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

Q1 FY08 Earnings Call

May 1, 2008, 9:00 AM ET

Executives

A. Wade Pursell - EVP and CFO

Alisa B. Johnson - Sr. VP and General Counsel

Owen Kratz - President and CEO

Bart H. Heijermans - EVP and COO

Analysts

Jim Rollyson - Raymond James

Stephen Gengaro - Jefferies & Company

Roger Read - Natixis Bleichroeder

Joseph Gibney - Capital One

Michael Bodino - Coker & Palmer

Sunil Jagwani - Catapult

Operator

Good morning andwelcome to the First Quarter Conference Call. All participants will be in a listen-only mode until after today's conference. [Operator Instructions]. Today's conference is being recorded and if anyone has any objections you may disconnect at this time. I'd now like to turn the conference over to the host for today's call Mr. Wade Pursell, Chief Financial Officer of Helix Energy Solutions, sir you may begin.

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

Thank you. Good morning everyone. Thanks for joining us today. Joining me today on the phone is Owen Kratz, our CEO, here in Houston; Bart Heijermans, our COO; Robert Murphy, President of Helix Oil & Gas; and Alisa Johnson, our General Counsel. Hopefully everyone has access to the copy of the press release and the slide presentation which is linked to the release. If you don't you can go to our website at www.helixesg.com, then the Investor Relations page and click on the webcast presentation there.

So we will start going through that presentation now, and starting with slide 2, I turn it over to Alisa for an important announcement.

Alisa B. Johnson - Senior Vice President and General Counsel

Great. As noted in our press release and associated presentations certain statements there in and in today's discussion are forward-looking statements. A number of factors could cause actual results to differ materially from those forward-looking statements. For a complete discussion of risk factors effecting the company, we direct your attention to our press release and to our annual report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission. Also during this call certain non-GAAP financial disclosures maybe made. In accordance with SEC rules the final slide of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The presentation together with their reconciliation is available on our website.

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

Thank you Alisa. Slide 3 shows the outline for this mornings call. I will summarize the financial results and turn it over to Owen for a quick strategic update which will be followed by a Q&A segment. And as we did last quarter we have included a section in the slides on operational highlights with some financial break downs for both contracting services and oil and gas. For your reference these are at the end of the presentation and we are not going to go through these slides on the call.

So, looking at slide 4, for the first quarter of 2008 we reported revenues of $450 million which is 14% more than last year's first quarter as we saw continuing strong demand for our services in the deepwater, offset a seasonal decline in contracting services on the shelf and our oil and gas production division generated about the same production as last year's first quarter with higher commodity prices. By the way the production levels generated this quarter exceeded our budgeted expectations.

With respect to the more traditional seasonal decline in activity on the shelf which is about 58% interest in Cal Dive, I would point out that they issued their earnings release last night as well and will be having their conference call at 11 o'clock similar time later this morning. So, I would defer specific questions regarding that business to the management team.

Turning to operating cash flow we generated nearly $239 million of EBITDAX during the quarter which was 43% more than last year's first quarter. In addition to the increases generated from the revenue increases just discussed we were able to sell 30% working interest in our Danny Noonan discoveries in two separate transactions for a total of approximately $165 million plus their obligation to pay 30% of all future related CapEx and an obligation to pay up to $20 million in the future of certain production milestones in there.

The first transaction for 20% closed at the end of the first quarter resulting in a gain of over $61 million, the other 10% closed last week which will result in additional earnings for the second quarter. I should also remind you that on the oil and gas side $14 million of impairment was recorded in the first quarter for Devil's Island which we disclosed to you on the last earnings call few months ago.

Diluted EPS for the quarter was $0.79 per share which was 32% more than last years first quarter, that increase is less than the operating cash flow increase due mainly to higher interest expense of $26 million versus $13 million due to increased debt levels to fend our large capital program, nearly all of which is not yet contributed to earnings. And a higher tax rate this year of 36.6% versus the 34% last year due mainly to our providing a non-cash deferred tax for Cal Dive earnings this year as our book basis has now exceeded our tax basis.

