McDermott International's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: McDermott International, (MDR)

McDermott International, Inc. (NYSE:MDR)

Q2 2012 Earnings Call

August 7, 2012 10:00 am ET

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

Scott J. Levine – JP Morgan Chase & Co.

Andrew Kaplowitz – Barclays Capital plc

Jamie Cook – Credit Suisse Group

Joseph Ritchie – Goldman Sachs

William Gabrielski – Lazard Capital Markets LLC.

Brian Konigsberg – Vertical Research Partners LLC

Robert F. Norfleet – BB&T Capital Markets

Tahira Afzal – KeyBanc Capital Markets

Robert Connors – Stifel Nicolaus & Co., Inc.,

John E. Roueche

Good morning everyone. We appreciate you joining us today as we discuss our results from the second quarter of 2012, which were released through our press release and in our Form 10-Q last night.

Joining me on the call this morning are Steve Johnson, McDermott’s Chairman, President and Chief Executive Officer; and Perry Elders, our Senior Vice President and Chief Financial Officer. Before turning the call over to Steve, let me remind you that this event is being recorded, and a replay will be available for a limited time on our website.

Additionally our comments will include forward-looking statements and estimates. And these forward-looking statements are subject to various risks and uncertainties, and reflect management’s views as of August 7, 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, as well as yesterday’s 10-Q, which together provide a discussion of factors that may cause 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.

And with that disclosure let me now turn the call over to Steve for his opening remarks.

Stephen M. Johnson

Thank you, Jay, and thanks to everyone for joining us today. McDermott reported solid results for 2012 second quarter. And in my view the quarter was good across the board, albeit fairly uneventful, which is fine. We are pretty much in line, where we expected to be at this mid-point of the year, which keeps us on pace for 2012.

To cut to the chase, McDermott reported net income of $52.7 million with earnings per share of $0.22 for the 2012 second quarter, which brings year-to-date net income through June 30 to $112 million or $0.47 per share. Perry will cover our financials in detail in a few minutes, but as I indicated we feel good about where we are currently.

During the quarter, McDermott had bookings of about $830 million with the book-to-bill ratio of about 93%, which keeps the Company’s backlog at near record levels with the total $5.75 billion.

Most of the projects that entered backlog during the quarter were more modest in size, but in total they added up. We had a number of awards from Saudi Aramco in the Middle East segment, including several under the long-term agreement. We expect to see some more of this type of work as the year progresses.

New awards were somewhat light in the Asia Pacific segment, primarily change orders, following last quarter’s substantial bookings. In the Atlantic, we had a good quarter with over $300 million in bookings including the Ayatsil-B project for PEMEX, the William‘s Discovery Junction award the William’s Spar installation and the British Gas living quarters. We also had a few other awards and several change orders and scope growth.

In fact, the Atlantic’s June 30 backlog of $850 million is the highest level since 2002 even better we continue to see a number of opportunities ahead in the region. Altogether, this is tangible evidence that the Atlantic segment is on track and as I have mentioned in the past, we expect this segment to return to profitability in next year.

Even with solid quarterly bookings and a backlog at historical highs, our bids outstanding still grew substantially. At quarter end, we had $7 billion of bids and change orders outstanding, which compares to about $4.8 billion in the sequential quarter and more than doubled the $3.3 billion from a year ago.

In any given quarter we have typically about 30 to 40 individual bids outstanding and we were slightly over the high end of the range at June 30. To give you a bit more color, of the 2012 second quarter amount we have about three bids around the $1 billion level, a dozen or so in the $100 million plus range and the bulk of the bids would be in the sub $100 million category. The majority of our current bids outstandings are traditional, conventional work and only about half of the total dollar value is fixed price.

While predicting the timing of any award is always difficult since it’s in the client’s hands and even in the best of times delays are common, our current forecast is for about half of the dollar amount of our bids to be awarded within the industry by year-end and the rest during the first half of 2013. Although we’d always like for awards to come faster, it’s certainly encouraging to continue to see such a robust market.

Even as bids outstanding have grown, our target list of projects has not suffered. We still have about $10 billion of targets identified. And as a reminder, targets are those projects that we intend to bid in the future, are well suited for us and that we expect to reach award stage in the coming 15 months. So if you combined bids outstanding with backlog and target projects, all as of June 30, 2012. You see a revenue pipeline potential that exceeds $22 billion.

And we also maintain a list of backup projects that may be considered. As always, the primary goal, whether it’s with an existing project a bid or a target is the development and execution of quality backlog. The market seems promising, but there will remain quarterly spikes and troughs.

Now at this point let me turn the call over to Perry to discuss in greater detail the 2012 second quarter financials. I’ll return after some operation after that for some operational comments and other comments and then we’ll open up the call to questions. Perry?

Perry L. Elders

Thanks, Steve, and good morning, everyone. As we reported, total revenues for 2012 second quarter were $889 million, almost $50 million above the 2011 second quarter. As compared to last year’s quarter, the increased revenues came from the Middle East and Atlantic segments, which more than offset the decline in the Asia-Pacific segment.

In the Middle East, the Safaniya and KJO Ratawi projects had substantial year-over-year increases in revenues, which more than offset the lower revenues from the nearly complete Karan project. The Asia-Pacific decline was largely due to the completion of the Platong Gas project and the winding down of the KTT project.

On a sequential basis however all our segments recognized the increased revenues as compared to the 2012 first quarter. Despite our revenues as compared to the year ago quarter, gross profits in the 2012 second quarter were down about $16.5 million, primarily due to a decline of about $33 million in profits from project closeouts.

