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Executives

Anthony Tripodo - EVP and CFO

Alisa B. Johnson - Sr. VP, General Counsel and Corporate Secretary

Owen Kratz - President and CEO

Bart H. Heijermans - COO and EVP

Robert P. Murphy - EVP of Oil & Gas

Analysts

Roger Read - Natexis Bleichroeader

Marshall Adkins - Raymond James

Joseph Gibney - Capital One Southcoast, Inc.

Helix Energy Solutions Group, Inc. (HLX) Q3 FY08 Earnings Call October 30, 2008 10:00 AM ET

Operator

Welcome and thank you for standing by for the Third Quarter Earnings Conference Call. Your lines have been placed in a listen-only mode until the question-and-answer session of today's conference. Today's call is also being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host Mr. Tony Tripodo. Sir you may begin.

Anthony Tripodo - Executive Vice President and Chief Financial Officer

Thank you, Kelvin. Good morning everyone and thanks for joining us today. Joining me today here at Helix is Owen Kratz, our CEO; Bart Heijermans, our Chief Operating Officer; Robert Murphy, our EVP of Helix Oil & Gas; Alisa Johnson, our General Council. And I would also like to introduce to our audience Cameron Wallace, our Director of Marketing and Investor Relations.

Cameron has taken on the Investor Relations role with Cliff Buster's departure. As some of you are probably aware of Cliff has accepted a terrific opportunity with the public company in Tulsa, Okalahoma. Cameron's direct line by the way is 281-618-6543 but as Cameron is climbing the learning curve, please direct any questions on the quarter to me.

Hopefully, you had an opportunity to review our press release in the 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 www.helixesg.com. The press release can be accessed under recent news and the slide presentation can be accessed by clicking on today's webcast icon.

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

Alisa B. Johnson - Senior Vice President, General Counsel and Corporate Secretary

As noted in our press release and associated presentation, certain statements therein and in today's discussion are forward-looking statements. A number of factors could cause actual results to differ materially from those forward-looking statements.

For a complete discussion of risk factors affecting the company, we direct your attention to our press release and to our annual report on Form-10-K for the year ended December 31, 2007 and subsequent reports on form 10-Q files with the Securities and Exchange Commission.

Also during this call, certain non-GAAP financial disclosures maybe made. In accordance with SEC rules the final slides of our presentations materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The presentation together with the reconciliation is available on our website. Owen Kratz will now make some opening remarks.

Owen Kratz - President and Chief Executive Officer

Good morning everyone. Not exactly a news flash, but we were hit by a hurricane. But hurricanes happen. One reason why we have not been more forthcoming with information prior to now was just due to the size and the extent of impact of the storm and the type of damage that was incurred.

The coastal areas from Mississippi to South Texas were impacted and now people needed to take care of personal and family first. So it as a while before we could we get our people back offshore, the corporate office lost its roof with its server, but some courageous action by our IT department setting aside their personal needs got us back up and running.

But really, the biggest issue was the type of the damage. Most of the damage impacting us was related to third-party pipelines and therefore, we were really relying on gathering information from third parties which was very difficult to get in the early days of this storm. But we do have a clear picture now and when the storm hit, of course we took it very seriously. As cash flow is deferred we immediately deferred spending and we continue to do so. We have sufficient cash flow from strong service performance cash on hand and access to our revolver to cover our revised needs and recovery efforts.

We currently have about 30% of our production back-on and we are ready to produce more on once the third-party pipelines get back into service. We expect to be back to at least near pre-storm levels by the end of the year. We are concerned about the credit crisis, but we don't have any near term maturity issues rollovers or covenant issues. And we have no current plans to access the credit markets.

Our concerns really made us spend considerable effort looking at our providers including insurers, banks, vendors, partners and clients for potential third-party exposure and we're comfortable with what we've found out and what we can expect but we do continue to monitor the situation.

Now, we all face a potential recession with the resulting drop in commodities prices. But just to put this in a little bit of perspective the current prices are the same as they were when we made the Remington acquisition in 2006. We're taking steps to protect our capital by hedging 60% of our PDP for all of '09.

We have a range of good return projects, but the spending can be flexible depending on what the markets indicate would be prudent. So in summary, just let me say again at this time we've sufficient liquidity based on current committed facilities. We've no in near term maturity or rollover issues.

We currently anticipate production recovery to pre-storm levels by year end. But again, much of this is out of our control because of these third-party pipelines. We anticipate generation of free cash flow, in second quarter of '09 and we don't foresee any covenant issues.