Turning to slide 5, a few months ago we shared our outlook for 2008 with you which is essentially our internal budget where the solid first quarter exceeding our budget expectations. As usual there are lot of moving parts with respect to our initial assumptions both positive and negative. You might recall that $3.66 per share budgeted amount for the year included $2.21 per share of base earnings and the remaining $1.15 related to increased earnings from oil and gas sell downs.

At this point we are comfortable reaffirming the base earnings number and that's without consideration of positive commodity price impact versus all exceptions and we are currently reviewing the extent of further oil and gas sell downs. With that I will turn it over to Owen for further discussion.

Owen Kratz - President and Chief Executive Officer

All right I will speak beginning from page 7 on the slide show. I think that the thing that I am most pleased about with the first quarter is that we have executed what we said we were going to do. On the left you can see the objectives that were stated previously and on the right a little bit of an update, and then to give a little color to those, we did sell down Danny Noonan as Wade mentioned. This one deal alone is a little over 50% of the production that we said that we would be selling down. I can't... I will tell you the onshore properties looked like they probably will close soon and things are progressing well there.

On the... on the next objective, it was to complete our service assets. On the Q4000 it is out of the shipyard now. It's on sea trials but having said that I do have to let you know it is about a month late. But at least we're out of the tunnel and we're in the final stages. The Caesar, it looks like at this point that it will be late coming out of the China shipyard and I know that there has been rumors about problems with our stinger, I just wanted to show you... shed a little light about what's actually going on. The stinger is fine, the hitch blocks that go on the back of the vessel that supports the weight of this stinger, we basically lead. Welding procedure was not done adequately and we rejected it and that's required us to go back and have new stinger blocks fabricated and that is a major delay. So, I just wanted to clear that air and we will be giving you further updates as to what that means for the schedule.

Moving on to the Helix Producer 1, I believe many of you will remember, I've mentioned that I was concerned about the progress of the work in the Croatian shipyard. The milestone to look for would be the vessel leaving in May to transit to the U.S. where it's under our control and we can progress things with a little bit more visibility. At this point I would still have to say that it's looking probable that sailing date maybe late. But again we'll give updates as we go there.

On a brighter note we did have the opportunity to acquire a new ROV's without the long wait of manufacturing and they immediately go into our fleet which was a recent treatment transaction. And the Noonan development looks like it is progressing well and could possibly be ahead of budgeting schedule. And then the Phoenix project, that's really dependent on the HP, the Helix Producer 1 schedule which will have to be updated later on.

Then the thing that pleases me most I think is that we are out performing our guidance. We had some negatives in the first quarter, the Q4000 was out for the full, but let me just say that the negative that I'm mentioning here are negative that we did anticipate and were fully considered in our expectations and guidance. The Q4000 was out for the full quarter and the shipyard having upgrades done, Devil's Island dry holes. The remaining part of that hit in the first quarter. We had the CEO severance paid and we were expecting the Cal Dive seasonal slow down.

Having said that there is even, I think while I am on the negatives, if you look year-over-year I think the major impact between last year and this year is the seasonal slowdown of Cal Dive, Devil's Island, Q4000, and the severance issue. Beyond that we had even stronger positives though. We had most of the contracting groups producing at stronger than expected performance levels. We had strong commodity pricing, but I would like to mention that when I'm talking about relative performance, I am watching the company, I am really talking about without commodity price. And finally we did we have stronger than expected production rate which is very pleasing.

Its been a really good start to the year but as Wade mentioned there are issues going on both positive and negative mostly issues with the shipyard which we will clarify when we can. But we still believe that we'll meet or exceed our guidance and again that's without the help of commodity price based on stronger performance better than expected and sufficient contingencies that were built into the plants. And almost certainly we will meet or exceed the expectations of commodity prices hold at these levels. But until there is a little bit of visibility on the quantification of both positives and the shipyard impact, we're not quite prepared yet to say if or how much we're going to beat the guidance. These things keep trending the way they are right now which is the great thing. I will probably be ready say more at the next earnings call. And with that I'll just open it up for questions.

Question And Answer

Operator

[Operator Instructions]. Our first question comes from Jim Rollyson from Raymond James.

Jim Rollyson - Raymond James

Good morning guys.

Owen Kratz - President and Chief Executive Officer

Good morning James.

