Cal Dive International Inc. Q4 2007 Earnings Call Transcript

Mar. 3.08 | About: Cal Dive (DVR)

Cal Dive International Inc. (NYSE:DVR)

Q4 2007 Earnings Call

February 29, 2008 12:00 pm ET

Executives

Quinn Hébert - CEO

Scott Naughton - COO

Kregg Lunsford - CFO

Lisa Buchanan - General Counsel

Analysts

Jim Rollyson - Raymond James

Roger Read - Natexis Bleichroeder

Joe Gibney - One Southcoast

Joe Agular - Johnson Rice

Steven Gengaro - Jefferies

David Smith - JPMorgan

Joe Hill - Copia Capital

John Bair - SKA Financial Services

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2007 Cal Dive International Earnings Call. (Operator Instructions).

I would now like to turn the presentation over to your host for today’s call, Mr. Quinn Hébert, Chief Executive Officer. Please proceed.

Quinn Hébert

Good morning, everyone. Welcome to Cal Dive’s 2007 fourth quarter earnings call. With me today is Scott Naughton, our Chief Operating Officer; Kregg Lunsford, our Chief Financial Officer; Lisa Buchanan, our General Counsel and Brent Smith, our Director of Finance and Investor Relations.

If you go to our slide show, on slide 3, agenda this morning will be similar to our previous formats, where I’ll give some color on the 2007 year-end review. Kregg Lunsford will walk us through the financial statements. Then I’ll talk about 2008 going forward. And we’ll review the earnings guidance and then we will open up the phone lines to questions-and-answers.

Hopefully, everyone has access to our press release and slideshow. If you don’t, you can find that at the website at caldive.com.

Before I start, I’ll turn it over to Lisa Buchanan, our General Counsel for an important message.

Lisa Buchanan

Thank you, Quinn. This conference call includes forward-looking statements, particularly with respect to any statements that we make regarding our earnings expectations. The forward-looking statements made during this call are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual future results may differ materially due to a variety of factors.

For information concerning factors that could cause our actual results to differ, we refer you to the risk factors described in our Form 10-K on file with the Securities and Exchange Commission. This call also includes certain non-GAAP financial measures. For a reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures, we refer you to our earnings press release and the presentation slides for this call.

Quinn Hébert

Okay. Let’s jump into 2007. 2007 was a really successful year for us. It was the full year that we had our entire busy fleet available for work and as a result, we saw increased revenue in EBITDA levels year-over-year. Our debt utilization remained strong through 2007; however, we did experience a return to customary winter seasonality in Q4. This decreased utilization in fourth quarter really impacted our service fleet.

If you look at what we did in ‘07, approximately 55% of our work in the Gulf was inspection, repair and maintenance, and about 45% was new construction. Of those types of projects we performed, 60% of them on day rate and about 40% of them were qualified turnkey projects.

Overseas, the lion share of our work was in the new construction market. With commodity prices in corresponding offshore activity levels, we had a high level of this new construction work and this translated a strong utilization for both our pipelay and our saturation fleets. We completed about 45 pipelines on 32 different projects for about 20 clients. Additionally, we worked for virtually all of the top-20 producers on the shelf and an additional 80 clients. So, we worked for over 100 clients in 2007.

Overseas, we are busy continuing with our international penetration in our target markets. Those target markets are Southeast Asia, Australia, the Middle East and Mexico. As a result, we saw our international revenues actually double year-over-year and they represented about 25% of our total revenues. As many of you know, we ended the year with a successful closing of the acquisition of Horizon around mid-December. As you can recall, while, we added about nine barges and vessels to our fleet, bringing our combined fleet to about 30 vessels.

This acquisition really sets us up greatly as it expands our capabilities on the derrick barge and also in our pipelay markets and accelerates the international expansion. With this combined fleet and the personnel under the two combined companies, we’ll be able to offer the clients an integrated solution to take on larger and more complex projects.

Before turning it over to Kregg, I would be remiss if I didn’t recognize the great effort of our men and women offshore and onshore in 2007. Our results really reflect their dedication and commitment to Cal Dive. Okay, Kregg.

Kregg Lunsford

Thanks, Quinn. Good morning, everyone. As Quinn said, we had a very strong 2007. Year-over-year, we had 22% revenue growth and 7% growth in EBITDA. We did experience some gross margin compression of about 8%, as it primarily relate to our increased investments in our international infrastructure and overhead including the full year of the Fraser Diving acquisition. We also had some decreased utilization as seasonality returned in the fourth quarter, and we also had increased regulatory required drydock amortization that had an impact on our margins.