As compared to the sequential quarter gross profits were essentially flat despite fewer closeouts and a lower utilization of our major work barges. SG&A expense declined about $13 million to $47.5 million as compared to the 2011 second quarter. This savings helped offset the year-over-year decline in gross profit.

Operating income for the second quarter of 2012 came in at $79.4 million, down $4.4 million from the comparable 2011 period. Operating margins were a little over 8.9% for the second quarter of 2012, which is pretty much in the middle of our 7% to 10% guidance range for 2012. And our year-to-date margins are now just under 10%.

In our segments, operating results improved as compared to 2011 second quarter in the Middle East and Atlantic. And operating income was lower in the Asia-Pacific segment primarily due to the decreased revenues. However, operating margins improved in the Asia-Pacific segment relative to the 2011 comparable period. While they declined in the Middle East due to fewer closeouts.

In the other income and expense line, we had a slight improvement of $1.6 million primarily due to higher interest income compared to the 2011 quarter. As you may recall we mentioned in the 2012 first quarter that our hedge foreign exchange portfolio nearly quadrupled due to the $2 billion INPEX award. At that time we discussed how changes in currencies with a larger hedge portfolio could make FX a more volatile line item in our future results.

However this quarter foreign exchange had a minimal net impact. Adding it up our pretax income was only $2.8 million of from the year ago and about a $0.01 a share. However, our provision for income taxes increased by over $11 million, representing much of the earnings variance this period as compared to the 2011 quarter.

The reported tax rate in the 2012 second quarter was about 34.5% compared to the 20.2% a year ago. As always our tax rate is primarily determined by the tax jurisdictions where we’re working and our cumulative tax position therein. Also, as a reminder, we're not recognizing tax benefits associated with the Atlantic segment at this time, which also increases our effective tax rate.

As Steve mentioned earlier, net income after non-controlling interest was $52.7 million for the second quarter of 2012 or $0.22 per fully diluted share compared to $0.27 we’ve reported from continuing operations in the 2011 second quarter.

Taking a look ahead at the rest of the year, we're sticking with the guidance we gave last October for operating margins between 7% and 10% for this year. Also we are expecting about $2 billion of our existing backlog to roll-off during the rest of the year, which provides comfort that the full year revenue should land in the mid-to-upper $3 billion range.

We say it every quarter that McDermott's business model doesn’t produce straight line results. In 90-day increments alone is probably not the best way to evaluate the business, as our results do tend to bounce around somewhat and anticipated work schedules do regularly change.

Turning quickly to liquidity; it remains strong with almost $750 million of cash, cash equivalents and investments at the end of the 2012 second quarter, which is an increase of about $20 million compared to year-end 2011, but a decline from the sequential quarter, primarily due to expected project cash flows and forecasted capital expenditures. Considering that, we are working capital intensive – our reported cash is often impacted by such sizable receives and payments. So we also look at net working capital levels namely current assets less current liabilities.

The June 30, 2012 position of $611 million is higher than a year ago, year-end 2011 and the sequential quarter. We had a modest increase in our debt levels related to final draws on a North Ocean 105 facility, but total debt remains a very small portion of our capital structure. So all-in-all our financial position remains very solid.

Let me now turn the call back to Steve for his remaining comments.

Stephen M. Johnson

Thanks, Perry. As you can tell from our comments, we continue to build that McDermott is on track for this year, 2012. And as you know we still have work to do filling up 2013, as we discussed in the last quarter. We are well ahead from where we started 2012, but obviously more work is needed.

As of June 30, our backlog was expected to generate about $1.5 billion in revenues for next year, an increase in 2013’s visibility by about $570 million from where we were at March 31 of this year. So we built-up our work for 2013 and we will continue to do so in the remaining quarters and even into next year.

Clearly, some of the project delays by our customers haven’t helped, but with more bids expected to be awarded in the remaining months of 2012 than we had as total bids outstanding at this point last year, the market remain strong.

Just doing some math; if during the second half of 2012, we were to add only $570 million each quarter to next years’ backlog roll-off expectation, as we did in Q2, such a result would likely indicate 2013 revenues would be down as compared to 2012 expectations, probably closer to $3 billion expected full-year range, if one excludes any potential larger 2013 awards that might have a quick revenue burn, like some marine projects.

Clearly, with our level of bids outstanding and more that are expected to come this year, at this time a lot of outcomes are still possible for 2013. So it would be premature to suggest the level of certainty that we don't yet have either way. As the rest of the year plays out, everyone will gain greater clarity on 2013. As we said last quarter we generally have 12 to 18 months worth of visibility from backlog when our project portfolio is averaged together, as such, this situation isn't new to us.

Delivering a solid 2013 should be from the combination of current work, future scope growth, and change orders, as well as new awards comprised of small, mid-sized and larger projects. Our current bids have more traditional revenue recognition profiles and our success on them will help determine next year’s activity levels.

For all our bids, we believe we have operated excellent solutions at competitive prices to our customers. Competition, however, is usually involved, so capturing any particular award is always uncertain and the timing of awards doesn't always match our initial expectations. But the opportunities are there.

Considering this isn't an unfamiliar situation at McDermott, we are always evaluating and preparing for a range of outcomes as we always do. The good news with current backlog position is that I don’t think McDermott has ever had the level of visibility that we now have under contract for the outer years, meaning 2014 and later. Getting back to the quarter, let me highlight our normally discussed operational metrics. During the 2012 second quarter, our activity level was somewhat mixed. We were over 120% of our standards in the construction facilities with almost $4.9 million man hours worked. This is an increase of 38% compared to 2011 second quarter and up about 24% ahead of the sequential period.