Jim Rollyson - Raymond James

Hey, Owen, first off you're just looking at your guidance for the year on the deepwater side or the service side, I think your margin expectation for the year was kind of mid 20% to 26%, had a lot of things going on this quarter, seasonality Q4'000 being out Seawell out for at least a month, all that being coming back in and fully booked, do you still think you are tracking pretty well to get up there for the year?

Owen Kratz - President and Chief Executive Officer

I think we have got Bart on the line here, so I think I let Bart who is Head of all these Operations speak to it.

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

Yes, I think despite a couple of the negatives that you mentioned, I mean the service business has done pretty well especially the deepwater side which is really deepwater pipelaying construction vessels and Baltic [ph] support vessels, they have done very well. I mean the Seawell had the slow month of January, the rest of the year looks positive. So yes, we definitely think that the budgeted margin number is achievable and hopefully we can do a little bit better.

Jim Rollyson - Raymond James

Very good. Your partner in the independent hub obviously said mid May for being down assuming that that's correct, Wade, maybe thoughts on the EPS impact of that and secondly you guys doing any of the repair work?

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

Yes, as far as dollar impact Jim, if it truly is mid May, it will probably be a penny to us probably $1.5 million or so. As far as the work we are doing, Bart.

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

Yes, Cal Dive has had invested a lot there vis-à-vis for some of the repair work and that could be back soon hopefully to complete the job.

Jim Rollyson - Raymond James

Okay, and then just last question from me Owen, you made your first property sell down, sounds like the onshore stuff you said was kind of tracking to hopefully be pretty soon, any good progress going on the other things you have kind of targeted for the year?

Owen Kratz - President and Chief Executive Officer

Well, yes. Jim, the first two we sort of took a rifle shot approach in approaching certain buyers that we knew had an interest. The remaining properties are being marketed by the bank and that's got a definitive schedule the data room and bid submissions, so I don't see any hiccups in meeting the timing expectations there.

Jim Rollyson - Raymond James

Okay, well great. Good quarter.

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

Thanks.

Operator

And your next question comes from Stephen Gengaro from Jefferies.

Stephen Gengaro - Jefferies & Company

Thanks, good morning guys.

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

Hi.

Stephen Gengaro - Jefferies & Company

A couple of things, one I thought and maybe I was wrong that Caesar was a critical path item for Danny Noonan but it looks like Caesar might be late but you are optimistic that Danny Noonan will be online, on time, can you reconcile it?

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

Yes, let me be a little clear about that. The Caesar is critical path on the Danny pipeline which is the... oil pipeline and that was not... that was never scheduled for production in '09 so, there is no impact there. The Noonan pipeline does not require the Caesar. And the Noonan, the gas portion, the larger portion of that development is the one that's looking like it is possibly ahead of budgeting schedule.

Stephen Gengaro - Jefferies & Company

Okay, good. Thank you. And then the... I know you are not going to give us quarterly guidance but when I read you outperformed your budget for Q1, does that include or exclude the sale?

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

Yes, excluding the sale we outperformed our budget for the first quarter Stephen. '

Stephen Gengaro - Jefferies & Company

Okay, so you are... and the gang, I know, DVR is going to have their conference call later, we expected seasonal weakness as well, it was weaker than we had thought. Was their results kind of inline with your expectations?

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

Yes, they were.

Owen Kratz - President and Chief Executive Officer

Also, to add a little to that, we used just below the mid point of the Cal Dive guidance in our expectations. And from now on I think I will be setting a trend. When I am talking about our performance of each quarter I really try and strip the noise out of it, the beginning of sales and the impact of any positive commodity pricing. So I speak and say we had really strong quarter it was excluding those events.

Stephen Gengaro - Jefferies & Company

Okay. Thank you and then just finally, Wade when we look at the CapEx program going forward and now it looks like, I guess your partners will pay about $70 million of the development cost, how does the CapEx look for sort of the rest of this year and maybe even what's left on the I guess it will be a well enhancer I guess in first quarter '09?

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

Yes, I don't want to get in to too much detail but I guess we had guided for the year $800 million of CapEx combined. I think total... for the total company that number is probably closer to $850 million up to $900 million if you are setting a range, depending on sell downs. Sell downs will play a big part of that. As far as then going in to '09, the step that's left is yes, still in the $35 million range probably.