We had net income of $105.6 million and earnings per share of $1.24 on a full year reported basis. Our EPS on a recurring basis was $1.36. Our net income decreased by 12% year-over-year, primarily as a result of our $12 million non-cash impairment of our investment in OTSL, as well as the increased drydock amortization and also interest expense related to the debt we incurred in connection with our IPO in December of 2006.

Moving onto slide 5, we’ve provided a reconciliation of our fully reported net income as compared to net income adjusted for non-recurring items.

And then on slide 6, you can see utilization remains strong in 2007 for both saturation diving and pipelay, with a very moderate declines year-over-year. Our surface diving fleet did experience a utilization decline of about 30%.

As Quinn alluded to, on slide 7, we are very pleased with our year-over-year growth in international markets, as we effectively doubled our revenues which equated to 25% of our total revenue mix. This compares to 14% in 2006. We are shooting to reach 35% in the upcoming year as we continue to penetrate our targeted high-growth international markets.

On slide 8, we have laid-out our capitalization as of year end. You can see at December 31st, we had over $60 million in cash, $375 million of debt, and a total capitalization of $963 million. That translates to a net debt to book cap ratio of 35% as of year end. We have pre-paid $40 million of this debt subsequent to year end, leaving $335 million outstanding as of today. We also have about $293 million available under our revolving credit facility after LCs.

With that, I’ll turn it back over to Quinn to talk about our outlook for 2008.

Quinn Hébert

Okay. If we jump to slide 10, let’s take a little bit of a look forward about 2008 outlook, we’ll look at the long-term fundamentals and more specifically drilling down into the Gulf of Mexico and international growth piece.

I mean looking forward, we believe the long-term fundamentals for our sector are pretty strong. First of all, demand for oil and gas are what appears to be solid. Additionally, the present commodity pricing levels are holding up and more specifically, our clients are confident in their sustainability. This is translated into the increased upstream capital spending programs as our customers hunt for additional reserves.

If you look at any of these upstream spending surveys, most of them reflect increased year-over-year spending levels by our clients, and frankly, we think and we expect this increase to upstream capital spending trend to continue. With these macro factors supporting pretty positive business environment, we expect to be pretty busy both overseas and in the Gulf of Mexico.

If you look at the Gulf of Mexico, we are expecting the Gulf to be busy, but it’s returning to a more traditional customary seasonal pace. A lot of the Hurricane Katrina and Rita work in ‘05 and ‘06 has been completed and so, we are returning to a traditional market. And when we talk about a traditional market in this type of case, generally the first quarter starts-off with a rough winter weather, which equates to decreased utilization. Then utilization activity levels build up through Q2 and then the last half of the year, at Q3 and Q4, are generally much, much busier than the first half of the year. And typically, utilization tapers-off mid-December when the rough winter weather returns.

And frankly, this construction cycle plays to our strength. When we conceived this consolidation play, we wanted to create the clear market leader in the Gulf of Mexico, and we believe we’ll accomplish that and with a strong balance sheet and a large diverse fleet with experienced people, that we can compete successfully offshore and we can offer our clients these integrated solutions. We believe we have a significant competitive advantage to differentiate us from the rest of players in our business.

With the active Gulf of Mexico players in this positive commodity pricing environment, we expect new construction activity to be pretty solid in the Gulf of Mexico. We also expect our inspection, repair and maintenance to remain stable and profitable, with the addition of the derrick barges to our construction fleet, as a result of the Horizon transaction. We expect to continue to compete actively in the salvage decommissioning market by actually acting as the prime contractor for the entire project. The example, we are pretty proud of the fact that we won our first decommissioning salvage job using both Cal Dive and Horizon assets, within less than about 45 days from our closing of Horizon transaction. I think this not only reflects the client’s confidence in our ability to execute these large projects offshore but more generally their confidence in our business model.

At this point in the market we continue to remain pretty active in a tendering phase in the Gulf. We estimate about 50 to 60% of our work will be qualified turnkey projects and the remainder will be day rate work. Of those projects, about 50% of the new construction projects, about 35% will be inspection, repair and maintenance projects, and then the remainder 15% will be salvage work.

I guess the real exciting area for us is the high growth area is clearly overseas, international marketplace. With the Horizon acquisition, we significantly accelerate our international expansion strategy. To give you an example of that, the Sea Horizon, which is a combination of derrick pipelay barge that we acquired from Horizon, will be fully utilized for 2008 in the Southeast Asia market, and then also through the early part of 2009.

Additionally, within about one month of acquiring Horizon assets, we made the decision to reposition the Texas, which is a multiservice vessel by adding one of our portable saturation system on top of her and moved her over to the overseas market in the Mediterranean to act as a DP 2 DSV. She is working off the coast of Malta right now, and we are building a backlog over for the rest of the year.

