our December 2007 Form 10-K filing with the SEC.

To begin, for the third quarter 2008, the consolidated revenues were $218.6 million compared to $203.5 million for the same quarter last year. The 7% increase in revenues in the third quarter of this year was primarily attributable to international growth in particular Asia Pacific, India and the Latin American units that more than offset lower revenues generated from our North American, Middle Eastern and West African units.

Gross profit decreased by a $145.7 million to a gross loss of $88.9 million in the third quarter compared to a gross profit of $56.8 million in the third quarter of last year.

During the third quarter of 2008, we eliminated our previously recorded profit estimates and recorded an estimated loss on the Berri and Qatif project in Saudi Arabia which total approximately $83.3 million and due to continued productivity and logistical issues and a rework of our plan to complete which is now scheduled to finish in the third quarter of next year.

Gross loss on the Camarupim project in Brazil, increased by approximately $17.5 million during the 2008 third quarter, due to lower than projected productivity and delays caused by weather. Both of these projects are now in a loss position.

West Africa experience slow activity in the third quarter of 2008, without idle vessel cost contributing to a gross profit decrease of $40 million. Gross profit in North America decreased $31.6 million primarily due to delays caused by hurricane, Ike and Gustav.

Lower 2008 project margins as compared to daily projects executed by the REM Commander in the third quarter of last year as well as delivering in setup cost this year related to recent additions to our fleet, the Global Orion and Olympic Challenger.

During the third quarter of 2008, Asia-Pacific, India successfully executed a major project and increased utilization to improve gross profit by $15.6 million.

Selling, general and administrative expenses were $25.4 million in the third quarter of 2008 compared to $20.7 million in the third quarter last year. This increase was primarily attributable to higher administrative and infrastructure cost related to our geographical expansion of the business into Brazil and the Middle East.

Interest income decreased by $6 million from the third quarter of last year, to $2.5 million for the third quarter this year due to decreased cash balances and lower interest rates.

The effective tax rate for the third quarter of 2008 was 13% compared to approximately 27% of the third quarter of 2007. The decreased tax rate was attributable to losses that could not be tax affected and lower margins in tax jurisdictions would have been profit tax regime where tax is calculated as a percentage of revenue.

We therefore incurred a net loss of a $102.8 million in the third quarter of 2008 or $0.90 per diluted share, compared to net income of $31.5 million or $0.27 per diluted share for the third quarter of 2007.

During the quarter, we booked approximately $200 million of new work resulting in a backlog of approximately $397 million at September 30, 2008. This book work is distributed among our reportable segments as follows: Latin America, $130 billion, Asia Pacific India, $106 million, the Middle East, $101 million, North America, $53 million and West Africa, $6 million.

Turning to cash flows year-to-date, net cash used by operations in the nine months ended September 30, 2008 was $121.9 million compared to $210.9 million provided in the same period last year.

This decrease primarily reflects lower net income and higher short-term working capital needs. Investing activity used $176.1 million net cash during the nine months ended September 30, 2008 compared to $145.7 million used during the same period last year. Increased capital spending contributed to this increase during the current year.

Capital spending of $240.1 million for the nine months ended September 30, 2008, principally reflects an acquisition of a deepwater sub-sea construction vessel and on going expenditures for the construction of our two new generation here pipelay vessels the Global 1200 and 1201.

Additionally, $57 5 million in proceed were received from net sales to marketable securities during the current period compared to $100.8 million net purchases of marketable securities for the nine months ended September 30, 2007.

Net cash used by financing activities was $19.2 million for the nine months ended September 30, 2008 compared to $257.3 million provided during the same period last year. Used of funds in the current period primarily a result from the repurchase of common stock through our share repurchase program. That repurchased approximately 3.1 million shares at an average price of approximately $8.19 per share. Funds provided in the nine months ended September 30, 2007 primarily result in the net proceeds of our $325 million debenture.

This all results in net cash outflow of $317.2 million for the nine months ended September 30, 2008 and an ending cash balance of $406.2 million. We also announced today developments regarding our $150 million revolving credit facility.

During the past several years, we have not borrowed under the credit facility and have used it solely for letters of credit and bank guarantees in the normal course of our business. Currently the company has no borrowings against the facility and $100.2 million in letters of credit outstanding.

