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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

Bryce D. Humphrey - BB&T Capital Markets, Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

Will Gabrielski - Lazard Capital Markets LLC, Research Division

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

Steven Fisher - UBS Investment Bank, Research Division

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

Scott J. Levine - JP Morgan Chase & Co, Research Division

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

Brian Konigsberg - Vertical Research Partners Inc.

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

McDermott International (MDR) Q1 2012 Earnings Call May 11, 2012 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the McDermott International First Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Jay Roueche. Please go ahead.

John E. Roueche

Thank you, Pamela, and thanks to everyone who's joining us this morning. We appreciate you participating today as we discuss our results from the first quarter of 2012, which were released yesterday through our press release and in our Form 10-Q.

As usual, I have with me today Steve Johnson, McDermott's Chairman, President and Chief Executive Officer; as well as Perry Elders, our Senior Vice President and Chief Financial Officer. Before I hand the call off 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. These forward-looking comments are subject to various risks and uncertainties, and they reflect management's views as of May 10, 2012. Please refer to our filings with the Securities and Exchange Commission, which are available on our website, including our Form 10-K for the year ended December 31, 2011, and yesterday's 10-Q, which will provide a discussion of factors that may cause our actual results to differ from management's projections, forecasts, estimates and expectations. And please note that, except to the extent required by applicable law, McDermott undertakes no obligation to update any forward-looking statement.

Let me now turn the call over to Steve for his opening remarks.

Stephen M. Johnson

Thanks, Jay, and good morning, everyone. In my view, McDermott had a very good start to 2012 with this quarter's results. Two months ago, we thought our first quarter results would be softer, but clearly, the operations and our project portfolio exceeded our prior expectations. Some of this outperformance was timing-related, some projects showed good improvement and we had cost savings, and importantly, we didn't have a large one-off project charge or charges that affected the last 2 sequential quarters. Adding to our solid financial results, the company also had its best quarter of bookings in its history at over $2.6 billion, which grew our backlog to $5.8 billion, also a high watermark in the history of the company.

Before I get too far into our prepared comments, let me give a brief outline of our intended discussion this morning since we're likely to go a little bit longer than usual. I'll provide a few more comments on the quarter before handing off to Perry to cover our financials in detail and supply some other metrics, then I'll return for my view of McDermott's strategy, both what we've been implementing as well as what we expect to be doing going forward. My objective is to be as transparent and fulsome with respect to growth plans and strategic direction as is reasonable given this broad audience. Following our prepared remarks, we'll open the call to questions. So let's get started.

As I indicated, we're quite pleased with the first quarter 2012 in many respects. McDermott reported net income from continuing operations of $59.3 million with earnings per share of $0.25. I've always said not to read too much into any one quarter, but it's a lot better saying this when we delivered solid results like this period.

While I don't intend to spend much time on it, I do want to update you on the Atlantic loss projects that impacted the last 2 sequential quarters. Both the PEMEX and Brazilian charter contracts continue to progress and go well. The Agile project has performed well or better than expected. On the PEMEX job, we changed the logistics somewhat and made a decision to release our contracted dynamically positioned vessel and then to perform all the remaining work with our own DB16 vessel. This change results in the contract taking a little longer to wrap up and an additional project charge this quarter of about $5 million, but this amount should be offset through increased utilization benefits through the second quarter.

As I also mentioned earlier, the company's backlog reached record levels at March 31, 2012, with a total of $5.8 billion. Bookings over $2.6 billion don't happen every quarter but we were pleased to be awarded this amount in the 2012 first quarter. Clearly, INPEX Ichthys award was the largest contributor. Even without this award, however, our bookings in the 2012 first quarter would've exceeded the amounts we reported in each of the last 2 sequential quarters. And in fact, the level of bookings in this first quarter alone exceeded the total we had for all quarters last year 2011. So similar to earnings, we're off to a very strong start for this year.

As we discussed in last quarter's conference call, the INPEX Ichthys subsea booking is our largest single award ever at the time of contract signing. Although the reported revenues don't really start flowing until after 2013 and primarily in 2014 and '15, we've already committed about 40% of the total contract costs to procurement orders and subcontracts. And in addition, we've entered into hedges for most of our expected foreign exchange exposures. To say it another way, we believe that we've significantly de-risked a large portion of this project in a fairly short order.

In addition to the INPEX project, we also received another sizable subsea order in the Asia Pacific region, which we expect will utilize our new North Ocean 105. This is the SeCaP project, a deepwater job in over 4,000 feet of water installing pipe and pipe flow lines, risers, umbilicals and umbilical packages. There are a number of firsts on this job, and as such, we'll utilize our deferred profit recognition policy. Virtually all the revenues are expected in 2012 anyway, so following this approach should have minimal impact on 2012.

The other notable award was the KJO Hout project, which is an EPCI award in the neutral zone between Saudi Arabia and Kuwait. The scope includes a jacket, deck-associated pipelines and some brownfield demolition work.

Additionally, we had about $130 million of bookings this quarter come through change orders, scope increases and settlements. Over the last 4 quarters, we've averaged about $235 million per quarter from this type of bookings, so the first quarter was somewhat below the recent average. However, we more than made up for it in new awards, predominantly in the Asia Pacific segment.

Turning to the Atlantic segment. We had a light first quarter in bookings, but as we announced earlier this month, we signed a BG Trinidad & Tobago living quarters modules contract, which should show up in the second quarter. In addition, there are several Atlantic projects in the pipeline which we expect to know about in the not-too-distant future.

Even with record bookings and backlog, our quarter end bids outstanding only declined modestly. At quarter end, we had $4.8 billion of bids and change orders outstanding, which compares to $5 billion at year end, but up significantly from $2.2 billion just one year ago. It's worth noting that the $4.8 billion does not include a recent bid in Abu Dhabi which we've removed from the total.

In any given quarter, we typically have about 30 to 40 individual bids outstanding. Of the 2012 first quarter amount, we have a couple of bids around the $1 billion level, many more in the $100 million-plus range and the bulk of bids would be in the sub-$100 million range. Since quarter end, we've spent a fair amount of time reviewing new bids for submissions, so the markets seem to be remaining quite active.

In the 2012 first quarter, the dollar amounts of our awards were highly subsea-oriented. However, the vast majority -- the majority of our current bids outstanding can only be described as traditional conventional work, and less than half of that total dollar value is fixed price.

For all of our bids, we believe we offer excellent solutions at competitive prices to our customers. But typically, competition is involved, so capturing any particular award is always uncertain and the timing of awards doesn't always match our initial expectations. As always, the primary goal is the development and execution of quality backlog. The spikes and troughs we might see in backlog or bids for any one quarter are only noise.