The other big asset in that area – in the international area is the Eclipse, which is a Cal Dive legacy DSV. She will arrive for work in India, next week and then she’s booked through the fall of this year. To reconfirm our international strategy, we are focusing on I guess four key target areas, the Mexico market, Southeast Asia, Middle East and Australia.

We are active in all those areas and intending for work in all areas. We are expecting the Mexico work to pick-up towards the end of Q2, Q3 of this year. As we alluded to earlier in 2007, we had about 25% of our revenues were international based in ‘08, we expect that revenue trends to go up to 35% of our total revenue base. Presently our backlog stands at about $175 million in revenue, half of which is internationally based revenue; and most of that backlog will be performed in 2008.

Additionally looking forward to 2008, we will also be internally focused, with welcoming over 800 ex-Horizon employees to the Cal Dive family and integrating those two companies in the combined unified company. To give you a little bit of update on the integration. We’ve consolidated our headquarters to one building, our department heads have been managed integrated departments for about three months now.

And the new offshore employees have been receiving Cal Dive safety and operational training. We are pretty experienced in the integration business, having been the consolidator of our marketplace, and the integration is coming along as we expected at this point.

Additionally, we will be focusing on delivering the 10 million of synergies that we identified early on in the acquisition process, and we’ll focus on as an integrated company exceeding our customers' expectations, as we deliver solutions offshore to our clients.

Before, I turn it over to Kregg, to run through the 2008 earnings outlook. I would like to make a couple of notes. One is that we have taken a hard look at our poster guidance, and we’ve determined that to give only high level guidance and have our company management team judged by our body of work on an annual basis. This represents a change from the level of detail that we’ve given in the past. And as the management team, we really believe our shareholders are best served by focusing on delivering annual results.

Now, with that, I’ll have Kregg run us through slide 11 and 12.

Kregg Lunsford

Thanks, Quinn. As you can see, guys, we are forecasting an EBITDA range of $260 million to $300 million this year. And with an EPS range of $1.01 to $1.35. Our CapEx is projected to be between $80 million and $95 million. With about half of that being a non-discretionary maintenance and regulatory required drydock cost. In terms of utilization, we are expecting to see about a 5 to 10 percentage point decline for our diving fleets. Following the Horizon transaction, we now have 9 construction barges.

Utilization and day rates in our opinion aren’t the most effective way to model for these assets because of the nature of the projects they undertake. The contracts they work under often include multiple assets, as well as, certain fairly material procured items and third-party pass-through costs, which typically can be marked-up 10 to 15%. Because of those factors, if you try to back into day rates by the asset you end up all over the Board, and at the end of the day it’s not really a very meaningful way to evaluate the business.

So, in our opinion, the upcoming project outlook is the most meaningful way to engage the expected performance for those assets. Having said that, utilization is still an important metric in evaluating performance and demand, and we expect our effective utilization for the construction barge fleet to be between 50 and 60% this year.

And finally, I want to reiterate a point Quinn made earlier regarding seasonality and what that means in terms of our financial performance. We talked about seasonality impacting the first and fourth quarters. To add a little bit more color, typically, as you would expect, the first quarter is the most impacted and it deliver the lowest utilization and contribution to EBITDA and income.

The third quarter quite logically is usually the strongest. The fourth quarter gets hit with the seasonality as well but often you do not really see an impact hitting until December. Typically, that wasn’t really the case in ‘07 because we really saw the slowdown occur as early as late September.

Nevertheless, because the fourth quarter often inherits the momentum coming off of our heavy workload during the third quarter it typically will outperform the second quarter. As a result, it is not unusual in our business to generate anywhere from 65 to 70%, 75% of your EBITDA and net income during the second half of the year. And finally, I’ll refer you to our reconciliation of non-GAAP financial measures on slides 12 and 13. And with that, we’ll open up the floor to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jim Rollyson with Raymond James. Please proceed.

Jim Rollyson - Raymond James

Good morning, guys.

Quinn Hébert

Hey, Jim.

Kregg Lunsford

Hey Jim.

Jim Rollyson - Raymond James

Could you possibly talk, you gave pretty good guidance here on ranges for EBITDA and earnings. Could you maybe talk just kind of high level thoughts on revenues and particularly on margins? Obviously, I think Owen mentioned earlier that you presume that margins are going to come down a little bit. Can you just kind of give us your thoughts on how things look maybe this year versus where they were last year?

Kregg Lunsford

Sure. I think if you guys look back at the revenue we’ve generated and historically that Horizon has generated, you would look at us on a pro forma basis, probably exceeding a billion dollars in revenue. There is some inter-company revenue elimination that exists when you put the two companies together because we’ll be working jointly on projects. So, we think we will be close to a billion in revenue, so maybe 900 to a billion.

