McDermott International Management Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 3.14 | About: McDermott International, (MDR)

McDermott International (NYSE:MDR)

Q4 2013 Earnings Call

March 03, 2014 5:00 pm ET

Executives

Steven D. Oldham - Vice President of Investor Relations and Treasurer

David Dickson - Chief Executive Officer, President and Director

Perry L. Elders - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Linda Yuan

Andrew Kaplowitz - Barclays Capital, Research Division

Steven Fisher - UBS Investment Bank, Research Division

Jerimiah Booream-Phelps - Deutsche Bank AG, Research Division

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

John B. Rogers - D.A. Davidson & Co., Research Division

Robert V. Connors - Stifel, Nicolaus & Company, Incorporated, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to McDermott International's Fourth Quarter 2013 Earnings Conference Call.

[Operator Instructions] I would now like to turn the call over to Steve Oldham, Vice President, Treasurer and Investor Relations. Please go ahead.

Steven D. Oldham

Thank you, Celia, and good afternoon, everyone. We appreciate you joining us today as we discuss our results from the fourth quarter of 2013, which were released through our press release and in our Form 10-K today.

Joining me on the call this afternoon are David Dickson, McDermott's President and Chief Executive Officer; and Perry Elders, our Senior Vice President and Chief Financial Officer. Before turning the call over to David, let me remind you that this event is being recorded, and a replay will be available for a limited time on our website.

Additionally, our comments will include forward-looking statements and estimates. These forward-looking comments are subject to various risks, contingencies and uncertainties and reflects management's view as of March 3, 2014. Please refer to our filings with the SEC, which are available on our website, including our Form 10-K for the year ended December 31, 2013, which provides a discussion of some of the factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations.

And please note that, except to the extent required by applicable law, McDermott undertakes no obligation to update any forward-looking statement.

Now with that disclosure, let me turn the call over now to David for his opening remarks.

David Dickson

So thank you, and good afternoon. As I join you today in my first call as Chief Executive Officer of McDermott, we are addressing some of the deepest challenges our company has seen in years. We are learning and growing from those challenges and restructuring both financially and operationally to ensure that we have the resources and the dynamic and accountable organization to achieve long-term success to best meet our customers' needs.

Over the past few months, I have been conducting a rigorous review of our organization. We have looked at our strategic focus, our projects, operations, business oversight, accountability and cost structure, and today I feel I have a realistical view of the business. While it is clear to me that we must stabilize and transform our business, it is also apparent that there are plenty of strengths and successes to celebrate in the organization. We build some of the most complicated unique structures in harsh environments, and we do it safely. We have attracted strong subsea and technical expertise, reaching critical mass in many experienced individuals who have recently joined our company.

Our Ichthys project is one to be admired and emulated. Additionally, in our offshore business, fabrication and marine construction are in our DNA. Our employees know it, and our customers know it, and it is our aim to demonstrate it to our shareholders as well.

Today, I am laying out my business improvement plan, which involves some strong and clear action but also establishes a path forward to meet the expectations of our stakeholders, that is our customers, subcontractors, suppliers, lenders, employees and shareholders. The actions we are going to take are immediate and will have a near-term positive impact on our business. But we note that it will take a longer period of time before they see the benefit in our financial results.

First, Perry Elders, our Chief Financial Officer, will discuss our fourth quarter financial and operational results. I'll ask Perry to focus more on the key issues and the operational matters rather than reel in number and our P&L, as you have those in the 10-K and the press release. Afterwards, I will detail our action plan for McDermott.

At this time, I'd like to turn over the call to Perry.

Perry L. Elders

Thanks, David, and good afternoon, everyone. McDermott reported a net loss for the fourth quarter of 2013 of $324 million, or $1.37 per diluted share. Such amount included an operating loss of $316 million in the fourth quarter. And of that amount, about 80% reflects cash outlays that were made prior to the fourth quarter. So of the $316 million fourth quarter operating loss, approximately $134 million related to commercial issues, approximately $80 million related to operational matters, approximately $86 million related to asset impairments and approximately $16 million related to restructuring charges in the Atlantic segment and for a corporate reorganization.

As David mentioned, we performed a rigorous review of all backlog projects over the past few months. As you know, GAAP does not allow for changes in judgments without changes in underlying economy events. However, there were a number of events, which occurred during the past few months that triggered changes in our estimates. The revised estimates reflect all information available to the company about both the triggering events and the forecast future project outcomes. We believe the result of such changes in estimates is a realistic forecast of project profitability.

