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Wall Street Breakfast

Helix Energy Solutions Group, Inc. (NYSE:HLX)

Q2 2007 Earnings Call

August 2, 2007, 10:00 AM ET

Executives

A. Wade Pursell - CFO and EVP

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

Martin R. Ferron - President and CEO

Owen E. Kratz - Executive Chairman of the Board

Robert P. Murphy - President of Helix Oil & Gas

Bart H. Heijermans - EVP and COO

Analysts

James Stone - Cambridge Investments

Roger Read - Natexis Bleichroeder

Phil Dodge - Stanford Financial Group

Stephen Gengaro - Jefferies

Travis Anderson - Gilder, Gagnon, Howe & Co.

Jim Rollyson - Raymond James

Joe Agular - Johnson Rice

Marshall Barnett - Capital One South

Presentation

Operator

: Welcome and thank you for standing by. At this time all participants are in listen-only mode until the question and answer at the end of today's conference call. During the question and answer period if you would like to ask a question you will be asked to quote your name and you company name also. I would like to remind all parties today's conference call is being recorded. If you have objections you may disconnect at this time. I would now like to turn our conference call to Mr. Wade Pursell, Chief Financial Officer of Helix Energy Solutions. Sir, you may begin.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Thank you. Good morning everyone and welcome to the Helix Energy Solutions Second Quarter 2007 Earnings Conference Call. We appreciate you joining us this morning. With me today as usual is Owen Kratz, our Executive Chairman; Martin Ferron, our CEO; Bart Heijermans, our COO; Robert Murphy, President of Helix Oil & Gas; and Alisa Johnson, our General Counsel. Hopefully everyone has a copy of the press release within and the slide presentations which we are going to go through this morning. If you don't, you can go to our website in the Investor Relations page there and click on the presentation.

I'll start on slide 3 of the presentation, you see the outline for the call this morning. I will summarize the results and walk through a quick financial overview and then I will turn it over to Martin for some operational highlights in both our services segment and our oil and gas segment as well as answer update on our earnings guidance and the variables. Owen will then wrap it up with some closing comments and a strategic summery followed by the Q&A segment. But first of all clicking back to slide 2, Alisa has an announcement for you.

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

Thank you. As noted in our press release and associated presentation, certain statements therein and in today's discussions are forward-looking statements. A number of factors could cause actual results to differ materially from those forward-looking statements. For a complete discussion of risk factors affecting the company, we direct your attention to our press release and to our annual report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission as amended by subsequently filed Form 10-K/A.

Also, during this call, certain non-GAAP financial disclosures may be made. In accordance with SEC rules, the final slides of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The presentation together with the reconciliation is available on our website. Thank you.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Thank you Alisa. First of all I would like to make a quick comment on Cal Dive. During the second quarter Cal Dive announced an to go out to acquire Horizon Offshore in a transaction valued at about 650 million. I am sure most of you noticed Horizon's quite disappointing second quarter earnings release yesterday. Cal Dive also released second quarter earnings last night and will be having its own conference call at 11 o'clock this morning central time. If you have specific questions on their earnings release or the pending Horizon transaction, I would ask you participate in their call later this morning.

Obviously if you still have questions after their call, feel free to call us or the Cal Dive management team.

So turning to slide 4. For the second quarter of 2007 we reported net income of $65.8 million or $0.70 per diluted share excluding three non-recurring items recorded by Cal Dive. The non recurring items were $11.8 million, $10.5 million after tax for non-cash equity losses and impairment charge relating to Cal Dive's 40% minority interest investment in OTSL, the Trinidad and Tobago Company. Cal Dive management will discuss this on their call but essentially OTSL generated significant operating losses during the quarter, lost several project bids which they were counting on winning and ultimately decided to exit the saturation diving market. Based on these events, Cal Dive performed an evaluation of the remaining investment balance and concluded it was permanently impaired and according wrote it off.

Cal Dive is not required to and has no plans to make additional investments in OTSL. Cal Dive also recorded a $2 million cash settlement with a DOJ related to the Stolt and Torch acquisitions back in 2005. Finally Cal Dive also reported a $127 million gain to $1.4 million after tax on a sale of a portable saturation diving asset during the second quarter. So including these non-recurring items after giving affect to the 27% minority interest Helix reported second quarter net income of $57.7 million or $0.61 per diluted share.

Turning to slide 5, net income for the quarter was $65.8 million or $0.70 per share before the non-recurring items compares to $69.1 million or $0.83 per share in the second quarter of 2006. Consolidated revenues were $410.6 million represents a 35% increase over last year's second quarter with increases in both services revenue and oil and gas production.

Looking on slide 6, you can see contracting services revenues, the maroon boxes, increased about $45 million or 20% due primarily to improved market conditions particularly within the Well Ops and robotics groups. In addition oil and gas sales increased $61 million, the grey boxes, due primarily to the production added from the Remington acquisition.

Gross profit of $141.8 million was 8% better than the $131.7 million achieved last year's second quarter. Gross profit margins of 35% were 8 points less than the year-ago quarter at 43% due primarily to the significant out-of-service days for Cal Dive's vessels and regulatory dry-docks 343 days in the second quarter of '07 versus 235 days in last year's second quarter. And also an increased DD&A rate for oil and gas production due to the Remington acquisition in July of 2006.

The reduction in gross profit from Cal Dive due to the dry-docks was offset by solid quarter for a Well Ops division particularly the Seawell and the North Sea which had its best quarter ever.

SG&A $33.4 million increased 6 million from the second quarter of 2006 due primarily to increased overhead to support the Company's growth over the last year. This level represents 8% of revenues 1 point better than the 9% in the second quarter of 2006. Equity in earnings we had a net loss of $4.7 million in the quarter due to the aforementioned $11.8 million equity loss and impairment taken on the OTSL investment approximately offset by $7 million for our share of earnings for the quarter from Marco Polo and our share of demands fees at Independence Hub. And I am sure most of you noticed that facility actually began producing during July.