As a result of our recent operating performance, one financial covenant of the facility not met. When this occurred, we commenced discussion with the bank group who provide the facility. These discussions are concluding. We believe these negotiations will result in an agreement soon. We also believe that the final agreement will contain a provision that will require us to temporarily cash collateralize the letters of credit and guarantees previously issued under the facility.

With that, I will turn the call over to Peter. Thank you.

Peter S. Atkinson - President

Thank you Jeff. I will be discussing our operational results by segment today and I will go straight by Middle East segment, where income before taxes declined by $87.4 million to a loss of $84.9 million for a third quarter 2008, due almost entirely to the deterioration in the very and complete project in Saudi Arabia.

During that third quarter, we experienced an exceptional loss in productivity and cost over runs from this project that resulted in our completely evaluation and extension of a schedule through cost to complete remaining scope of work.

In addition, during the past two weeks, we re-sequenced certain phases of the remaining scope of work to mitigate the risk of excessive equipment and personal standby cost, during the previously scheduled to regulatory dry document that need [indiscernible].

This week's scheduling threats to assess its continuous working through the bad weather season in January and February 2009, and we've increased the contingencies for estimated future weather downtime remain good during that period.

Two to three pipelines and 12 of the loss of lines being laid and three of the sub-sea balance... baskets installed. We have one remaining pipeline and 11 skins to install [ph] and the project is currently scheduled to complete in the third quarter of 2009.

Revenues now in our North America offshore construction segment with $28.9 million from the third quarter of 2008 compared to $32 million in the third quarter of 2007. This $3 billion decline in revenues reflects more utilization in the third quarter of 2008 primarily from the non-unavailability at the churn key which remained in extended dry dock for the whole of July and most of August.

Income before taxes decreased $11.6 million to a loss of $6.7 million in the third quarter of 2008 reflected more revenues appeared at non-compensated that was done by cost during hurricane Gustav and Ike.

Most dry docks standby cost for the time too on productivity issues on certain projects. Revenues in our North American sub-sea segment of $43 million in the third quarter 2008 compared to $45.6 million in the same quarter last year.

Income before taxes declined by $23 billion to a loss before taxes at a $0.5 million in the third quarter of 2008. Margins were for plant were lower, primarily due to poor productivity on lump sum projects, lower day rates and higher rental cost on a chartered flow total as compared the day-rate projects executed by the REM Commander in the 2007 third quarter.

Camarupim, standby operations and mobilization expenses for newly acquired Global Orion and Olympic Challenger were also comparably impacted to the financial results for the third quarter 2008 compared to the prior year quarter.

Although third quarter results for both North American segments were initially negatively impacted by stumped constituted the hurricanes. With subsequently experienced, the moderate increase demand for our services are most of our vessels in the Gulf of Mexico are now committed to substantially over the fourth quarter.

Revenues from Latin American segment increased by $20 million to $59.5 million in the third quarter of 2008, primarily due to additional revenues from our operations in brazil. Income before taxes declined by $33.1 million to a loss of $21.9 million in the third quarter of 2008.

We have now completed the installation of the offshore pipeline but lower than expected some vessels stand by the ways for the mechanical with what the down time, unfavorably impractical results for the third quarter of 2008. Revenues in our West Africa segment were $22.9 million in the third quarter of 2008 compared to $44.6 million in the same quarter last year.

While we successfully and profitably completed to the Valpro project with the Hercules in Gabon in early August, the idle cost Cheyenne and Sea Constructor contributed to the third quarter loss before taxes of $12.3 million. Due to lack of visibility on short-term opportunities, increasing uncertainty and challenges surrounding projects in Nigeria and post Hurricane activity in the U.S. Gulf of Mexico, we've decided to move two of our vessels, the Hercules and the Sea Constructor to the U.S. Gulf of Mexico.

This relocation is expected to be complete in the first quarter 2009. Revenues for our Asia Pacific India segment increased by $31.4 million, $40.4 million in the third quarter 2008. Higher activity related to our project in Vietnam and a seminal on a third party chart in Malaysia contributed to the increase. Income before taxes was $9.5 million for third quarter2008, compared to a loss of $ 6.1 million for the third quarter of 2007.