Beyond bids, our target list of projects has grown modestly. We still have north of $10 billion of targets identified, which we expect to reach award stage in the coming 15 months. Combining bids outstanding with backlog and target projects all as of March 31, provides revenue pipeline potential that exceeds $21 billion. Additionally, we have a sizable list of backup projects or potential jobs that may or may not come to fruition.

With this market background, let me, at this point, turn the call over to Perry to discuss in greater detail the 2012 first quarter financials and our outlook. I'll return afterwards for the discussion of our strategy, both in progress and upcoming. Perry?

Perry L. Elders

Thanks, Stephen. Good morning, everyone. As we reported, total revenues for the 2012 first quarter were $728 million, about $170 million below the 2011 first quarter. The Asia Pacific segment was the primary source for the lower top line. Revenues in that segment were down, primarily due to lower activity on the large Kipper Tuna Project in Australia, as well as due to the completion of the Platong Gas II Project, which was very active in the 2011 first quarter.

The Middle East also saw reduced revenues, primarily due to the near completion of the multiyear Karan project and Saudi Arabia, although the decline was offset somewhat by increased activity on the Safaniya project in the same country. As we've discussed quite a bit over the last few quarters, our Morgan City facility has an improved workload as compared to the last 2 years. This work, combined with a full quarter of DB16 marine days, helped to offset declines in the Eastern Hemisphere and led to 150% increase in the Atlantic segment's revenues.

Gross profits in 2012 first quarter were down about $22 million from a year ago quarter as a result of lower revenues. However, the gross profit margin increased about 100 basis points to 17.9%. The gross margin improvement from just projects alone was even greater than this, but higher utilization as compared to the 2011 first quarter, partially offset the project improvements.

With lower SG&A largely mitigated by the swing in equity of unconsolidated affiliates, operating income in the first quarter of 2012 came in at $80.2 million or a little over 11% of revenues. This margin was largely in line with our 2011 first quarter. The Asia Pacific segment had a 48% increase in operating income despite lower revenues, largely due to project improvements and closeouts. And we saw an improvement in the Atlantic segment, but these improvements were more than offset by declines in the Middle East, including fewer closeouts.

In the other income/expense line, we had a $15 million positive variance compared to last year's first quarter. While interest income net was up and other expenses were down, the bulk of this improvement came from noncash gains on foreign currency exchange. This gain was principally driven by the measurement -- the remeasurement of cash balances denominated in other currencies, primarily the Australian dollar.

In addition, with the INPEX project award, the notional value of our foreign currency derivatives nearly quadrupled since year end from a book of about $300 million to around $1.2 billion. Although these hedges protect our project profit at completion, for much of the currency rate movements and operating loss, a portion of the foreign currency fluctuations do impact current quarter earnings.

With this sizable increase in derivatives, combined with a quarterly remeasurement of foreign currency monetary balances, we have now booked a foreign exchange out to its own line in the income statement to increase transparency, since it's likely, this will continue to be volatile in future periods. Even though we had a nice gain this quarter, we'd encourage you to recognize this is largely a noncash, nonoperational impact driven by external market factors.

The reported tax rate in the 2012 first quarter was about 32%, which was up compared to last year's first quarter and a little higher than we'd expect, due to unbenefited losses, jurisdictional mix of earnings and some one-off items, such as about $2.5 million for the tax provisions on the foreign currency gain I just discussed. As always, our tax rate will be determined by the tax jurisdictions where we're working and the cumulative tax position therein.

As Steve mentioned, net income from continuing operations was $59.3 million for the first quarter of 2012 or $0.25 per diluted share, compared to $0.29 we reported in the 2011 first quarter.

Turning to liquidity. We had almost $900 million of cash, cash equivalents and investments at the end of the 2011 first quarter, an increase of about $170 million compared to the year 2011. The sale of the former charter fleet business accounted for about 1/3 of the increase, but ongoing operations represented the majority of it.

To cover some of our typical operational metrics, our activity level during the 2012 first quarter was generally in line with the year ago and mix compared to the sequential quarter. We were essentially at standards in our construction yards with over 3.9 million man-hours, flat with the 2011 first quarter and about 15% ahead of the sequential period.

Likewise, our marine work barges increased as well, compared to the year ago quarter at 314 days versus 294. However, over 1/4 of this year's days related to the 0 margin PEMEX project which provided utilization, but no profit. Compared to the sequential quarter, barge days in total were down as we expected and communicated last quarter. In summary, this quarter's barge utilization of 62% was better than expected for the remainder of 2012.

Taking a look ahead, while operating margins exceeded our expectations in the first quarter of 2012, we're sticking with our guidance range we gave last October. With about $2.8 billion of remaining 2012 revenues expected to come from existing backlog during the rest of the year, we continue to be comfortable that the full year revenues in the mid-$3 billion range is reasonable, with quarterly operating margins in the 7% to 10% range. This would imply a pickup in quarterly revenues during the remainder of the year, with operating income generally in the neighborhood we achieved this quarter. So absent FX movements or other unforeseen or unforecastable items, this would imply that the current mean analyst estimate for 2012 looks to be in a reasonable range based on our current expectations.

Of course, we say it every quarter that McDermott's business model doesn't produce straight-line results and 90-day increments is probably not the best way to evaluate the business, as our results do tend to bounce around somewhat and the anticipated work schedule does regularly change. However, the 2012 first quarter was clearly launched the year with a good start.

Considering the current year looks pretty good at this point, the pushback we've received lately from investor relates to 2013. While it's a little early to get excited or depressed at this point, it is always true at McDermott, and I assume at most project-oriented businesses, that someone can look out into the future and see a cliff that isn't covered by existing contracts.

The nature of our business is usually clients wants us to get started on their projects shortly after award, and the EPCI projects typically last a couple of years or so. As such, we generally have 12 to 18 months worth of visibility from backlog when the project portfolio is all averaged together. It's a long way of saying this situation is not new to us. We've been here before and we're actively addressing it. The large INPEX award was a different profile than most of our work in terms of longer visibility. However, most of the projects we're bidding have a more typical expected revenue recognition.

After only one quarter in 2012 and considering how our projects awarded and worked off, I can't, at this point, give you an accurate prediction for next year's revenues. What I do know is we have over $900 million of work for next year that's expected to come from a current backlog. We're expecting to see some scope increases and change orders beyond what we have now from current projects.

We've got nearly $5 billion of bids outstanding at March 31, and bidding activity, thus far, in the second quarter, has remained strong. Delivering a solid 2013 should be a combination of current work, scope growth, change orders and new awards, comprised of small, mid and large size projects. This is our business model, and therefore, we never rest on our laurels since there's always a period ahead to fill out. We recognize that, at the moment, we have capacity for this year and next, and we're actively looking to sell it. Visibility into 2013 will continue to increase as this year progresses.

Now let me turn the call back to Steve for his remaining comments.

