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Executives

John E. Roueche - Vice President of Treasurer & Investor Relations

Stephen M. Johnson - Chairman, Chief Executive Officer and President

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

Analysts

Andy Kaplowitz - Barclays Capital, Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Steven Fisher - UBS Investment Bank, Research Division

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

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Brian Konigsberg - Vertical Research Partners Inc.

Robert Connors - Stifel, Nicolaus & Co., Inc., Research Division

McDermott International (MDR) Q4 2011 Earnings Call March 1, 2012 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the McDermott International Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Mr. Jay Roueche, McDermott's Treasurer and Vice President of Investor Relations. Please go ahead.

John E. Roueche

Thank you, Diana, and thanks to all who are joining this morning. We appreciate you participating with us to discuss the fourth quarter and full year of 2011, which we released yesterday through our press release and our Form 10-K filing. As usual, joining me today are Steve Johnson, McDermott's Chairman, President and Chief Executive Officer; and Perry Elders, our Senior Vice President and Chief Financial Officer.

Before I hand the call over to Steve, let me remind you that this event is being recorded and a replay will be available for a limited time on our website. In addition, some of our comments this morning will include forward-looking statements and estimates, including with regard to our view of 2012. These forward-looking comments are subject to various risks and uncertainties and they reflect management's views as of March 1, 2012. Please refer to our filings with the Securities and Exchange Commission, which are available on our website, including the recently-filed Form 10-K for the year ended December 31, 2011, and yesterday's 8-K, which provide a discussion of factors that may cause actual results to differ from management's projections, forecast, 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. Let me now turn the call over to Steve Johnson, McDermott's Chairman, President and CEO, for his remarks on our fourth quarter results, the full year and his views on the business and operational environment.

Stephen M. Johnson

Thanks, Jay, and good morning, everyone. To state the obvious, our fourth quarter was disappointing. The Atlantic projects in Mexico and Brazil, that also impacted our third quarter, offset otherwise good performance on the rest of our project portfolio. My objective this morning is to provide an overview of the quarter, the challenges we faced on the lost projects and probably more importantly, our outlook for the coming year. There's an important positive to this story. We don't anticipate full year 2012 to look like the second half of 2011. With the loss projects, we have one advantage with the fourth quarter results and the later reporting cycle, in that we are able to reflect the actual experience we had on these projects during January and February of 2012 into yesterday's reported financial statements.

Also, in our press release yesterday, we indicated that at this time, we view the current range of analyst estimates as reasonable book-ends for your expectations of McDermott this year. Our plan is right in that range and we believe it's achievable. For your modeling, we expect the first quarter to be the low point of 2012, with the improvement to come in subsequent periods. But before getting too far ahead, let me return my comments to a review of yesterday's news. I'll let Perry cover the financials and the details thereof shortly. But as pointed out, we had a number of items going both ways in the fourth quarter.

In total, the net impact was about $66 million negative. None of the items had a taxable impact, so the operating income effect dropped straight to the bottom line. Clearly, the 2 major negatives were the Atlantic projects that we discussed in some detail in late October. They represent over 90% of the gross charges this quarter, so they are worth talking about further. As you may recall, both our marine projects entered into during 2011 that are utilizing previously-idled vessels, and the work on this projects hadn't begun as of the third quarter last year. Beyond that, the issues are largely unique to each project so let me take them one at a time.

The largest negative impact this quarter was the pipelay project in Mexico under contract to PEMEX. In addition to our DB16 vessel, we also have a subcontracted dynamically-positioned support vessel working with us. As you may recall, the project was awarded in the early spring of 2011 and we were expecting to complete it by the fall of that year. Before the difficult weather that is characteristic of the winter months, unfortunately, we experienced delays beginning the project due to a summer tropical storm, combined with customs clearance and site access issues in Mexico. This delay moved the project into challenging weather months. As such, in our third quarter results, we increased the expected marine days necessary to complete the job by over 50% for our DB16 pipeline barge.

However, in late October 2011, our vessel still hadn't begun pipelay work. We started in mid-November. And as it turns out, the weather we experienced was worse than the third quarter forecast. Further, the repeated starting and stopping associated with the weather downtime resulted in productivity at subpar levels. With actual time and experience now under our belts on the project, we have again increased the days expected to be necessary to finish out this project. This time, more substantially reflecting our actual experience on the project through mid-February, as well as our expectations for the remainder of the project.

We added costs for full liquidated damages, contingency and other costs. In total, we recorded a charge of about $55 million in the quarter. We're expecting the DB16 to finish its work by the end of March and the subcontracted vessel and the whole project to be complete by the end of April. Importantly, we have completed pipelay of all 3 pipelines associated with the project, which was the most weather-sensitive scope. The remaining work entails dredging, platform piping, subsea spool tie-ins and various associated hook-up and commissioning activities.

The second project is the multi-year charter in Brazil for Petrobras. In the third quarter, we took losses on this project related to costs associated with the maintenance and upgrade drydock, which we determined would be expensed against that project rather than capitalized like most drydocks because of the age of the vessel and the length and scope of the project. In addition, we increased our operating cost forecast. The loss recorded in Q3 was $28 million on the project. And this quarter, we incurred an additional $39 million charge.