With increase of $15.6 million due to higher revenues, an increase project margins attributable to higher utilization. With that, I'll return the conference back to Mr. Clerico. Thank you.

John A. Clerico - Chief Executive Officer

Thanks Peter. As you've just heard this report, our quarterly results reflect operating losses in all of our geographic segments except Asia-Pacific. That's obviously unsatisfactory and we are working hard to improve these results in every area. A particular area of focus is converting bid opportunities into backlog by improving our marketing in bid preparation processes.

We are also seeking to strengthen our project management teams. Lastly, we are working to identify cost reduction opportunities and controlling our use of cash. These efforts will be global in sculpture [ph] and improved net actions will be taken quickly. Let me conclude by saying that we are capable and enthusiastic people who are committed to the success of Global. I have witnessed energy and team commitment that has brought this company through tough times in the past. I am confident this will resolve in improved performance and will return to profitability.

Thank you that concludes our prepared comments and we will take your questions. Let me say that in order to allow adequate time to answer your questions, we will extend the time allotted if necessary and be available to answer your questions as long as we can. Thank you.

Question And Answer

Operator

[Operator Instructions], our first question comes from James West with Barclays Capital, sir your line is open.

James West - Barclays Capital

HI, thank you, good morning guys.

John A. Clerico - Chief Executive Officer

Good morning Jim.

James West - Barclays Capital

John or Peter, look at over the last two years Global is made a big push in to the Middle East and Brazil and the results have been as you said earlier unsatisfactory, from I guess the management level and John may you can speak to the board as well, are you committed to staying in both these markets?

John A. Clerico - Chief Executive Officer

Let me say unequivocally, yes, obviously our entry in to those markets has been less than auspicious. Its clear from what both Peter and I have said that we made significant number of mistakes, some of that was preparation mistakes, some other was execution mistakes but we are committed to the market that's arguably the most... the most important global market and we are going to stay there, learn from our lessons, execute well in the future and hopefully make some money.

James West - Barclays Capital

Okay fair enough. And then just a quick question for Peter on West Africa. After we move the two vessels you mentioned back to the U.S. gulf, will you have assets in West Africa any more or will that completely figure that market?

Peter S. Atkinson - President

We're keeping the Cheyenne [ph] there in the market at the moment.

James West - Barclays Capital

Okay. And does the Cheyenne have work or are there opportunities for Cheyenne in the next year?

Peter S. Atkinson - President

We are currently targeting the project there. We're in hectic [ph] discussions with the client which we expect to concluded it in the next few days and we took in more clients because it's the only way to execute that work going to work with the client.

James West - Barclays Capital

Okay great. Thanks guys.

Operator

Thank you. Our next question comes from Karen David-Green with Oppenheimer.

Karen David-Green - Oppenheimer & Co.

I was just wondering if you could give us a little bit more color John on kind of timing of return to profitably. I mean you stepped in recently you mentioned that the call of two weeks ago clearly and not enough was felt in terms of down sides for the quarter, but looking at where you are now and having a better understanding over the past week going through this process, can you give us a little bit more clarity on kind of what we should expect for Global in the coming quarters?

John A. Clerico - Chief Executive Officer

Yes, I'll do my best to do that. I don't have an exact timetable but I can tell you unequivocally [ph] that you're going to see a progress from us soon as I try to indicate. We're taking a lot of actions. We're not taking a lot of time to do that. We think we understand what needs to be done and taking those actions quickly is just as important as taking them.

So I fully expect you'll see a pretty significant improvement from us pretty fast. Beyond that, I hope you'll understand I am just getting into this. I don't have... I spend a lot of time working on the next few quarters. I am comfortable with what I just said about you'll see better performance. We are working to make it happen as quickly as we can but I hope you'll understand that I don't have a specific timetable to give you.

Karen David-Green - Oppenheimer & Co.

I know absolutely. I guess kind of on a scale from 1 to 10, do you think you're half way there?

John A. Clerico - Chief Executive Officer

With regard to the actions to be taken, I would say we're not half way there. We understand what needs to be done. We've got a lot of work to do between now and the end of the year to implement those actions that with regard to what happened to us in this quarter and the adjustments we had to make, that I do not expect to continue in any sense.