So I'd like to discuss some of the specific triggering events on projects. First, of the approximately $134 million of operating losses related to commercial issues, key drivers included changes in our recovery estimates on projects with unapproved change orders and claims previously submitted to customers. In most cases, the work was performed and the cost was incurred prior to the fourth quarter. We have advanced commercial resolutions on these projects in order to resolve these issues and improve our relationships with key clients.

As a result of those discussions, written communications and, in one case, a settlement, we no longer believe the full value of those claims and change orders on several projects are likely to be recovered.

More specifically, approximately $91 million of the commercial losses are attributable to 2 projects. 1 project in our Asia Pacific segment was physically completed in the second quarter of 2013. The triggering event for the estimate change followed mediation and subsequent negotiations with the customer, and we settled the claim last month. We are also no longer recognizing certain claims on another project in our Middle East segment. The triggering event for the change in estimate for that project, which is now in a loss position, resulted from communications and negotiations with the customer in the fourth quarter, as well as early 2014. We remain in negotiations with the customer and anticipate fiscal completion and commercial resolution of the project by the end of the second quarter.

Second, of the $80 million fourth quarter loss related to operational matters, approximately $50 million was related to our typical quarterly SG&A cost. In addition, the key driver was a $28 million loss related to a deepwater pipelay project in Malaysia. During installation on this project, we experienced both mechanical downtime on one of our vessels due to failure of a thruster and lower-than-anticipated productivity in the fourth quarter of 2013.

However, since the fourth quarter, we are especially pleased with the turnaround of our deepwater pipelay project in Malaysia. The North Ocean 102 has completed its work and has demobilized from the project. The Lay Vessel 105 is now in the middle of laying the final section of pipe, which is the last of 4 pipelay campaigns. Since our thruster issue, the vessels have performed at or above our expectations and industry standards, and the customer reached first oil last month. We expect to complete the project later this month. And although this project resulted in a substantial financial loss from operations' point of view, we're pleased with recent technical accomplishments.

Third, during the fourth quarter, we impaired $86 million in assets. As David will discuss later, $39 million of impairments were triggered by changes to our vessel capital investment plans. In addition, $47 million of the impairments were related to goodwill, primarily related to a 2007 acquisition, which was triggered by forecast profit reductions from the profit estimate changes in the fourth quarter of 2013.

Finally, we also incurred $16 million in restructuring charges during the quarter, of which $10 million was a non-cash expense. These costs related primarily to the restructuring of our Atlantic segment, which was announced last summer and is progressing as expected. The costs are -- also included a broader corporate reorganization, which began in late 2013. We expect, in aggregate, of $90 million in restructuring charges through early 2015, of which $34 million has been incurred through the end of 2013.

In addition, I wanted to update you on a couple of other larger customer projects. We commenced the installation of the Tension Leg Platform on the Papa Terra project in the fourth quarter. However, weather and operating conditions prevented us from making all the progress we previously anticipated during the fourth quarter. Seabed conditions were worse than expected and resulted in piles filling up with mud and resulting delays. We also experienced significant weather-related delays, which is compensated by the customer but is essentially breakeven.

So from a financial perspective, we currently estimate the Papa Terra project to be around breakeven, although there is an opportunity to improve its financial performance. From an operational perspective, the platform is now connected and in position. The marine installation is nearly complete. So the most challenging elements of the project are behind us. We are in the process of demobilizing the equipment and vessels from the field and expect to substantially complete with the project later this month.

Moving to our contract with INPEX for the Ichthys subsea field development, which is the largest subsea project in the industry at the time of award. Activity remains robust, and our detailed engineering is substantially complete. We have committed nearly all of the cost in our procurement and subcontract budgets and are focusing on managing our vendors and subcontractors for quality and timely performance. Fabrication is well underway in our Batam, Indonesia yard, and we are planning for the project's offshore campaigns to begin in the second half of 2014.

Over the last quarter, we conducted an extensive review of the project with experienced individuals who recently joined our company and concluded that the project is expected to be completed on time and profitably. As David indicated earlier, we are very proud of the Ichthys project and believe it demonstrates McDermott's strong capabilities and potential.

Turning to our revenue pipeline, we reported a backlog of approximately $4.8 billion, of which 59% related to our offshore operations and 41% related to our subsea operations. Bookings in the fourth quarter totaled $709 million and included epic work in the Middle East, a transportation and installation contract in Brunei and a charter of the North Ocean 102 in Brazil.

Our bids and change orders outstanding at year end were $3.6 billion compared to $9 billion at the end of the third quarter. The decrease includes one mega project in Indonesia that was included in our bids outstanding as of September 30 but, as of year-end, was included in our target projects. That project was retendered by the customer, but we have been identified as 1 of 2 qualified bidders. We are in the process of preparing a rebid and expect to submit it in the next few months.