One thing we learned during the Horizon transaction is that their management team told us they are a lot better at projecting their gross profit than they are the revenue because there are so many variables in the construction contracts they’ve taken. So, whether you have to procure a pipe and have third-party engineering cost push their contract versus whether your customer decides to handle that themselves can cost pretty wide swings in the value of a contract. But in any event, directionally, that’s kind of where we intend to shake out.

On margins, I would say also as a result of the blending that’s going on here, because of the construction barge market as you guys know, typically has had lower markets than a pure diving company would have – margins than a diving company would have. And that’s because of this procurement and third party passthrough costs, which I said earlier, is about 10 to 15% markup.

So they have blended margins or they have margins typically in the 25 to 30% range. So I think on a blended basis, if you look year-over-year on our performance, you would expect a 5 to 7% lower gross margin for the combined company going forward.

Jim Rollyson - Raymond James

That’s very helpful. Thanks for that. Quinn, you guys have had pretty good success so far in moving some assets overseas and you seem to be targeting continued growth there. Can you talk about maybe what you’re seeing on the Horizon for work there or opportunities to move vessels? You guys announced some of that in January. Just kind of thoughts there.

Quinn Hébert

Sure. I think the next targeted market where you see some movement is really Mexico, where we’ll look at moving some of our large amount of pipelay vessels. That’s the first place I think you’ll see something happen in ‘08. And then going forward, just opportunistically, we’ll be looking at the core markets, and as we see and identify, continue to move assets there.

Jim Rollyson - Raymond James

Understood. And last question. I think you noted that CapEx about half of that was maintenance. Can you maybe just spend a minute on what the other half is targeted for?

Quinn Hébert

Sure. It’s investments and equipment, upgrades to capabilities within our assets. Primarily, we’re putting a new crane on the Eclipse, that’s a big piece of that. And also, we are constructing a new portable SAT system that we expect to deliver by the end of the year.

Jim Rollyson - Raymond James

Okay. Thanks, guys.

Operator

Your next question comes from the line of Roger Read with Natexis Bleichroeder. Please proceed.

Roger Read - Natexis Bleichroeder

Yeah. Thanks. Good morning, gentlemen.

Kregg Lunsford

Good morning.

Quinn Hébert

Good morning, Roger.

Roger Read - Natexis Bleichroeder

I was wondering if you could go back through, real quick, the backlog. I mean, one of the questions going into the merger with Horizon and one of their kind of recurring challenges have been issues with their backlog not always being executed well. Can you walk us through, Quinn, where you are in terms of your comfort level? I mean obviously, you’ve executed on at least a couple of months work of that backlog to-date and what maybe – I don’t know, just what’s developed out of that up to this point?

Quinn Hébert

Sure. On the backlog, most of the international backlog is for projects in Southeast Asia off of the Sea Horizon. We’ve had a good track record with the Sea Horizon. We’ve had a top to bottom review by our Eastern Hemisphere management team. So, we feel pretty good about delivering that portion of the backlog in ‘08. I think the problems you are referring to are the Mexico projects, which we haven’t won any additional work in Mexico yet.

Roger Read - Natexis Bleichroeder

Okay. And given the merger with Horizon which had a somewhat larger international component to it, is it that stepping away from Mexico is why we’re not seeing greater than a 35% contribution from international in ‘08?

Quinn Hébert

I think what’s happening is in Mexico we’re seeing some delays by in connection with the regime change last year with the President. So Pemex is little bit slower out the gate and so we’re not forecasting a whole lot from Mexico at the beginning of this year. It’s more toward the tail end of this year, so we’re taking a little bit more of a conservative approach in terms of how much that Mexico market we’ll actually capture.

Roger Read - Natexis Bleichroeder

Okay. That’s helpful. And then, Kregg, this is probably for you, could you give us an idea of what exactly constitutes that range of performance in the EBITDA estimate? How do you go into 260 to a high of 300?

Kregg Lunsford

Sure. A big component is just driven by utilization. Except our -- primarily the saturation diving fleet. So I think as we said earlier, we’re expecting anywhere from a 5 to 10% percentage point decline year-over-year. And then within that range, on the low-end, it’s probably – from the low to the high, it’s probably about a 5% variance. So that’s one of the biggest contributors. The other difference from the low to the high would be the amount of work that we win with the construction barges.

We have a reasonable amount of work that we’ve built into the budget with some upside to drive to the high end of the range, as we kind of go to market on an integrated basis and try to win some more projects, so some of the additional revenue synergies on top of the cost based $10 million that we talked about, will drive us to the higher end of the range. So, I feel those are the two primary drivers between the low and the high end.