Stephen M. Johnson

Thanks, Perry. As I mentioned a few moments ago, I'd like to take some time to speak to McDermott's strategic actions over the last couple of years, and also what we plan to be doing going forward as we continue to position the company for growth. Some of my comments will reiterate what we've said in bits and pieces previously, but I believe it now makes sense to lay out our strategy in a more comprehensive way, both from an end market perspective, as well as a capital asset perspective.

In terms of end markets, the McDermott brand is known globally as a leader. With our strong positions and historically shallower markets, such as the Middle East and Asia Pacific, we're often thought of externally as only a shallow water market participant. It is true that we excel in this market with jackets, platforms and pipelines, and we very much continue to see opportunities here for the foreseeable future.

However, we also participate in the deepwater market with floating production solutions, as well as subsea and SURF installations. In my view, this area is our largest growth opportunity, and we have recently seen several important customer awards such that almost half of our first quarter backlog was for deepwater-related or SURF projects.

We believe these offshore upstream oil and gas markets are growing, and long-term global economic fundamentals are very strong. To further capitalize on this growing market opportunity, we intend to increase our investments.

As you all know, McDermott's business model is somewhat unique in the E&C space. We're more capital-intensive, having distinct construction yards with the associated equipment and owning marine vessels for offshore installation. We see a lot of advantages to this business model, including the ownership of hard assets that have substantial value and our capabilities that enable us to keep profits that some others subcontract away.

However, considering this model, capital discipline is vital. We view our cost of capital to be in the low double digits, and obviously, the capital deployed needs to exceed that level. Our approach is to not only require appropriate returns on new capital invested but also to frequently evaluate capital that's already at work and ensure what is invested is still achieving its best return.

By way of illustrating this point, in the 2012 first quarter, we sold our charter fleet for about $61 million. Not that it was a bad business but it wasn't poor, and we believe we can achieve higher returns by deploying that capital elsewhere. Without question, our marine vessels had the most capital invested of our major assets and with the combined insured value exceeding $1.2 billion.

We've talked about our vessel renewal program in the past. This effort is a combination of enhancements to the existing fleet and purchases or newbuilds of other vessels. Divestitures and/or retirements of existing vessels is also important and a complementary component. Considering this program cannot be a single quarter or even a single year effort, our activities may have gone somewhat under the radar. But let me assure you, the company has been very active and will continue to be so in the future.

So let's talk first about asset enhancements. Some of the highest return on invested capital can be achieved by upgrading and/or adding capabilities to an existing asset. Less incremental capital is required as opposed to buying or building something, but the benefits obtained would be similar so the economics are better.

We currently have 3 major enhancements in progress for our large work barges. The first is on the DB50. In conjunction with the scheduled drydock, we've been significantly upgrading this vessel with over $150 million of planned investments, primarily to upgrade the power and propulsion systems and adding a deepwater lowering system. We're about 95% completed on the project. And when the vessel returns to work, its life expectancy will be expanded and the enhanced capabilities will enable it to pursue a wider variety of projects at an expected higher return rate and in deeper water, all with reduced expected downtime allowing it to work more days.

The DB50 has traditionally been considered the queen of McDermott's fleet, generally staying quite active and having work come to it, and we expect this view will only grow once it returns to the marketplace this summer.

The 2 other enhancements are in earlier phases. The DB30 is currently working on the Macedon Project in Australia, but it's scheduled to go into the shipyard in 2013 to upgrade the vessel with a dynamically positioned system. Currently, the vessel operates, utilizing anchor handling tugs, to lay pipelines. After the 2013 upgrade, it will be deepwater capable and self-propelled for pipelay activity.

Similar to the DB50, we believe this upgrade will enable the vessel to expand its reach, work in deeper waters, experience less downtime and lower its operational cost without the need for as many support vessels in the construction spread. The expected cost for this project is approximately $70 million, and about half of it completed by year end 2012 and around half in 2013.

The major enhancement is for our current Lay Barge 32 or the third major enhancement, I should say, which is one of our newer assets entering service in 2010. We have the vessel built at a cost of around $100 million. Initially, the barge was just a pipelay asset due to the work we had at the time. Considering the success we've had with multiuse vessels, i.e., barges that can do lifts as well as pipelay, we determined that adding a crane to the 32 should significantly increase its capacity and utilization for a variety of projects. The investment is expected to be an incremental $84 million, again with about half spent in 2012 and 1/2 in 2013.

We believe these 3 enhancements will improve our competitive position, provide solid returns to shareholders, enable our vessels to pursue expanded scope and reach, and therefore, I believe it makes sense -- makes a world of sense to pursue.

However, not all of our assets are good candidates for upgrades, and so we expect some new vessels will be part of our program as well. Significant progress has occurred in this area. In December of 2009, we completed the transaction that provided us ownership interest in 2 specialty subsea vessels. This included acquiring a 50% interest in the North Ocean 102, the 102 vessel-owning company and a 75% interest in the vessel-owning company building the North Ocean 105.

We gained full access to the 102 subsea vessel in 2010 and have an option to purchase the other's owner share outright. Since entering our fleet, the 102 has been highly active and an important asset that has enabled us to win work, such as the Macedon project.

Over the last couple of years, the North Ocean 105 has been under construction and it is due to join our fleet this summer. In fact, just this week, the final major pipelay component, the lay tower, is being installed on the back end of the vessel. The North Ocean 105 vessel represents about a $200 million investment on our part, and it's expected to head for the Far East relatively soon to begin working.

Both the 102 and the 105 significantly expand our SURF and deepwater credentials, which are among the fastest-growing areas in the market we serve. These vessels are fast transit, dynamically positioned and will be positioned for rigid or flexible projects in water depths up to 10,000 feet, which is a significant slice of deepwater market.

Considering the expected demand for these subsea vessels, yesterday, our Board of Directors approved plans for constructing a third vessel of this class. Tentatively called the 108, we have attained a slot at the same shipyard that built the 102 and 105, and we'd expect to begin construction later this year. It will be 100% owned by McDermott and is planned to enter service in 2014. The total cost should be approximately $260 million spread out over 8 to 9 quarters during construction.

I've also spoken in the past about the potential for a deepwater S-Lay vessel, which would provide McDermott the ability to lay larger diameter pipe in greater depths. To date, we've not yet acted upon this opportunity since, before committing to a large sum of capital, we want to weigh the economics, the near-term demand and our capital structure against each other. Considering buy versus build decisions and time any activity accordingly. However, the fact that we haven't yet announced anything should not signal that we aren't actively evaluating it or that it won't happen. In fact, we hope to finish our analysis and make a decision later this year.

Now it may seem ironic that during a year where we admittedly have lower marine utilization than we'd like, that I'd spend this amount of time talking about our growth in marine assets and capabilities. However, this is a long-term strategy, not driven by any single year's fluctuations. Between the 3 enhancement projects that I mentioned, the North Ocean 105 and the newly authorized 108, I've now laid out about $750 million in initiatives, with about half of this amount already spent. If we conclude that adding a deepwater S-Lay vessel to our fleet is the right thing to do, the total investment for all projects mentioned would top $1 billion over a few years.