Karen David-Green - Oppenheimer & Co.

And you mentioned that strengthening the project management team, can you talk a little a bit about what that's you think need to be taken for that to unfold?

John A. Clerico - Chief Executive Officer

I think you'd probably agree with me, in any company that has problems in various areas, it's all about people and we have some project execution problems that Peter and I tried to outline for you, I think its... a couple of things are important that we're trying to do.

We've lost some key project management engineering people over the last two years, we're working hard to get some of those back and otherwise replace some of those loses. We're trying to make sure as we win new business that we step each project team with experienced people, people who know how to operate in the area where the project is taking place and that we give them adequate resources and other team members to execute.

We are also trying to take some organizational steps to make sure that every one who gets involved in the business acquisition process whoever its marketing or debt estimating people have a clear stake in the out come rather than just handing it off to a project management team.

I'm expecting to see some pretty significant improvement in that pretty quickly such that I do not expect as I said to have a repeat of issues we have had in Saudi Arabia and Brazil.

Karen David-Green - Oppenheimer & Co.

Okay. Thanks a lot.

Operator

Our next question comes from Ryan Carlson with Advantage National Bank. Sir your line is open.

Ryan Carlson - Advantage National Bank

Okay thank you. My question is fairly simple I thought the announcement not too long ago caused the safely [ph] the result of the call was going to be $0.50 loss for the quarter and it ended up being 90 and I guess my question is how bad and why did we miss it that much, how did we not know we are in this position?

John A. Clerico - Chief Executive Officer

Well I tried to indicate. We have made an important press release two weeks ago about the change at the top in the management of our company and in doing so we were well aware at the time that we were having a difficult quarter, we would have a large loss and under performed everyone's expectation including our own.

So that's what Charles does to pre announce result. But at the same time there was a detailed review of particularly the Saudi project underway and lot of issues being examined, a lot of project execution change is being evaluated and they just weren't far enough a long at that point for us to have a sense of what it might do to the quarter.

That's an unfortunate thing, timing wise I wish it hadn't happened that way. But what's important to us is that we have an executable project planned for the project that we don't assume certain conditions that are too optimistic and that we give our team a plan that they can execute on.

Operator

Sir, does that answer your question?

Ryan Carlson - Advantage National Bank

Yes it does. Thank you very much.

Operator

Thank you sir. Our next question comes from Joe Agular with Johnson Rice. Your line is open.

Joe Agular - Johnson Rice

Thank you. My first question is the loss on the project in the Middle East which you all have taken in the third quarter and the timing that you gave of the contract completion date in the Q3. Could you from a cash flow perspective maybe help us understand when the loss sort of will occur in coming quarters? Its spread out fairly evenly or--

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

Joe that is the loss that we booked in the quarter includes state the projected cost through the third quarter. So I guess the cost will be fairly breakable where they are in. As part of the reasons the schedules extended is that we reduced the numbers of vessels perhaps and extended the calendar schedule to the third quarter.

Joe Agular - Johnson Rice

Okay. I guess I didn't ask the question very well. But what I'm asking is the loss of the second quarter of $83 million sort of represent the remaining cash out flow that you have over the next three quarters or so?

John A. Clerico - Chief Executive Officer

For that project, yes.

Joe Agular - Johnson Rice

Okay. I mean sometimes the timing I guess is, I didn't know maybe there is materialism something that you've already spend the money on and the actual cash number might be lessened now or it could be the same but no anyway.

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

Most of the remaining executions schedule is operations for expense is off shore vessels and labor and sub-contracts, they've not been executed the installation, the or project remaining project.

Joe Agular - Johnson Rice

Okay. The second question I have I guess is more of a general question with regard to the overall company. When you mentioned project management and emerging dating [ph] and there is two places obviously where you can list out. One is pretty in back dated in the first place then the second is in the actual execution in the work that you debug [ph]. When you look back at these projects, can you tell us maybe whether it was more of the bid that was prepared poorly or was it the execution or obviously it's a combination of both. But maybe what area do you think you have to improve on the most?

John A. Clerico - Chief Executive Officer

From my perspective, I would say its full scale through preparation to execute work that involves both the bidding assumptions that we make and the project plan, the execution plan that we put in place, we have needs in those areas I would say.