Roger Read - Natexis Bleichroeder

Okay. And then just my final question to clarify one of the things that was asked, I think, on one of the – well, maybe it was the final comment before the start of the Q&A. You defined effective utilization 50 to 60%. Can you tell me how that differs I guess from calendar utilization?

Kregg Lunsford

Sure. We define effective utilization as the number of days available for work versus 365 days. So what we do is you take the 365 days less any regulatory required drydocks that you are mandatorily have to take the boat out of service. So we look at both calendar and effective utilization, but the effective utilization oftentimes is a good – a better measure of demand and not skewed by drydock service days.

Roger Read - Natexis Bleichroeder

Okay. Thank you.

Operator

Your next question comes from the line of Joe Gibney with Capital One Southcoast. Please proceed.

Joe Gibney - One Southcoast

Good morning everybody.

Quinn Hébert

Good morning, Joe.

Kregg Lunsford

Good morning, Joe.

Joe Gibney - One Southcoast

I was curious if you could update us a little bit on the portable SAT dive systems. I think you’re adding three units previously for your update for 2008, is that still accurate?

Quinn Hébert

Sure. I’ll let Scott Naughton, our Chief Operating Officer answer that Joe.

Scott Naughton

Yes. That’s exactly correct. We have three more systems that we’ll be adding this year. Two of them we expect to be operational this summer. One of them will be in the international group and one of them here in the domestic side. And by year’s end, we should have that third system that will take us up to 10 portable systems.

Joe Gibney - One Southcoast

Okay. And just want to touch a little further on Mexico. I understood your comments there that you maybe see a pick up here at the end of Q2, Q3, obviously a little bit of the regime change transition period overall. I guess just trying to get a sense of what kind of turns the needle I guess from your perspective of them getting more aggressive? Is it simply waiting things out in this transitory period that you feel you’re adequate to be able move some assets down at that point?

Quinn Hébert

Right, we’re going – once we – we’re not going to move assets down speculatively. We’ll make sure that we have backlog one in hand before we go down. And I think really it’s just a function of getting all of the new directors and sub-directors in place and getting the capital expenditure monies released to get Mexico turned back on.

Joe Gibney - One Southcoast

Okay. All right. That’s helpful. Any follow-up work here, I mean as we’ve closed out Northeast Gateway, what are some of the expectations on domestic side for obviously, you’ve moved the Texas out, but how are things looking domestically here?

Quinn Hébert

Things are looking good. We’re building up a pretty good backlog of work on diving fleet. Q1 was slow as we expected. But I don’t want anyone to press the panic button, because this is going to be a pretty busy year in the good weather months. That’s why the last two years have spent a lot of money on the capital expenditure programs, with production restoration.

A lot of that money was spent on paid weather stand by and that’s one of the big differentiators between ‘08 and the first three quarters of ‘07 where that dynamic is not occurring. But all of our clients are talking to us. We have – we’ve tendered over 100 bids in the first two months of this year. So we – things are looking good.

Joe Gibney - One Southcoast

Okay. And just sort of one high level question here relative to international. Looking forward beyond ‘08, I mean, 35% of the business here international and growing, presumably, just trying to get a sense of what you think that number could be as we get to ‘09, ‘10, how we should think about this business from an international domestic standpoint, understanding of course, you’re always going to have your base business here in the Gulf.

Quinn Hébert

Yeah, I mean, our home could be the Gulf of Mexico. We think that’s a good home because it has the largest infrastructure and it’s mature, so it can support a steady, stable with respect to repair and maintenance business. Going forward, we’re looking to expand into the areas where our clients are spending their money as the surveys indicate. And I don’t think it’s unrealistic for us to see in the next two to three years for our revenues to be 50% or greater international and 50% or less in the Gulf of Mexico. I think that’s a natural evolution. And it’s frankly what our clients are asking us to do. So that’s what we’ll do.

Joe Gibney - One Southcoast

All right. I appreciate it. Thanks. I’ll turn it back.

Quinn Hébert

Thanks.

Kregg Lunsford

Thank you.

Operator

Your next question comes from the line of Joe Agular with Johnson Rice. Please proceed.

Joe Agular - Johnson Rice

Thank you. I had a question on the utilization estimate you gave for ‘08. Did you say it was effective or that was actual?

Kregg Lunsford

It’s actually, both on an effective and calendar basis. We’re expecting a decline year-over-year, like I said, of about – between 5 and 10%.

Joe Agular - Johnson Rice

Okay. Did the delay in the acquisition merger with Horizon have any effect, do you think Quinn, on the contracting of some of the Horizon assets in ‘08?