Approximately 75% of our outstanding bids and change orders relate to our offshore operations, and 25% relate to our subsea operations. The 2014 awards are expected to be more back-end loaded. Our list of target projects total $16 billion as of year-end. As a reminder, targets are those projects that we intend to bid in the next 5 quarters. Approximately 82% of the value of our target projects relate to our offshore operations and 18% relate to our subsea operations.

The December 31, '13 -- the combination of our backlogs, bids and change orders outstanding and target projects, which is what we call our revenue pipeline, totaled $24 billion, a record level for the company. Clearly, there are many compelling opportunities for McDermott in the market. Demand is strong, and our company is uniquely positioned to benefit.

Now moving to the balance sheet. We have a strong balance sheet and cash position. We ended the year with approximately $150 million in cash and cash equivalents, of which $25 million was restricted. During the fourth quarter, our total debt position decreased to $89 million as we made a quarterly principal payment on the North Ocean 102 facility. As of the end of last week, the company has approximately $335 million in cash and cash equivalents, restricted cash and investments. Our $950 million credit facility had no funding borrowings at year end. Since then, we have drawn approximately $250 million of the credit facility and repaid $32 million to retire the maturing debt related to North Ocean 102 vessel.

In light of the project issues described earlier and although at year end we were in compliance with the covenants of the credit facility, in early 2014, we entered into discussions with the lenders of our $950 million credit facility for an amendment to provide additional flexibility going forward. Among other things, an amendment could modify the form of the facility, amount of borrowing limits and the financial covenants. We are pleased with the constructive nature of our ongoing discussions with our bank lenders and appreciate their support.

We also recently entered into a commitment letter with Goldman Sachs that provides up to $950 million in new senior secured financing, which is expected to be available while we negotiate the amendment to our credit facility. The new financing contemplated in the commitment letter would have a term of 5 years, and the proceeds would provide funded capacity for letters of credit, as well as working capital and general corporate purposes.

Upon completion of the amendment to the existing credit facility, we expect to terminate the new financing commitment. If the existing credit facility is not amended as contemplated, we believe than the new financing commitment, taken together with our projected cash flows from operations, would be sufficient to fund our liquidity needs for more than a year.

In addition, if funded, much of the contemplated financing is expected to be used to cash collateralize letters of credit issued to our customers as part of the normal course of business. So it would essentially be a gross up of the balance sheet for cash and debt.

While we're not providing guidance for the upcoming year, I would like to remind you that our backlog's operating margins remains in the low-single digits. In 2014, we expect $2.6 billion of backlog to be recognized as revenues. Of this amount, $395 million, or 15%, is expected to come from projects in a loss position. Therefore, they'll contribute revenues but no gross profit. Our recent awards, where margin is in line with our long-term market expectations, although those awards are not expected to make any significant contribution to 2014 earnings. Additionally, we expect to incur an incremental $55 million to $65 million of restructuring cost during 2014 and early 2015. This is both corporate and Atlantic, which is expected to be heavily weighted towards the first half of 2014.

As we work through this backlog and close out our legacy issues, we expect that McDermott will deliver improving financial and operational performance over the longer term.

Now I'd like to turn the call back over to David Dickson to discuss our plan for recovery.

David Dickson

Thank you, Perry. So following Perry's discussion of the fourth quarter results, I would like to highlight our plan of action for McDermott that is already underway, which we expect to stabilize the business and position our company for long-term growth.

Today, I am announcing a new organizational design to do additional focus on our end markets and customers and to better leverage our global assets and capabilities. The new organization will be designed around 2 operations, that is offshore and subsea, and will be led by 2 strong individuals. Scott Cummins, who will lead our offshore operations, has been with the company for more than 25 years in various operational and management roles. Tony Duncan, who will lead our subsea business operations, joined McDermott last year with nearly 30 years of industry experience, including 15 years of management experience with tier 1 marine contractors.

Our business line leaders will be responsible for the strategic direction of our businesses and align us with our customers' needs. They will also provide business oversight and project execution support for our regional operations. Our business line leaders will be held financially accountable for their business line results and for efficiently allocating our assets among our regions.

This structure facilitates a transfer of our tough lessons learned in one region for the benefit of the others. It is designed to improve consistency and allow more efficient flow across the organization. Our new operations will be supported by teams from 4 regions, that is: Americas, North Sea and Africa, Asia Pacific and the Middle East. The regions will have P&L responsibility and will be held accountable for business acquisition processes, execution and cost management.