Our major marine work barge days, on the other hand declined compared to the quarter a year ago at 294 days versus 362, similarly, compare to the 2012 first quarter barge days were also down slightly, partially offsetting this lower level of work from our big barges, we saw substantial increases in our newer high spec vessels both year-over-year and sequentially.

Now, while I don't think much time needs to be spent on it, let me give you a very quick update on the Atlantic loss projects that impacted the second half of last year. The pipe lay project in Mexico for PEMEX was completed in the 2012 second quarter. While the actual work is done, we are still negotiating with the customer for additional recoveries, but these will likely take some time to work through if they come to fruition. On the Brazilian project, once commenced, the Agile vessel has generally performed at or better than our expectations on the five-year charter contract for Petrobras. In fact, during the quarter, the Agile performed exceptionally well with about 95% up time, which is a metric we monitor closely.

Another quick update relates to the INPEX Ichthys Subsea award, which we booked in 2012 first quarter, as our largest single contract at the time of signing. As we indicated, even though revenues aren't material to our business yet, we are already very active on the project and it now committed over 50% of the total contract costs through procurement orders and sub-contracts.

And we’ve also entered into hedges for most of the foreign currency exposures. We believe these actions that we are continuing to de-risk a large portion of this project in fairly short order. Last quarter, I went into some amount of depth on McDermott's strategic approach for growth. And while I don't repeat that discussion today or don’t plan to, let me provide some updates on a few of the initiatives and reiterate that these actions are all part of our long-term plan. A large aspect of our plans going forward involves our marine vessels, which had a combined insured value exceeding $1.2 billion. And we made some good progress in this arena over the last few months.

The North Ocean 105, which had been under construction for a couple of years was completed in last June and is now in the Asia-Pacific region to begin its first subsea project imminently, with a number of other projects booked to follow over the next several years. We're delighted to welcome this fast transit, dynamically positioned, deepwater subsea asset to McDermott. Additionally, the shipyard contract for our latest new build, the Lay vessel 108 should be finalized soon. And we would expect to have this vessel on the water in roughly two years from now.

Turning to the DB50, the 50 underwent sea trials recently as part of its substantial year long upgrade. Following the trials, it went back to the shipyard for normal punch list and other items that were identified as part of its test run. It should be leaving the shipyard in a matter of days and headed to Trinidad to test the deepwater lowering system prior to its scheduled work in Brazil.

Last quarter, I discussed the potential for obtaining a deep water S-Lay vessel, which would provide McDermott with the ability to lay larger diameter pipe in greater depths of water. At this time, there is nothing new to report, but it does remain on our radar and we still expect to finish our analysis and make a decision later this year.

As we're doing these upgrades and modernizing our fleet, we are also focused on divestures and retirements. We’ve had some buyers interested recently and expressed interest for certain vessels. Whether a transaction can come together with these parties, we'll just have to see but to be clear, we don't need to or intend to do a fire-sale transaction. The vessels under consideration would generally be the larger and older vessels that are on the shorter end of our retirement plans for them and as such, they tend to be substantially depreciated on our books and have lower market values.

However, these vessels are well maintained, valuable and compatible assets for many projects around the globe and have a good life ahead of them for such work. Similar to last quarter's charter-fleet transaction, if some of these vessels are more valuable in others' hands than ours, we will very much entertain the prospect of accelerating aspects of our renewal program.

Now, those are the major updates, but suffice it to say there's a lot of additional work going on, both on these and other strategic initiatives within the Company. Overall, the keys to success are still the same; it's about project execution and de-risking projects. Delivering certainty on our projects starts with bidding correctly, scoping and executing the work effectively, contracting well and partnering where appropriate.

As Perry indicated McDermott will not be a straight line business, but we believe our markets remain strong. Offshore is the right place to be and McDermott is directing its future with a well conceived growth strategy.

I'll now start to wrap-up, so we can open up the call for questions. We had a good, solid second quarter. There were no major project issues to discuss and considering the level of bidding activity coupled with our growth step strategy, it’s easy for me to be exited about our future. August is fairly quiet from our planned investor interactions standpoint, we do have a few visits on the schedule, but September will be as usual a very busy time.

We plan to participate in the Barclays' Energy Conference in New York, the Vertical Research Conference in Connecticut and the Davidson E&C Conference in San Francisco. In early October, we'll be at the Johnson Rice Conference in New Orleans before settling down to close for third quarter and whether it's here in Houston or at one of upcoming conferences, we look forward to seeing and taking and talking with as many of you as possible in the not too distant future.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Scott Levine from JPMorgan. Please proceed.

Scott J. Levine – JP Morgan Chase & Co.

Hi good morning guys.

Stephen M. Johnson

Good morning.

Perry L. Elders

Good morning, Scott.

Scott J. Levine – JP Morgan Chase & Co.

So it seems like the results resolve the amount of your expectations and broadly speaking, not much change in the outlook for 2012, but as you indicated, a little bit of work to do to get to the 2013 numbers. Can you provide a little bit more color I guess with regard to the jump in the bids outstanding and whatever reflects in terms of maybe customers looking to proceed with projects or do you've seen any change in the mind set broadly speaking there?

And then as a follow-up, if I can get a little bit more color maybe on our relationship you see into 2013 between margins and either the magnitude of revenues or utilization rates that you would project and what should the relationship be, one would think between margins and revenues as you look into next year?