Joe Agular - Johnson Rice

Okay. The other question I had was on more of a strategic nature, I mean this industry obviously there is been a lot of queries over the last number of years where as the market is going well, you can certainly get better pricing you can do well, that's not its little bit tougher. But some times you find periods where the vessels are contracted more in day-rate basis and obviously are assuming less risk in that case. Do you ever... have you ever thought of trying to push through a strategy where you might try to do more just plain day-rate or its just simply not do able in some of the international construction market?

John A. Clerico - Chief Executive Officer

When I make the statement I'm not making it precisely okay. But we try to do that every single project we bid we have... it always a competitive issue, its always an the issue of how much risk is involved in the project obviously if it's a very heavy risk project we are going to try to exclude those risks and get as close as we can to a day-rate in situations and we are actually looking at a couple of things at the moment that are very close to that.

Joe Agular - Johnson Rice

Okay thank you, thank you for that.

Operator

Thank you sir, our next question comes from the Jim Rollyson with Raymond James, your line is open.

James Rollyson - Raymond James

Good morning guys.

John A. Clerico - Chief Executive Officer

Good morning.

James Rollyson - Raymond James

John just a follow up on Joe's question or may be Peter, he was talking about the cost estimate for this projects in the Middle East or the two projects in the Middle East, just kind of clarification here, is that suggesting that the loss you guys had in the quarter, pre-captures a lot of the negative of this project or that we still extrapolate that spread similar losses out over the next few quarters. Try to understand right.

John A. Clerico - Chief Executive Officer

Let take a cut at that and I'll let Peter expand it. It represents what we believe is an executable plan to finish the project including the cost of finishing the project, its not one of those. What's the absolute worst case scenario? So I can't say that we wouldn't have further negative impact. But as I said in my remarks it's our best estimate, our best realistic estimate. It comes directly from our project team who is going to do the work and we are committed to doing it.

James Rollyson - Raymond James

Perhaps the different way you've taken a lot of the lumps on the project in this big number this quarter. Is that fair?

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

That is fair Jim. We've estimated the cost to complete and we've booked the loss on the project that come to you [indiscernible].

James Rollyson - Raymond James

Got you. Okay perfect.

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

Based on our current net estimate of that execution.

James Rollyson - Raymond James

Sure. I'll recognize that it could just slip a little bit and whatever but I understand that. You made comments John about Latin America, Brazil and some of the issues this quarter. I guess you kind of made it sound like some of the worst at least on the project you are working on is behind you.

And as I recall, you've got some work coming up in that geographic region in Mexico which you guys have historically done pretty well on. You're looking forward to seeing better Latin American results as we go through the two, three quarters?

John A. Clerico - Chief Executive Officer

Unequivocally yes and pretty much across the board. We're working hard to learn our lessons from our mistakes and the actual experience in both Saudi Arabia and Brazil. We think we've learned them and we think from here we can do better.

James Rollyson - Raymond James

Okay. And lastly, just guys on a coverage issue assuming that's probably not going to be a huge problem given that you are sitting currently on a fair amount of cash. Is that pretty much just a negotiation probably paying some fees and I think you mentioned some collateralization and then you kind of go on your way. Is that what you're kind of looking at?

Peter S. Atkinson - President

I would just, I am not going to put an adjective on it but I'll just say that anytime you have to clash collateralize, we are therefore going to have to carefully control our cash to make sure not only do we have enough cash to collateralize the letters of credit and performance guarantees where we are required to put up.

But then we have a sufficient cushion of cash to cover up going forward and what might very well be and we're getting ready for more difficult industry conditions and having cash resources is important to get through a period like that. So, I don't think we have a major issue here to answer your question. But it does indicate to me that and land extra importance to the task of managing our cash.

James Rollyson - Raymond James

Does it change it all your outlook on the two new build vessels since you obviously got payments on that going forward to the next couple of years?

Peter S. Atkinson - President

No, those commitments are strategic in nature and vital to our future.

James Rollyson - Raymond James

Okay. Thanks for the time

Operator

Thank you, our next question comes from Matt Gower with Grey Fire Capital [ph]. Sir your line is open.