At the same time as we're pursuing upgrades and modernizing our marine fleet, we're also focused on divestitures and retirements. Similar to the charter fleet transaction, if certain of our vessels are more valuable in other's hands, we'll very much entertain the prospect of accelerating aspects of our renewal program. Together, the vessel -- this vessel management approach focuses on return on invested capital while improving the capabilities of our marine fleet.

While it's true that vessels are fewer in number and generally have higher per-unit valuations than our onshore assets, our strategy is much more than just upgrading, buying and selling boats. At March 31, about half of our backlog is in SURF projects. To effectively continue our growth in this market, we'll look to expand and add to our subsea engineering capabilities. This can be achieved or pursued more slowly organically or more quickly through acquisition. Any acquisition would be people-focused, and thus, we would expect the cost to be fairly modest in comparison to the vessel capital.

Our fabrication facilities, both current and prospective, also represent an opportunity for strong returns on invested capital. We announced last year that we formed a JV in Brazil and have obtained acreage for a new fab yard. Considering that, in the past, McDermott has spent fair sums of money on capacity in China and in Mexico, believing the market would come to us and that we haven't yet achieved the level of business we desire, our approach to Brazilian facility is, in fact, reversed. We will continue bidding for work for Petrobras on terms and conditions and with margins that are acceptable to us. And if we're successful in winning such work, then we will build out that facility.

Lots of contractors are racing to the South America chasing Petrobras spending. But in my view, few seem to be making meaningful income. A winning-first, building-second approach will help ensure we're not chasing work later, simply for utilization reasons.

Likewise, in Mexico, we're well-suited now for a wide variety of projects, but there may be some types of jobs or throughput levels that would require incremental investment. Similar to Brazil, we'll look to win first and then invest second in Mexico.

To be clear, the demand for a traditional conventional work remains strong, and we are in no way abandoning this market. However, if you evaluate what's under consideration, it's all about upgrading our assets and capabilities and expanding our reach in deepwater and in floating facilities in SURF markets, pursuing new geographies and directed squarely at achieving growth.

Within our strategy is a self-imposed constraint. We will maintain a balance sheet with adequate cash and liquidity. Likewise, we plan for any debt to be limited to 1x EBITDA or ideally less over the long term. So you might ask, if the returns are so good, why place any limit on yourselves? Well, simply put, the boneyard is really full with companies in our industry that got overlevered and overextended. We want to continue to maintain ample cash and liquidity because we're predominantly a fixed-price contractor operating in cyclical markets.

Further, while a strong balance sheet normally wouldn't win you work, the lack thereof could cause you to lose work. Customers want to be sure you have staying power before they award you a multiyear contract valued in the hundreds of millions or even billions. Likewise, some contracts occasionally have negative cash flow profiles where we spend money ahead of our customers. We charge them for the cost of money in those cases. But working capital movements in this business can indeed be large.

Finally, a reasonable amount of liquidity allows us to be settled about any project upset conditions. We've done a lot this far at McDermott with this approach, utilizing primarily cash from operations and project-oriented debt.

As I mentioned earlier, I'm working for shareholders, managing our business and planning for the future with a longer-term view. Our strategy is not swayed by 90-day results. While I believe all the items I have discussed are substantial value creators and are in shareholders' best interest, timing can be modified as needed. I do not tend to focus on the daily stock price, and I do not recognize the -- and I do recognize that the overall market has been jittery of late. And while I'm not a market professional, I do believe, however, that we've begun trading in what I consider a head-scratching level, considering value of our hard assets, over 1/3 of our current market valuation in cash, the significance of our backlog and what I'd consider an excellent market ahead of us. However, I do believe the capital markets get it right over time.

While we do not currently have a stock buyback plan in place, it's not to say that it couldn't occur in fairly short order. The board regularly evaluates this alternative as well. And frankly, doing so would be a much easier process for us than managing for the long-term business.

We also clearly have worked on going beyond the long-term strategy, as there are operational priorities as well. The Atlantic segment has been challenged for a number of years preceding my arrival at McDermott and especially in recent quarters. I believe, however, that with bold decisions and much hard work, we're very much in the process of making the turn.

This segment has the greatest exposure to deepwater and SURF markets and represents a great opportunity for growth. Our cost cutting initiatives are now largely complete, and we're actually actively hiring in our Morgan City, Louisiana facility and in our engineering centers.

The market we serve seems to be coming to us. We're currently negotiating a number of projects which we would hope to become awards in the near term and would primarily provide revenues for 2012 and 2013. As you know, our scope on Papa Terra is only about $200 million, but that project seems to be progressing, and we're expecting to reach the 70% threshold in early 2013. While we believe full year 2012 in the Atlantic segment is likely to remain in the red, as I've mentioned before, I expect profits next year.

Overall, the keys to success are all about project execution and de-risking our projects. Delivering certainty starts with bidding correctly, scoping and executing the work effectively, contracting well and partnering where appropriate. As Perry indicated, we don't expect this to be a straight-line business. As long as we do predominantly fixed-price work and projects that last multiple years, we'll continue to be lumpy from a 90-day viewpoint. But we believe our markets will remain strong. Offshore is the right place to be, and McDermott is actively transforming its future with a well-conceived growth strategy.

At this point, I'll begin to wrap up so we can open the call up to questions. I know we went longer than normal, but it's a conversation I simply wanted to have. Since we had a strong quarter and didn't need to talk about any hiccups, I thought now was a good time to lay out our plans in a more comprehensive way. So in closing, I remain excited about our future. The first quarter exceeded our expectations on the income statement, while our quarterly bookings and overall backlog reached historic levels. Bids outstanding remain strong with solid opportunities beyond that. We recognize what's needed for this year and next, and we're preparing accordingly while maintaining even longer-term perspectives.

Two major initiatives, the DB50 and the North Ocean 105, are nearly complete and should be contributing soon. We take capital seriously. We're shareholder-focused and we believe our future remains bright.

In May, we have a number of investors visiting us, and in June, we're planning to participate at the Credit Suisse E&C Conference in New York and the Johnson Rice E&C Conference in Chicago. And we look forward to continuing the dialogue with you in the months ahead.

And operator, with that, let's now turn the call over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Andy Kaplowitz with Barclays.

Andy Kaplowitz - Barclays Capital, Research Division

So Steve, as part of looking at the strategy of McDermott, how do you get investors comfortable with the change in the backlog in the sense that you're now, as you said, half SURF? And McDermott historically has said, we do -- we do best what we've done for a long time, which has been shallow and conventional. So as you focus on SURF, how do we get comfortable that we're not going to have hiccups in the new business as we go forward?