Regarding the tax rate for the quarter, 35% was a full point higher than last year's second quarter due primarily to most of the OTSL charges and all of the DOJ reserve being non-deductible. So I expect the rate to return to around 34% for the remainder of the year.

The debt incurred last July for the cash portion of the Remington acquisition, $835 million caused cost interest expense... net of interest income and capitalized interest for the second quarter 2007 to be $14.3 million which is $11.3 million more than the $3 million in second quarter of '06. The Remington acquisition also was the main driver behind an increase in diluted shares outstanding of $96 million compared to $84 million in second quarter of last year.

And turning to the capital structure, if you see slide 7, total consolidated debt as of June 30, 2007 was 1.4 billion. This includes 140 million under Cal Dive's revolving facility, that's the blue box. This facility is non-recourse to Helix. The other components are primarily unchanged from last quarter, it's the Term B facility of $829 million in the orange box, the convertible notes of $300 million in the maroon box, and the MARAD debt of $129 million in the green box. So excluding a non-recourse Cal Dive debt, about half of our debt is currently fixed at a blended interest rate of 4.8%. So level of debt amounted to net to debt book of 43% and with $735 million of EBITDAX for the last 12 months. Excluding the IPO gain this represents 1.8 times trialing 12 month EBITDAX.

Summarizing CapEx, total capital invested in the first half of 2007 was approximately 447 million with about 63% of that in the oil and gas segment primarily drilling success at Noonan and Danny and share prospects. Contracting services capital related primarily to the Well Enhancer new build and conversion cost in the Helix Producer I and the Caesar. So, I think with that I will turn it over to Martin for operational highlights.

Martin R. Ferron - President and Chief Executive Officer

Thank you Wade and good morning to everybody. I am going to cover the highlights of the rest of the presentation starting on slide 8. The market for our contracting services is still strengthening nicely. And we managed to increase revenues by 20% year-over-year, despite a very extensive asset downtime for regulatory maintenance that Wade explained during the quarter. Cal Dive alone lost the equivalent of four key vessels for the entire period. Also the Intrepid was out for much of the time. This maintenance activity obviously had a negative effect on gross profit on margin but we expect to get back to 35% plus margins for the rest of the year.

Of particular note in the numbers provided on slide 8 is a dramatic improvement of well operations profitability up 14 points year-over-year with the Sea Well enjoying her best quarter in almost 20 years of operation.

Also Canyon had a record period and contributed over 60% of deepwater construction gross profits. This type of performance bodes well for the rest of the contracting services group, now that the bulk of the maintenance activity is behind us. Other highlights from slides 8 to 13 in all, firstly the Q4000 had a much better quarter, earning 30% margins on the work she was able to carry out before the major station keeping upgrade which is planed to start in late August.

We also secured a nice 60 day per year over three year well intervention contract procured at good rates. The Intrepid and Express is fully booked for much of 2008 already and a schedule for the Caesar is flowing up very well. For Q2 Orito Home [ph] was up sure rising in the [ph] Gulf of Mexico. Canyon as well is perform extremely well financially and involved in some very technically challenging projects. During quarter two they have proved their rock-cutting capability as part of a pipe burial job offshore South Africa. And commenced robotic coring operations for a deepwater mining operation offshore Papua New Guinea. This is discovery channel stuff.

We connected a very successful well operations project offshore Australia and as of 1st of July perched the remaining 42% interest to Seatrack which we didn't already own. Seatrack will in the future operate as our well operations Southeast Asia group.

Production throughput is growing at Marco Polo and now stands at around 50,000 barrels of oil equivalent a day with further growth likely by the end of the year. Also now the production has been initiated at the independent sub, the operation is expected -- sorry, the operator is expecting a significant amount by the end of the year. The Helix Producer has taken real shape as can be seen on the images starting on slide 10 where the transformation from train ferry to floating production system is well underway.

Turning now to slide 14 where for the first time we shall backlog for contracting services excluding Cal Dive, excluding Cal Dive because their business is mainly a spot market. The bookwork includes equity contributions from the production hubs and stands at $1.75 billion. Much of that is external work and we have commitments for 2010 and beyond. Many of our competitors in the deepwater and surf markets like to show these backlog slides. So we have done same here because we are very excited about the visibility. And I'd also like to point out that embedded in this revenue is margin in excess of 35%. So we are in good shape as far as commitments for many of our deepwater assets.

Net revenue and equity earnings for these segments this year in 2007 is $530 million and we already have well in excess of the number committed for 2008. We will obviously take questions on this new slide if you have any.

Okay. Moving on to talk about the oil and gas division starting on slide 15, we expected just a modest increase in production during quarter two and achieved this in spite of the interest in the deepwater Tiger field being shut in during May due to a fire on a third party processing platform. We were also disappointed in contribution from some of our non-operated properties during the quarter.

Looking at the financial stats on slide 16. Our cost structure is still negatively impacted by the hurricanes of 2005 and the allocation of much to the Remington acquisition value to their proven reserves. The former factor cost us around $5 million during the quarter, net of insurance proceeds and the later increase on DD&A rate by around $1 per Mcfe. Both factors will diminish over time as we bring on new production.

On the subject of new production potential, let's firstly turn to look at slide 17 which shows our exploration report card for the first half of the year. We drilled another 6 successful wells during quarter two including the deepwater Danny test and we now have built a sequence of 19 out of 19 successful wells with 12 out of 12 occurring this year.