Stephen M. Johnson

Alright Scott, I’ll response to the first part of the question with respect to bids outstanding and Perry will handle the margins and utilization. So Scott, a little bit more color on the bids outstanding, your question was maybe what’s on the minds of the customers. I’d put it this way: we have a robust series of markets that we participate in globally. In the three regions that we serve, I would say the customers approaches to releasing work continues to accelerate with a few caveats. The larger bid seem to have challenges associated with them and we have talked about several of those in the past and those seem to shift to the right or have been doing so at least in the past 12 months.

The growth in the bids outstanding, I'm pleased to say, is more balanced than it has been in the past with the addition of additional opportunities from the Atlantic region, whereas the Middle East and Asia-Pacific have been kind of filling out the pie in the past several quarters. I would say, it’s a nice balance between what I would call conventional or more shallow water floating solutions and SURF.

In this particular quarter, however, the more conventional or traditional, more shallow water work seems to be taking lead in terms of the overall carve up of the pie if you will, but my overriding comment is that the customers are working with us, they need our services, we see high activity with tenders, the bidding activity in the company in all three regions now is as high as its ever been, because of those opportunities.

Perry, you want to address the margins?

Perry L. Elders

Yes, of course. Got about 2013 kind of revenues, margins and activities, I guess just to briefly reiterate Steve’s prepared comments on revenues. We now have and have reported expectations that our backlog will produce about $1.5 billion of revenues for next year and we need to continue strong bookings and grow at 2013 revenues. As it relates to margin expectations, we are not ready to give any specific guidance around that, although I’d make a couple of comments here to help you out a little bit. One is that, as we look at the backlog and as those projects are – the stage they are expected to be in 2013, it will largely depend on the margins in 2013, or will largely depend on the closeout change orders and harvesting of contingency that might take place in that year. And as we see the maturity of the backlog at that time, don’t expect to have significant dues coming to the margins from those type of activities.

Further, and to your final question about activity, fab yard activity looks to be fairly stable. Steve reported we had a strong Q2 of 2012. As we look into 2012 or into 2013, the fab activity looks good. The marine activity Steve reported on Q2 was good at about the 60% range, which is in line with where we were in Q1, but as we have been indicating what we know is happening was, some of the vessels in terms of, for example, the transit of the 50 and 60 that was working on the Mexico project, we expect that activity to be lower in the second half of 2012 as well as into 2013. And because of the fixed cost on those major work barges that’s a drag on our margins for the second half of 2012 as well as into 2013.

Scott J. Levine – JP Morgan Chase & Co.

Understood, thank you and maybe as a quick follow-up, somewhat related, I think it indicated that a bigger portion of the bids outstanding is not associated with fixed price work and can anyone provide a little bit more color as to why that is and what changes in the contracting landscape of mix there and also little bit more color on the risk and margins associated with the indicated, more conventional work within your bid funnel as opposed to more of the deepwater and SURF opportunities, differences between the risk and the margin profile for the two categories if you will?

Stephen M. Johnson

Yeah, the first part of the question Scott, with respect to the nature of the contracting methodology, I wouldn’t read a great deal into the fact that we have less in terms of fixed price and the bids outstanding in any given quarter or greater in any given quarter. I think it is just the particular trend in that given quarter. I would say, however that to the extent we can, those portions of the projects that come to us that are not scope identified and we can’t nail down the scope, we argue to try to get those move into a non fixed price mode. So the statement I made, have to do with the total dollar amount of fixed price, meaning, versus non fixed price.

It is not a trend in the industry, I would close with. Now, as it relates to the nature of the work from the standpoint of conventional or shallow water versus SURF and margins expectations related to that. My view of the world is this, we should be paid for the work we do, the risk that we take and the uniqueness of the service that we offer. I would generally feel that we would have and continue to have solid earnings within our guidance range for conventional work and over the long-term expectations are that there would be some increase in margins for the more technical SURF, subsea types of programs as we are seeing on some of the awards we’ve had recently in the Asia-Pacific region.

Scott J. Levine – JP Morgan Chase & Co.

Understood. Thanks. Nice quarter.

Operator

And your next question comes from the line of Andy Kaplowitz from Barclays. Please proceed.

Andrew Kaplowitz – Barclays Capital plc

Good morning guys, nice quarter.

Stephen M. Johnson

Good morning, Thanks Andy.

Andrew Kaplowitz – Barclays Capital plc

Steve or Perry, I just want to follow-up on one of Scott’s questions and maybe add to it a little bit. Perry, you mentioned you were at 120% in your fab yards. I mean I know you know this, usually the way the EPCI contracts work, right, as you would then proceed into marine after that. So what I'm having a hard time with is, why would marine necessarily be down next year, if you’re big in your fab yards this year, assuming that you can book a little bit more work.

And then in conjunction with that, you've got steel prices coming down here over the first six months of the year and as we all know, procurement is a big portion of these contracts, so wouldn't that help you as you go forward over the next six to 12 months?

Perry L. Elders

So Andy, yeah, I see your kind of logic flow on fab flowing into marine and it certainly does. But again, the marine portion of this is partly with our fleet and partly with contracted vessels, but with respect to our fleet activity, it still doesn’t provide full utilization of those major work barges in 2013, more in line with kind of what we're forecasting for 2012. So we are still not seeing – but as Steve mentioned, we are looking for book environment work as well, so but we don’t we have that currently in the backlog.