Stephen M. Johnson

Well, let me give you a broad response and maybe use the INPEX project as a proxy here. As I mentioned in the prepared remarks, Andy, we're all about end of bidding stages, planning for early de-risking of the project. On that program, we intended purposefully to subcontract out a significant piece of it as we ready ourselves to grow into this market further. And in the first 90 days after the award, we took great pains and great efforts to work with our suppliers to buy out those supply contracts. That's just a method, so there's one response to you. How do shareholders get comfortable with us moving into this market? I think they've got to have confidence that McDermott has a method to approaching this market. We don't bid at everything that comes our way. And what we bid on, we're highly selective. And the criteria for bidding the deepwater SURF subsea markets are, first, do we have the resources? Second, do we have the capability and can we subcontract for that capability? And third, do we have an ability to get visibility on this project so that -- on any of these projects so that we can identify upset conditions? We felt that way about INPEX, we felt that way about SeCaP, we felt that way and feel that way about a number of others that are in the pipeline. The good news here is we have the assets with the 102 and now the 105, and in a couple of years, the new 108. Assets are a key, management discipline is a key, but preparing for the risks and de-risking the project would be my overriding response to your question.

Andy Kaplowitz - Barclays Capital, Research Division

That's helpful, Steve. If I focus on the Middle East for a second, in particular. It's been a very strong historical region for you. Your backlog is down a bit over the last couple of years. Has there anything that's materially changed in that region, either more competition now or is it just sort of the pendulum has swung and you're about to win a lot more work there?

Stephen M. Johnson

Look, the first thing to say to you is, if I could just say it this way, nothing is broken in our Middle East segment. In this particular quarter, we had about $11 million of fewer closeouts compared to Q1 of last year, which was a needle mover. The rest of the movement is largely just a mix issue. From a competitive standpoint, same competition we've been seeing for years, I think you would have to chalk this up a little bit more to deal flow and timing than anything else. Would you add anything to that, Perry?

Perry L. Elders

No, that is correct. As we look at the bids outstanding and the target projects, there's a number of opportunities coming up in the Middle East, both in Kingdom Saudi Arabia as well as Abu Dhabi and other markets there.

Andy Kaplowitz - Barclays Capital, Research Division

Okay, that's helpful. And just one quick clarification, Steve or Perry. You said $5 million charge on PEMEX. Was that in 1Q or is that in 2Q?

Stephen M. Johnson

That was in the 1Q. And just to make sure you got that, that was done more consciously than some of the other charges. We've swapped out a vessel, and we swapped out a vessel for our own vessel, which lengthened the project, which resulted in higher costs in our vessel and the length of the time. But that'll get offset in, I would expect, Q2 because of the utilization of the DB16. So in my parlance, it will be a wash.

Operator

And your next question comes from the line of Rob Norfleet with BB&T Capital Markets.

Bryce D. Humphrey - BB&T Capital Markets, Research Division

This is Bryce Humphrey on for Rob. Appreciate your commentary on the margin front. I wanted to dig in a little more. Your performance this quarter was obviously impressive, especially relative to where you were thinking you were going to be at this point of the year. And you've talked about historically, or at least the last quarter or so, of marine vessel days being a big swing factor for margins this year. So could you just talk a little bit about some of the initiatives you're taking to fill what was, I guess, a 400-day gap versus last year? And maybe update us on where vessel days booked stand versus this time last year?

Perry L. Elders

Bryce, I'll take that. As I mentioned in the comments there, we did enjoy 62% utilization, which was ahead of what we expect for the year, which is below -- we kind of expect the year to be below 50%. So we're not in a substantially different position as we look at the rest of '12 than we were last quarter. We had a nice first quarter but that underutilization of those vessels is part of the drag on the margins and the reason for our guidance. Now, as it relates to the second question, what are we doing about it? We principally have our vessels to fit on EPCI jobs. We believe it is a strategic advantage to have that marine fleet. But we do look for work to fill in between EPIC jobs, and so we're obviously actively looking to put those vessels to work on marine-only jobs.

Bryce D. Humphrey - BB&T Capital Markets, Research Division

Great. If I could just follow up there on margins. If I recall correctly, I think you'll have a few projects winding up in the back half of the year, especially in the Atlantic, which I guess could result in some closeout opportunities. Is that the case? And if so, is that another potential margin risk at the -- towards the back half of the year?

Perry L. Elders

Yes, what Steve mentioned in his comments earlier was that part of what we enjoyed in Q1 was a shifting of some of the timing on some of those project closeout contingencies in the Q1 for the back half. There is further estimated closure of projects and contingency harvesting in the latter part of the year. The exact timing of that, obviously, we're not going to give up anything with customers on it to get it closed out earlier. But it could occur earlier in the year, that's why we're kind of challenged to estimate which specific quarter it's going to come in.

Bryce D. Humphrey - BB&T Capital Markets, Research Division

Okay. And then last one on revenues. You expect to burn $2.8 billion this year from current backlog and your targets -- you're targeting in the kind of the mid-$3 billion range. So can you just talk about how you fill that gap? Is that additional bookings over the next quarter or 2 that start to generate revenue pretty quickly, or is it just some of your more typical quarterly booking burn work?

Stephen M. Johnson

I really don't think there's a gap there, Bryce. We did $728 million of revenues in the first quarter, and we're expecting $2.8 billion [ph]

Bryce D. Humphrey - BB&T Capital Markets, Research Division

Got it. So that's the delta?

Stephen M. Johnson

burned for the rest of the year.

Operator

And your next question comes from the line of Jamie Cook with Credit Suisse.

Jamie L. Cook - Crédit Suisse AG, Research Division

Two questions. One, Steve or Perry, I was interested in your commentary on 2013 given the concerns out there that -- the concerns out there on 2013 consensus estimates. I guess my question is, I guess, can you just talk to of the major offense [ph] out there that we're tracking? Assuming you win them, would they start in 2013? Is there more of a delay start like that we would see with it? And can you talk about sort of the margin profile for those contracts as well? And then I guess my second question, Steve, I was interested in your commentary sort of on the share repo side, just given the way your stock is trading. So I guess what's holding you back and how do you balance the share repo, given the pretty aggressive CapEx that looks like we'll be spending over the next several years? And with that, I'll go back in queue.

Stephen M. Johnson

All right. Thanks, Jamie. Why don't we take them in order? Perry, you want to try to respond to the first one, on 2013?

Perry L. Elders

Sure. So, Jamie, the profile of what we expect to book for the rest of this year is more of our traditional profile jobs that would result in sooner burn of revenue than what we saw in the INPEX project. So we fully expect to book work this year that would contribute to revenues in 2013. As it relates to the elephant projects, yes, there are several out there, and they would make nice contributions to 2013. But there are a number of kind of smaller-sized projects that is kind of our main line of business. And I know the market gets focused on these big ones because they get a lot of publicity but we have a number of nice-sized projects, $500 million or less, that we expect to win and would contribute to 2013.