In the first half our estimated 1P and 3P reserve additions are 140 Bcfe and 330 Bcfe respectively. Remember the Remington had 280 Bcfe of 1P reserves when we bought them. While the Murphy tells me that this level of success and aspiration is unprecedented in his experience, and I am sure that he will echo our sentiments in the Q&A session.

On the 2007 production fronts, our modified range for the year is now 70 and 80 Bcfe and since last time we have removed the acquisition which due to the further aspiration success and lowered expectations for output from non-operated properties in the Main Pass area in particular.

See slide 18 for full details there and again we will be taking questions on that. We are still expecting a significant increase in production over the remainder of the year as we being on new operator shelf developments. The major ones are shown on slide 8... slide 19 and I'd like to point out that this ramp-up requires an almost Herculean effort to bring on 19 new wells and involves a setting of 5 new platforms, 11 subsidiaries and a laying of 16 new pipelines, so we are busy, so lot of effort going into the ramp up.

Next year we are looking forward to reap benefit of our deepwater aspiration in acquisition efforts and it can be seen from slide 20. But following the addition of Danny our deepwater interest will deliver on upward step change in production when all on stream and around 80% of our incremental production will be oil.

As we have created considerable wholly holding value in several of these deepwater PUDs we may yet sell down some interest on the right economic terms. I said out in our initial guidance given in December last year. The current stats of our hedging program is shown us slide 21. And it is important to note that we are looking to opt positions of the start base [ph] with the deepwater project come into closer view; especially it's pervading all price strips.

Like to conclude my remarks by providing an update on full year 2007's earnings guidance, and again we put in the pre detail analysis on slides 22 to 24. Overall, we expect contracting services and corporate performance to be near the mid point of our initial guidance range. On the shortfall from lower production, we will be at least partially offset by lower expiration expense. I mean we haven't had any dry holes and our expiration program is pretty much behind us.

And as I mentioned PUC, we might sell down some minority interest and create a deepwater production volume. Barring a significant decline in natural gas prices, we are comfortable with the present consensus estimate of around $3.26 of earnings, the contribution for the next two quarters being around 45% and 55% of the remaining second half number respectively. Surely to talk about our 2008 numbers as we just started our budget in process. However a takeaway from this presentation is that we have the contract in Babylon [ph], new marine assets coming and hopefully incremental production. So that should make 2008 a very exciting one. We wrap and I will hand over to Owen with his remarks.

Owen E. Kratz - Executive Chairman of the Board

Thanks Martin. I've got relatively few comments. I think following the Remington transaction I have got to admit that we got ahead ourselves on the timing of the value realization that was on the transaction. But since then I think we've corrected the timing errors that we have -- that was in the guidance but it doesn't diminish the ultimate value potential of what that deal meant for the Company. I think it should now be apparent following the drilling success that we have demonstrated that the value of the transaction was truly in the prospects of... that came in the transaction. 12 for 12 on drilling out of 2 for 2 in the deepwater and initially 140 Bcf booked is significant reserves. Our cost to produce already is the best in class and its heading lower as production increases and discoveries are matured which proves the model of being able to lower our F&D cost.

Unfortunately all the focus of these significant events over the last 18 months on the production side has sort of clouded or fogged over the perceptions of Helix and distracted from the attention on the service and contracting side. As slide 6 shows, we are still 60% services and 40% reduction which is in the same range that we have been for over a decade. I think it's important to note that we opportunistically grow both sides of our business model or may get ahead of the other but we are very focused on growing the whole model.

In many ways the two sides of the company are interdependent, mutually supporting. Currently we have got around $1 billion in capital expansion and progress of which more than 50% is dedicated to contracting. I think it's very exciting when you start... I like the pictures on that one slide in the presentation, it gets very exciting when you start looking at the Well Enhancer coming on for Well Ops, the Caesar coming on for the big pipelay group, the Q4000 being converted for drilling, a new spool base in the works, we have got additional subsea lubricators for Well Ops being manufactured, 7 new ROVs, 2 ROV drill units that are out and we have successfully proved the concept, ROV rock cutter on a 200 horse power deepwater plencher which is a new technology and pretty exiting.

We've got the Helix Producer well along on being ready for a deployment on the Phoenix Field, we've got the Chiras [ph] sitting down in Southeast Asia waiting to be develop as an FPSO [ph] and we got the exciting news of the Independence Hub just coming on. These are all really exciting growth initiatives largely overshadowed by the focus on the big production deals over the last 18 months.

Incidentally now the timing of the assets coming to the market on the service side will be over the '08, '09 period which is during the same timeframe that production developments are scheduled to come on. So it should be pretty exciting to watch what the results are. In fact some of these services assets have their first utilization scheduled on deployments to do our own developments. So again it shows the synergy of the model. With this kind of visibility Helix is perhaps a value player this year but it's my hope that during '08 we'd be able to... to be recognized as a growth place as well which is after all what we truly are.

We are first and foremost a growth company. There's been tremendous performance in the company over the last year and things are going well and bode well for long-term sustainable growth there. With that I will turn it back over.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Okay operator we are ready for the Q&A.

Question And Answer

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from James Stone with Cambridge Investments. You may ask your question.

James Stone - Cambridge Investments

Hi, good morning guys.

Martin R. Ferron - President and Chief Executive Officer

Good morning.

James Stone - Cambridge Investments

Owen, I heard you saying about the growth that's out there and you know the improving visibility you have -- it's hard to kind of spice that in when you go four quarters straight with missing or lowering production numbers and I think that's the frustration that's out there in terms of trying to understand how you can build a long-term model on the production side without the confidence that the numbers... that you going to make the production numbers. And so just try... my question is... it was more of a comment, but my question is how do we get comfortable that once you move into the execution of these production projects, the things that are going to get down on time, that the flow rates are going to be there and that you not going to be held up by continuing third party problems.