Quinn Hébert

Yeah. I mean, I think that probably had something to do with the position we’re in. But I don’t think it was material. I think what we saw, Joe, is a lot of our clients were focused on ‘07 efforts and around September, October, a lot of them just frankly had spent the lion’s share of their ‘07 capital expenditures and they started to reign their budgets in. I think in ‘08, I think everyone expecting a more traditional approach to the construction cycle and that’s what we’re seeing reflected in the market.

Joe Agular - Johnson Rice

Yeah. In terms of the international work that you may start to bid on with – to combined assets, both the diving service as well as the pipelay vessels, have you done any bidding on that – of jobs like that, yet?

Quinn Hébert

Yes, we have. And on the first two, we were unsuccessful, just because somebody else was low and willing to take more risk and we had a pretty specific business model when we go offshore to approach risk, and we’ve had lots of practice over the last 35 years and when we go offshore, we want to make money. And so, that’s kind of been our business philosophy. I think it’s stood the test of time.

Joe Agular - Johnson Rice

Yeah, that’s certainly notable that you all stick to your bidding discipline. I’m sure everyone applauds you for that. I just was trying to figure out whether or not there was – that general – it seems like the strategy of using both sets of vessels to pursue work.

Quinn Hébert

Well, we’ve won work with the combined assets. We just are staying pretty focused on our business model. And we look at risk to reward ratio. We’re going to be consistent.

Joe Agular - Johnson Rice

Okay.

Kregg Lunsford

I mean, we won here domestically. We announced earlier a big salvage project that utilized derrick barge and diving assets here in the Gulf. It was a nice size contract. I don’t have the number in front of me. But I think it’s roughly $35 million size and we’ve also put together the Sea Horizon and some of our portable saturation diving assets overseas and one more in Southeast Asia to give you a little more color.

Joe Agular - Johnson Rice

Okay.

Scott Naughton

Right. And the Castrol and one of our DP SAT ships will be moving out on that project next month. The derrick barge Atlantic with one of our portable SAT systems will be following up on the same project, so we have seen some early success already.

Joe Agular - Johnson Rice

Great. The – another just financial question. With your CapEx guidance and your EBITDA guidance, if assuming there is no really big change in working capital, you guys, it seems like, should generate substantial amount of free cash flow in ‘08. I mean, I guess, I would estimate as much as $100 million possibly. Just your thoughts on would you continue to look to pay down debt or what would be your decisions for that excess cash?

Kregg Lunsford

Sure. Yeah, absolutely. In the short-term, we will continue to pay down debt. We are comfortable with our excess to capital as part of our overall facility. We also have a $300 million revolving credit facility in addition to the term loan that’s currently outstanding at 335 million. So paying down debt makes sense because you’ll always have plenty of access to capital with the revolving facility.

For ‘08, we have one more required payment of 20 million and that doesn’t come due until December. So I think we will delever in the interim, but still have plenty of dry powder to continue to make investments under acquisitions to continue to execute our strategy.

Joe Agular - Johnson Rice

Okay. Great.

Quinn Hébert

Thanks.

Joe Agular - Johnson Rice

Thanks.

Operator

(Operator Instructions). Your next question comes from the line of Steven Gengaro with Jefferies. Please proceed.

Steven Gengaro - Jefferies

Thanks, ladies and gentlemen. Just two questions, I guess, the first just relates to the pricing and the second one on utilization. But when you look at the diving fleet, can you give us a sense for kind of current pricing versus six months ago or a year ago, whatever frame of reference is easiest for you, if you can? And you’ve particularly by asset class as far as the DP SAT system versus the surface systems, can you kind of give us either quantitatively or at least directionally what’s going on and what we should expect in ‘08?

Quinn Hébert

Sure, absolutely. I’ll start with DP SAT ships. That class of our fleet stays busy through the cycle. And the pricing represents that we’re holding strong at the pricing levels that we experienced over the last couple of years, even today. So that’s – that is holding steady. In the four point saturation diving fleets, we expect pricing this year to be down around, call it 7 to 10%. The surface vessels where you’re seeing the most dramatic drop-off in utilization, we’re going to see a pricing drop 20 to 25%. And then if you turn to the construction barges, as I said, that’s a little harder to look at on a day rate type basis because you – it’s really more of a project-based approach. So, I think it’s probably more meaningful to look at that in terms of the big projects we win and not really look at it on a day rate kind of approach.

Steven Gengaro - Jefferies

Okay. And is – will you see ebbs and flows in price on the surface vessels you think throughout the year in the stronger and weaker times it gets pretty consistent at those levels.

Quinn Hébert

I’ll let Scott Naughton answer that.

Scott Naughton

Yeah, that’s a pretty typical seasonal reaction and just with the bidding activity we’re looking at right now, we’re seeing good opportunities for rate increases as we get into the better weather months.

Steven Gengaro - Jefferies

Okay. That’s helpful. Thank you, gentlemen.