Stephen M. Johnson

One thing, I would add to that Andy, is not all of that utilization in fab yards currently as we reported the 120% of standards, is EPCI work some of it is fab only, so there isn’t a marine component that follows, so that should be thought about and to reiterate the point that Perry made, we don’t necessarily, even if it’s an EPCI job have the marine assignment, it could be chartered vessel or sub-contracted or directly contracted with the customer, but having said that, your thesis is generally right, as regards material pricing and steel pricing, I would say you are correct. Steel pricing is coming down. I think that is – that argues for lower fabrication pricing to our customers, the customers should get that benefit and we should be able to mine some margin out of that over the future.

Andrew Kaplowitz – Barclays Capital plc

Okay, thanks for that, and then just focusing on the Atlantic division for a second. I know you've talked about it going to profitability next year. You are starting to ramp up in revenue and we are still not getting the fixed cost absorption, so is it just timing and you have to put in cost before you sort of get the profit ahead of it, I mean what’s going on there Steve? And when can we really expect some impact on that business with the rising revenue?

Stephen M. Johnson

Yeah, the good news has already been stated. We’re booking work here. It takes SG&A, it takes investment to get that work, so I would argue with the time, with for you and with you on the timing thesis here, we got to invest in order to grow the business and that’s simply what’s going on here. If we weren’t getting the work and we were still spending money, I would be a bit more concerned, but I am pleased with the awards we’ve had, the nature and the quality of those awards and the prospect for newer work on the horizon. I would say to you that I am not as happy with the execution in that unit at the moment, but we are working diligently to make sure that the execution is in line with McDermott standards everywhere else around the world.

Andrew Kaplowitz – Barclays Capital plc

Okay, thanks for that Steve.

Stephen M. Johnson

Thank you.

Operator

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

Jamie Cook – Credit Suisse Group

Hi, good morning a couple questions. One, just a follow up on the margin question with regards to 2013, I guess the other thing that strikes me in terms of why margins. Two questions on the margin front, 2013 one, Steve in your backlog right now are the presumed margins and sort of targeted 10% to 12% range?

And my second question is, if we look at sort of closeouts in the quarter, they were abnormally low and below the long-term run rate, and I feel like that's been a theme, why is the level of closeouts still so low, and it doesn’t sound like you are expecting to get any help in 2013, which surprises me?

And then the last question, we keep having this theme that the marine utilization is lower than we anticipated, which – or is lower, which is creating a drag on margins, so I am just trying to balance that with your aggressive CapEx plans to increase the number of vessels that you have, so at what point do you say, okay, maybe the work’s not coming and maybe we sort of hone in on the – we’ve reduced the level of CapEx spend that you are talking about? Thanks.

Stephen M. Johnson

Thank you, Jamie, there is a lot in there, and so I think Perry and I are both going to have to way in. The first part of your question with respect to margins in backlog, I would say, you are right thinking that, we endeavor to achieve margins and backlog at the guidance range. I would add however though that the ultimate margins at the end of the day aren’t necessarily exactly related to the as bid condition. But that’s what we endeavor to do.

Let me go to the back-end of the question on vessels utilization. If vessel utilization over a longer period of time, then we have experienced thus far continues to wane. I would say you are exactly right on the CapEx side of the equation. We don’t see that at the moment and in fact as indicated last quarter on this call, we have intentions to be aggressive with the next new vessel in our fleet, the DLV, a deepwater pipe layer that I mentioned in my prepared comments and we will move forward with that.

My view of the utilization issue is more timing related than it is anything else. Perry, I’d have you comment about that in the market.

Perry L. Elders

Yeah. On that vessel utilization, just to be explicit here Jamie, the numbers that Steve quoted and I reiterated about the 60% so far this year relates to the major work barges. Okay, and that’s where the drag has been. But where the investment is going, is in the other deepwater construction support vessels that are shipshape vessels, not barges and the utilization in that part of the fleet is closer to 100%, okay. So we’ve seen excellent experience with those vessels, and we are forecasting likewise. So in that also ties in on the barge side to Steve’s comments about our retirement plans with respect with some of those older barges, so just want to make that the delineation between the barge utilization that we get a lot of talk about versus the others.

And then on the third part of your question, the middle part on closeouts, you are right that 2012 has seen lower than expected closeouts, that’s what we expected, that’s why we set the guidance last year that we did and so not surprising at all.

As we look at the backlog burn into next year and where those projects will be, there is the potential for additional closeouts into 2013 some of it relates to change order, some of it relates to closing out projects, some of it relates to claims with customers. So it’s early for us to comment on the contribution of that in the 2013, but the opportunity is there.

Jamie Cook – Credit Suisse Group

But besides timing, is there anything performance wise that is making you – that would allow you to think that the dollar amount associated with the closeouts would be less than what we saw in 2012? I am just trying to figure out if there is anything performance wise that’s preventing us from getting from the closeouts increasing?

Perry L. Elders

Yeah, the answer is no on the performance side. There is nothing about the job executions that suggest to us that we’re going to have either lower closeouts in 2013 than we had at 2012. I think you’re waiting to see if there is upside to 2012 closeouts. And I guess my answer is that there is the potential but it’s yet too early to call that.

Jamie Cook – Credit Suisse Group

Okay. And then last, I guess, Steve, I would like to hear your thoughts just broadly on some of the recent, there has been a lot of M&A in the space, we saw some stuff last week. I would just like to sort of hear your thoughts out there on whether you think this is sort of a sign of more to come and are you surprised there hasn't been more of the international players looking to get into the market, and on a flipside, how you think about acquisitions for the company in terms of doing something larger or being on the other end of that transaction? Thanks.