Owen E. Kratz - Executive Chairman of the Board

Well first of all let me say that I do and we had a lot of transition in the company last year with the acquisition of Remington and we got overly excited about the potential of what we were doing and got into a habit of over promising and under-delivering. With that recognition and I think you have seen over the years where this isn't the first time we fell into that trap. It probably won't be the last but it's certainly not going to be in the near-term going forward. We have more than learned our lesson. Hopefully we have got the production. There are a lot of moving parts, a lot of new things for us to the try and get our hands around on the production and we just plain didn't have it right.

We have a done of lot of soul searching and lot of digging down in depths and hopefully we have got the numbers right. The impact there... you are right... right now on the show if I'd say the biggest impact to the production rates on the shelf, the shortfalls are coming from the consequence of our participation as a non-party in some of the fields. That's probably the biggest impact.

Historically we have always looked to be the operator and I think we are just going to have to discount greatly the potential of any non-op interest in our future projections and start talking about what we know we can do and we are in total control of our own destiny.

Going forward now it is a challenge. I mean I think we got the number right here, I think it's a number that is easily doable as supposed to what we have been citing in the past. I think guiding in the past we have been trying to communicate the potential of what we have and going forward I think the difference is we are going to be expressing what we feel we can definitely achieve.

Having said that a lot of this production ramp up is based on executing the development projects. By now we've got them all scheduled within new assets coming on. But I will say assets can somehow be guarded late [ph], weather can have impact. Hopefully we have built enough contingency into our scheduling here to accommodate that. And if anything I hope that we are a little more on the conservative side than is necessary.

James Stone - Cambridge Investments

Okay. And then my second question is, is $1.75 billion backlog number, can you frame that in some context for us. What kind of ballpark would that have been a year ago or a quarter ago, give us a sense of what kind of magnitude of improvement you are seeing in the contracting business.

Martin R. Ferron - President and Chief Executive Officer

Yes Jim, I'll take a shot at that. I think we put the slide in because we are excited about the contracts we booked recently and over the last year both internally and externally. Now booking work for assets that are not even in the water yet, like the Well Enhancer and Caesar, Helix Producer I, and we just wanted to point out that like other similar deepwater contractors, we do have commitments and those commitments are at a good margin. So this situation is improving nicely and we'll update slide if it's helpful for future calls.

James Stone - Cambridge Investments

But no venture to guess as to kind of -- what kind of order of magnitude change you've seen in your backlog in the last year.

Martin R. Ferron - President and Chief Executive Officer

Well I would say I will certainly see a 30% to 40% increase easily.

James Stone - Cambridge Investments

Okay, thanks.

Operator

Thank you. Our next question comes from Roger Read, Natexis Bleichroeder; may ask your question.

Roger Read - Natexis Bleichroeder

Yes, good morning gentlemen.

Owen E. Kratz - Executive Chairman of the Board

Hi Roger.

Roger Read - Natexis Bleichroeder

I guess we could... slide 18 with the production targets for the third and fourth quarters, you highlighted Martin the number of things you have to do, what's the over-under, I mean I understand what you are trying to do to get to the numbers but if you look at your experience over the past year that you have been with Remington and what you are attempting to do, how do you kind of handicap beyond sort of picking a midpoint between the high and the low case in terms of the likelihood of making those numbers both in terms of the exit rate for Q3 and the exit rate for Q4. And if there is a hurricane that comes through the Gulf and causes everybody to go to shore for a week or so, should we definitely assume that the low end is the right place or is it something you can recover from between say end this month and end of the year.

Martin R. Ferron - President and Chief Executive Officer

Yes I will start and hand it to Robert. You have tried a frame this range now of 70 or 80 Bs in terms of low and high case expectation. As I mentioned we've taken some non-op production out in Q3 and Q4. But given what we are doing with Cal Dive assets and with Helix assets on these shelf development projects, we've tried building some contingency time there. But obviously if a hurricane comes through that dramatically impacts operations in the Gulf that could hamper us and push us towards the low case. Robert, do you want to add to that?

Robert P. Murphy - President of Helix Oil & Gas

Right. I think the hurricanes, that's the variable that's very hard to model in. But we do have some downtime built in with natural decline. But the step rate change that Mark mentioned during the presentation, he went through really the laundry list of ingredients that make up the step rate change in going through the number of well but the real key factor in execution here is we have most of the wells drilled and completed out of the five platforms that he mentioned, four of them are set, one is being set right now. The real item that we have to execute on is getting our pipelines laid and I think we are at a great advantage here because we have a great shelf contracting unit here in Cal Dive that has been executing pretty well for us. So if you want to handicap it, it's at the pipelines and I think this is a company that weighs pipelines pretty well. So hopefully that will give you little more insight on what the actual work to be done is.

Roger Read - Natexis Bleichroeder

That is -- that's helpful. And in terms of having the pipeline and pipeline sizes available I mean there's no material problems here in terms of acquiring the materials.

Owen E. Kratz - Executive Chairman of the Board

No and I think there is one thing I do need to mention that the MMS, the governing body, and the Gulf of Mexico, they are really backlogged on their permitting process and what we have seen post hurricanes is this -- this has been a time period that's been extended and I think of anything we have come to realize that if we expect to get a permit out of the government to lay a new pipeline in 50 to 70 days, I think we need to actually count on that being more like 70 to 110. And that has had a big impact. Materials were fine, but most of it is just getting these permits and getting the routes shot in a timely manner.

Roger Read - Natexis Bleichroeder

Okay. So that's very helpful. And then well the other question I had sort of unrelated to that. The Helix Producer I, you have the picture in there about it leaving the shipyard, can you update us what else has to occur to that vessel to get it ready to go on the Phoenix Field next year and what's the timing in terms of installing that vessel and ultimately hooking up to field to it would they?