Our focus in '09 will be on debt reduction following completion of currently committed CapEx projects. We have and will continue to pursue opportunities to lower debt and generate free cash flow on a more accelerated basis, if we can.

2009 outlook will obviously be dependent upon the global economic issues and the impact on the industry. Therefore, we will provide guidance once we finished our 2009 budgeting process which is under way.

To give you an idea where our capital projects stand, as I mentioned we are currently continuing with major capital projects under way, but we have altered the timing of the capital expenditures somewhat to conform more conservatively with our cash management efforts.

The seizure is currently expected to be in the market in the second half of '09. Well Enhancer is still expected to be completed by the second quarter of '09. As for the Helix Producer 1, completion of the ship conversion is expected by the second quarter of '09 and it should be ready for field deployment by the end of '09.

The Phoenix field development work is currently scheduled for the Q3 and Q4 of '09 with first production at year end, if any development is currently scheduled for first production in Q3 of '09. Excuse me, you have to... I've got a little cold, so I'm a bit foggy. But in our press release it mentions that our CapEx plans for '09 are roughly half of the $800 million to $850 million this year. You can even look at $400 million to $425 million range has been split roughly 50/50 between oil and gas and services.

The 50% are going to oil and gas, will cover some well work that we had planned at some modest well work program, plus abandonment and the other remainder of it, we'll dedicate it to the development work mentioned above. The other half, going to services, it's sufficient to complete all of these CapEx projects that just ran through. Plus it holds out approximately $60 million for maintenance CapEx on our fleet through the year.

So upon completion of these legacy CapEx projects, Helix focus will be on discipline approach to capital deployment, reducing debt and returning to a strong operational focus as we continue to pursue ways to accelerate the debt reduction.

So having given a little bit of intro, we'll now dive into main presentation.

Anthony Tripodo - Executive Vice President and Chief Financial Officer

Okay, thanks Owen. Let me move straight to slide four. I mean I won't go over slide four in detail because it's fundamentally a recitation of the press release, but the quarterly revenues $660 million represented a record for Helix as well as the gross profit figure of $201 million and that we're able to do despite the reduced production levels. This didn't translate into our record EPS for the following reasons, part of the up quarter was due to Cal Dive and of course we have to book a minority interest expense as a result of their higher earnings.

We all saw this quarter booked no gains in sales of oil and gas assets as we had in prior quarters as we had no sales. And the impairment loss we took on a tighter feel of $6.7 million due to Hurricane Ike damage, so the accumulation of those factors did not allow us to book a record EPS.

Obviously, and as Owen as suggested in his opening remarks, our EPS this quarter was significantly impacted by the 4.5, the reduction and production as well as our inability bring on incremental production in the Noonan field due to the hurricanes.

Going on slide five, in addition to the highlights I've already mentioned and Owen's mentioned let me point out a couple of other highlights.

First of all our contracting service business had a real strong quarter as our assets performed at high utilization levels, the Q4 1000 was back in service for a full quarter working in the Gulf of Mexico and as I mentioned Cal-Dive had a strong quarter and they will be conducting the conference call in couple of hours.

We actually did commence productions for couple of days from the Noonan which was ahead of our expectations during the quarter.

Before we have to shut it in first for Hurricane Gustav and then for Hurricane Ike, we expect to recommence production later in quarter four when down stream pipe line repairs are completed and again as Owen mentioned we believe we will get back to pre hurricane production levels around the end of the year, pre-hurricane production levels was 160 million cubic feet a day, again that is subject to third party pipelines and facilities coming back on stream.

So at this point this represents our best estimate of the production ramp up. Currently we're producing at approximately 30% of pre-Hurricane Ike levels.

On to slide 6 obviously we have lowered our previous guidance for 2008 for 336 to 276 on account of the reduced production.

We expect production for the full year to be 15 slower then we previously forecasted and we're also using a lower commodity price tag. Previously we were using $9 for gas $120 for oil, now were at $7 per gas and $70 for oil.

What the current outlook does reflect is a much stronger year for our contracting services business than we have previously guided to.

I'll turn slide 7 back to Owen.

Owen Kratz - President and Chief Executive Officer

All right thanks Tony, talking about the impact from hurricane, you see that the season total impact of 15 BCF one question might have been, how do we derive that from our projections. We were expecting to produce 18 BCF in the fourth quarter, there is this tremendous ramp up from the third quarter basically because that was newly coming online.

We do mention that we expect to be back to the exit rate of a 160 which is near pre-storm levels by the end of the year but I should point out that exit rate does not include all of the production that was in service pre-storm being back on line.