First, let's start with the good news on this project. When we had our last call, we were stuck in Europe at the shipyard. The vessel has made it across the Atlantic Ocean now. And as of February 11, it is now on-hire. This was about 1 month later than our forecast during the prior call, largely due to additional ship yardwork needed once we arrived in Brazil to repair a nonfunctional thruster -- an event that arose just as we were preparing for on-hire work in January. Of this quarter's charge on the Brazilian charter project, almost half is related to increased contingency on the project. We reviewed the issues we had, that we had incurred to date that is, and the anticipated risks remaining over the 5-year project ahead of us, and determined more contingency was necessary. As with all of our projects, our desire is to avoid spending contingency and see it turn into future profit. But the project needed more coverage at this time.

The rest of the charge was from a variety of miscellaneous items, primarily some expected cost escalations and foreign exchange changes. Last quarter, I told you we had recorded everything we knew and could reasonably foresee. The same is true now for the fourth quarter. The difference is, with regard to Mexico, we've now finished the pipelines have the majority of expected working days behind us, and are now using actual experience to determine the future productivity and weather downtime estimates. And with respect to the Brazil project, we're now on-hire and performing work for Petrobras.

We fully understand and share your disappointment regarding these projects and we're taking the lessons learned to improve our processes going forward. In circumstances like these, however, some information was not knowable in the third quarter and certain other events were unforeseen. Perry will talk about the benefits we disclosed that partially offset these project losses. However, I will briefly address one of them.

During the fourth quarter, we reversed about $9 million of previously-accrued 2011 annual incentive compensation. That's a more formal way of saying there will be no annual bonuses paid at McDermott for 2011 performance. Shareholders should rightly believe that this is the obvious outcome considering the Atlantic projects, which are in a loss position, and it certainly is true. At McDermott, we're in it all together and we're aligned with our shareholders. We did not achieve our collective goals in 2011 but as I tell every employee, we will again.

Now I'm not a big believer in ifs and buts or except-fors. However, I do think it's appropriate to highlight that absent the $66 million of net charges, the fourth quarter for the majority of our work was outstanding. In the Asia-Pacific segment, operating income increased by over $70 million compared to the fourth quarter of 2010. In the Middle East, revenues were up modestly and operating margins were about 20%. Together, these segments made nearly $135 million in operating income for the quarter. And I appreciate their good work and contribution. This performance level is a clear indication to me that most of our projects have gone well and are in-line with or even better than expectations. Of course, I would have preferred spending most of my time today speaking to this positive news.

Now let me, at this point, turn the call over to Perry to discuss in greater detail the 2011 fourth quarter and the full year financials. I will return afterwards and discuss some of the operational metrics, provide business updates that we regularly provide and I'll begin to look forward in the business. Perry?

Perry L. Elders

Thanks, Steve, and good morning, everyone. Total revenues for 2011 fourth quarter were $816 million, a 51% increase from the 2010 fourth quarter. Revenues were somewhat less than expected from backlog roll-off, primarily due to revised work schedules, timing and POC slippage. The Asia-Pacific segment was the major contributor to the year-over-year increase, growing the top line by almost $200 million. Although we also saw increases in both the Middle East and Atlantic segments as well.

For operating income, McDermott produced $31.4 million in the fourth quarter as compared to $59.3 million a year ago. Clearly, the net $66 million charge was the largest reason for the decline. We also saw significantly fewer project closeouts in the 2011 quarter compared to the 2010 quarter. However, the Asia-Pacific segment delivered substantial improvement compared to the quarter a year ago. And the Middle East segment also provided solid results as well, with about $74 million in operating income.

These pretty well covered the loss projects and the bonus reversal portion of $66 million. There were 2 other items included in this number that we considered nonoperating that benefited the quarter. The larger of the 2 was income derived from our captive insurance program. As many of you know, we self-insure a number of our potential exposures. In evaluating our claim and safety statistics, our third-party actuaries determined that our plans were over accrued, which allowed for a release of about $17 million into income during the period. Although they review our captive positions annually, we regularly have adjustments. The size of the release is larger than most years, and we wanted to identify it accordingly.

The second item relates to our decision in the third quarter of 2010 to discontinue plans to build the fabrication facility in Kazakhstan. You may recall, at that time, we took about $20 million charge associated with our expected cost to exit that facility. After more than a year later, we determined that our exit costs were going to be less than we had accrued. And therefore, we were able to recover about half the initial charge.

With all the items we had this quarter receive no tax effect, the reported tax rate for 2011 fourth quarter was unusually high at over 75%. Said another way, our provision for income taxes was nearly 3x our net income. As always, our tax rate will be determined by the tax jurisdictions where we're working and our cumulative tax position therein. For the year 2011, our tax rate was about 35%. I'd expect 2012 to be around the 30% level. Although, like all our estimates, this is a forward-looking statement. Net income from continuing operations less noncontrolling interest was $9.3 million for the fourth quarter of 2011 or $0.04 per diluted share, well below the $45 million we reported in the 2010 fourth quarter.

Turning to discontinued operations, the loss in that category in the 2011 fourth quarter represented a write-down of the Canadian charter fleet business. Based on conversations we've had with interested parties, as well as outside advisors, we believe the write-down was appropriate. I should also note we've made good progress recently on this divestiture and are expecting these assets will be sold during the first half of 2012.

Quickly looking at the full year 2011, revenues were $3.4 billion. Operating income was about $251 million and delivered operating margins of 7.3%. Net income was $151 million or $0.64 per share. Clearly, without the $127 million of net charges, 2011 would have been an outstanding year. In 2011, we invested approximately $282 million in capital expenditures, which is in line with our expectations for 2011 and going forward, assuming no new growth initiatives. Some major investments underway include the North Ocean 105 vessel and the DB50 upgrade, both of which should be out of their shipyards this year.