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

Yes, this is Bart. The picture shows the vessel but it doesn't show the vessel leaving the shipyard, it's still in the shipyard. If we leave the shipyard now, it probably wouldn't survive the transatlantic crossing because there's still a lot of work left there -- it left dry-dock and that's what the picture shows. The vessel... I mean the conversion is going to continue on schedule. We expect it to leave the shipyard in the first quarter of next year. Then what's going to happen is the vessel is going to come here to the Gulf Coast and it's going to go to Corpus Christi where Keyweets [ph] Offshore is fabricating all the production modules. Those production modules are then going to installed on the vessel and all going to be hooked up. And that's in process, that's going to take I mean probably 3 to 4 months and we expect the vessel to sale out in the -- through the Phoenix Field on it's own power in the third quarter of next year. And shouldn't take long to hook the vessel up to the wells that are already there, the flow lines will have been pre-installed, the buoy will have been pre-installed and that will pull the buoy into the vessel and we should be on production.

So, everything goes pretty well, I mean goes at the moment in accordance with plan. And we've got a very good team working on it and so we feel pretty positive about the whole development.

One comment I want to make also on the backlog slides, a question was asked earlier, we show around $1.75 billion of backlog, if you go back a year... go to August of last year, I would say probably in billion dollars of this backlog have not been contracted. So it's a very big change from a company where historically the backlog was maybe I mean 3 to 6 months. We go now... we are at mid-transitioning into a company that has very extensive backlog and that shows I mean the market that our contacting services are working in. But it also shows the interest and the confidence our customers have in our services.

Roger Read - Natexis Bleichroeder

Great, thanks.

Operator

Thank you. Our next question comes from Molder Keane, EBS Financial; may ask your question.

Unidentified Analyst

Good morning. A question for you regarding the Noonan and the Phoenix deals. First of all could you give us some kind of a ball park number as the earning contributions from these two fields. And secondly would you comment on what potential there is for increased production from these 2 fields overtime?

Martin R. Ferron - President and Chief Executive Officer

Molder, we've got a slide which shows details on both Noonan and Phoenix.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Slide 20.

Martin R. Ferron - President and Chief Executive Officer

Slide 20. If you take a look at that, we have given some reserve estimates and some fierce production estimates. I don't think we want to talk about earnings contribution at this point. I mentioned we haven't done our budget yet for '08. But I think you have got enough information there to take your own stab at it.

Unidentified Analyst

What potential is there to increase the production in the -- especially from the Phoenix field which is -- should be a pretty big production right away, but can you increase that beyond the current production estimate?

A. Wade Pursell - Chief Financial Officer and Executive Vice President

I think the trick will be on maintaining production at that level. We do have other wells, explore a few opportunity to bring on. So we are hoping to keep this production level flat for several year, this is our objective.

Unidentified Analyst

Thank you.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Thanks.

Operator

Thank you, our next question comes from Philip Dodge with Stanford Group, may ask your question.

Phil Dodge - Stanford Financial Group

Thank you, good morning. I wanted to first ask you about the 140 Bcfe of reserves that you have added with the encouraging exploration results. Would you be in position to book that at the end of 2007 and then would the arithmetic be that nothing else happens you would add 60 to 70 Bcfe for the year to the December 31, 2006 number.

Robert P. Murphy - President of Helix Oil & Gas

Well we typically as... I think it was mentioned that most of the... the meat of our exploratory program has been already taken place. So we don't have a lot of exploratory wells left to drill this year. It's principally development/pipe conversion program. Is that what you are asking?

Unidentified Analyst

Really asking whether you are going to be able to book... the overall period of time you are going to be able to book the 140?

Robert P. Murphy - President of Helix Oil & Gas

Well that's... we were pretty confident that we can, I mean we have estimate out their and yes that's we are out of the 140 we're saying, yes, we're pretty confident we'll see that number.

Unidentified Analyst

And then on the current production level what's the decline rate before you spend any money to tamper the decline rate and how much money are you spending to tamper the decline rate?

Martin R. Ferron - President and Chief Executive Officer

Well the maintenance capitals we will call it, the graph's pretty illustrative of our decline rate. You can see we add three categories on that graph, the PDP reserves, the proved undeveloped reserves and then the new developments. But in general it's 25% to 35% on shelf Gulf of Mexico reserves.

Unidentified Analyst

And is that before or after maintenance spending?

A. Wade Pursell - Chief Financial Officer and Executive Vice President

That is before maintenance spend.

Unidentified Analyst

Okay. And then finally on the Phoenix production rate, is that the total of the production that Chevron had before the hurricanes plus the discoveries they made is that process for getting to that estimate?

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Right the... right when the typhoon field encountered the hurricane Rita, there were two wells that were in progress that Chevron was... one was... had just been completed, the other had just been cased. So when you look at the last month of production prior to the hurricane, you need to add that plus the two new wells, PUD, yes.

Unidentified Analyst

Okay, Thanks very much.

Owen E. Kratz - Executive Chairman of the Board

Thanks Phil.

Operator

Thank you. And your next question comes from Steven Gengaro with Jefferies Company; may ask your question.

Stephen Gengaro - Jefferies

Thank you, good morning everybody. I guess really one main question. Can you walk us though in as much detail as you are willing to, when you look at your step up in earnings from the second quarter actuals to the third quarter, kind of what the pluses and minus are we should be thinking about over... sequentially over the next quarter or two.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Yes, if you take $0.70 as a starting point, taking out the non-recurring items, obviously we've got all of our asset base going to contribute in Q3 except for the Q4000 which is going to be out for September. So call it the top... all there three [ph] start working. So you will see a major difference in utilization and therefore contribution in contracting services. Also reassuring our production increasing. So you should see an extra contribution there. So those are the main drivers as well as contribution from the Independence Hub.