Our management team and organization will focus on 4 key areas with both short-term and long-term targets and goals. They are: one, strengthening our balance sheet and instilling capital discipline; two, improving alignment with our customers and building stronger customer relationships; three, improving our cost structure and increasing our competitiveness; and four, building a performance-oriented and highly accountable culture.

McDermott has reorganized in the past, but the organization has been slow to evolve and has not fully addressed the structural issues that have created operational challenges. Our near global structure combined with a new culture of performance and increased accountability is real change across our organization.

Our first focus is to strengthen our balance sheet and instill capital discipline throughout the organization. While our corporate staff continues its work to negotiate an amendment with our bank group, my vision for a more disciplined organization involves a project execution team becoming more mindful of the cash impacts of project operations and change orders and improving our working capital position at the project level. In addition, and in keeping faithful to both our long-term strategy and financial discipline, we are reevaluating and modifying some of our capital investment plans. For example, our DB30 is a very capable vessel for our offshore construction services.

However, the additional capital and operating costs of our previously planned dynamic positioning upgrade would not help provide the ability to compete effectively with near high-spec deepwater vessels. Therefore, I have canceled the planned upgrade. We will look for other opportunities to similarly curtail CapEx spending.

Finally, we expect to divest underutilized non-core assets, some of which we have announced. Their sale provides a benefit of cash available for reinvestment and a reduction in the fixed operating cost on a go-forward basis.

Now let's talk about customers. By adding value for our customers, we expect to create value for our shareholders. We designed our new organization to better align our customer needs and strengthen customer relationships. We will add new positions that are designed to proactively address customer expectations and promote commercial agreement.

In addition, we will have dedicated personnel manage our global relationships with key customers. Those relationships will pay dividends to the organization that can help us strategically commit future capital spending and be on the leading edge of our industry.

Another focus of our strategy is to evaluate our cost structure and increase our competitiveness. When analyzing the business, we found that we were highly burdened with fixed cost. It goes beyond just underutilized vessels. We will be moving to aggressively lower our fixed cost and build a more flexible organization. This means operating with more of a global perspective. Our new leaders will have the flexibility to allocate assets around the world. We expect to realize some efficiency by having consistent global standards and the flexibility to use the most efficient office, vessel or yard. Global flexibility will not only allow us to be more efficient on what we do today, it will also allow us to pivot to the customer needs of tomorrow.

We will also look to take advantage of economies of scale as we break out of regional silos. Lessons learned in R&D ought to be spread among the organization.

Our new organization will also be much flatter than the one it replaces. For one, we will not be hiring a Chief Operating Officer. Layers of management are being eliminated to provide more direct accountability from our operations to our corporate leaders. With fewer layers, I believe we can be more responsive as an organization to our customer and operational needs.

Because of these changes, most of the fixed cost reductions will come from direct operating expenses and G&A. It is not about shrinking the business, it is about leveraging the strength that many regional competitors do not have.

Our fourth and last key area is culture. Culture is difficult to change but can often be the identity of an organization. Our organizational changes are consistent with a high-performance and accountable culture.

Since I joined, we have hired over 80 experienced professionals from -- many from tier 1 EPCI companies, and we expect many more. We plan to reinforce our culture of performance and increased accountability with an overhaul of our short-term and long-term compensation plans. The new plans will work company-wide performance goals related to not just operating income but also to growth and cash flow.

Despite the recent internal turbulence, the underlying external market opportunity for McDermott is impressive. We are targeting to bid over $16 billion in new projects over the next 5 quarters. Our North Sea and Africa region, while relatively new to the company, has extensive subsea bidding opportunities and, with the right people and structure, can be a profitable source of growth.

Now looking at the U.S. Gulf of Mexico and the Americas region. I have a number of years of experience there, and I'm confident that I am -- confident that with the right team, we can build this region into a major driver of profitability for the company.

Lastly, I would like to talk about our Ichthys project in Australia, the largest subsea project at its time of award. We have conducted extensive reviews of the project with new subsea professionals who have joined the organization. We are making good progress to date, and I am impressed with the quality of the team working on the project. The project is being executed in line with any tier 1 competitor. I personally will continue to remain focused on this project to see it through to a successful completion.

In closing, 2014 will be a transition year for the company in many ways. Business as usual is over. This will require your patience as we implement our course of action to restore long-term and sustainable returns that shareholders deserve. And with that, I would like to open the line to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Tahira Afzal, KeyBanc.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

I guess -- my first question is, David, as you've decided to take over this role, you are very familiar with potentially the projects McDermott has bid on at the small industry. And I guess as you've hired people to review excess in particular, could you talk about what your impressions of the project risks were before you were here and if they have changed as a consequence of the review?