Stephen Gengaro - Jefferies & Company

Okay. And then beyond that sort of an ongoing kind of maintenance level for the company, is there a good number to use?

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

Yes, I would say from a maintenance CapEx stand point its maybe a $100 million range for the services. I mean on the oil and gas side it really depends on what the expectations are with respect to maintaining oil and gas production. But you are talking something more in the $253 million to $300 million range I think on the oil and gas side.

Owen Kratz - President and Chief Executive Officer

Just to break it down a little bit more, the maintenance CapEx from the fleet I believe is going to be little less than a 100 but then on the Shell production our goal is not to offset decline completely on the Shell but let it trend like it is now with offsetting partial declines, targeting something like a $150 million a year budget there, another probably $100 million on a start up again of our deepwater drilling program. But as I have said, in the past we're not planning to drill anymore 100% well, so that $100 million would be covering multiple wells at a lower interest rate.

Stephen Gengaro - Jefferies & Company

Okay, thank you and then just one final one and that is when you... your production guidance for the year, it was 69 [ph] sales and 64.5 after sales, I think that's right, is that still a good number?

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

Yes.

Stephen Gengaro - Jefferies & Company

Okay, very good. Thank you.

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

Thank you.

Operator

Thank you, our next comes from Roger Read from Natixis Bleichroeder.

Roger Read - Natixis Bleichroeder

Yeah, good morning gentlemen.

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

Good morning, Roger.

Roger Read - Natixis Bleichroeder

I guess what I want to try and understand in your offshore construction space, what can really ramp up, I mean if I look at how the Intrepid and the Express did those would look, you know that's kind of consistent performance on the rest of the year with the moving parts being whether or not you are working on your own projects or not I suspect. What can the Q4000 do for you this year, can you walk us back through kind of the Shell frame contract that signed on the Gulf and then kind of what kind of construction work it may do. So I was just trying to think about where Q1 performance was and what that could mean for the remainder of the year?

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

Bart you want to walk us through the backlog?

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

Yeah. I mean if you start with Q1, I mean clearly... I mean, the Seawell has a slow start because the clients cancelled the contract in January. The rest of the year looks very good, so that going to be a positive change. Same story, we have rest of the year booked and pretty good margins and that has been the frustrating part, is that we have this great backlog this year and also for the next couple of years. I mean, we are pretty excited about what this vessel can do in the Gulf of Mexico, but if you took a bit longer to get it out of the shipyard, but that is going to be positive change. I mean, for the rest of the year compared with first quarter, yes, Express and Intrepid should be pretty flat. Then on the Canyon side, we're going to have this island pioneer DP vessel to our fleet, that this starting in June is going to work in the North Sea for the rest of the year using the I-trencher [ph], the new 2000 horse power trencher that we are building that is pretty close to being finished, being completed. So we have got a lot of things, lot of assets that are going to contribute more for the rest of the year than they have done in the first quarter.

Roger Read - Natixis Bleichroeder

Correct me if I am wrong here Bart but the Q4000 backlog for the remainder of the year is mostly in well intervention work that is done previously contract and we do have some drilling type activities for third parties and the only work that we have scheduled for internal support of VRT is a completion out on the Phoenix field.

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

That is absolutely correct. The only internal work is completion which is expected to take around 45 days or so. The rest of the year is all for third party. Of course also the Phoenix work is, we haven't... there is some third party component there. I mean, the charge is earned and the 30% interest in the field. Overall what we have seen, the demand for the Q is strong, also because the demand for deepwater drilling rigs is still strong. And we expect that the demand for deepwater drilling rigs to continue for the next couple of years which allows the Q... allows us to use the Q as a well intervention vessel at very attractive rates.

Roger Read - Natixis Bleichroeder

Okay. And just a little bit more on the Q just because it's been a vessel with a lot of promise but had trouble delivering consistently... with the exception of the work on Phoenix, just.... and assuming the thruster issues are all taken care of now. I mean this vessel should operate pretty much like the other Gulf of Mexico vessels in terms of utilization. And if utilization is there, sounds like the backlog is fine, the margin ought to be significantly better than what we have seen historically on this vessel?