Stephen Gengaro - Jefferies

And there's nothing you see... that's sort of a negative sequentially.

Martin R. Ferron - President and Chief Executive Officer

At this point I don't see any major negatives, that's for sure.

Stephen Gengaro - Jefferies

And I guess just to be sure that the sort of... your comfort with the consensus is based off of -- between sort of the $0.70 number for the second quarter.

Martin R. Ferron - President and Chief Executive Officer

Yes.

Stephen Gengaro - Jefferies

Okay. I think that's all for me. Thank you.

Operator

Thank you. Our next question comes from Travis Anderson, Gilder, Gagnon, Howe; will ask question.

Travis Anderson - Gilder, Gagnon, Howe & Co.

Hi I was just wondering given the wonderful success that you have had in drillings with the all prospects to date, how much was the team that was with Renaissance when they did all that is still with you.

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

Yes, pretty well intact. We had very little loss from the exploration production staff that was -- that came from the Remington acquisition.

Travis Anderson - Gilder, Gagnon, Howe & Co.

[Multiple Speakers]. Kudos to you and your team. Even though production that has been a problem for us to accurately forecast and get back up to the expected levels, we are... if there is another company in the Gulf that has actually increased book reserves on the shelf this year, I cant think of them, whereas you guys have.

Robert P. Murphy - President of Helix Oil & Gas

Right.

Travis Anderson - Gilder, Gagnon, Howe & Co.

[Multiple Speakers]. In terms of prospects that you are developing then, is it more or less on the same pace that Remington was at.

Martin R. Ferron - President and Chief Executive Officer

Yes we continue to --

Travis Anderson - Gilder, Gagnon, Howe & Co.

[Multiple Speakers].

Owen E. Kratz - Executive Chairman of the Board

Right. Yes, the team is continuing to farm our data sets, looking for more prospects. And it is a proven team. Also it's just a proven process that has been held together.

Travis Anderson - Gilder, Gagnon, Howe & Co.

Great, thanks.

Operator

Thank you. Our next question comes from Jim Rollyson, Raymond James; you may ask your question.

Jim Rollyson - Raymond James

Good morning guys.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Hi Jim.

Jim Rollyson - Raymond James

One question Martin, just following up on something you said earlier, you are talking about the production issues which I obviously I was talking about, and it sounds like a lot of the issues have been third-party related and you took out the acquisition wedge, etc. Can you just talk about how your own operated production has been doing, maybe relative to what you guys were planning at the beginning of the year?

Martin R. Ferron - President and Chief Executive Officer

I would like Robert to handle it, if you don't mind.

Jim Rollyson - Raymond James

Sure.

Robert P. Murphy - President of Helix Oil & Gas

You bet. And just from a... again referring to the slide, we have obviously scrubbed this down pretty well. And when we look at our projection from late last year through the proved reserve category, we have had some fields that have not performed as projected and others that have performed. So when you put it all together, we are right on our projection for approved reserves.

The... I guess the shortfalls that we've experienced as we have some non-operated fields that we projected to perform better than they have, now it's not a matter of performance, it's a matter of execution of the word. These fields that we have seen some lack luster performance on, the reserves we saw there, the operator's just not getting to it and the operators are much larger companies than we are. So you can kind of put 2 and 2 together there. The other thing that was... has become a shortfall for us is we've had a... an interest into main past properties that we are non-operator of that have done on the market for sale and they are pretty much drilled completed but the infrastructure has not been put in yet because of this spending sale process. We see that coming to a close here, but those main past properties have also contributed heavily to the shortfall. So from our own proved reserves, our own operated properties we have seen exactly what we have projected.

Jim Rollyson - Raymond James

Absolutely. Just a follow up question on cost. Obviously you Martin mentioned just kind of recurring hurricane issues that have been showing up in the cost. How much long do you expect those to kind of carry forward and I presume as the production starts to ramp your unit cost ought to come back down, is that fair?

Martin R. Ferron - President and Chief Executive Officer

It's fair. The unit cost from a DD&A perspective because we are a successful efforts company, it is on an individual field basis, it's not pooled. So there will be ups and downs as far as which field come on but we are bringing on so many that we should see a lower unit reduction cost there. From the abandonment due to hurricane damage that we experienced in 2005 we still have some more to do. I think that's where we are working on it diligently but the government wants it done and we want it done.

Robert P. Murphy - President of Helix Oil & Gas

Yes and this... Jim this relates to P&As, and Wade said they are not going to produce it anymore.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Right.

Jim Rollyson - Raymond James

Yes, perfect. Last one for Owen. About a year ago if I recall, you were a little bit concerned working into later part of this year as is related to diving assets coming into the market. And given kind of how strong the market has maybe gotten since then or held up since just wanted to get your current view of how the market's shaping up looking at the next year?

Owen E. Kratz - Executive Chairman of the Board

Well, I'd really like to avoid getting into Cal Dive business with their call coming up, I would take questions after I let you all hear their impressions of it. I will say that historically, Cal Dive's business is to a large extent IRM work which is pretty steady state versus the cyclicality of development work beyond that I let Tim talk. From our perspective that Helix if you look at the assests that we have the assets that we are bringing on, these are not me-too type assets, these are all specialty niche assets and that's for a reason and I don't want to put panic in anyone's mind but I am... and you know me Jim, I am always planning for the next downturn. For that reason we have specialty assets that are not as sensitive to an oversupply situation that may be coming out of Norwegian shipyards. Having said, to the extent that an oversupply does occur or a weakening of the demand in the market, then that creates opportunities for us that will certainly jump on. For that reason I think over the next 12 to 18 months, creating some balance sheet strength is not a non-prudent thing to do.