Part of it is a some Noonan are coming online at a low rate and I shall give you a little explain Noonan story a little bit. Noonan was to produce through a 13 inch pipeline, that pipeline has been severely damaged with prolong repairs necessary.

Part of our organic development consisted of a 6 inch line oil line of that runs from the landing platform of the Noonan field over two East Cameron 346. We've gone ahead and accelerated laying about 6 inch line and we're going to use that to get Noonan back on line, a little end advance of the major pipeline repair.

Of course that's at a lower rate but so we are not expecting full rates from Noonan and then till after the beginning of the year so the exit rate does not includes of all of Noonan nor does it include our some of the other production that's not back on line yet. It does includes some new production from some fuels in main pass and a new well that we're getting ready to bring on that East Cameron 346 is actually on the old well that we have lost and we've taunted and now have... are expecting couple of thousand barrels of day of oil out of it.

So anyway that sort of gives you a little better understanding of what that exit rate of pre storm levels means, it's the same rate but different composition with more to come.

And that gets into the our 55 Bcf range to 75 Bcf range of guidance that we're providing right now. I think the take away here is that it's not going to be the AD3 Bcf previously directed.

The reasons for that is that with personnel and resource, resources in capital tat were previously allocated to bringing on new production being re deployed to recovery,

there's a certain deferment in the growth of the production.

We've also as mentioned before, we've curtailed some capital spending and that will also differ production growth. But the range is still pretty impressive when you consider of what's going on the 55 is derived from just taking the exit rate at the end of the year and taking it flat over the year with the assumption that well work and the additional of production pre-storm that continues to come on offsets decline.

Noonan ramping up an additional amount so we're confident that we'll offset the decline, by how much we don't know and therefore the range and we'll give you better guidance once we finished our '09 budgeting and actually see the rate of these pipelines coming back in the service.

The damage that we incurred, we incurred damage broadly across our fields. A lot of the platforms had damaged but very little of it was to the extent that would peak production really the pipelines are the other major pullback for us. The Platforms we did loose some platforms.

So there is additional production potential down the road from especially one of these was a pretty good producer but we're not the operator so we don't... we are not for the, to the recovery plan there yet.

The only other thing I mentioned is that we are in the process of level two inspections right now. And at the end the water portion and as we saw what Katrina, Rita you do find additional damage over time. But we don't believe that this is going to amount anything material.

We have some very small fields that quite honestly we haven't really looked at in debt for a recovery plan. So there could be some minor impairments in the future but they would be dominium the remaining reserves, would not amount to anything. So hopefully that gives you an idea where we stand on our recovery and with that I will pass it over.

Anthony Tripodo - Executive Vice President and Chief Financial Officer

Okay, we've added a couple of slides here. Slides 8, 9 on liquidity and capital resources because we know that there is lot of interest on the subject given the widespread concerns about state of the financial markets and the impact of Hurricane Ike to Helix.

So let me highlight a couple items on slide 8, first we decided to be proactive given the concerns with financial markets and credit liquidity and drew down $175 million from our resorting credit facility. We believe we will meet some of these draw fund operations while our production is down.

But certainly we'll have a lot of ammunition left. We still have $44 million remaining to remain in our log and based on our current cash flow models we do not anticipate having to utilize all of the $175 million draw down.

Not having to access any of the remaining revolver capacity I want to emphasize that, we have reduced capital spending for the remainder of '08 and we expect the CapEx in '09 as Owen mentioned will be less than half of '08 levels and also just to give you some assurance in price protection on oil and gas production, we ended to additional oil and gas commodity edges for '09 and a little bit for '08 and we will go with those in more detail latter.

I have been asked by many recently as to whether we have any significant debt maturities coming due in near future and we've attempt to outline this on slide nine and as you can see here we have no major principle payments to either the reminder of '08 or '09 or 2010. In fact the first side on that matures is our revolving credit facility that is not until the summer of 2011 and openings being equal, we don't even expect to be borrowed on our revolving credits facility by then.

More importantly as our production gets back to pre-hurricane levels and our capital spending starts to wind down in '09 we actually anticipate being in a lower net debt position at the end of '09 as compared to where we stand now again this is based on estimated production rates assume commodity prices et cetera.

Also we are in compliance with all of our debt covenants and our internal models reflect continue compliances through out '09. So hopefully that answers a lot of questions on liquidity and capital resources but please feel free to call me if you have any more. At this point I'll turn the presentation over to Bart.

Bart H. Heijermans - Chief Operating Officer and Executive Vice President

Thanks Tony, slides 10 to 15 contain some detailed information about our contracting services operations, and we're happy to entertain any question about this information, but I'll summarized it by saying that the segment is performing very well.