Stephen M. Johnson

All right. Taking your second question with respect to buyback, Jamie, I'd say it this way: I am not saying that we won't buy back shares, so we'll start with that. If we do buy shares, I'd like to permanently retire them, not just buy at $10 and reissue at $15, for example, because clearly, holders at $15 would be looking for a higher valuation. I believe our longer-term strategy makes sense and needs to be pursued, so that, to the extent we use capital to buy back shares, it will delay the strategy that I spoke to. It'll delay the inevitable need to plan for the future and for growth. Having said all that, if you ask me the question, is there a possibility that we can do both? We certainly can. It remains an option. The priority is around the building of, the buying of assets in order to return greater returns to the shareholders.

Perry L. Elders

And Jamie, I may not have completely answered your question. You had a part related to margins of what we're pursuing. And yes, the work that we're pursuing that we see in bids outstanding and targets is in line with kind of our historic level expectations. It's all about utilization as we've been talking about for 2012 and '13 on particularly the vessels.

Operator

And your next question comes from the line of Will Gabrielski with Lazard Capital Markets.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

You said you're hiring in Morgan City, and is that just for the work you've booked so far, or is there more of a robust bid pipeline for Morgan City potentially coming?

Stephen M. Johnson

Two answers to that. The hiring that's going on now and has been going on for some time. I believe the number would be around the 1,300 level today, which is higher than it's been in many years in terms of the workforce. But that was done for the work that we have in backlog today. The pipeline of opportunities for Morgan City is similarly better than what we've seen in the past, so we'll continue hiring, depending upon the timing of those awards. I don't know if there's a trough in between the backlog and the booking and the needs for the future projects, but we would be hiring to meet the needs of projects under any instance.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay. And then in terms of potentially talking about that division, the Atlantic division as a whole getting back towards a break-even number, I think you had alluded to the fact that in '12, it could happen on a quarterly basis. Is that still part of the plan?

Stephen M. Johnson

Look, it's always in my head to try to turn it around as quickly as we can. It is not off the table. My estimation is, is that investors should look for us to turn this thing around after quarter 4 and be profitable in 2013. Am I going to be profitable even in the first quarter of 2013? Hope so, but it'll be profitable, in my view, or I expect it to be profitable, in 2013.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay. Can you talk about the North Sea as an opportunity or is it something that you have a lot on your plate, laid out a lot today? Is that a market where you might look again?

Stephen M. Johnson

The simple answer is yes. And we're aligning our strategies and our assets around the North Sea. There are opportunities that we're looking at today. Subsea, engineering, capabilities exist in northern Europe, particularly in the U.K. and -- or in particular Aberdeen, Scotland. We have a new London sales presence and a sales office, so we are moving, frankly, with a fair amount of caution but deliberately back into the North Sea. These vessels that I talked about in my prepared comments, including the ones that we've enhanced, the DB50, as an example, and any of the North Ocean vessels are suited for work in the North Sea.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay. And then just lastly on vessel utilization but more specifically within the SURF market, one of the competitors is out talking about how tight it is this morning and Aker was talking about some of the potential bottlenecks, I guess. How, if you go geographically, do you guys feel your position right now within that market? And would you say your subsea assets are as utilized going over the next 12 to 24 months as the market is?

Perry L. Elders

The -- if you think about our fleet, Will, the vessels that are on propellers, so this is the 102, the 105, the Agile, the Emerald Sea and the Thebaud Sea, we are enjoying nice utilization on those in the past and forecast based on existing backlog. And so I think that's consistent with what it sounds like you're hearing. The 62% figure that we quoted relates to our barges, and we have 8 major work barges. And so that's where we have a heavy fixed cost that we work to cover and is the drag on our margins for 2012. But the vessels on propellers that you're referring to that are serving the deepwater are highly utilized.

Operator

And your next question comes from the line of Robert Connors with Stifel, Nicolaus.

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

And it just sounds like, reading through some of your comments, Brazil is still high risk for contractors and Gulf of Mexico, obviously, has a lot of SURF potential. And really, we haven't seen the full earnings potential of the Atlantic, and particularly, the Gulf of Mexico region because since you started breaking out, that hasn't really been an active market. I guess structurally or competitively speaking, is there anything different within the Atlantic region versus some of the other regions where maybe the earnings profiles may be a little bit better outside of it being, obviously, going forward, a little bit more SURF potential?

Stephen M. Johnson

Yes. Here's what I'd say, the Atlantic region has been restructured, and it's been restructured to get our costs aligned with the size of the market. So that's one data point. I would also say that, with our fabrication capabilities there between Morgan City and Altamira, we have a cost advantage in Altamira, and we've got a capability in Morgan City that almost no one else has because of its history. Stepping back from it, look at how it's procured, whereas in the Middle East, in the Far East, the preponderance of awards or contracts are EPCI, not to say that there isn't the occasional marine-only or fab-only. In the Atlantic, it's almost exclusively disaggregated; engineering-only, fabrication-only, marine installation-only. So we've called it an a la carte market for years around here, and that's the buying behavior that makes it unique. So we don't get the opportunity to bring our advantages as an EPIC contractor, and that changes the dynamic and it changes how we operate here.

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

So basically, I guess, how you operate, does it provide the opportunity to build in more contingencies for your bid where, if you execute well, you plow those back probably [ph] just more disaggregated?

Stephen M. Johnson

Well, not necessarily. We align our contingencies with the risk, the contract risk, the pricing risk, the scope risk, the weather risk. So we try to align our contingencies with the nature of the risk. What it does do is, is it doesn't give us the benefit of bringing our full suite of capability and pull-through to bring vessel utilization through pull-through to an EPCI contract like we can do in Asia Pacific or Middle East, for example.

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

Okay. And then you sort of mentioned your low single-digit WACC range, but when you look at the 102, 105 and upgrades to the DB50, where do you see the ROIC potential for those? If I could push you for a figure, that'd be great, but...

Stephen M. Johnson

We hopefully didn't say or I hopefully didn't say low single digits, it's low double digits. So starting with that, Perry, why don't you take the ROIC question?

Perry L. Elders

Yes, kind of low teens and so certainly, the investments that we've made both in the enhancements of the existing fleet as well as growth assets, like the 108, have to beat that. When we put together our economic analysis, Robert, you would want to know that we're disciplined in the analysis, that's why we haven't jumped at the S-Lay opportunity, and we're being very thorough. We're realistic in the assumptions around those. And so we hope there's upside to what our kind of investment expectations are at the outside. But in all cases, we don't spend the money unless we can create value through the terms in excess of our WACC.

Operator

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

Steven Fisher - UBS Investment Bank, Research Division

You mentioned the nice number of prospects sub-$500 million level. So have you actually seen the market for smaller and filling work start to accelerate?