Quinn Hébert

Thank you.

Operator

Your next question comes from the line of David Smith with JPMorgan. Please proceed.

David Smith - JPMorgan

Good morning, guys.

Quinn Hébert

Hey, David.

David Smith - JPMorgan

One of your competitors recently suggested that the MMS is increasing pressure on the operators to accelerate their plans to recover down platforms as well as maybe decommissioning on the economic platforms. I’m wondering if you’re seeing an evidence of this?

Quinn Hébert

You know, not really. I mean I think the MMS is – I think this is obviously on their radar screen. But I haven’t really seen them – we haven’t seen clients doing anything on an accelerated basis they wouldn’t otherwise be doing just in the normal course of business. I think what everyone is viewing as acceleration is just really the – just the whole – just the quantity of the number of platforms that you’re having to get done. It kind of feels like it’s accelerated but it’s just because over a 100 platforms were damaged or destroyed in the hurricane. I think that’s what’s happening.

David Smith - JPMorgan

Okay. So if the MMS were to get a little more strict that could be a potential source of higher utilization?

Quinn Hébert

Yes, absolutely. For our derrick barges and our DSVs and portable SAT systems.

David Smith - JPMorgan

You guys mentioned a number of bids that you’ve been placing wondering, if you might have an estimated dollar value?

Quinn Hébert

David, we haven’t really quantified the value. It’s an interesting point. We’ll think about that.

David Smith - JPMorgan

Could be a new metric to keep track...

Quinn Hébert

Sure.

David Smith - JPMorgan

of going forward. I know in the past that you guys attracted a number of smaller acquisition opportunities and I wonder if you could give any update on your view of that market or if maybe you’re looking to take a breather while you integrate HOFF?

Quinn Hébert

Well, I think we have a plate full with HOFF right now. But we’re known as an acquisitive company, it’s kind of how we’ve built DVR. And so, we learned long time ago to never say never in this business. But right now, it terms of acquisitions, they probably would be more of overseas flavor or probably looking more in terms of one-off vessel or barge acquisitions.

David Smith - JPMorgan

Great. Thank you very much.

Quinn Hébert

All right.

Kregg Lunsford

Thanks.

Operator

Your next question comes from the line of Joe Hill with Copia Capital. Please proceed.

Joe Hill - Copia Capital

Good morning, guys.

Quinn Hébert

Hey Joe.

Kregg Lunsford

Hi, Joe.

Joe Hill - Copia Capital

Is there any chance you all can get some of the third party contracting business for superior on that DP Chevron contract?

Quinn Hébert

Synergy services, the big one?

Joe Hill - Copia Capital

Yes.

Quinn Hébert

Yes, there’s an opportunity. I know that they’ve bid out the biggest share of that and it went into...

Kregg Lunsford

Well, we still have some outstanding bids on that work. We haven’t heard of any final decisions yet.

Joe Hill - Copia Capital

Okay. So at least you’re in the mix?

Quinn Hébert

Sure.

Kregg Lunsford

Yes.

Joe Hill - Copia Capital

Okay. Hey, Kregg, what’s the ‘08 drydocking schedule look like relative to ‘07?

Kregg Lunsford

I can go ahead and give you an update on that. We’ve actually already completed a couple of vessels. We had a four-point surface boat which we’ve completed and its back in service. Prior to the acquisition, the lone star started her regulatory drydock and that has been completed. Right now, we have one of our four-point SAT boats, the Constitution in drydock.

She will be back in service in before the end of March. The Mystic Viking is actually working right now on a phase down in Trinidad. She will start an extensive drydock in March that we estimate to be 60 to 75 days. And then the Uncle John will have a – it’s not a drydock, but we have a regulatory requirement for June for her. We have a 4-point surface boat that we’ll have to drydock in the middle of summer that’s the Mr. Fred. And then the only thing after that is we have on December 1st we have regulatory deadlines for a 4-point SAT, a 4-point vessel and a utility boat. We will certainly request a 30-day extension for those so that we can start those after the holidays in January. But we do have the full CapEx cost for those projects in our 2008 numbers.

Joe Hill - Copia Capital

Okay. Scott, you guys historically have provided a schedule in the slides. I was just wondering if you would consider doing that again, that would kind of make life easier for us guys trying to figure out the seasonality or at least how things are going to fall in a quarter-by-quarter basis?

Scott Naughton

Yes, I think, Joe, I appreciate the question. I think in our decision to kind of stick to more of an annual performance approach. We decided not to give quite the detailed by vessel, by day, by quarter information. I think we do believe that sort of the directional guidance we’ve said in terms of EBITDA and income contribution during the year should cover the impacts of the out of service days.