Helix is operating a record number of twelve vessels in our four main regions namely Gulf of Mexico, North Sea, Off-shore India and South East Asia including Australia. And our vessel utilization is very high, our backlog visibility is well into the second half of 2009.

And we have yet to see any signs of demand weakness. So that was short and sweet like our operating business. So I'll turn it over to for oil and gas to Robert Murphy.

Robert P. Murphy - Executive Vice President of Oil & Gas

Yes, please jump forward to slide 16. As you've heard production for the quarter was down significantly from Q2 due to three hurricanes that we had shut in for and result down just for Mike. But repairs of progressing on our major offshore facilities, however, we are only presently producing 30% of our pre-Ike daily rate.

This is principally due to what you've heard already third-party export lines and the onshore processing facilities associated with them. Following the guidance given by these third-party transmission companies on the timing of restoration, we do expect to be at our pre-Ike production rate by the end of the year as said it before approximately 160 million cubic feet gas per day.

We did commence production on schedule from our deepwater Noonan discovery from one of the two wells prior to the storms. As we're disrupted twice by two storms, we're unable to bring the field back to its potential running rate.

That did gather enough flow data to feel confident that we will achieve our full rate of over 100 million cubic feet of gas per day which is $60 million net to our interest.

There was no damage to the Noonan development by either storm, however, as mentioned earlier a large third-party export line was severely damaged downstream of our host platform.

This, the owner of this line has projected a restoration date of December 12th on their website.

Turning to slide 17, this slide summarizes our operating cost structure on a mcfe produced basis. The operating expense incurred for Q3 of $2.10 per mcfe stands out when compared to prior quarters, principally due to lower production in Q3 relative to the fixed cost associated with operating the properties. Additionally, we incurred hurricane expenses in September that we recorded and have applied to our insurance to deductible. We did record a property impairment related to our Tiger deepwater field as the subsea well house facility was destroyed by Hurricane Ike.

Due to the wells limited remaining reserve potential, we've written off this property as we do not intend to find a new host facility for the well. All-in-all, we expect our overall operating expenses in Q4 to be higher on a unit basis due to projected decreased production levels. But expect them to fall back in line to pre-hurricanes levels once production is fully restore. And Tony?

Anthony Tripodo - Executive Vice President and Chief Financial Officer

Yes, slide 18 summarizes our hedging positions as of today. I'm going to focus on 2009. In October, given the concerns about the direction of commodity prices, we entered into a series of additional collar type hedges to bring our total hedge positions for '09 to 43 billion cubic feet equivalent. If you take the middle of our current '09 production estimate of 55 to 75 Bs, this represents approximately two-thirds of estimated production. The additional hedges are at a collar floor of $75 for oil, and $7 for gas.

I am not going to over slides 19 to 22, as their informational non-GAAP reconciliation schedules, presented for your reference. So at this time, we will be happy to take any questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question comes from Roger Read with Natexis. You may ask your question.

Roger Read - Natexis Bleichroeader

Yes, good morning.

Owen Kratz - President and Chief Executive Officer

Good morning, Roger.

Roger Read - Natexis Bleichroeader

I guess, lot of places to start. But, could you give us an idea on the oil and gas production range for '09, 55 to 75, and I understand where you are laying start up with the Danny field and the Phoenix field etcetera. But what all plays into that range? I mean, on percentage basis that's fairly wide?

Unidentified Company Representative

Noonan, I'll turn this over to Robert, and let him answer. But let me just give my take before you start. Noonan, at the exit rate is only producing at 22 million cubic feet a day, due to sections [ph] line that we're laying. Once the major pipeline repair is done, and we're expecting that very shortly after the beginning of the year. That adds 40 million a day to our rate, which trends... that's incremental and not in the 55 number. Then we have Danny, which adds another two, if it comes on August 1, it adds another two bcf in the year. So you very quickly start ramping up from there. The 55 is based on the exit rate taken flat with decline being offset by well work in some of the pre-storm norm production coming online.

Unidentified Company Representative

Did that help?

Roger Read - Natexis Bleichroeader

Yes, yes, okay. That... okay, I was wait, if you're going to follow-up on that.

Robert P. Murphy - Executive Vice President of Oil & Gas

Well, I think from a wider range that you see that 55 hopefully, would cover not an Ike like event, but associated shut-ins with storms, entering the Gulf also. And I did mention that the third-party export line that Noonan goes into, they're stating December 12, as their restoration date.