Stephen M. Johnson

Happy to do that, Jamie. With respect to the announced transactions, probably reserve any comment related to those, I know those that are been reported, I know many of the executives in those and I’d say at least one of them is a significant undertaking that they’re pursuing, I wish them well and beyond that I wouldn’t add anymore. The question is, is there more M&A activity? Is this a trend? I think its really too early to say, I don’t have enough information, there is only one or two data points out there but I would say as regard to McDermott, we understand our fiduciary duty here. And are we a buyer or a seller? Frankly, we could be on either side of a transaction, we’re shareholder focused and none of us are tied to our offices here.

So in my view, I don’t know that I see a trend, but I do know that there are certain business combinations out there that we would be interested in that are transformational and some of them would be more niche types and we constantly look at those, and we’re very disciplined about those opportunities either way. And at each Board meeting on the strategic discussion, we speak to those and not just a passing way. We’re very significant discussion about all of the above.

Jamie Cook – Credit Suisse Group

Thank you.

Stephen M. Johnson

Thank you.

Operator

And your next question comes from the line of Joe Ritchie from Goldman Sachs. Please proceed.

Joseph Ritchie – Goldman Sachs

Good morning everyone.

Stephen M. Johnson

Hi, Joe.

Joseph Ritchie – Goldman Sachs

So my first question. Steve, thanks for providing some – back of the envelope calculations on the revenue for 2013. I know that you are not expected to provide an estimate at this point but, my question on if you were to run off $500 million to $600 million that you booked in the back half of this year, I mean would that mean that you would have to book some of these large projects in the back half of this year and perhaps may be you can talk about the timing for those projects as you did mentioned, they appear to continue slipping to the right.

Stephen M. Johnson

Yeah, be happy to do that, Joe. I would say where we sit today at the end of the second quarter and as I said in my prepared comments, we’re not in a position to start guiding for next year. There are a number of – an array of potential possibilities that still exist, subject to a series of binary decisions by customers for projects that are in our bids outstanding. I will also say that in my view, this is not unusual for McDermott to be in this position and I would say that we don’t just have two quarters left to round out 2013.

There are a number of projects that are out there that we’re following that could be quicker burn than others. There are, as I mentioned, a large project or two, as you also mentioned that have slipped to the right and one in particular has been reported in the press as slipping, so significantly to the right. I would tell you that its one of the issues that we’re dealing with for 2013 to replace that revenue that would otherwise been burned in 2013 if we were so fortunate to receive the award. There is simply nothing we can do about that other than to look at the alternatives and look at replacement revenue and we look at that in a number of different ways including replacement of those projects that we didn’t win, replacement of revenue that slips to the right, looking at what I would call quick hitting projects, typically marine-only projects that would allow us to have quick burn of revenue. So the management team is highly focused on all of those aspects and I invite a follow-up if I haven’t hit all of your points Joe.

Joseph Ritchie – Goldman Sachs

No, I think that’s helpful commentary, Steve. I had a question. I'm a little perplexed by something. I know there were no major issues that really occured this quarter and yet in the queue, the amount of backlog that’s in a loss position has increased fairly materially, call it 20% to 25%. And so what’s happening there, given that there won’t really any issues this quarter?

Stephen M. Johnson

Well, let’s just dispense with the two past loss projects. The PEMEX project in Mexico, as I indicated is completed and the Brazilian charter contracts, they continue to perform well. We did have a couple of smaller projects that move to a loss position in the quarter, but I would characterize those as typical of the project profiles where it’s not uncommon for projects to fade in the early phases and recover later through change orders and contingency harvesting. And it’s just another example of why we have lumpy quarters, but there isn’t anything else in there that I would say is material to the increase in the loss projects value. Perry, would you add anything?

Perry L. Elders

That’s exactly right.

Joseph Ritchie – Goldman Sachs

Okay. And on the smaller projects if I am thinking about, I guess I’m just trying to think about the margin trajectory and I know you guys have guided already to 2012, but as I start to think about 2013, could these projects then potentially impact 2013 because they are coming through at zero or is there a potential benefit that you see on the change orders, I’m just trying to get my head around that?

Perry L. Elders

Yeah. The additional, it’s about $100 million, I guess $90 million increase in the backlog for those projects as Steve referenced will burn in the second half of this year and early part of next year. So, but again the size of those is not significant to where it would make a significant movement in the margin. But yeah, it will roll-off in that period.

Stephen M. Johnson

Yeah, Joe, if you look at the total amount we’ve sell over a half of the projects that are in loss position still relate to the Agile project and those revenues gets spread out over a five-year period and so the rest would be relatively de minimis to the total level of revenues.

Joseph Ritchie – Goldman Sachs

Okay, thanks. And I guess one last question. On the fab assets that you’re looking to divest, can you maybe help provide a little bit more color on who the potential buyers are for those assets and if you have any other commentary on timing that would be really helpful?

Stephen M. Johnson

You said fab assets, but we’re assuming that you marine assets

Joseph Ritchie – Goldman Sachs

That’s exactly what I meant, I meant the marine assets. Sorry guys.

Stephen M. Johnson

Yeah, and they are marine assets. Look, these are the two or three older or shall I say more mature vessels that do have both some functional and economic life in them. Timing has to remain unknown, because there simply isn’t a deal on the table today that we can speak to. We have high interest on one or two of the vessels and it just remains to be seen and I’m not in a position to talk about who the buyers might be or talk about anything related to the transaction as we maybe in discussions today, Joe.