Turning to liquidity, we had over $730 million in cash, cash equivalents and investments at year end. Despite the challenges with the projects we had in the fourth quarter, our liquidity improved by over $112 million sequentially, and our working capital position grew as well.

Looking at 2012, we're sticking with our outlook we gave in October. We expect revenues to be in the mid-$3 billion range, with operating margins in the 7% to 10% range. As Steve mentioned, we expect the first quarter to be in the trough, and we indicated that the range of analyst estimates is reasonable expectations for McDermott. An important factor for all to note is that, of our year-end backlog, only about $350 million is from projects currently in loss position. If our forecasts prove accurate, this future revenues are expected to equal costs when recognized. About 85% of this is from the 2 Atlantic projects we discussed earlier, with the vast majority being the 5-year Brazil project. We also continue to account for one project under deferred profit recognition policy, representing approximately $144 million of the December 31, 2011, backlog.

With that, let me turn the call back to Steve for his remaining comments.

Stephen M. Johnson

Thanks, Perry. We're taking a little bit more time with our prepared comments this morning to make sure we're getting the information out that you want and need. I believe between my earlier comments and Perry's, we pretty well covered the 2011 financials. So now let me begin to look forward in the business.

Bookings in the fourth quarter were relatively light at approximately $440 million, which has been pretty much the case for all of 2011 at only $2.3 billion for the year. We expect over 80% of our year end $3.9 billion of backlog to become revenues in 2012, so we believe we have a solid foundation of work already booked to achieve our expectations for this year.

In the 2012 first quarter, we announced the INPEX Ichthys subsea booking, which is our largest single award ever at the time of contract signing. This project was 1 of 2 very large bids that we discussed in last quarter's call. All of the $2 billion plus of work will flow through our financial statements, although we did name Heerema as a major subcontractor and they will perform a portion of the work under contract to us. Whereas most of our contracts burn off very quickly and our outyear visibility is usually limited, with the INPEX project, the majority of revenue will be recognized after 2013, so we've begun to build up work further out than usual. As of year end, INPEX was still part of the nearly $5 billion of bids and change orders outstanding. It's comforting for me to know that we've won the largest bid in this amount already.

The second large project that we discussed last quarter is still being evaluated by the customer. We expect we'll know, one way or the other, during the second quarter and possibly by our next call. After growing by 50% for the 2 previous sequential quarters, bids outstanding stayed essentially flat from Q3 to Q4, which isn't unusual for the holiday season quarter.

To recap the year, we started 2011 with $1.7 billion of bids outstanding. We booked $2.3 billion during the year, and then ended the year with nearly $5 billion of bids outstanding. I'd say -- it is safe to say that the market remains active. For all of our bids, we believe we've offered excellent solutions at competitive prices to our customers. However, virtually every bid is a competitive tender and our capture of any award is uncertain. And of course, the timing of awards can shift to the right as some customers don't move as quickly as they initially indicate.

Clearly, we don't bid everything we see, but we do try to go after projects where we feel we can add value and earn an acceptable return for our shareholders. We seek projects that fit our unique capabilities, including marine, fabrication, EPCI, which is our model, and of course, SURF. I can tell you that while, in any quarter, we may see spikes and troughs, the quality of our backlog is always paramount.

We've identified North of $10 billion of targeted projects, which are defined as projects that we are suited to execute and that we expect to bid in the coming 15 months. Combining the bids outstanding with our backlog and our target projects, all as of the year end, we expect a potential revenue pipeline of nearly $20 billion. Beyond targets, we have a sizable lift -- list of backup projects or potential jobs that may or may not come to fruition.

In addition to the year-end amount's outstanding, we've been busy thus far in 2012 reviewing new bids for submission as well. We expect 2012 to be a solid booking year and we're off to a pretty good start. We need to win a fair amount this year to keep revenues at a strong level for 2013 and beyond. Our focus on becoming a serious competitor in the SURF-only market, clearly, has begun to show results. I expect that about half of our first quarter 2012 backlog will relate to SURF projects.

As expected, our activity level during the 2011 fourth quarter was much better than the quarter a year ago and as compared to the sequential quarter. We had over 3.4 million man hours in our construction yards. Likewise, our marine-work barge days increased as well versus both periods at 476 days. Going into 2012, we have over 400 fewer booked marine days than compared to last year at the same time. And to the extent we can find profitable marine-work only, it would substantially help our full year.

At this point, I'll begin to wrap up so we can open the call up to questions. But before I do so, I'd like to make a few closing remarks. The fourth quarter was unsatisfactory due primarily to only 2 projects. And we're nearing completion on the Mexican project and have gone on-hire in Brazil, both of which are clearly positive. To me, the best news is 2011 is behind us. And I remain quite enthusiastic about this business. The new year has started out well, with what likely will be our best booking quarter ever. And we have a good amount of work out for bid and solid opportunities on the horizon. So it should be a good bookings year as well, if we achieve our traditional win rate.

We'd like to get some work that contributes to the current year and build a foundation beyond it. Both the DB50 and the North Ocean 105 are expected to come out of their respective shipyards and enter service during this 2012 year. We've formed a JV in Brazil and begun bidding work through it. We expect our financial results will improve during the year and in comparison to 2011. March looks like a full schedule, with current and potential investors at conferences and meetings. And I very much look forward to continuing the dialogue with each of you.