But we're not using that. And not that we hope that they make that date, which would be great. But we're being a little more conservative in the estimate, due to the winter time months they're doing the work in. So not to get very granular with next year's production range, but we did also have some platforms that have damaged, but are not severely damaged. That will come on over the course of the first and second quarter.

So in that range, 20 bcf that we're giving, that timing is uncertain. So what I think we've done is put a pretty conservative forecast out there with the 20 bcf range.

Roger Read - Natexis Bleichroeader

Okay. And then, my other question, the seizure vessel now a second half '09 delivery target, or availability target. Owen, can you give us a little idea of what other than obviously you are trying to mange your cash flow and CapEx, was there something else that lead to that vessel. I mean I was thinking Q1 delivery date if memory serves. So I guess we have slipped about six months?

Owen Kratz - President and Chief Executive Officer

Yes, it's the combination and I'll let Bart speak to the details of it, because he's personally overseeing it. It is just a combination our cash flow management combined though with an ongoing problem with the Chinese shipyard, just slow working, it's just... it's matching our interest at this point.

Bart H. Heijermans - Chief Operating Officer and Executive Vice President

Yes, it's really the... it's Bart. It's really the number of people at COSCO shipyard is making available for the conversion of that vessel and the low productivity that's... that we have seen in the last, mainly in the last six months and so we know the number of men hours that are still left. And we're applying the historic productivity factor. And so, we I mean calculate in the... I mean delivery of that vessel by mid next year.

And I mean hope fully COSCO can make more people available and or their productivity is going to go up, but the only thing that additional and as we know is the historic productivity and we apply that. I mean try to come up with an estimate that we think is realistic.

Unidentified Company Representative

And Roger I'll add, we do have a contingent on the way over to sit down and try and talk with COSCO and see how much we can accelerate this. The cash impact of this project at this point is not that great because we are so close to the completion. It's just sort of excruciatingly slow work pace over there.

We are loosing contracts that we had backlogged for this vessel and we are very much interested in continuing to try and accelerate it, if we can.

Unidentified Company Representative

Let me just add to that aspect, I mean we had nine months of work contracted for this vessel and some of this work we have taken over with our other vessels and then some of the work we have self contracted and some of the work, we are... I mean working with the producers to deploy that into late '09 or 2010 and so it looks like those producers are willing to do that because this work was not a critical path for their oil and fuel developments. So it's, I mean that's at general level.

Unidentified Company Representative

I have noticed that other projects in the yard recently were announced... were being deferred for financing reasons, but that should provide more resources from the yard plus the producers that we were contracted to are starting to become impacted to the point where we were starting to get... garner some support in putting some more pressure on the yard to increase the price.

Roger Read - Natexis Bleichroeader

Okay and then were you're outsourcing or I guess outsourcing is right term but finding some body else to do the work in your place do you bear any risk if they failed to perform or is it a very clear sub way for your essentially abdicating responsibility in terms of either generating revenues or taking risk on loses?

Unidentified Company Representative

Yes, their of for the one of the projects is specific that we have sub contractor to a another allow share contractors. Those terms are back to back with contract between us and our producer. Our customers has stepped up and has come in and as called for some of the higher cost and assure some of the liability in excess of the liabilities that we had to assume and so our customer he has helped a lots on that projects.

Roger Read - Natexis Bleichroeader

Okay and then my final question, when is the Phoenix vessel excuse me Phoenix vessels when is the Helix producer want for the Phoenix fields when is that arrive in the U.S. give a date for that now?

Owen Kratz - President and Chief Executive Officer

We're planning on an April transit at this point.

Roger Read - Natexis Bleichroeader

Okay, that's it for me thanks.

Owen Kratz - President and Chief Executive Officer

It's roughly a 30 day transit so you should see the vessel in Texas in May.

Unidentified Company Representative

We have moved to the vessel from the yard to Croatia, to a yard increase, the yard in Croatia was I mean it was just making not enough progress and the yard increase are the vessel has been for the last four or five weeks, the yard increase is doing very well.

Owen Kratz - President and Chief Executive Officer

And I might we also add prior to this move, we did not have direct management of the conversion phrase of this project with that moved to the new yard we've now taken the direct management of the project.

Roger Read - Natexis Bleichroeader

Okay thank you.

Operator

Our next questions comes from Marshall Adkins, with Raymond James. You may ask your question.

Marshall Adkins - Raymond James

Good morning guys, obviously somewhat brighter outlook you've given us in the markless pricing in your stock few day ago. I want to drill down and I understand your budgeting process is going on right now. And you don't have any specifics but just rough back at the envelop types stuff given your guidance for the rest of '08, looking to till '09 you ought to build generate ballpark 300 million of free cash flow, earnings of $3 plus. Is that even in the ballpark, is that [indiscernible] you guys.