David Dickson

So yes -- I mean, coming on board, which we highlighted in our remarks there, is that after joining, we did an extensive and rigorous review of all our projects, both for offshore and subsea. We have been very fortunate and lucky that a lot of industry experienced personnel have joined our company and, in particular, the subsea arena. A lot of people will relate everything back to the SeCaP project. But I would say, since the account, which was bid and awarded some time ago, is that there have been significant improvements internally in the company in terms of both bidding and executing subsea projects. In addition, some of the people that have joined the company have extensive experience in bidding subsea projects. And we have made some, let's say, temporary fixes in our processes, which will become permanent fixes as we roll out the organization commencing next week.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Got it. Okay. And second question, David, and then I'll hop back in the queue. As you fermented this financial structure to see through your transitionary phase, could you talk about how your customers have reacted? Are they trying to appeal with anything? Or has there been any slight concern at all?

David Dickson

Tahira, since I joined McDermott, I would say that all our customers have been very positive. Clearly, our customers would like to see a strong McDermott in the market, and that has been clear. And the fact that our bidding activity, even though we say in the fourth quarter bidding activity is done, our bidding activity today as of beginning of March is very high, and the prospects at hand looks good. So I would say that the feedback from our customers has been positive. Yes, there has been some concern with the results from last year. But in my discussion with the customers, they feel that there is a position for McDermott in the market. McDermott has a lot of strengths that it can offer our customers, from people to our fabrication facilities to our vessels and also our EPCI capability. And I think our customers are very pleased or will be pleased as we get through this transition and develop a strong organization.

Operator

The next question comes from the line of Jamie Cook, Credit Suisse.

Linda Yuan

This is Linda Yuan in for Jamie Cook. So I understand that you're suspending guidance. However, can you help out with some components? Like what is the ability to grow revenues beyond what has been burned in backlog? What is the profitability of backlog? And in terms of that $55 million to $65 million in restructuring, when is that payoff expected? Is any of that expected in 2014?

David Dickson

Linda, I'm going to ask Perry to take this question.

Perry L. Elders

Okay. In terms of the latter part first, on the restructuring cost, I think you said the payoff of that, which I assume you mean the benefit of it, the payout, which is the expenditure of it, will occur in the first part of the year primarily. The benefit of it, we'll begin to see in the latter half of the year. But certainly, we will not see a full run rate of the benefit of that restructuring in 2014. In terms of bookings, as David just mentioned, we do have a substantial amount of activity ongoing at the moment as it relates to bids and putting together tender activity. And so as we look into 2015, you would be aware from the 10-K disclosures that we've got almost $2 billion in our backlog that will be recognized in 2015. So we see that we've got more visibility to kind of 2015 than we ordinarily have because of Ichthys primarily. But the other bidding and tendering activity is very nice and as we had a nice fourth quarter in that regard, we see that continuing. But as I mentioned in my earlier comments, we expect those bookings for '14 to be kind of back-half loaded. That's not to say the activity is low or that our prospects are low, but just the timing of the customers, award processes on the specific jobs that we're bidding looks like the bookings will be more back half of '14.

Linda Yuan

Okay, that's helpful. And then switching over to cash. What -- how do you think about your ability to generate cash, if any, in 2014? And what are your assumptions on CapEx? And then could we have more color on the divestitures that you're contemplating? I mean, what is the size of the portfolio? And do covenants become an issue at any point?

Perry L. Elders

Okay. A lot of aspects there, let me try to get at different ones of them. So as I mentioned, we kind are on pace for where we expected to be in terms of cash. We've been, as we've talked in the past, managing our working capital appropriately. Those actions have borne fruit in the last 6 to 9 months, and we expect to continue to do that. As we look forward, one of the detailed elements of the action plans that David described in general is to move to a different business model, if you will, to the extent we can with both customers and vendors. We haven't implemented that at this stage, so we're more doing kind of the old school working capital management. But as we go forward, we are seeking to improve our cash flow from the projects, as David mentioned, by holding the project teams accountable for cash flow, as well as profitability. And so we believe that over time, we will be able to take these short-term gains in working capital and convert them into sustainable gains driven by the business model. As it relates to CapEx, we do have hardwired CapEx programs underway for our Lay Vessel 108, as well as DLV2000, and you'll find in the 10-K updated guidance with respect to the CapEx programs for each of those years -- for each 2014 and '15, for those 2 vessels. So we do expect to continue to be free cash flow negative in 2014 in terms of the consumption of cash on projects just based on existing backlog of business, as well as use of cash for our growth CapEx. We have deferred certain items, as David mentioned, and we have reduced CapEx. And we believe we've done so appropriately without taking any business risks. As it relates to divestitures, the 10-K does disclose and has previously disclosed a couple of vessels that we're holding for sale. We hope to advance those sales in the near term. There were no additional vessels announced as being held for sale in the 10-K. So still the ones, the DB16 and the KP1 that we talked about previously. We do have other "long in the tooth" older vessels that we're actively considering, and we may move them to held for sale classification in later periods. But right now, they're under consideration. As it relates to covenants, as we mentioned, we were in compliance at December 31. We are anticipating being in compliance as we move forward in terms of the amendment that we're working to complete with our credit facility banks. So that's the key focus of our capital financing efforts at the moment.