And with that, operator, let's now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Andy Kaplowitz, Barclays Capital.

Andy Kaplowitz - Barclays Capital, Research Division

Steve, I'm trying to gauge your tone around the markets. You sound, I guess, cautiously optimistic. But at the same time, we all know that you need to book a good amount of work. Has the market changed at all over the last few months? If you look at your big primary competitors, they do seem to be doing pretty well, maybe getting a little bit more full. There's lots of competition out there, we can appreciate that, but is there any reason to get more optimistic given the market and certainly where oil prices are?

Stephen M. Johnson

You know, Andy, I think there is. And I don't have any hesitation with saying that. The pipeline of prospects that we see and those that we've been reviewing recently gives me a great deal of comfort that, we not only have good prospects where we have unique solutions to offer, but we've also got what I'd call targets or alternates in the event that we're not successful. That's one data point. The second thing is, I would say to you that as we moved into, I'll call it new markets and maybe new regions, an example of a new market would be SURF, where we've been successfully recently. And an example of a new region would be in the Middle East moving into the UAE, we've been successful. And we look at the pipeline of projects coming from both of those. And I call those additive to our base or core business. So taking all that into context, looking at oil prices, assessing the market on a global scale, I feel as good as I ever have. And I'd have to tell you, I'd feel better than I have in any given quarter in the last 18 months about our opportunities.

Andy Kaplowitz - Barclays Capital, Research Division

Okay. That's great, Steve. Let me ask you an unrelated follow-up. If I look at your 2 problem projects, one of them, the PEMEX job, I mean, I think we -- it's a pretty small job versus what you can do and with a very large charge. And I know you know the history of McDermott very well. I mean, McDermott had pretty big weather issues back in Qatar a couple of years ago. How could this happen? I mean, tropical storms happen in the Gulf of Mexico. But I understand things happen, all that kind of stuff, but how can we make sure this kind of thing doesn't happen again? And how can the charge be so big compared to the actual project?

Stephen M. Johnson

Yes, it's a great question and I'll give you the summary answer. It's a dialogue we could have that would be quite lengthy. The first thing to note is, while we have spoken to the fact that we were pushed into a weather window, which was worse in terms of its severity and its impact on our ability to lay pipe, there's some other underlying issues that I would say are behind this particular project. And there are a number of lessons learned associated with it. But just in summary fashion, the weather is a contributing factor to the low productivity, standby times, start-stop, reacceleration, all of that impacted productivity and therefore the cost on the job. But at its root cause, this project, frankly, was not bid well. And it wasn't bid well, not only because of weather risk, but it wasn't bid well in terms of our execution plan. And we are very quickly responding to that issue. The execution plan, I would say probably didn't have enough durations and it was too aggressive on some of the activities. The barge, the DB16 was frankly brought out of cold stack and that barge hadn't worked in laying pipe in a PEMEX project since 2007, so there were some disincentive issues to that. And then the client. And we like working for PEMEX, but we hadn't done a significant marine campaign for PEMEX in some time. So embedded in those issues are some lessons learned. Overriding all of that is we're going to take another step on our weather-risk protocols that go beyond what the company did as a result of the Qatar projects in 2008. So look for us to be addressing how we bid weather risk in the future in a more specific way. And I don't want to go into any more details on that from a competitive reasoning standpoint. But there are 4 or 5 lessons learned on this project that were somewhat related to weather, but also related to the execution plan, Andy.

Operator

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

Jamie L. Cook - Crédit Suisse AG, Research Division

Two questions. Just more centered around your 2012 outlook and the 7% to 10% operating margin. Steve, I have a hard time -- I get the Q1, but I have a hard time believing the low-end of the guidance just given we sort of ended up there with all the problems that we had in 2012. I mean, I guess, the first question is when -- at what point do we get to your -- within the quarter -- at what quarter do we get to the longer-term targets in the 10% to 12% range. I understand Q1 is going to be weak, but at what point do we run rate that you get to your longer-term targets? And then my second question is well, how do we think about, this might be too granular, but how do we think about profitability by region? Because I look what you put up in the Middle East and Asia-Pacific in terms of operating margins and again, to get to the low end, you've got to assume Asia-Pac is just a complete disaster, again, in 2012. So can you just help me with how we should think about profitability by those regions? And then I'll get back in queue.

Stephen M. Johnson

So let me have Perry lead off and then I'll come back and book in that end for you. Perry?

Perry L. Elders

Yes. Jamie, couple of things here. I realize the guidance continues to sound somewhat conservative relative to the results x these project losses, but...

Jamie L. Cook - Crédit Suisse AG, Research Division

I'm just hoping Steve set himself up to look good this year.

Perry L. Elders

Okay. As we've mentioned last time, the major driver, and I'll give you some data points here, for 2012 is vessel utilization. We mentioned it in the call that our utilization this quarter was almost 95%. But if we look at the number of days that we have booked for the vessels going into 2012 compared to where we were a year ago, we're down about 40%. And so it's that vessel utilization and carrying those fixed costs that's going to be a real drag on us in 2012. Obviously, we're trying to book those available days, but that's the overarching reason.