Anthony Tripodo - Executive Vice President and Chief Financial Officer

Well Marshall it's Anthony. How are you?

Marshall Adkins - Raymond James

I am great.

Anthony Tripodo - Executive Vice President and Chief Financial Officer

Good, I think we'll answer that question by saying that we do expect to generate free cash flow in '09 despite reduced commodity prices because our CapEx spending is going to be substantially lower. In terms of earnings, you're back of the envelope at this point. I don't think it's materially off. We're still in the middle of it. So it's difficult to give you any intelligent response to that.

Owen Kratz - President and Chief Executive Officer

Marshall let me just go down just one level though. We've given a pretty broad range on production, and I think we'll be able to narrow that down once we see the actual pipelines coming back in the service and have better visibility. On the service side, we have spent some time calling around to producers because there was a lot written about capital budgets being cut in response to the commodity prices dropping. So far what we found is that there is... we have not seen any cancellations in our backlog. So our backlog remains strong and pretty much full certainly through the first half of the year. And in our budgeting process as usual we'll probably take a little more conservative approach to the second half of the year but right now it's looking pretty promising.

Unidentified Company Representative

Yes, to my... Marshall as you looking at the contract and service side of the business we had very high asset utilization in Q3. If you wanted to some back and below if you mind I want to get aggressive about utilization for '09 but Q3 had a Q4 thousand and for full quarter. And with the seizer [ph] coming on you can expect some incremental contribution may be not much though in '09. So I would look at Q3 as perhaps a proxy for what that service business might do with lower utilization only because of the uncertainties that exist, because of general economic conditions.

Marshall Adkins - Raymond James

Well, that was going to make my next question. It seems to me, and I'm sure we'll all hear more from [indiscernible]. You're going to see a lot of hurricane related repair work in over obviously, more shallow water stuff. But over the next year, what are you seeing on that? Or what's your sense from just the hurricane related work?

Owen Kratz - President and Chief Executive Officer

From, and I should let Cal-Dive address this more directly. But it's obviously there's a fair amount of hurricane work, probably somewhere less than what was following Katrina and Rita. But still substantial.

Marshall Adkins - Raymond James

Okay. Last question here on this same kind of trend is your margins recently have been trending up, I mean, a lot of that obviously is getting the utilization up.

Going forward, in terms of pricing, and I guess margin trends, should we expect that those to continue expanding modestly, or was this kind of a high watermark, and maybe pulled back, a little bit where were to a quarter or two ago?

Bart H. Heijermans - Chief Operating Officer and Executive Vice President

Yes, this is Bart. Our margins are in functional demands of sub-contractors we used in this projects. And so therefore, and you'll see some fluctuations quarter-by-quarter. But I'd say even in general, it's going to mean we expect they don't put Helix Contacting Services to be between 20% and 30%. And then called about you we're going have to listen to their call.

Marshall Adkins - Raymond James

Perfect. Good job guys, thanks.

Owen Kratz - President and Chief Executive Officer

Thanks Marshal.

Operator

Our next question comes from Mark Thomas [ph] with Simmons and Thomas. You may ask your question.

Unidentified Analyst

Good morning, guy.

Unidentified Company Representative

Good morning.

Unidentified Analyst

Owen, just a quick question on hedging. It appears at this point the restoration of production, greatly depends on I guess, the third party. Do you have any contingency plans to make hold on production if you're unable to restore production, as quickly as you're forecasting?

Owen Kratz - President and Chief Executive Officer

That's one reason why we've limited the hedges in place next year to 60%. And we're based on what we're relatively certain about on production that we don't see that as being an issue. I will tell though, going into this fourth quarter, we had some exposure on hedges. The first thing that we did following the storm was we basically closed our hedged positions out, so that we removed one bit of uncertainty. And we actually booked again from that process.

But, we will watch that closely. But at 60%, I feel pretty comfortable barring a hurricane, following a hurricane, you'd have to take some near-term action. But in general, for the year, we're comfortable that we can meet the 60%. We... under our covenant guidelines where we are allowed to go as high as 75.

Unidentified Analyst

Okay. Thank you very much, I'll get back in queue.

Operator

[Operator Instructions]. Our next question comes from Joe Gibney with Capital One Southcoast. Your line is open.

Joseph Gibney - Capital One Southcoast, Inc.

Good morning, everybody.

Unidentified Company Representative

Good morning, Joe.