Joseph Ritchie – Goldman Sachs

Okay, thanks. I’ll get back in queue.

Operator

And your next question comes from the line of Will Gabrielski from Lazard. Please proceed.

William Gabrielski – Lazard Capital Markets LLC.

Thanks, good morning.

Stephen M. Johnson

Hi, Will.

William Gabrielski – Lazard Capital Markets LLC.

Can you talk about Papa Terra and progress there and whether or not you’re on track still maybe in early 2013 to hit 70% complete and start recognizing profit?

Stephen M. Johnson

Happy to do it, Will. I would say this, it is a first quarter 2013 of that with respect to achieving 70% of course, which is our procedure and our policy on for deferred profit recognition. I see that we will achieve that level subject to what the customer wants to do and the customer has a number of parts associated with the Papa Terra project which could cause us to move into a different timeframe, we’re talking with that customer at this juncture, but there's nothing further that we can report other than we’re performing well, we’ve had challenges with schedule, we’ve had challenges with technology, and those are resolved as they come forward. This is a big complex TLP and I would say and this is from the customer’s mouth to our ears that we are performing as well if not better than any contractor doing this kind of work in Brazil today.

Will Gabrielski – Lazard Capital Markets

Okay, great. On Ichthys, can you talk about the hiring of subsea engineers, progress you're making, what the market looks like for those employees right now and how? Is that having any negative impact on the margin and the region until you ramp that project up?

Stephen M. Johnson

Yeah, it is tough to be absolutely honest with you, it’s tough to find the right engineers at the right time, we’ve done very well down in Perth, Australia. So I am pleased with our progress in ramping up with the kinds of the engineers and support people that we need, we’re always seeking more, we’re in a hiring mode, is that having an impact on the project or the ultimate financials on the project, I’d have to say at this juncture, no. We're monitoring it on a monthly basis through the head office here and the regional executives are looking at it, I would say on a daily basis. So there is nothing that I would say that has a negative long-term effect, but it’s a battle everyday to get the right talent to these types of projects.

Will Gabrielski – Lazard Capital Markets

Okay. And then lastly, I guess, when you look at where our consensus revenue is and you addressed in detail for next year very well with, what your plan is and where you’re right now. But as a bigger percentage of your bids out becomes smaller projects, I guess, can you talk about the internal process to review those bids and whether or not I guess at the division level, some of your employees, might be feeling pressure to book work or not? And how thorough the bid review is on the smaller projects, given that that’s where we’ve seen the problems over the past few years in terms of execution?

Stephen M. Johnson

Yeah, Joe, I will speak to it from two sides here.

Will Gabrielski – Lazard Capital Markets

Will

Stephen M. Johnson

Excuse me. Sorry, Will, I knew that…

Will Gabrielski – Lazard Capital Markets

Okay.

Stephen M. Johnson

Look, in two sides here, number one is that we have not adjusted our thresholds for reviewing projects in a manner which would distance management from those bids, and in fact any bid at $40 million and greater comes through me and my management team to review, and in my view that is a very low threshold or very low test for reviewing these projects.

Further any projects that have unique characteristics associated with them contract terms that are unique or potentially onerous, financing pieces, any of those kinds of things get a lot of visibility. We spend a great deal of our time these days focusing on those projects and whether they are conventional or subsea or SURF, our attention doesn’t wane. So my view of the situation is that, while we did have one sneak through the net in 2010 or 2011 today we endeavor to assure that that doesn’t happen and we focus on those projects nearly almost in different to what the dollar value is. We are focused on the risk and bidding reviews or a risk management process in this company.

Will Gabrielski – Lazard Capital Markets

Okay. And then lastly, you have a few vessels, obviously, marked for sale, assuming, you can get the right price. I’m just curious may be on, if you can give a, what the utilization was ex those vessels, which I assume are largely underutilized at this point?

Perry L. Elders

They are in our forecast one of these particular vessels has been working recently. I don't want to be more specific on that, but as we look forward these are vessels that we don’t expect to provide any activity for ‘12 or ‘13.

Will Gabrielski – Lazard Capital Markets

Right, but if you were to strip out the utilization of those from your forecast what would your, if you change the denominator if you would. What the utilization might look like company wise?

Stephen M. Johnson

Well, we don’t have that math here with us right now, it would depend upon a number of factors including, which vessels were not part of the equation, but suffice it to say these have tended of late to have been more of the under utilized vessels.

Will Gabrielski – Lazard Capital Markets

Okay, great. Thank you.

Operator

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

Please proceed.

Brian Konigsberg – Vertical Research Partners LLC

Yes, hi, good morning. I’m just curious as far as kind of the prospects that you have outlined, as far as kind of utilization of the marine vessels, the barges in particular would you say that there is a good portion of that coming from more interest in kind of marine only work, has that picked up from the previous couple of quarters and maybe just give us some color around the dynamics of demand there?

Stephen M. Johnson

What I would say is, we are pushing the utilization of our marine assets through our bidding practices. And what I mean by that is, it is a much better financial result to have the vessels working for perhaps a bit low margin than they have the vessels tied up at the dock Brian, so you would find the management team doing the right thing on behalf of the shareholders, seeking market opportunities for those vessels in any way that is reasonable in terms of return and risk. So the characterization of the bids outstanding what I say there is a great deal of marine only that wasn’t there in prior quarters, I wouldn’t claim that, I would say that our sales force is very focused on the short term need to get the vessels working in 2012 and 2013.