Unidentified Analyst

Thank you. Couple of questions on Saudi Arabia, if I may. What was the your total cost projection for completing that work initially and what is...what's your final estimate in or basically out of percentage basis so you could say we projected with the x and it turned out to be one and a half x?

John A. Clerico - Chief Executive Officer

I will let Peter or Jeff take that one, if I am right.

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

Without getting the average of estimate that kind of projection is three times what we originally had in that project.

Unidentified Analyst

Okay and when that works start?

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

It start at... it was awarded in May 2007, they initially started in September 2007 but that we went off and executed another project in between and we've really spotted back off shore in April 2008?

Unidentified Analyst

Okay. And are there any other project within the company that were initiated since the Saudi Arabia project was initiated that you are concerned about?

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

Opportunity in project but there are projects that we don't have those concerns about and we have executed several projects successfully.

Unidentified Analyst

Okay, terrific. And then are the customers in Saudi Arabia happy with the work, the cost over and that withstanding?

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

Our relationship with the client which is around there the national oil company, are fairly good obviously they are happy at the delay in schedule but they are being very responsive in what they have looking at the issues that we've experienced.

Unidentified Analyst

And then, one last one, if I may have you pulled of your bids recently as a result of kind of rethinking the bidding and project management process and your experience in Brazil and Saudi Arabia or things kind of as they were?

John A. Clerico - Chief Executive Officer

Well, that's normally a question of risk and are we prepared to assume it on a project. I think we have pulled at least one bid that I have been made aware of. I can't tell you but that's directly attributable to Saudi Arabia just involved a cost risk straight up we weren't prepared to make.

Unidentified Analyst

Yes. Okay thanks very much.

Operator

Our next question comes from Alex Loth with Kendon Asset Management [ph]. Your line is open.

Unidentified Analyst

Hi I know you're renegotiating your facility. But that looks like that still would give you potential for our buy backs and with your convertible bonds trading as distress they were was wondering if that was an option you are looking in to? I can give you levels of the care.

John A. Clerico - Chief Executive Officer

I have to say right now marshalling our cash resources that is the top priority and we have not been recently buying stock back until we get finished with that exercise and satisfy ourselves that we have adequate room I don't think you would see us buying our stock back?

Unidentified Analyst

I was actually refereeing to the bonds which are a probably option than your stock right, now you have mentioned the same answer but when if you go to look at buying stock back definitely look at the bonds.

John A. Clerico - Chief Executive Officer

I beg your pardon, I misunderstood your question. We will look at that, but it is going to be dependent upon the same review of cash.

Unidentified Analyst

Thank you.

Operator

Our next question comes from James Hu [ph] with Wells Capital Management.

Unidentified Analyst

Oh yes good morning. I wanted to get a little bit more color on with Caron Green's question on, in terms of the key management people that you loss in your project teams could you provide more clarity in how many people you lost, what areas they were expertise in and also could you provide why did you loose the key people was it comp issue was it competitors just poaching away and how fast do you think you could get these people back?

John A. Clerico - Chief Executive Officer

Let me see if I can deal with all the aspects of that. These first of all are not senior management people. They are people who have experience in running projects in various areas of projects.

Down to barge superintendents and project engineers. But the kind of people you can put on a project who can evaluate and prepare for execution and give you a higher probability of success. I don't have an exact number of those people. There's something around a dozen. We actually have good prospects we're getting a number of them back and good prospects I would say for replacing them and with other folks with the reason you lose them, I would say is mostly competitive.

These are the kind of people that everybody wants and when they see good ones, they go after them. And I would just say that it's mostly a competitive issue and I don't think in the cases that I am aware of the compensations particularly and obviously if somebody goes to another company and they get a bigger job, they make more money, but I think it's more just competitive issues.

Unidentified Analyst

Do you have a timetable in terms of when you'll be back up to proper levels.

John A. Clerico - Chief Executive Officer

I don't have a precise timetable, but no time is too soon I would say.

Unidentified Analyst

Alright, thank you.

Operator

Our next question comes from Jim Makery [ph] with New Bigger Bermen [ph]. Your line is open sir.