Joseph Gibney - Capital One Southcoast, Inc.

Robert, just a question for you, just curious here as I'm drilling down on pd and loe expectations for the fourth-quarter. Could you give some incremental color about what we should be thinking about?

Robert P. Murphy - Executive Vice President of Oil & Gas

Well I think, when you look at on the mcfe [ph] basis, as I discussed. It's kind of ugly. But it's relative to the main of production. Take from a the low you're going to see stay pretty constant, Howard you going to have it in additional hurricane repair expenses that if we don't have to claims filed in timely, you will have that reimbursement come a quarter later but I believe you just said that you might see some variation there. The abandonment number has you see for Q3, I'd say that you got to see something similar to that in Q4 or finally getting the last storm cleaned up there, and from just the R&M work I think it's been relatively stable but you are probably going to see some non-hurricane R&M that's going to come in Q4.

So, when you look at DD&A, I think you going to see a decrease slightly due to us getting Noonan back on hopefully for may be 30 days with this new line we are re laying.

So overall I don't think you're going to see much improvement until Q1.

Unidentified Analyst

Okay. That's helpful. Just want to follow-up on the HP1 delivery side [ph]. he shifting it to the Greek yard. Correct me if I'm wrong, you guys were still in the midst of taking control or super structure work.

Am I understanding that you would have gotten this vessel into the states side by end of the year is the delay now and the expectation. Any thing new that has cropped in this particular yard increase, or is it just a transit in moving it over from Croatia. Certainly more color there on the incremental gap between over transpired moving in or does it need push up on why it's taking a little bit longer to get on the base line?

Owen Kratz - President and Chief Executive Officer

There was a certain amount of delay just involved in the mechanics of terminating the over contracts negotiating for the ships release, preparing it and toying it.

So there was a bit of delay there. And as you mentioned there were some issues with the super structure that had been identified while by us when it was still in the Croatian yard. So the re-mediation work of that supper structure work may cause a little bit of a delay but basically its running concurrent with the completion work on the whole vessel.

So I'd say it's mostly due to just the process of terminating or negotiating trends following this year and than giving the project started again in Greece and I will tell you that we're very happy with the Greek yard right now. At the pace of the work as its proceeding plus the run rate of the cost of the work is roughly 50% of it was running in Croatia so we have made a tremendous gain on the economics.

Unidentified Analyst

Okay and last one Bart or Tony, you mentioned key 4,000 basically a full quarter contribution, what was the utilization for that unit during the quarter and it was up principally the driver of the uptick on the Heels contracting side we had the profit margins so taken up to 27% from 22%. Is that the principle drivers just the queue?

Anthony Tripodo - Executive Vice President and Chief Financial Officer

The queue was one of the main drivers and then also our robotics division had a very strong third quarter which is normally I mean the crawl there were older assets or working in the North Sea and there are that trenching vessels and the queue I mean that's I thinking of 100% utilization and the Cal-Dive maybe 99 maybe one day down that it will... it was very high in the vessel, it did a great job on the projects she was working on.

Unidentified Analyst

Okay thanks guys I'll turn it back, appreciate it.

Operator

Our next question comes from Michael Marino [ph] with Johnson Rice, you may ask your question.

Unidentified Analyst

Thank you, my question relates to I guess the roughly $200 million of CapEx you all expect to spend it your key next year, how does that break up? What exactly are you doing? Does that include Bishop or the more Noonan wells there? I just want if you could put a little more color really I guess what I'm trying to figure out of how does that level of CapEx impact production we look out even into it 2010?

Unidentified Company Representative

First of all them leverage follow up but I give you my take again the range of 55 to 75 or is they is a range that we believe that can be met with just the incremental CapEx for the Danny [ph] field being they only contribution in that. The roughly 200 million of EMP is split roughly a 100 million for well work abandonment work and the remainder going to the Danny and Phoenix developments. There is no incremental additional CapEx in there for drilling.

First of all I think the drilling program this year is a little too early to say, we have drilling prospects that are fully engineered and ready to go. But with the hurricane recovery there is going to be a certain extent of re-drill that we are going to have to dedicate to our personal assets to over seeing and then going forward on drilling prospects that we have engineered they are not in the range right now.

They are not in the CapEx and the intent would be to do those on a discretionary basis but using largely on a promoted basis. So, that is limited to the amount of CapEx that put into it.

Unidentified Analyst

Okay.

Unidentified Company Representative

I am sorry.

Unidentified Analyst

I am going to let Robert go ahead...