Jim Rollyson - Raymond James

Very good. Thanks guys.

Operator

: Thank you. Our next question comes from Steve Ponts [ph] with Paul Capital; may ask your question.

Unidentified Analyst

: Thank you. One, maybe you could give us some flavor of what the current contracting environment is like for you big assets up here and what the visibility is like? You put up $1.75 billion backlog number and you eluded to the fact that visibility, is better can you give us some color on what it's like now versus a year or two ago?

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Well there's been a dramatic improvement. I think the backlog slide we put in shows that we have visibility into 2010. And I will mention Intrepid and the Express and are booked through '08 pretty much. And we do have commitments in the following years. The Caesar is -- order book is filling out nicely. And then the Seawell is probably committed for at least a couple of years. We have taken orders for the Well Enhancer. So visibility has dramatically improved since last year, and there are good rates too. I would like to point out that we are bidding higher and helpfully we will be able to achieve superior gross profit margins on our work.

Unidentified Analyst

: Right and I realized this question has already been asked but as your production comes on, what kind of reductions could we expect in this DD&A rate. I mean you bring out a fairly significant amount of production, are we goanna to bring that DD&A rate down $0.50, $0.75. [Multiple Speakers].

Martin R. Ferron - President and Chief Executive Officer

If you look at the estimated planning and development cost for the prospects that we have drilled this year and the exploration success we've had. Even at one fee, we are predicting well less than 250, an Mcfe of F&D cost. So once that comes on, you will see a dramatic reduction in our DD&A rates. I would to see it getting nearer $2 -- get down to that sort of range.

Unidentified Analyst

: Okay.

Martin R. Ferron - President and Chief Executive Officer

That's our objective. Don't forget we want to be 25% below industry norms. That's our aim.

Unidentified Analyst

: Okay. And if you turn to page 28 and you look at guidance for rest of the year, there is just some enormous swing there between what the revenues are from now to year-end and what the... your potential income from operations could be. If you take that incremental number, it turns out to be $108 million or something over $140 million difference in revenue. Is that anything in particular that's out there or just some jobs that need to get finished to get up to the $1.2 billion revenue number.

Owen E. Kratz - Executive Chairman of the Board

No, it is just vessels returning to work. If you get the opportunity to listen to Cal Dive's call, you'll see that their revenues were way down this quarter because so many assets are out for regulatory maintenance. We also have the Intrepid out for a long period during the quarter. So these assets returning to work don't make a measure [ph] to us.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

And what we are presenting on the slide is our initial guidance.

Unidentified Analyst

Yes.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

And right now, we're saying we're trending toward the middle of that guidance.

Unidentified Analyst

Okay, and finally maybe this jumps the gun also, but horizon reported a surprisingly... maybe a surprising number last night, and given the fact if you are in the middle of this deal with them, what's the status of that? Or you expect any change in the status of that merger?

Owen E. Kratz - Executive Chairman of the Board

I think you got to put that question to the Cal Dive management.

Unidentified Analyst

Thank you.

Operator

Thank you. Our next question comes from Joe Agular with Johnson Rice; you may ask your question.

Joe Agular - Johnson Rice

Thank you. I was wanting to refer back to the backlog page that you all had in your slide presentation, and the equity and earnings number that you gave in that first slide, could you... what does that represent?

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

The equity earnings number is... represents our earnings out of our equity investments in Marco Polo and Independence Hub based on the demand charges and volumatic payments based on the most lucky case of the existing fields that are producing.

Joe Agular - Johnson Rice

So this goes out for years then?

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

Yes.

Joe Agular - Johnson Rice

Okay, and then --

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

But it doesn't include any other fields that in the future are going to be tied back to these hubs.

Joe Agular - Johnson Rice

Right, okay I was just... I was trying to figure out that being in the contracting backlog is... whether that was additional work that needed to be done or it just the equity in the earnings side.

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

No capital has to be spent.

Joe Agular - Johnson Rice

Okay.

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

And also remember... I mean it is equity earnings, so that means, it's revenue minus expenses. So to really talk about margins here, it's a 100% margin number.

Joe Agular - Johnson Rice

But that represents the flow through you expect on to the Helix income statement.

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

Correct.

Joe Agular - Johnson Rice

Okay. Second question is, in the next slide there is a number given for production facilities as well which I had assumed is work that you are going to be doing on what is that new production facilities that include both you own and others, or is it... could you just help me understand whether that's --

A. Wade Pursell - Chief Financial Officer and Executive Vice President

If you go to the next slide, the next one is about oil and gas.

Joe Agular - Johnson Rice

Well I am sorry, not the next slide, but next chart in that slide that breaks out between deepwater pipeway production facilities and so forth.

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

Yes, that's the difference between the equity earnings in the first chart and production facilities in the second chart is the revenue that we have contracted for from the Helix Producer I.

Joe Agular - Johnson Rice

Okay, so this is work that you all are doing on the Helix producer.

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

Yes, it is. East direction [ph] revenue from the Helix Producer I.

Joe Agular - Johnson Rice

Okay, thank you very much.

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

Thank you Joe.

Operator

Thank you. And the next question comes from Marshall Barnett with Capital One South; you may ask your question.

Marshall Barnett - Capital One South

A quick question for you regarding the backlog slide. You are showing about $600 million that you have expected for '08. I was wondering what you have in terms of the remaining capacity for backlog additions during '08. Would you say there's a lot of room left?