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

Yes, as we said --

Owen Kratz - President and Chief Executive Officer

Actually just for full disclosure that we've done an awful lot of most of the cost overrun on the Q4000 was not associated with the drilling upgrade that was pretty well in hand. We have done an awful lot work to try and increase the uptime status on Q4000. We've added cost bracing on the whole to stiffen it up. We've changed our management so that we've have done an awful lot. I will say though that we... due to deliverability issues from Rolls-Royce, we are running with some old gears over... as the new ones come in we are going to have to replace them over time. But with the exception of that one weak point that Q4000 should operate much stronger and with much better uptime from here on.

Roger Read - Natixis Bleichroeder

Okay, and then shifting gear just a little bit, what is the expectation on production volumes kind of Q2, Q3 ex a NOONAN start-up?

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

We are pretty much flat. The start up we are looking for increased production in Q4 maybe a little in Q3 but primarily Q4.

Roger Read - Natixis Bleichroeder

Okay. So there is approximately 15Bs a quarter, is the right way to think about it?

Owen Kratz - President and Chief Executive Officer

Right we are now that we have sold, I mean from that 69 down to the 64 flat that we were looking at... in our last call.

Roger Read - Natixis Bleichroeder

Okay. Thank you.

Unidentified Company Representative

Roger.

Operator

Thank you. Our next question comes from Joe Gibney from Capital One.

Joseph Gibney - Capital One

Good morning everybody.

Unidentified Company Representative

good morning.

Joseph Gibney - Capital One

Owen I was wondering if you could update us a little bit of how should we think about it from a vessel delay side we look to 2009, any impact here and your thoughts on the well enhancer and when that's going to be coming in?

Owen Kratz - President and Chief Executive Officer

I think thewell enhancer is the vessel that... I mean it's a newbuild vessel, it's nothing of a conversion like the other two and that vessel is still much pretty on schedule. The launch of the vessel is scheduled for May the 31st in the Merwede Yard in Rotterdam and then there's going to another at... I mean 8 months 9 months of work that has to take place in that vessel. We feel pretty confident that this vessel is going to be... will become operational in the first quarter of the 2009. And this keeps work comes [ph] back to the ready in 2009 and so we feel pretty good about that vessel.

Joseph Gibney - Capital One

Okay and then just following up on the deepwater contracting side, appreciate the color on some of the contracts. But how should we think about some contractor work and the proportion there and its impact on margins as we work our way through the back half year? Do you see that tapering off I believe that was some of your commentary coming at the last quarter's call, is that still a fair assumption?

Owen Kratz - President and Chief Executive Officer

I think if you look at the sort of I mean that's our model where in the past I mean... where you really... Helix or Cal Dive used to be much more in the contract to contractor where our model has shifted to where we have become more of a prime contractor. So, we will continue to have a decent amount of sub-contracting work and pass-through work, which will lower the margins but should increase the total profit contribution. And also on the chartered vessels side, I mean that was just, for example, Canyon in the first quarter we had five vessels on charter, and you can see the earnings contribution of Canyon was pretty strong compare with last year. Last year Canyon had only in the first quarter... only had two vessels on charter. So we have gone from two to five and as you can see the profit contribution year-over-year for Canyon has grown but it mean the more vessels you have on charter the return on capital employed is going to go up which is a positive thing. But the margins will get compressed. Although I think if you look at our model and the 25% growth profit margin it's still very healthy compared with a lot of our peers in the deepwater.

Joseph Gibney - Capital One

Sure, that's helpful. I appreciate and Owen just a one follow up, can you give us an update here kind of your 30,000 foot view on your Cal Dive ownership position, and any update there relative to your commentary out of fourth quarter? Appreciate it.

Owen Kratz - President and Chief Executive Officer

No, no I don't want to step on anything that Cal Dive might have to say but everything that's going on there is pretty... it was anticipated. I think our position still remains the same at this point that we want to be a rational investor. We believe that Cal Dive is on, it's got its best growth ahead of it. So right now we're not... we wouldn't go into the market to lower our interest than Cal Dive right. Having said that had the right price I guess anything is for sale. But there is not an intention of selling down right now.

Joseph Gibney - Capital One

Okay that's helpful. I appreciate it. Turn it back.

Operator

Thank you. Our next question comes from Michael Bodino from Coker & Palmer.