Operator

The next question comes from the line of Andrew Kaplowitz, Barclays.

Andrew Kaplowitz - Barclays Capital, Research Division

So, David, with all due respect, you still have a long list of projects and loss positions and you've actually added to them here this quarter. So as we go forward, what's your confidence level that you can stop adding to those, to that list, and that -- this is probably the last big quarter of charges. I mean, I know you're going to tell me that accounting said this is the last big quarter, but we've been through this a number of times over the years at McDermott. And I know you're a new leader here, so hopefully we're all optimistic that it gets cleaned up. But why is this time really different when it comes down to it?

David Dickson

Well, Andy, I mean, there's not much I can talk about the past, because obviously I wasn't here. So the process that I've gone through since coming on board was actually to personally review every project with the corporate team and go into a lot more detail. My view is that what we have today are realistic estimates -- I won't go through every project in detail -- coupled with the fact that we've also been adding to the team, high grading the team in some areas. We have had some changeouts in personnel in some areas. So there's a lot of activities that are ongoing [indiscernible] to get to the bottom of this, and a lot of effort has gone in the last 4 months since I came on board. So what I feel at the moment is that today, we have, let's say, a more realistic and achievable position. And then secondly, a lot of these projects that we're talking about in a -- that are in a loss-making position, or what I've referred to as the legacy projects, and a lot of these are coming to an end. If we talk about projects such as SeCaP, you heard from Perry, we're only a few weeks away from completing that project. And although it has been a significant financial loss, I think it's important to highlight that the operations for the last 2 months have been in line with industry standards and comparable to the performance of any other tier 1 competitor. Secondly, we talked about Papa Terra. And Papa Terra at the moment is forecast to be breakeven. But again, the TLP is now hooked up so the most difficult and technically challenging part of the project is complete, and now we're into the demobilization phase. So when I look at the backlog, a lot of these projects are coming to an end. I'd also like to highlight what Perry also indicated, is that in at the backlog, we're also adding projects. And those projects have margins which are in line of where I want to take the company in the future.

Andrew Kaplowitz - Barclays Capital, Research Division

Okay, that's helpful. And then, David, maybe can you can talk a little bit about when you might achieve a more normal business? Obviously, you've talked about restructuring and you talked about that sort of going to '15 and gaining the benefit of that. Do you think, based on the backlog that you have, that '15 could be a more normal year? And then what is normal to you? Is that sort of the 10% to 12% that McDermott used to talk about in terms of margin? Is that 5% to 8%? What should the business do in your opinion?

David Dickson

Well, I think, Andy, the first point is, is that -- difficult to compare with the past. As I indicated, we're moving to a 2-business segment organization. And over a period of time, we will start to publish our results separate of subsea and offshore. The timing of that, I cannot confirm yet. But as we go through this year, we'll go through that process. My long-term target is to get the subsea business performing in line with the rest of the tier 1 companies. And same with -- on the offshore and -- and you know what those numbers are by looking at the other competitors in the market. So that's where my long-term plan and where I plan to take this company in the future.

Andrew Kaplowitz - Barclays Capital, Research Division

Do you think you can achieve that by '15? Or is that too early to say?

David Dickson

Andy, I would say that firstly, I've been in the seat for 2 months in terms of the CEO, and I think I would be only speculating at this time to give an indication of when that would be. What I would say though is that I am happy with the organization that we're putting in place. I think it provides the right focus. I'm very happy with the people that have joined the company, and I'm also very happy with a lot of the strength that McDermott has. I mean, it has a lot of potential. So I think at this time, Andy, it's too early to state -- to say when we will be through this -- what I've referred to as a transition period.

Operator

A question from the line of Steven Fisher, UBS.