Unidentified Analyst

Good morning gentlemen. Had a question on the Middle East. Why stay, you have lost 25% of the company's market capitalization over there. It appears the customers you say good things about him but clearly there is a huge disconnect between what you were trying to do or may be what they were trying to do and what's the path going forward. Why do we keep our assets there and keep losing money?

Peter S. Atkinson - President

Well let me just say first of all, I am not going to stand here and say on the conference call but this had a lot to do with the customer. This was our failure to execute, our failure to prepare much, much more than it was, anything that may have been caused or contributed to by the customer and as long as that's the case and we feel we can adjust to that, my inclination given the size and importance of the market is to stay the course and try and do a better job and execute in the future. If we can do that then your issue is right to the top of the priorities list but I am not satisfied if that's the case.

Unidentified Analyst

Thank you.

Operator

Before we take our final question, [Operator Instructions]. Our final question at this time comes from John Lapor with Baso Capital. [ph], sir your line is open.

Unidentified Analyst

Hi guys, just had a couple of questions about the balance sheet, the ending cap it was under 6 million [ph] and went down about $82 million from last quarter, can you give us a sense of how much progress payments of the two vessels, what are you look at as far as CapEx and what is maintenance CapEx and how do you see that in the rate of decline cash, kind of over in the next few months?

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

I'll take that one, this is Jeff Levos. Progress payments on the 1200 and the 1201 are roughly as follows, the 1200 as you recall we've disclosed before is roughly $230 million to $ 235 million project.

Through the third quarter, we have approximately $94 million spent. In the fourth quarter, we're looking at about $20 million to $25 million, the 2009 scheduled expenditures are little under $90 million and the finalization in the first and second quarter is about $10 million or about $27 million. As to the 1201, the total project cost is about $245 million. During the third quarter, we have a little over $50 million into the project. The fourth quarter estimated expenditure is about $12.5 million. The 2009 scheduled expenditures are about $69 million. The 2010 expenditures are approximately $85 million and then in 11, you finish out the last 28.5.

As you referred to that, those represent our primary capital expenditure program under way. As we previously disclosed, we estimate between $35 and $50 million on average in a year to be what we would consider our base capital expenditures and of course this year you'll have to keep in mind that we in the second quarter purchased a large vessel. So those would be the big moving parts on the cash expenditures.

Unidentified Analyst

That commitment is done but on the large vessel, there are any remaining commitments on that.

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

I am sorry. Say that again.

Unidentified Analyst

Debt commitments are already done but you said on the large vessels, are there any commitments?

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

Yes the second quarter purchase was a cash purchase.

Unidentified Analyst

Okay and then the other question was in terms of the LCs [ph] and the covenant, what covenant was that. Was that the DA [ph] convenient and what could get it so that that cash could be released at some point in the future or the GAAP or EBIT it is what do you think would have to do to free up that cash?

John A. Clerico - Chief Executive Officer

Well I hope you appreciate as we disclosed today in the earnings release. Those while we believe, we were in a position to complete those negotiation. They are still technically active. So the covenant that was not met, was the fixed charged coverage, covenant on the important development that we concluded needed to be disclosed as the cash collateralization aspect of the new agreement other than that, I think at this point we need to go ahead and finish out our negotiations and then disclose to you quickly what the results of those are?

Unidentified Analyst

Okay and just the last thing from a cost basis. How much cost do you think you can save. Is any Piper [ph] I know you have identified some plans but is there any thing that you could talk about from a dollar amount of what type of cost can be reduced, whether SG&A or other types of cost?

John A. Clerico - Chief Executive Officer

It's a little early for me to be real specific but in the quarter, we had 12% of revenues in SG&A which is too high by a fairly significant amount, we're also going to be looking at some operational cost to see what's, to see what's possible there, things like overseas places and then the cost we devote to that, looking at revenues they generate but those kinds of things also so it will be both corporate and business in nature.

Unidentified Analyst

And what do you think we will get more detail on the plan and what type of realized cost savings that will result in?

John A. Clerico - Chief Executive Officer

We'll be talking about that as we get a little bit further along with it hopefully as we get out and talk to people and answer your questions, we will be able to give you some more flavor on that.

Unidentified Analyst

Okay, thank you.