Stephen M. Johnson

Yes. Well, the first comment would be of the outstanding bids and even the target bids, I wouldn't look at those as being populated heavily by elephants. There may be only 1 to 2 that are in the billion dollar range. The preponderance of what's in that pipeline are hundred billion dollar range and -- hundred million dollar range and lower. So if that's emblematic of the market, then that's what it is. And in fact, the focus on the larger elephant projects, in my view, isn't particularly helpful to the conversation we had earlier around 2013. It's the smaller projects that we have that are the preponderance of what's in the pipeline that could help us in 2012, 2013.

Perry L. Elders

And Stephen, in addition, those comments and I think it was the principal focus of your question was around kind of the ones that we see in the pipeline, the lead time kind of the EPIC projects. But in addition, I think you were asking about the kind of filling jobs of this consumed utilization and do we see those kind of jobs? And the answer is yes. Obviously, we saw some in the first quarter that helped our barge utilization up to 62%. And Steve mentioned with the 50 being backed out in a few months here, that job or that vessel does attract those kind of jobs when it's in a particular market and because of its capabilities. So we believe those opportunities exist but we don't have them in the bag.

Steven Fisher - UBS Investment Bank, Research Division

Okay, that's helpful. And then just maybe asking a 2013 question a little bit differently. At what point in 2013 do you think that any new bookings would only have a modest impact on the year? Basically just trying to assess how many more quarters you have to book new work that could still move the needle for 2013?

Stephen M. Johnson

It totally depends on the booking. It's the type of the booking and the quickness with which it starts. And the example, of course, would be, if it's a marine project that has a quick start, it could start burning instantaneously. If it's a large EPIC project, the engineering doesn't drive a lot of revenues. So it kind of depends upon the type of the booking.

Steven Fisher - UBS Investment Bank, Research Division

Okay. And just one quick one. How far along are you on the Macedon project and how is that going?

Stephen M. Johnson

I don't have a percent complete in my head, but the answer to how it's going is, it's going very well. We've got the DB30 moved up there. All reports are that there are no issues or certainly no significant issues. Do you have a number, Perry?

Perry L. Elders

We were just 1% complete at the end of the quarter, so we're just getting started.

Operator

And your next question comes from the line of Matt Tucker with KeyBanc Capital Markets.

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

When you look at your bids currently outstanding, could you estimate how much of that work would be executed in 2012 versus 2013 versus beyond that? And then same question also for your target list.

Perry L. Elders

Yes, let me try to give you some sense of that. For the bids outstanding is what you're asking about. Let me look it up here. Do you have a second question? I'll try to get to something.

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

Sure, definitely. Again, as you look out to 2013, are there any areas that you're starting to see capacity tighten up or that you think you could, we've heard that from some of your peers? And any areas where you think you could start to see pricing improve?

Stephen M. Johnson

From the 3 reporting segments within McDermott, the activity level in the Asia Pacific region is the highest and as well as the resource comment on McDermott and is also a resource comment on the competition. If there was going to be a mover in terms of us being able to have expansion on our pricing, it would probably occur in the Asia Pacific region. Certainly wouldn't put Atlantic in that position just yet. We're probably a year or so away from that. The next ones on certain programs where we have capability in the Jebel Ali facility in the Middle East or we have the right vessel, we can do that in the Middle East as well. But I don't see a broad-based reason to think about it that way throughout the company for sure.

Perry L. Elders

On the first question, Matt, on the bids outstanding, the $4.6 billion. As Steve mentioned, there's a couple of large ones in there. One of those would make a nice contribution to '13; the other really would not. But most of the opportunity for '13 relates, as Steve said a couple of times now, to the numerous projects that are kind of below that $500 million range. And I would say that a large portion of those would contribute to 2013 if we won.

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

So is that something like $3.5 billion, $4 billion of bids outstanding would be primarily 2013 work?

Stephen M. Johnson

I don't know that we want to get into actually quantifying that. But suffice it to say, as we indicated, the bulk of our bids are sub-$500 million, and most of those would be our traditional bread-and-butter work that would have the very typical revenue recognition profile that would start up pretty quick.

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

Got it. And just one more question. In terms of getting back to profitability in the Atlantic, can you kind of walk us through how you get from here to there? Is it better utilization in Altamira? Is it more on the marine utilization side, just less revenue from 0 margin projects? Could you just provide some color there?

Stephen M. Johnson

There's some of all of that in there. Top of mind would be booking work for Altamira and for Morgan City, and that's certainly the focus. There isn't much to do on the costs or the SG&A side. We've accomplished that. From a marine standpoint, certainly, the utilization of the DB16 would be a big help for us. Our focus is in getting work for the 2 fabrication yards. And as I mentioned in the prepared comments, we've got some projects that we're beginning to negotiate for both of those yards. And I think that will be the starting point for lighting the match to get the turnaround accomplished.

Operator

And your next question comes from the line of Scott Levine with JPMorgan.

Scott J. Levine - JP Morgan Chase & Co, Research Division

One more quick one on the composition of the bids outstanding and the target bids. I was hoping you might be able to break that down geographically if you hadn't done so already, and indicate as well whether there's been any dramatic change in the geographic composition versus, say, 6 months to 1 year ago?

Stephen M. Johnson

I've got it right in front of me here, let's see. The bids outstanding, think the snapshot at the end of the quarter, 70% Asia Pacific, 18% to 20% Middle East and the rest Atlantic. And the second question was, can we provide that kind of detail on targets? I don't have that. Perry, do we have that?

Perry L. Elders

Yes, I have that as well. And so think of kind of Atlantic in kind of the mid-teens and kind of the Middle East as almost half, almost 50%, and Asia, the remainder.

Scott J. Levine - JP Morgan Chase & Co, Research Division

Got it. And then turning to Brazil. It sounded like it was helpful perspective on that market. I'm wondering if the perspective on the markets have changed and what's kind of informed that? It sounds like, obviously, you're still looking to attack that market aggressively but really decisions to invest depending on workflows, but maybe broad observations on the Brazilian markets since you increased that activity there over the last couple of years?