Jamie L. Cook - Crédit Suisse AG, Research Division

But what do you see in terms of potential prospects that can improve the down 40%? I mean, Steve was also just talking and it's like he's never felt better about what he sees going forward for markets. So I guess, at least, maybe not early in the year but I would assume why can't -- I understand where you sit today, but why isn't vessel utilization going to improve? Or are you -- assuming we stay at these levels in your margin targets?

Stephen M. Johnson

Yes. What I would say, Jamie, is we understand the challenge. Now we've got to work on it. The challenge as Perry indicated, is clearly vessel utilization. And we are targeting marine-only projects, as well as our normal model EPIC or quick burn projects that will help us through this. So my best guess is, whereas the first quarter is going to be the trough as we indicated, maybe utilization on marine assets will continue through the second quarter. We have the DB50 coming out, we have the 105 coming out, we've got the first project for the 105. Here's my plan and my goal. Try to get the back end of the year to where the utilization kicks up so that we can come in the year and get back into our competitive range by the end of the year. And that's about as far as I'd go with you. But I know our challenge. Question is can we find those projects, win them and get to work on the water?

Jamie L. Cook - Crédit Suisse AG, Research Division

But you see projects out, it's not like there's not projects out there that you could -- not like there's no prospects, Steve, it's just a function of you getting them?

Stephen M. Johnson

Yes. I'd like to always have -- I'd always like to have more, Jamie. But yes, I see some out there.

Jamie L. Cook - Crédit Suisse AG, Research Division

Okay. And then just how we think about the profitability again? Any color by region and how we think about the losses -- you know what I mean, the losses again for 2012 by region? I mean, again, Middle East and Asia-Pac was so good, I just don’t understand.

Stephen M. Johnson

Yes. And we expect the Asia-Pac and Middle East to continue to be good, although a couple of comments about it specifically. For Asia-Pac and Middle East we do expect 2012 to be a year in which we will have more project closeouts and contingency resolutions and hopefully continue to see harvesting. They are -- our ability to harvest that continuously and brighten these projects is a big key that's back-end loaded in the year. The second thing is as it relates to the Atlantic, which is the drag on the earnings, x these 2 loss projects, and we believe we've got those contained, as Steve mentioned in his comments, we're still incurring losses in the Atlantic. We have taken a number of actions to [indiscernible] but that's still taking place in the early part of the year. And then also, in Atlantic, as you're well aware, we have the Papa Terra contract that is on deferred profit recognition and has the potential to get turned on in the fourth quarter, depending on how execution goes and how schedule holds through 2012. So we believe we've got the base structure of the Atlantic business in the right place, but the Papa Terra project is a key to the Atlantic profitability, particularly late in the year

Jamie L. Cook - Crédit Suisse AG, Research Division

But you lost, what $177 million into the Atlantic region in -- I mean, so does that number improve relative in 2012? You'll be in a loss position but I'm just trying to figure out where we sit?

Perry L. Elders

Yes. You know in the Atlantic region, of the losses, almost $140 million for the full year of 2011 was related to these 2 projects. So again, we believe we've got those 2 projects contained. And if you look at the run rate of Atlantic losses, x these projects, we believe we've been managing those costs and the turnaround for the Atlantic region, a big part of that is the Papa Terras.

Stephen M. Johnson

So yes, it improves in 2012.

Jamie L. Cook - Crédit Suisse AG, Research Division

Which is why I have a hard time, again, with your low end, but okay. I'll get back in queue.

Operator

The next question comes from the line of Tahira Afzal, KeyBanc.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

I'll try to be brief. Two questions. Number one, have you included the divestitures gains in your expectations for 2012 when you're comparing it to consensus? And is this multiple or would it be something which is nominal? And number two, you said, Steve, earlier on in your prepared commentary that you are making some active changes in your bidding processes. Could you talk about whether this includes any change in personnel as well?

Stephen M. Johnson

Why don’t I take the second one first and Perry will come in with the first one in. We are making changes in our bidding process having to do with weather and having to do with getting a more robust and specific execution plan, which is specifically targeted to each one of the bids. As it regards personnel, in the Atlantic region, over the last several quarters, we have made significant personnel adjustments, both at the working level and through leadership. I don't believe you will see significant leadership changes going forward. In fact, I feel very good about leadership in the Atlantic region now and that team, I believe, will lead us to where we want to go at the end of this year and in 2012. Having said that, if the prospective projects we see in the market doesn't come to fruition and if we can't find a way to get the Atlantic region turned around, there could be something more draconian that has to be done, but that's not in our plan. And the first question then, over to you Perry?

Perry L. Elders

Yes. What we did was we took an impairment in the fourth quarter on Secunda, the charter fleet business up in Canada, that has that business now recorded at the value that we expect to realize, the proceeds we expect to realize upon sale. Therefore, we do not expect to experience a gain upon sale. But I'd also remind you that this is reflected in discontinued operations. And therefore, it's not part of our operating income guidance and the guidance that we commented around EPS from continuing operations.

Operator

And the next question will come from the line of Will Gabrielski, Lazard Capital Markets.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Can you guys walk through on the Ichthys project, what percentage of that will be burned off in '13 and '14 and how quick the ramp up would be based on what you see today?