Steven Fisher - UBS Investment Bank, Research Division

Wonder if I could just ask you to clarify or give a little more detail on your "aligning with customer" initiative. I'm just trying to understand what that means practically. And how would this help your competitive positioning?

David Dickson

Steven, I would address them to me. So firstly, more upstream with the whole process. And that is today, I feel that we could enhance our competitive position by being more involved with our customers as our customers look at future developments and future programs. And today, we're not in that space. And I think it's a great opportunity to take McDermott to that space through LNG engineering activities and also developing relationships with our customers as we discuss future technology and future R&D. The second part of it is, I refer to what Perry talked about in his remarks, in that we've had some challenges in the fourth quarter in terms of recoveries in our projects from change orders and claims. And some of that is a result of some relationship. And I won't say breakdowns, but we were -- lack of strength in our relationship with a customer or, let's say, an enhanced relation with a customer could probably have brought a better result.

Steven Fisher - UBS Investment Bank, Research Division

Okay, that's helpful. And then for Perry, when do you think you'll have all your financing all finalized?

Perry L. Elders

I believe second quarter is our plan to have the credit facility amended by then and the final financing arrangements in place. So it should be over the next -- hopefully, near term, the next few -- certainly next month or so, but could run into early Q2.

Operator

A question from the line of Vishal Shah, Deutsche Bank.

Jerimiah Booream-Phelps - Deutsche Bank AG, Research Division

This is Jerimiah Booream on the line for Vishal. I know you guys mentioned that Papa Terra would be breakeven but with a possibility of profitability. So I was just wondering how likely that is and what level you could get to in a best-case scenario?

Perry L. Elders

So obviously, if it was probable, we would have recorded it that way. So that's probably the first way to look at it. As David mentioned, we believe these forecasts are very realistic. As I commented, there is upside on this. We have submitted several change orders with the customer, and there's other situations with the customer that could improve the margin on this as we close out the job over the next few months. We've got to finish in the field, and then we'll move into the commercial closeout process. So we're not in a position to give you any specific numbers around that. But I think the -- again, the breakeven position is very realistic with upside.

Jerimiah Booream-Phelps - Deutsche Bank AG, Research Division

And on the North Sea and Africa segment that you plan to roll out, what's the opportunity and the timeline there? And, David, how might you bring your expertise to that rollout?

David Dickson

These opportunities are real and real today. Our near subsea division in North Sea Africa, which will be based out of London, is already more than 130 people today. We are actively bidding projects both in North Sea and Africa. I don't want to name them, but we are more than 4 projects in North Sea. Bids ongoing today. Our bids are being submitted. And 2 major projects in Africa. So that opportunity is realistic today. We obviously have ways to go in terms of pure strengthen in our position there, but it's certainly a great growth opportunity for McDermott.

Operator

A question from the line of Martin Malloy, Johnson Rice.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Given the $306 million of letters of credit, it looks like you've outstanding in the last month and $250 million of borrowings and the CapEx expenditures that you have going forward here; $450 million to $500 million just for the DLV2000 and LV108. What is your ability to go after this $16 billion in target projects? Do you have the letter of credit capacity to pursue all these?

David Dickson

Perry, do you want to do that?

Perry L. Elders

The short answer is yes, Marty. These projects either would be financed through the existing capacity that you referenced, because we do have capacity under the credit facility and the other backstop that we've put in place. But also, these larger projects in particular can be self-financed with the customer either in separate facilities or other arrangements with the customer. So we don't -- we haven't seen and don't expect that to be any issue at all.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Okay. And then could you talk maybe about the top people that you've been attracting? What have they seen in McDermott that has allowed you to attract them to the company?

David Dickson

I would say most of the people joining the company see an opportunity and more focus obviously on the subsea side to grow something that maybe the opportunities don't exist where they are today. McDermott has an excellent brand and has an excellent reputation and was previously, as you know, in the subsea business until in the late '90s. So with the investment that's been ongoing with projects that's been awarded, there has been attraction for a lot of people to join the company and be something -- be part of something as we grow it and as we implement our strategy.

Operator

The next question comes from the line of John Rogers, D. A. Davidson.

John B. Rogers - D.A. Davidson & Co., Research Division

Just following up on one of the earlier questions. I'm just trying to understand, I guess, maybe for Perry, as we get in towards the end of 2014 with the negative cash flows and the CapEx, I guess, how close is this going to get in terms of making sure that you're still funded all the way through the year? I mean is that -- can you give us a sense of where that -- those 2 lines get the closest and kind of then where cash flows should start to catch up?