Michael Bodino - Coker & Palmer

Good morning guys.

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

Good morning Michael.

Michael Bodino - Coker & Palmer

I have just a couple of follow-up questions on versus guidance on DD&A on the E&P side guidance is 315 an Million, there were some 7.25 got to DD&A up to 455, is guidance still good there or should we tweak that a little bit?

Owen Kratz - President and Chief Executive Officer

Yes, if you look at that CD&A and strip out the Tiger or the Devils Islands you are running about 345, 346 and we guided at 315 I believe for the year and it's going to come down once we bring the new deepwater production on it.

Michael Bodino - Coker & Palmer

So you kind of keep it flat to 345, 346 next couple of quarter then?

Owen Kratz - President and Chief Executive Officer

Right.

Michael Bodino - Coker & Palmer

The same question kind of for LOEs you got it for 202 and you put up 164 somewhere in the fourth quarter, how we think about LOE guidance since...

Owen Kratz - President and Chief Executive Officer

Again the LOE went up relative to Q4 just because of volume slowing down. So on the unit basis, it's relatively flat from Q4 from just a cash standpoint but again that impact is volume driven so.

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

It should go down later in the year --

Owen Kratz - President and Chief Executive Officer

Right.

Michael Bodino - Coker & Palmer

Okay. And relative to the assets that you all are thinking about selling, we sort of talked about onshore before but can you give us some more color on what other assets you are thinking about possible monetization of?

Owen Kratz - President and Chief Executive Officer

I think due to the amount of Q4000 activity and the amount of contracting work to be done on Phoenix our first target would be to sell down an additional 30% to Phoenix. That would lower the elimination between the company layoff of the greatest share capital going forward and still leave us with a significant interest.

Michael Bodino - Coker & Palmer

And do you have a timeline that you hope to accomplish there?

Owen Kratz - President and Chief Executive Officer

Wade do you now have the latest update from the bank?

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

You know I'd just say in the near term, I don't think we can say anything more than that Michael. But excepting that we had hoped I think we even said in the guidance to be done around the... somewhere around the middle of the year and I'd say I think that's still what we are looking at.

Michael Bodino - Coker & Palmer

And other assets beyond Phoenix and Southern Mississippi, is there a lot of other assets that you are looking at in term of rationalization?

Owen Kratz - President and Chief Executive Officer

We've been receiving some interest on other things, but at this point that's as far as our expectations that we have for year, that's as far as we were going we'll look at things and reassess but right now that's sort of our plan.

Michael Bodino - Coker & Palmer

And one last question I know Cal Dive's number is out, I know historically you all have, how is the backlog and the balance that you are shaping up. I mean things continue to show high level activity and you're getting a lot more interest or how do we think about that both domestically and internationally?

Alisa B. Johnson - Senior Vice President and General Counsel

Doyou want me to answer that though?

Owen Kratz - President and Chief Executive Officer

Yes go ahead.

Alisa B. Johnson - Senior Vice President and General Counsel

Yeah I mean the backlog on the serve side I mean still looks pretty good, in the areas that we are in, on well intervention side, in the Gulf and then deepwater construction and that's more the niche areas like well intervention Southeast Asia. We are still seeing growth in those areas?

Owen Kratz - President and Chief Executive Officer

I'd just add though, with just a little of market flavor. What we are seeing is that the demand for contracting services still remain incredibly strong on a global basis. There are bottlenecks within certain niches primarily around sourcing enough skilled personal. The one area weakened that we are seeing is on the spec-built DP vessels, we are starting to see some fluctuation in the charter rates which is one of the reasons why we stepped up and added more vessels into Canyon. And that's a good thing for us. The vessel rates are coming down yet the contracting rates are staying high, so that bodes well for us.

Michael Bodino - Coker & Palmer

Great well congratulations on the quarter and keep doing what you are doing.

Owen Kratz - President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Sunil Jagwani from Catapult.

Sunil Jagwani - Catapult

Yes hi. Good morning. I had just a bunch of mini questions. Firstly I guess I am not clear at regarding what your plans are about how you would replenish your E&P inventory because you acquired the assets 1 or 2 years ago and then you started to sell some down. When you talk about drilling the partial interest wells how are you going to replenish the inventory for those wells?