Stephen M. Johnson

Yes. Let me try to give you some color on that. The way I'd have you think about the INPEX project is, because of its size and scale and because of the nature of how the project needs to be planned, there won't be significant revenues in 2012, Will, it's largely getting ramped up and starting some engineering. However, we will be doing some procurement to derisk the project early on. So 2012 will be somewhat immaterial in terms of revenues. 2013, a bit better, but you really start seeing the revenue ramp-ups in the latter half of 2014 and in 2015 and beyond. But the current year is pretty limited.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

So if you were to -- I'm sorry, for 2013, if you were to roll in Ichthys on top of the $500-or-so million, you have in backlog coverage for 2013 today, is there any way you can pinpoint a ballpark number?

Stephen M. Johnson

I'd tell you it's probably a number that is less than we would like. But the nature of the project, it's probably around $100 million to $150 million of revenue, it's just not that significant. 2014 is when it starts moving.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay. Fair enough. Bigger picture, I guess, if you look at trying to fortify maybe your position in the market and the way the market is shifting to deeper waters and advances in technology like subsea processing and separation, FPSOs, et cetera. I'm just wondering what does McDermott do with its fleet of vessels to really position itself for that market where maybe there’s, a, less of a fabrication component depending on what type of production system is being utilized and then, b, in terms of the bigger trunk lines versus subsea tie-ins and things like that. How does McDermott think about itself 5 years from now if that market continues to go in that direction?

Stephen M. Johnson

Well, and we think it does. But I would also tell you that the base business, the conventional business does not wane. So it's the -- while we do need to retire some older vessels that are shallow water-related and we need to do some reconfiguration of fabrication facilities, the conventional business, the revenue opportunities for McDermott do not become de minimis by any stretch of the imagination. So that's one data point. Data point #2 is we are investing now and plan to invest over the next several years significant amounts of capital in SURF-related marine assets, like the Reel-Lay vessels we already have underway, North Ocean 102 working, 105 comes out in the middle of this year. We're considering a third type of vessel in the fabrication yards, either through leases, joint ventures or investment. We will be looking at reel facilities so that we can reel the product for our vessels as we move into SURF. So you'll see and you are seeing significant transformation going on in the business today. But our strategy is one of not foregoing our core conventional business, but being additive to it. And we've been successful in SURF already, albeit in some occasions by joint venturing or subcontracting, as is the case with INPEX, but as is the case with other projects, Macedon, et cetera, we're doing it on our own with our own vessels.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

You said, and correct me if I'm wrong, half of the backlog today is related to SURF-type work, including Ichthys, right?

Stephen M. Johnson

For the first quarter of 2012 is what we said.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Right, so including excess. And I'm just wondering, if you look at your marine day capacity right now, how much of what percentage of your total marine day capacity would you qualify as driven by the SURF market as opposed to your traditional market when it comes to marine days, is that a fair question?

Stephen M. Johnson

Yes, it is. I don't know if you have a number, Perry?

Perry L. Elders

The major -- the utilization statistics that we quote will relate to our marine work barges, our major work barges, that's the 500 days a quarter. And in addition to that, we have the vessel capacity that Steve talked about in terms of the 102, 105 and anything we may add to that. So we can use a few of those 500 days to support offshore work if there's a lift involved or once the DB30 gets the DP capability added to it. But not a lot of the 500 days a quarter is available for the deepwater SURF market.

Stephen M. Johnson

I would add not only the DB30 but the DB50 that comes out of drydock early summer, also, is getting additional thruster capability and deepwater lowering system on it. So some of the existing vessels that were originally designed for shallower water through DP and thruster capability to hold them on station, are also very applicable to deeper water.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay. And then one last question, if you'll allow me. On the subsea market, if you look at the mix of backlog today versus your mix of vessel days, do you have the capacity to go out and win another Ichthys size or half the size of Ichthys type subsea contract for execution in '13 and '14 right now or do you need more vessel capacity to do that?

Stephen M. Johnson

We absolutely do have the capacity to do that, and depending upon the merits of that project or of projects, we may or may not be partnering or subcontracting. But we have the capacity to do that within the company for sure, within fabrication and within marine.

Operator

And the next question comes from the line of Steven Fisher, UBS.

Steven Fisher - UBS Investment Bank, Research Division

What level of marine utilization do you need to get back in order to hit the 10% to 12% margins for 2013? Is it the full 500 days? And then just confirming, you said you could get there either with big programs or with some fill-in work?

Perry L. Elders

No. Steven, we could move the meter substantially if we got back to more like a 2011 utilization, and that doesn't mean the 95% in Q4. If you take the blend of the full array, we were North of 50%, 60% for the full year and our current booked work with a modest amount of pickup still has to sit below 50% utilization in '12. So if we can move that up by 25% or so, we could move the overall consolidated margin up to the top end of our guidance range.

Steven Fisher - UBS Investment Bank, Research Division

And it doesn't have to be through a big program, it could be you through some of the fill-ins, you said, right?

Stephen M. Johnson

No. It's actually preferred that we spread it out amongst more programs and several vessels.

Steven Fisher - UBS Investment Bank, Research Division

Okay. And then just quickly, what are the biggest risk factors on the Agile job going forward? I mean is it just keeping the vessel in service or is it based on some type of quality of performance metric?