Stephen M. Johnson

Yes, sure. Happy to, Scott. I certainly wasn't trying to be clever with my words around Brazil. We do feel very good about Brazil. We think it's a market that we should be participating in. But the clarity that I wanted to convey was McDermott wants to do it in the right way, with the right price for the projects. And more importantly, whereas in the past, on a couple of investments, we had built the yard and then suggested that, if we build it, then we would have projects come forward. In Brazil, the opportunity is afforded to us because of the nature of the timing of the awards and the full quantum of the projects that are out there, for us to be able to be a consortium that owns land, that has done some initial work to prepare the land for fabrication and then not do the full buildout or the partial buildout until we have an award. That actually is available to us down there and we're taking that road. That's not to indicate that we have any weakness in terms of our thinking about Brazil. It's to indicate that we're being more prudent than we might have been in the past. So on the bidding side, there's another part of the equation. We want to make sure that we bid the projects we can win, and that we bid the projects against the competition where our new fabrication yard has the right solution and the right price, with the right contingency cover and with the right margins. All that is easy to say. It's very difficult to do in the face of stiff competition. In my view, being a first mover down there building a fabrication yard, may not be the right answer. Being a fast follower, as I've said many times before, is probably the right answer. The overall fundamentals of Brazil, which is a sense of your question, I think, remains strong. New leadership in Petrobras, I think, is going to keep the pressure on to continue to bring the development of the country forward and the development of those offshore facilities, and we're going to be there to play.

Operator

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

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

Just thinking about Altamira and the path towards developing that yard more. Would you expect to see the initial -- well, I know you've done some work there, but next ramp-up in terms of workflow there coming from PEMEX and kind of proving up the yard's résumé before you were able to successfully bid on projects outside of Mexico.

Stephen M. Johnson

Yes, I look at Altamira kind of that way. Today is the 11th of May, and we're expecting PEMEX' announcement on a fabrication award, and we hope to be one of them. There should be several of them, so there's just kind of a data point for you that's current, but we won't know until we know. We will continue to build out Altamira. But similar to my comments on Brazil, we now have the luxury because of the level of buildout that we're starting with, Marty, to build out a skidway or build out additional facilities there in time to respond to whatever award we would see, and we would try to embed some of that CapEx in the bids if we can. So we're going to be building on a win-first, build out-later basis. And the market down there is going to be our traditional market, and there's a possibility for us to do some more -- some nontraditional work in that facility as well.

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

Okay. And could you provide us with an update in terms of activity levels under the Saudi Aramco long-term agreement?

Stephen M. Johnson

Yes, the LTA program for Saudi Aramco is moving forward. There are a couple of dynamics that are going on inside of Saudi Aramco that are probably worth mentioning, including some internal EPC contracting personnel change-outs. But we're not quite halfway through the year, but we expect LTA work to continue to come forward for McDermott and hopefully at a higher level. So timing is always subject to change but we expect the opportunities on the horizon. And there's several that are on the near-term horizon there.

Operator

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

Brian Konigsberg - Vertical Research Partners Inc.

Just real quickly, Perry, the cost cuts, it sounded like that actually was -- contributed nicely to the margin performance in Q1 as well. I was just curious, can you quantify what that actually did add to your profitability, and how do we think about it going through the year? Is it going to provide a structural support or is it really the best utilization is going to kind of overshadow any kind of cost improvements that you've made?

Perry L. Elders

I think you've answered your own question. Vessel utilization is the main story. Cost improvements, our cost cutting was appropriate and we've managed both corporate G&A costs, as well as, as Steve has talked about for several quarters, the Atlantic cost cutting, which he has indicated as principally completed at this stage. So I would say that, that element contributed some. Don't look for a significant structural change from here forward on cost side, but the opportunity is in covering the fixed costs of the barges on -- from a utilization perspective.

Brian Konigsberg - Vertical Research Partners Inc.

Got it. And just running on that line. So the vessel opportunities, it does sound like that the opportunities are picking up in the pipeline as you mentioned. I was just curious as far as the assumptions that you're making, are you assuming that utilization rate declines because you're just burning the work that's already in your backlog, or are you assuming kind of a corporate-wide win rate as far as the opportunities you see ahead of you?

Perry L. Elders

So there's 2 things. I want to make sure it's clear which question I'm answering here. Remember, I mentioned that we have 2 vessel groups. We've got the barges and we're 62% utilization into Q1 for that. As we went into the year, we were expecting sub-50% and we still expect that sub-50% for the rest of the year based on what's in backlog right now. We're going to work to improve that as we did in Q1, but we don't have line of sight to it at this stage. The second vessel group is those on propellers. Vessel utilization is strong. But I thought I sensed, in your question, utilization around the newbuilds and as we build our economic cases around the newbuilds and what assumptions we make in that regard. And the newbuilds that we're talking about, the 105 and the 108, we use the experience that we've had on the 102 plus what we're -- what we've actually bidding the 105 for, so we think we've got appropriate utilization assumptions on the newbuild.

Brian Konigsberg - Vertical Research Partners Inc.

Actually, I was more referring to the barge side. So less than 50% to the rest of the year. So basically, it's every -- it's work that's already booked, but any opportunities that you see ahead of you, which you said are kind of building in the backlog or in the pipeline, that would just be incremental opportunity for you?

Perry L. Elders

Yes.

Operator

And your last question comes from the line of John Rogers with D.A. Davidson.

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

A couple of things. First of all, in terms of the cash flow in the quarter was very strong. And I guess, Perry, did that have -- what did that have to do with project timing and downpayments on projects versus just collections as we think about that the rest of the year?

Perry L. Elders

Yes, I mean, I guess to cut to the chase of where I think you're headed with your question, is are we going to hold that improvement? And the answer is yes, as it relates to the year, but we could have a quarter-to-quarter movement during the year. We could get some of it back, for example, in Q2 and flip around and look at total working capital, not just cash here. And as Steve mentioned in his comments around the capital structure of the company, we do have projects that do -- we do have to pre-fund in our customers, and that's why we've got the level of cash that we have available. So anyway, the cash flow should hold for the year.

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

Okay. And then, Steve, just relative to your comments on the breakdown of bids outstanding, it looks like a 10%, 12% in the Atlantic region, do you have to hit a really high win rate there to get that business profitable, or is it just have to do with mix, because 10% of $4.8 billion, I'm looking at your current revenue run rate?

Stephen M. Johnson

Yes. Well, the circumstance we're in is a delightful one from my standpoint. We've got -- and I think I mentioned in the prepared comments, John, that we've got 3 bids that we're negotiating today. So I think about it first from that standpoint, that we've got some negotiated bids, that if we get 1 or 2 of these things, we'll go a long way to getting us to the point where we can see the horizon here. But beyond that, the deal flow seems to be picking up. And part of that has to do with our selectivity around what we're pursuing. The other part has to do with the fact that, I believe, the Gulf of Mexico, including PEMEX and U.S. operators, are beginning to pick up with some of their projects and giving us opportunities.

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

Okay. So that's referring to projects that are not yet being bid on?

Stephen M. Johnson

Yes, yes, yes.

Operator

With no further questions in queue, I would like to turn the call over to Jay Roueche for closing remarks.

John E. Roueche

Thank you all again for participating today. Just want to remind you that the call did include forward-looking statements, and I encourage you to see our SEC filings and yesterday's press release for more information on these. Certainly, if anybody didn't get a question answered that they would like, I would encourage you to call me afterwards. And, Pamela, this concludes our call.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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