Joe Hill - Copia Capital

Okay. Okay, well, I’ll have to take that and be happy, I guess. Quinn, where can you do better than your budget? Where can you – if you can beat the numbers, where do you think can you come out ahead?

Quinn Hébert

I think really on the construction barges. There is some upside both domestically and overseas. That’s really the biggest up side for us. We look at this guidance range; we try to be something that’s realistic and achievable.

Joe Hill - Copia Capital

Okay.

Quinn Hébert

Really be honest with ourselves and with the street.

Joe Hill - Copia Capital

Okay. And my last question I guess here is what was Horizon’s utilization running pre-Katrina? I kind of had them running around 70% in ‘06, but obviously that was a little bit of a higher number. What is kind of the normalized range?

Quinn Hébert

Yes. I think you’re right. I think you’ll probably approach 70% during ‘06, which is probably a peak for them and global and any other person that’s really in the business in a big way. From what I’ve looked at Joe, not just for Horizon but the other assets, I think 50 or 60% utilization range is probably a pretty good solid meter for any of them.

Joe Hill - Copia Capital

Okay. Thanks a lot guys. I appreciate it.

Operator

Your next question comes from the line of John Bair with SKA Financial Services. Please proceed.

John Bair - SKA Financial Services

Good morning.

Quinn Hébert

Good morning.

Kregg Lunsford

Good morning, John.

John Bair - SKA Financial Services

I noticed on your slide 7, you showed a 5% of US non-Gulf of Mexico revenues and I was wondering where that was coming from and if there is some room for growth there?

Quinn Hébert

Sure. That primarily reflects the Northeast Gateway project that we got a percentage of contribution towards just the 21 days that we owned Horizon this year. In terms of growth in ‘08, we actually have a nice project that’s very similar in nature that we are optimistic about. It’s not on the books yet, but we are optimistic and so the northeast region could be a good opportunity for us going forward. So could you see that percentage perhaps be larger going forward.

John Bair - SKA Financial Services

Would it be 10% range or?

Quinn Hébert

I couldn’t really say, but...

Kregg Lunsford

It’s more like the 5% range.

Quinn Hébert

Maybe – well, it’s 5% this year. It could be – yeah, that’s probably fair. Maybe up to 10%.

Kregg Lunsford

Yeah.

John Bair - SKA Financial Services

Okay. And my next question. Do you have any – I am sure you have interest in it, but with the fairly recent discoveries offshore, Brazil looks like there is going to be a heck of a lot of work going on down there. I’m wondering if you have any – if you’re looking to try to tap into that in any way?

Quinn Hébert

No. That’s a good question. We actually have a live tender for one of our construction barges in the shallow water basin in Brazil and there is going to be a lot of work. So, that’s definitely an area that we’re looking at.

John Bair - SKA Financial Services

Okay, great. Thank you very much.

Quinn Hébert

Thank you.

Kregg Lunsford

Thank you.

Operator

We’ve have a follow-up question from the line of Roger Read with Natexis. Please proceed.

Roger Read - Natexis Bleichroeder

Yeah. Just real quick, Kregg, question for you. The depreciation expectation for this year and the tax rate, and I guess maybe your thoughts on interest expense given you’ve already paid $40 million back and you continue to pay down debt this year in terms of how that would impact our interest expense?

Kregg Lunsford

Absolutely. If you look on slide 13 in our EBITDA reconciliation.

Roger Read - Natexis Bleichroeder

Yeah, we couldn’t get the slide before the call, so...

Kregg Lunsford

Oh, no problem. I will just -- you guys can refer to that. But I’ll quickly run through it.

Roger Read - Natexis Bleichroeder

Okay.

Kregg Lunsford

We’re expecting depreciation and amortization of about $70 million next year. We’ve modeled interest expense between 23 and 29 million. As you know, we paid down 40 million earlier than the required payments this would have been in June and September. But because of the excess cash that we generated, we thought it was a prudent thing to do.

Roger Read - Natexis Bleichroeder

Okay.

Kregg Lunsford

Our rate on the term loan is LIBOR plus 225. So, that’s our interest range. In terms of our income tax rate, because of our expanded increased exposure in the international markets, we’re actually projecting anywhere from 30.5 to 32.5 income tax rate. So, 31.5, right down the middle is probably a reasonable assumption for modeling purposes.

Roger Read - Natexis Bleichroeder

We can live with that. Thanks.

Quinn Hébert

Thank you.

Operator

We’ve no more further questions in the queue. I would now like to turn the presentation back over to management for closing remarks.

Quinn Hébert

Okay. Well, thank you very much for participating in our call and your interest in DVR and we look for our next call with all of you guys. Thank you.

Kregg Lunsford

Thank you.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect, and have a good day.

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