Stephen M. Johnson

It's more the former. The contract arrangements that we have with Petrobras and the Agile has a specific number of days available to work during the year. That doesn't mean that the vessel is working those number of days but she has to be available. So the first answer to your question would be, is she available to work? And there's no reason to believe that we have any issues there at all. In fact, she's performing well on her first assignments, although it's more light work as she gets started here. The second thing is to make sure that we accept the work that the vessel is capable of doing. And there are circumstances sometimes that a customer has needs, and we've got to be settled that we work the boat within its technical parameters. So those are the 2 things that we have to pay particular management attention to and the contingency that you heard us talk about in the prepared remarks, which is a significant part of what we charged the project with in 2011 fourth quarter is therefore some unforeseen events, additional drydock if needed. We wanted to be as liberal as reasonable to make sure that we have coverage and we believe we do.

Operator

And the next question comes from the line of Martin Malloy, Johnson Rice.

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

Could you talk about potential uses of cash? You've been holding significant cash balances on your balance sheet for a long time, and studying additional deepwater vessels, but we haven't seen any announcements. Would it make sense to put a share repurchase program in place if the money's not going to be invested?

Stephen M. Johnson

Thanks, Marty. The quick answer to your question is it may make sense to do that. And in every discussion with our board that we have, we have the issue of use of cash and we look at CapEx investments, as well as dividends and share buyback, et cetera. I would observe for you though that in 2011 and in -- or 2012 and 2013, we're spending significant amounts of CapEx and investing in the business, not only with our North Ocean 105 that comes out, but also more on the North Ocean 102. We are looking at a couple of new vessels to respond to the SURF and deepwater market. And we're looking at Brazil associated with a fab yard there that you've heard us talk about. That one is related to a win. If we win work in Brazil, we'll be investing through our partnership in a fab yard there. We simply see the market telling us that there is so much work in deepwater and SURF and in new regions like Brazil, that our focus should be investing in those assets. But I would book-end my comments by saying, even today, as we speak with our board, we look at all of those options for use of cash including share buyback and dividend. Perry, do you have something to add?

Perry L. Elders

The only other comment would be that our customers look at us and expect us to have the financial capabilities. So from a competitiveness standpoint, it's important for us to have this type of a balance sheet, very liquid and conservative.

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

And in terms of the bids outstanding, is there any help you can give us in terms of the timing of some of the awards you have bids outstanding on in the Middle East region?

Stephen M. Johnson

Yes. Let me give you more than you asked for. In the Middle East region, we've got a number of projects that are, I would say, in the $500 million or greater. And I can think of 3 of them now. The first of which we expect some kind of decision by the end of the second quarter. So the timing is pretty near here for the first of those 3. And the others are in the third and fourth quarter. In Asia-Pacific, in our last call, we mentioned that we had 2 significant projects in the pipeline of $5 billion. We were awarded one of them with INPEX. The other one is due to be awarded, I would hope, by the end of the second quarter. And as we said in our prepared comments, perhaps we'll even know about it by the time we get to the call. But backing up to the Middle East, the so-called LTA program in the Middle East from Saudi Aramco is showing some positive signs of providing McDermott with opportunity to do more work than we have in the last year or so. And there's good logical reason for that, and that's competition being more full with their fab yards than maybe McDermott is. And in my view, we should win equal to or more than our fair share of that LTA work. And that might be late first half and into the second half of 2012.

Operator

The next question comes from the line of Joe Ritchie, Goldman Sachs.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

My first question is on the PEMEX project. It looks like you reserved liquidated damages on the project. You're using actual experience, so that seems to have mitigated some potential additional write-downs on that project for the rest of the year. Can you just talk a little bit about your confidence that we've kind of captured all of the potential charges at this point?

Stephen M. Johnson

Yes, I'd be happy to. First thing to note is we have reserved full liquidated damages. So we can't reserve anymore LDs. There's a good and a bad news story to that, right? That's one data point. The second thing is if I look at the details of the work to go for the 2 vessels that are working on that job, there are really less than 30 days of work to do for the DB16. And that's, in my view, based upon the contingencies we have laid in on top of weather-laden workdays, a reasonable estimate to complete with that barge. And there is no pipeline to lay and some of this work is above water on the platform. On the DSV progress report, and I'm just kind of, Joe, disaggregating it as we think about. We look at it from the bottom up. On the DSV progress, I would say it's a very similar story and there's no reason why we shouldn't be able to complete in the April timeframe or end of April by that vessel. So because we have actual weather experience and because we know exactly what has to be done and because we've reserved for full liquidated damages, it's simply up to how much weather affects our work on a going-forward basis and the contingency that we put in, the estimate for inefficiencies, not LDs anymore, but inefficiencies I think is robust enough to cover us.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

That's helpful color, Steve, and that this disaggregation is also helpful. I guess switching gears a little bit into Brazil. You guys have mentioned the Papa Terra could reach profit recognition in 4Q. Can you provide an update on how that project is going and your confidence level in actually hitting that profit recognition target?

Stephen M. Johnson

Yes. As I've said before, this is a huge project, and these large projects that have multiple participants as this one does, we've got a partnership on this project, have their own set of challenges and we go through those on a regular basis. My update on Papa Terra would be we are schedule-challenged to some degree, but not without workarounds. And we are challenged with the client to some degree in having the client recognize some of the change in scope of services and change in scope of facilities that we are installing. But those are normal types of conversations you have on any one of these EPCI projects. So at this juncture, at the end of year report, I feel like the project is on track, not without its challenges. And as we get to 4Q of this year, we'll take an assessment of where we are with our change order recovery and where we are on schedule, and make a determination about profit take-up.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

And your sense on Petrobras willing to do scope changes and accept those change orders, do you have any sense on that at this point given your pretty early stages in your relationship?