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

Not remaining [ph] the Caesar I think --

Martin R. Ferron - President and Chief Executive Officer

Yes I mean I think there's room left on the Caesar, there's room left on the Canyon fleets, there's room left on the Q4000, I mean we have got Shell contracts. And of course, Q is going to drill internally, but we still plan to get some of the third party well intervention revenue and we are bidding over a lot of jobs with the queue and it's goanna be higher margin opportunities. And in Express... because Express and Intrepid are getting pretty -- the schedules are getting pretty full. But what we're is we are using some of the Canyon vessels. Remember with Canyon, we have a pretty large fleet of vessels we have chartered. We are using some of those Canyon vessels to support the deepwater feet. We are removing some work... high margin work from the deepwater assets to the canyon fleet and... so I think on the canyon side, there's goanna be a significant upside compared with the backlog that we show in this chart.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

I'd like to jump in here though. I just like to mention the backlog slide... I think the greatest value there is to show stepwise change in the company. It is starting to speak more towards potential than perhaps what I am comfortable doing, that's why I have never been a fan of other contractors that hide backlog and I want to make sure that we don't get into that trap. This is intended to show that the... even though we have a lot of new assets coming to market... our... the volume of our work is visible and greatly expanded so we don't have a utilization risk on these new assets to come to market. But I would stop short of trying to infer anything from the backlog slide as to the potential for beating future numbers. If you'd noticed we have avoided talking much about '08 other than saying that we've got a lot of developments coming on line but at the same time that we have assets coming on line. The potential there is big and I want to make sure that we don't fall into the trap of hyping the potential of what's going to occur here. We have got now and between the end of the year to accurately... really dig down and come up with guidance that you can take to the bank.

Just for instance on slide 18 that production ramp-up, I think that's a continuation of the format in trying to show you what... how we are thinking in the company. As Jamie mentioned... or he pointed out, there is a big difference between talking about your potential and talking about what is expected and talking about what you can take to the bank. And I don't want to see you guys slide into... again talking... over-hyping potential and... but at the same time I don't want to see us falling into being known as a sandbagging company. In the perfect world on those production graphs there, I probably wouldn't have the 80 Bcf on there. No I think that's a kind of a potential number. But then again it was would be wrong to just say 70 Bcf because that's probably on the sandbagging side. But I think the 70 is a number that we are doable. And we are taking an honest effort at showing the yellow line there which is what is expected. So --

Marshall Barnett - Capital One South

Thanks.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Just take all that with a... for what it is worth. But I am... we are trying to get this accurate going forward.

Marshall Barnett - Capital One South

That's very helpful, thank you.

Operator

Thank you. Our next question comes from Greg Cules [ph] with Brencourt Advisors; you may ask your question.

Unidentified Analyst

Hi guys. I had a couple of quick questions. First on slide 9 when you talk about and forgive me if this question has been asked already, I didn't hear it. The utilization of pipelay versus robotics, what sort of percentage of deepwater is a breakout, pipelay versus robotics as I said is a pretty significant decline in asset utilization in pipelay versus robotics.

Martin R. Ferron - President and Chief Executive Officer

Well in deepwater pipelay we don't have two assets present, the Intrepid and the Express. Intrepid was out for long period for maintenance not... that's what brought the number down to 70% whereas in robotics we do have many RVs working. So we were able to improve utilization dramatically over 2006 levels and 2007. We've been improving marketing additions [ph] and seasonality.

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

Yes, if the Intrepid hadn't been a drydock and of course it's in the regulatory drydocks, you have to do that every couple of years. If Intrepid hadn't been a drydock, the second quarter I mean would have been better than the first quarter number from a utilization perspective.

Unidentified Analyst

Actually you are saying then, pipelay would have been higher than 93% utilization --

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

Yes.

Unidentified Analyst

Versus 70.

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

Yes.

Unidentified Analyst

Okay, and then going back to slide 8, when we look at sort of the significant decline in utilization or in revenue... the revenue decline in terms of percentage from deepwater and shelf. Was shelf primarily due to the ownership in Cal Dive and deepwater was just... as you had said here with Intrepid... had Intrepid been in service, we likely would have seen deepwater construction, revenues higher than the first quarter sequentially.

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

The declines in revenue are purely due to maintenance activity.

Unidentified Analyst

Okay.

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

With the difference quarter-to-quarter.

Unidentified Analyst

And so then that's just overhead absorption when we see a comparison in margin as we move down to gross product... gross profits.

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

Yes.

A. Wade Pursell - Chief Financial Officer and Executive Vice President

Yes and I think also on the margin side from deepwater construction I mean... I think what's also mentioned is that there was a legacy contract that Express worked on for quite some time in the second quarter, that was a contract that was bid in '05 at pretty low margins and we don't have any of those legacies contract left.

Unidentified Analyst

Yes, okay. So those are burnt off and just a general question maybe for you Martin. Are you seeing any change in terms of scarcity of labor crew with fuel costs, etc., whereby you are seeing just an inherent compression in gross profit margin or should we expect that when utilization rates are sort of 90% above, knowing sort of what the historical possibilities are. Is that something then that we can sort of look forward to? And then also are the types of assets coming on in the upgrades will inherently lead to higher margin business?

Martin R. Ferron - President and Chief Executive Officer

That's a pretty wide-ranging question. I think we are seeing a pressure on labor and material cost is the same as everybody else working in the industry. But all predictions for gross margin 35%, the contracting services take that into account. I think in certain segments we might see higher margins. From the specially assets that we are all bringing to markets over the next couple of years. So our earnings guidance reflect current cost pressure in the marketplace.

Unidentified Analyst

Okay, great. Thank you guys.

Martin R. Ferron - President and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions]. Sir, at this time I show no further questions in queue.

Martin R. Ferron - President and Chief Executive Officer

Okay. Well, thanks everyone for joining us today. We look forward to reporting to you again next quarter.

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Source: Helix Energy Solutions Group Q2 2007 Earnings Call Transcript
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