Perry L. Elders

Yes. I mean, we obviously have a detailed rack up by project of the cash flows, of the projects and the plan for the CapEx. We have been working with the shipyards in terms of managing those CapEx programs you referenced. And the simple answer, John, would -- I mean, I can't give you our forecast, but we're financed and not by the skin of our teeth. We're comfortably financed with the $950 million either under the credit facility or the backstop.

John B. Rogers - D.A. Davidson & Co., Research Division

But that $950 million -- I mean, the backstop, you've got a year under that and...

Perry L. Elders

No, it's renewable structurally after the year. But the expectation is that if we access it, which -- again, we don't expect to access it. It would be a 5-year facility. So our expectation is we'll renew the credit facility, which has 2.5 years left to go, and the backstop is just kind of a safety net. If we access it, we expect it to be a 5-year facility.

John B. Rogers - D.A. Davidson & Co., Research Division

And then for David -- I mean, in terms of your review, you've talked about some of the project reviews. But are there services or capabilities that you need to add at McDermott over the next 2 years to compete in the market?

David Dickson

Let me start from the basics where we are today. My first plan is what I've said in my remarks in that I want to stabilize the organization. So that's been the process. We're going through the backlog. But also by turning initially a temporary fix in for the one-up process, which becomes a permanent process in the next couple of weeks. This isn't a fix, it's just an enhancement of the process which was already existing. It also involves strengthening and some of the team and also reorganizing the business that creates a better oversight. That's more on the process, and that carries through into how we review our projects. And that -- and in fact, how we review our businesses. More on the strategic side, what I have done today is I have put, and I indicated in the remarks, a small pause on our strategy whilst I evaluate the strategic move into subsea, which is the right one, and more evaluating -- making sure it is the right path, but also, with the addition of some of the expertise that were brought on that we're fully evaluating, how we should better spend our CapEx dollars as we move forward. And that exercise will complete over the next couple of months.

Operator

The next question comes from the line of Robert Connors, Stifel, Nicolaus.

Robert V. Connors - Stifel, Nicolaus & Company, Incorporated, Research Division

Just to touch upon the CapEx issue, can you just remind me how much you had budgeted for the DB30? And then just on top of that, I believe the annual maintenance CapEx of about $75 million to $100 million per year was cut a couple of quarters ago. Just wondering when you'd expect that to get reinstated?

Perry L. Elders

Sure. The DB30 originally was circa $80 million or so. We had spent some of that money, and that's why there is an element of impairment associated with that, related to the monies we had spent. In terms of maintenance CapEx, you're right, circa $75 million to $100 million. We curtailed that by about 50% to kind of the mid-50s. Again, well within kind of our normal profile. We reduced kind of some of the "nice to haves," if you will. So we don't see that jumping back up for the next year or 2.

Robert V. Connors - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then, David, you sort of selectively pointed out that Gulf of Mexico is going to be a major profitability driver, especially with your experience in the region. So just conceptually, if we look at McDermott, say, 3 to 4 years out, is the story going to change for McDermott much more to be maybe a little bit more focused as a regional player? Or do you still see yourself geographically pretty distributed?

David Dickson

The plan is that we will remain geographically distributed. My reference to the Gulf of Mexico is that McDermott has had some challenges over the years in this region. And as you know, there was a strategic shift to close Morgan City and focus on Altamira in Mexico, which was definitely the right decision and one which I support even though it happened before I came on board. I think there is a fantastic opportunity for McDermott to grow in this region. The opportunities ahead, and if you follow the activity, I think Gulf of Mexico, particularly the drilling activity today, is that 2 to 3 years down the line, I think there's going to be extensive opportunities for McDermott to grow. However, in the meantime, we're going to make some organizational changes that'll involve strengthening the leadership for the region that will help us become more competitive.

Robert V. Connors - Stifel, Nicolaus & Company, Incorporated, Research Division

And if I could just tag on one more on that subject, do you see the Altamira yard as critical towards that strategy?

David Dickson

Absolutely. What we're doing with the investment, we also -- if you picked up during my remarks, I talked about a solid [ph] organization. And what we're working towards is that we have -- in McDermott, where fabrication is in the DNA, we have a yard in Jebel Ali, which is working extremely well; a yard in Batam, which is working extremely well. And as part of the reorganization, we're going to look to move some of the expertise from those locations to Altamira so that you have all yards working to the same processes, the same systems and the same productivity. So I'm very, very confident and very excited about the Altamira yard for the future.

Operator

At this time, we're going to turn the call back over to Mr. Steve Oldham for closing remarks.

Steven D. Oldham

Thank you, Celia, and thank you for participating today. Operator, this will conclude our call.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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