Operator

We do have a couple of more questions that came in gentlemen. Our next one will come from Jim Withlend [ph] with Carls and Capital [ph]. Sir your line is open.

Unidentified Analyst

Good morning guys. Putting your translate your book value about 650 is that a tangible book and can you talk about the book value versus what you guys estimate as your actual net asset value of the vessels et cetera?

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

Jim this is Jeffery.

Unidentified Analyst

Hello Jeffery.

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

As we've discussed on previous conference calls. We and as we have discussed today we're in the position of getting global back to a premier performer and best in class. Are that being said we don't spend a lot of our time looking at net realized book value, net versus net book. Now that's not we worry about. Various parties have drawn lots of numbers around in that area but we're focusing on the plans that we have discussed today.

Unidentified Analyst

Okay. And well I'm just thinking that with your stock turnover 30% today. Trading in the twos but it might be helpful to know what you guys think in the company's worth I am not thinking about it from an acquisition point of view but some base value that investors could hang on to if you would?

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

Well speaking at a non-financial trends without trying to base it up some financial calculation like book value realizing the book value or anything else. The key to providing support for our investors is getting our performance up, where people can look at it some other way than just what's the value of the hard assets and the company and is just that what we are working on.

Unidentified Analyst

Alright appreciate it.

Operator

Gentlemen at this time we have one final question, it's from David Stameron [ph] with Wine Trial [ph] Capital. Sir your line is open.

Unidentified Analyst

Hi I'd just like to go back first to Jolagelars [ph] question, it appears like if we go back and re-estimate Back in re-estimate the profit on Saudi project for example and so I'm just trying to understand to the extend that you have gone back and re-estimated things that you've already spent money on, this is change in profits really a reflected true cash, the increased cash cost of going forward of the projects?

John A. Clerico - Chief Executive Officer

I believe it does.

Unidentified Analyst

So it's, okay alright and in the Gulf of Mexico, you talked about losing money because of substantial downtime related to Ike and Gustav and you guys have been operating there for how many years and I'm just wondering is it change in competitive situation or momentary bout of insanity or what it did? Where these storms just that much out the norm that you all end up taking the lump sum risk and getting burned like you have on those two events?

John A. Clerico - Chief Executive Officer

No, whether it can be good or bad for us and in the gulf of Mexico, the plant normally based, but was the downtime when you haven't name storm but the only pace if you are off shore when the storm is named, if your at the bank between projects then they state... you don't know when we get compensated for it.

Because Ike and Gustav occurred so closely together that clients were aware of the second storm coming into the gulf and they didn't mobilize us into the field and we have to stand by until Ike had quit the region.

Unidentified Analyst

And on the Middle Eastern projects, if you sound like you wanted to stay there, I mean is the competitor situation there such that your assets are entitled to earn a return and you can't move towards something that more approximate the cost bases situation or I mean you've shown no ability to estimate the proper amount of cost and surcharge is the other questioner. Mentioned it's hard for us shareholder to get confidence but that's certainly going to change.

John A. Clerico - Chief Executive Officer

Well I certainly can't deny what's happened in the past. I can just say that our own preparation mistakes contributed to it. We don't think that there is anything structurally in the way a ramp [ph] business that should prevent us from earning inadequately return.

Our ramp goes one of the experienced state oil companies in the world. Lots of people have worked for them over a long period of time, other people have made money. We just think that we haven't put our best execution capability forward to see if we can be one of those.

Unidentified Analyst

And are you going to continue to bid on large lump sum projects over there or is there something changing the way you are going to bid or what?

Jeffrey B. Levos - Senior Vice President and Chief Financial Officer

We are pretty cautious at the moment in terms of how we bid. I mentioned that we will spread a little fend [ph] with regard to our best project management teams and resources. The last thing we want to do is repeat that experience by bidding on some thing where we can't put our best team to work to execute and get us a chance to be successful.

So I would say we are being fairly cautious at the moment.

Unidentified Analyst

Okay thank you very much.

Operator

Gentlemen that was our final question.

John A. Clerico - Chief Executive Officer

Thank you very much. We appreciate everybody's attention to the call. We'll be available for additional questions also off line. Thank you.

Operator

That does conclude today's conference call. We thank you all for participating. You may now disconnect and have a great day. .

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