Robert P. Murphy - Executive Vice President of Oil & Gas

No, I think that pretty much covers but again that range at 55-75. We are sitting here right now at 30% our pre high grade. So I think for us to even go any further than what we have said on a capital budget right now with the premature, so as we move through, that is very critical Q4 I think we'll have a better visibility on what are spending, good and actually end that means.

Unidentified Analyst

I guess my question was more related to 2010 production, but the Phoenix field coming on line give you enough to show growth in 2010 because you always spent you always spent 200 million in 2009. What is that, due to 2010 production because -

Robert P. Murphy - Executive Vice President of Oil & Gas

We only have Danny [PH] on for, I believe it's a quarter, so that's pretty significant when it comes on and then with Phoenix coming on there is a very, very high rate of flush production.

Unidentified Analyst

Okay

Unidentified Company Representative

Okay.

Unidentified Analyst

So 2010 still looks, I mean, good from a production standpoint. Even we have spended 200 million, I guess is what I'm just doing.

Unidentified Company Representative

Yes.

Unidentified Analyst

Okay and I guess as a follow up, the Q-4000 that's working in intervention mode presumably and will be for the foreseeable future.

Unidentified Company Representative

Yes, that's correct. As... I mean is will be a working as a well intervention vessel, I mean until probably mid next year. I mean the Kent work is in intervention vessel for the whole of next year, but we still plan to start drilling with the vessel where they've got some work on track... on the hydrates project and than also we still hope to do our first completion with the vessel and do some top hole drilling and slowly getting into the full drilling mode. But this is improving, this is something... we're going to take and gradual approach where are going to I mean, there is some top hold rating, some completion first before we're going to start, doing some of our closable [ph] drilling.

Unidentified Analyst

Okay, great. That's all I had.

Operator

Our next question comes from Kelly Artringer [ph] with Bank of America. You may ask your question.

Unidentified Analyst

Good morning. Just a couple of questions. The first one is on your staging of CapEx for 2009. You guys said that your budget would be about of what it is this year. Is that going to be spread pretty evenly over the year, or will it be more spent first half or --

Owen Kratz - President and Chief Executive Officer

No, it'sfront-end loaded, because it's oriented towards completely these major CapEx projects, to seize here the well enhanced or the HP1, the Danny infrastructure et cetera. So its fairly front-end oriented. And I don't have those statistics in front of me, but we can talk about it later, Kelly, and I'll give you more granularity behind it. But just think of it being front end loaded.

Unidentified Analyst

Okay. And I think you said early on the call that you expect to be free cash flow positive in this second quarter, is that right?

Anthony Tripodo - Executive Vice President and Chief Financial Officer

Yes, about the second, quarter yes.

Unidentified Analyst

Okay. And then, Owen in your remarks you said that in '09 you wanted to pay down debt through cash flow. I think you also made a comment, I can't remember how you phrased it, but something on the lines if you don't do other things, or to accelerate to the debt pay down, can you elaborate on that, or have you got, I know earlier in the year you'd have anticipated more assets sales on outside great marks for that. But can you just kind of give us your views on that right now?

Owen Kratz - President and Chief Executive Officer

As far as asset sales, let's talk about production first going into '08, we are originally, had a $1.15 of that 336 guidance, which was made up of assets sales. The actual for the year was actually only 52 spends was achieved from assets sales. Which and I don't know, this is a little digression, but if you back out assets sales, and look at just operating income, it shows how strongly we operated for the year.

The original guidance would've been at a 221 level, if the hurricane and everything hadn't have happened, we were on track to hit 303 for an operating income. And as it stands we still beat the original guidance, in spite of the hurricane and everything. So we're operating very strongly there.

There is another $0.63 then in that original projection. So there are obviously other assets sales that we could make, and because of the strong commodity and pricing in the strong performance of the company, we didn't do it. We still have that option ahead of us. Yes, so that's one side on the production side.

And then the other side we got obviously our position in Cal Dive and we reiterate that eventually we would probably be exiting that position. Right now, it's a pretty nice sort of assets to hold and we do playing on being a rational investor, but you have to look at the total value equation as to what the resulting the impact of value for shareholders would be from a capital redeployment. And we'll continue to explore those going forward, that's what I was talking about.

Unidentified Analyst

Okay. Thank you.

Operator

I am showing no further questions at this time.

Anthony Tripodo - Executive Vice President and Chief Financial Officer

Okay. Alright in closing, thanks for joining us today. We very much appreciate your interest and participation. We look forward to speaking everyone again in... at year end and again thanks very much. .

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Source: Helix Energy Solutions Group, Inc. Q3 2008 Earnings Conference Call Transcript
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