Stephen M. Johnson

Yes. My sense of that is, is that we enjoy working with Petrobras. We would like to have them respond to our change notifications more quickly. It simply doesn't work that way and that's the way it is, and that's the way we have to deal with it.

Joseph Ritchie - Goldman Sachs Group Inc., Research Division

Okay. And then one last question, if I may. If I take a look at your revenue growth expectations on the Street today, there's pretty aggressive expectations into 2013 with mid-teens revenue growth. It seems like this is going to be more of a 2014 revenue burn, but your prospects do look good going through the rest of the year. Can you talk a little bit about your confidence in hitting that type of well, a, if revenue is going to grow and the opportunity to be in that type of range?

Stephen M. Johnson

Well, the tale of the tape for 2013 is how successful we are in 2012 in bringing in new work. And the earlier we bring it in and the characteristics of those new awards is the sub-key here. And the more marine work we get, the quicker the burn, the higher the utilization of the vessels and all things turn good for us. So we've got a challenge to book new work in 2012 for 2013 because of the revenue roll-off in 2012. But we're focused on it, Joe.

Operator

And the next question comes from the line of Brian Konigsberg, Vertical Research.

Brian Konigsberg - Vertical Research Partners Inc.

Just a quick question. In previous quarters, actually I think it was Q3, you had mentioned that you're considering some restructuring of the fab yards based on utilization that is currently undergoing. Can you just give us an update on that? Is there anything baked in for 2012 associated with potential restructuring charges?

Stephen M. Johnson

I'm at a bit of a loss here, Brian, as to restructuring of fab yards. We said some restructuring possibilities for the Atlantic.

Brian Konigsberg - Vertical Research Partners Inc.

Right.

Stephen M. Johnson

Yes. The region, the Atlantic region, a reporting segment, we were looking at potential restructuring charges. There was little in the fourth quarter. Don't expect anything significant on a going-forward basis for that reason unless there is reason to do so because of lack of market opportunities. But as we stand now, we don't see any specific restructuring at our Morgan City yard doing anything different there or at Altamira in the Atlantic region and certainly, not in the Middle East or in Asia-Pac.

Brian Konigsberg - Vertical Research Partners Inc.

Got you. And just curious from where you stand now, I know you're still kind of getting through these projects but the potential for recoverability over 2012, is there anything baked in associated with that? And if not, any change in the prospects of doing so?

Stephen M. Johnson

There's nothing baked in on either the Mexican job or the Agile. A little color on that, I'd say there's very de minimis opportunity on the Agile project unless there is some goodwill associated with LD relief, but we don't anticipate that and certainly haven't baked in anything in. On the Mexican job, we believe that we have a claim basis for the delay, which caused us to work into an adjacent worse weather window. And I'll leave it at that, because we've got work to do as we think about that claim. So there could be some there.

Brian Konigsberg - Vertical Research Partners Inc.

Right. And just lastly, as far as bids outstanding and the prospects for '12, how much of that would you say is potential for projects in Brazil? And how does that color your view on going ahead with building the fab yard that you've been discussing?

Stephen M. Johnson

With Brazil at the moment, and I think it'll change over time, but Brazil at the moment is a bit binary. We've got one bid outstanding and that is the trigger point for making a decision around building in the fab yard. We may not know about that in the second quarter, maybe even later in the year. There is more to be bid in Brazil, but we have none outstanding, beyond the one that we have in the pipeline today.

Operator

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

Robert Connors - Stifel, Nicolaus & Co., Inc., Research Division

Just real quick on those $5 billion of bids outstanding as of the fourth quarter, did that include the INPEX LNG project? And if not, what was the $2 billion that filled in the gap?

Stephen M. Johnson

Let's see, it did include the INPEX Ichthys because that award didn't occur until the first quarter and that was a little over $2 billion. Projects that filled the gap were probably numerous, Perry, do you have...

Perry L. Elders

Well, I think he was saying if it wasn't in your...

Stephen M. Johnson

Yes. But it did, it was in there.

Robert Connors - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So pretty much as of today, that figure still stands at roughly $5 billion.

Stephen M. Johnson

It does.

Robert Connors - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And just regarding Brazil and more SURF-related work, and the CapEx and infrastructure that would need to go into that. Would we see that more of a 2013 type of event or later considering this binary one bid outstanding sort of goes in your favor? Just trying to get a sense of CapEx ramp going forward?

Stephen M. Johnson

Hard for us to know at this juncture. All I could say is, is we've submitted our bid to our customer. I believe they're looking at technical side of the bid, Robert. No indications that there is any commercial assessment yet. And I simply couldn't tell you until we start getting feedback from the customer, if we do, what that timing looks like. So I don't have a sense of it. But my guess is a 2012 decision on building, which would depend upon -- building the fab yard, which would depend upon award, starts looking less and less likely day for day here because I just think this is going to take a while.

Operator

This concludes the question-and-answer portion for today's conference. I would now like to turn the call back to Mr. Jay Roueche for closing remarks.

John E. Roueche

Thank you all again for participating with us today. I want to remind you that the call included some forward-looking statements and I encourage you to see our SEC filings and yesterday's press release for more information on these. We didn't have time this morning to get to everyone's questions, So please don't hesitate to call me later in the day if you have any additional follow-ups. And at this time, operator, that concludes our call.

Operator

Ladies and gentlemen, thank you once again for participating. This concludes today's conference. You may now disconnect, and have a great day.

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