Owen Kratz - President and Chief Executive Officer

I'll letRobert [indiscernible] would estimate that we would plan to remain active in resales. We are adding acreage all the time. We already have a significant amount of acreage. We have over 25 deepwater prospects alone still in inventory to be working. We are adding additional prospects everyday, the group up in Dallas continues nonstop and generating prospects and acquiring acreage.

Sunil Jagwani - Catapult

And then just along those lines you talked about roughly $900 million in capital this year. I'm guessing that with a couple of projects under development is it unfair for me to assume the bulk of that going to E&P?

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

No it's a... in our initial guidance we said about half of it was the services assets that we talk about earlier and that's still the case.

Sunil Jagwani - Catapult

Okay so closer to 50-50 not mostly E&P. Okay got it. And then just lastly how much if any did you gain some of your exposure to the pound with the vessel in the North Sea?

Owen Kratz - President and Chief Executive Officer

Exposed to the pound, I think the pound ha been pretty flat with the dollar, euro has become much stronger in the last quarter, which has impact us on some of these conversions and newbuilds. But the pound and dollars, I don't think that exchange rate has changed any --

Sunil Jagwani - Catapult

Okay.

Owen Kratz - President and Chief Executive Officer

And of course the Seawell's contribution in the first quarter was not significant but we expect that contribution to become much more significant the rest of the year. So if the pound would strengthen against the dollar then that would have positive impact for our North Sea contribution.

Alisa B. Johnson - Senior Vice President and General Counsel

Just to give a philosophy on how we try and operate with this capital project as well have a lot of foreign currency costs associated with these capital projects. We try and match that with our foreign currency income. The pound relative to the euro is an important metric for us. The fact that the pound has been tracking closer to the dollar in the last quarter means that we've incurred some additional currency costs, exchange costs on the capital projects which has increased the costs.

Sunil Jagwani - Catapult

Okay, just last question

Alisa B. Johnson - Senior Vice President and General Counsel

On a cash basis it's a wash.

Sunil Jagwani - Catapult

Okay, and just last question maybe you can give us an overview of what you see in the market for increasing supply on the deepwater vessels --

Alisa B. Johnson - Senior Vice President and General Counsel

I'm sorry I missed the question.

Sunil Jagwani - Catapult

Yes just an overview of how you would see the supply factor evolving in deepwater market, the deepwater construction vessels?

Alisa B. Johnson - Senior Vice President and General Counsel

I think on the specialized deepwater construction vessels I mean there is an increase of supply but also Owen mentioned earlier results in increase in demand. And hopefully that's going to remain balance. What we have seen is that there are a large amount of ship owners that are trying to become active in this market as contractors. But I think we have the type of tools with trenchers and the ROVs and some of our pipe-less systems to add value to those vessels. And so I mean I think it will be more successful deploying these vessels as construction vessels than the ship owners will be.

Owen Kratz - President and Chief Executive Officer

And to add a little more color philosophically, if you look at our model we are a niche player if you look at each of vessels there, they are the upper end... at this point I don't believe we have a vessel in the fleet that's already been ten years. And they are very specialized in the upper niches of the market and that would by design so that we don't get into the... we're little hedged against the supply-driven softening where we charter vessels is in the ROV group. And that's for a number of reasons, one it allows us to always charter the latest and most modern vessels in the ROV fleet. And also that's the area of market where you see the weakening. When you have a lot of... what Tom Marriott [ph] used to call me too type vessels being built on back in shipyards there. They are multipurpose vessels and therefore they tend to trickle down in the niches of their contracting and the last niche we usually have occupied was the ROV niche and that's where we are seeing the initial softening in the vessel rate.

Sunil Jagwani - Catapult

Okay. Well thank you so much for your answers.

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

Thank you.

Operator

I have no further questions standing by at this time.

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

Okay, thanks everyone for joining this morning and we look forward to reporting to you next quarter and hope we're seeing some of you at our annual shareholders' meeting next week. Thanks.

Owen Kratz - President and Chief Executive Officer

Thank you.

Operator

This concludes today's conference call. Thank you for joining.

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Source: Helix Energy Solutions Group, Inc. Q1 2008 Earnings Call Transcript
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