Brian Konigsberg – Vertical Research Partners LLC

Yeah, and just curious about the comment about the insured value of the fleet, I mean just kind of looking at the breakdown of your PP&E, does seem like that $1.2 billion probably vastly outstrips what you are carrying on the balance sheet. I’m just curious how that valuation came about, is that kind of a DCF of future cash flows based on utilization of your vessel fleet? Just trying to kind of tie those together?

Perry L. Elders

It is a price value principally whereas what you see on our books obviously depreciated costs, so there is $1.2 billion depreciated cost on the books for the entire PP&E not just the vessels, but the price value that we’ve spoken about, are the insured value is principally the price value?

Brian Konigsberg – Vertical Research Partners LLC

But you have a carrying value of that vessel fleet, can you provide that or what it is as far as cost on the balance sheet at this point?

Stephen M. Johnson

We don’t have that broken out specifically, I apologize for that Brian, but if I were going to ballpark it, I’d say by roughly half of the net PP&E.

Brian Konigsberg – Vertical Research Partners LLC

Got it. And as far kind of the incremental bids that came out that have kind of added to your bids outstanding, can you just give a little flavor as far as geographic dispersion of that where is the incremental demand kind of or the incremental opportunity started to kind of flow into your pipeline.

Stephen M. Johnson

Let’s back into it, I would say that in total bids outstanding is broken down about 70% Asia Pacific, about 20%, 22% Atlantic and 8% Middle East, as we sit at the end of the quarter…

Perry L. Elders

The other way Steve, Middle East….

Stephen M. Johnson

Excuse me, yeah, Middle East is…

Perry L. Elders

22.

Stephen M. Johnson

22 and Atlantic is 8, I apologize. I would say that the number of projects related to the type of work has moved more too conventional, we’ve got about 65% of the bids outstanding are in conventional shallow water, we still have a fair percentage in SURF and floaters. The opportunities in the Atlantic are growing and the view I would say of the Middle East is largely around Abu Dhabi and Saudi Arabia was Saudi Aramco and in Asia Pacific, it’s largely around additional work in Southeast Asia, some in Australia to just give you a little bit more granularity.

Brian Konigsberg – Vertical Research Partners LLC

Great. Thank you very much.

Stephen M. Johnson

Fair enough. I can real quick make a quick comment, we’ve got several more people in queue still and we would like to get to as many as possible, if the remaining questioners can limit their questions to one a piece, we’re willing to go another 15, 20 minutes, but would like to get to as many people as possible.

Operator

Very good, and your next question comes from the line of Rob Norfleet from BB&T Capital Markets. Please proceed.

Robert F. Norfleet – BB&T Capital Markets

Good morning, congratulations on a nice quarter.

Stephen M. Johnson

Thanks Rob.

Perry L. Elders

Thanks Rob.

Robert F. Norfleet – BB&T Capital Markets

Just a quick question. Perry, I know you discussed earlier the lower utilization on the large work barges. Obviously, will have an impact on margins, which it has thus far this year, in the second half of year, but any reason that we shouldn’t be thinking at margins for the year, should at least be more towards the high end of your range of 7% to 10% given that you’re averaging 10% due to first six months of this year and to get to the mid point you have to be looking at a pretty deep decline, so I just want to kind of get your thoughts on that.

Stephen M. Johnson

Yeah, I mean just with respect to that one factor, which is the major barge utilization, we're expecting lower utilization in the second half of the year, based on what we knows the schedule is for several of the vessels, including the 50 transit in the 16 that was working on the Mexico project, so that factor alone will have a dilutive effect to margins in the second half versus the first half. And talk more broadly speaking and I see your math obviously in terms of where we are through the first half, but given this lower barge utilization and a lack of significant opportunities to pick ups and claims in change orders in the second half is why we feel that we need to stick with the 7 to 10 for the second half.

Robert Norfleet – BB&T Capital Markets

Great, and then my follow-up and I’ll get off just quickly Steve, you’ve talked about in the past moving towards chartering vessels on the spot basis to improve utilization levels and marine days versus long-term contracts, especially initially when the DD50 came out, how is that strategy working and how should we thinking about that in the second half of the year.

Stephen M. Johnson

We continue to exercise that option where it make sense and we do it on a regular basis around the globe, strategies working well for us, I wouldn’t consider it a major needle mover in the Company, but it works very nicely for us as you think about timing of projects and availability of our own fleet.

Robert Norfleet – BB&T Capital Markets

Great, thank you.

Operator

And your next question comes from the line of Tahira Afzal from KeyBanc. Please proceed.

Tahira Afzal – KeyBanc Capital Markets

Good morning, gentlemen. Thank you for taking my call. I’ve just one question, could you comment on any changes in competitive dynamics and your win grade as you look over the last two, three months. There seem to be a couple of new entrants of maneuvering within some of your competitors. That’s all from me. Thanks.

Stephen M. Johnson

Yeah, thanks Tahira. In the past two, three months I wouldn’t say with the projects that we have been competing for we’ve seen a material shift or change each one of these bids kind of stands on its own merits. The bid slate is what the bid slate is and the same cast of characters, if you will, the same bidders tend to show up on most of these there is noting that I would report regionally that is unique in the Middle East, Asia Pac or in Atlantic. We are always concerned about some Korean bidders showing up on bidding list in the Middle East and in some cases, of course in Asia Pacific. But that has been a constant over the past several quarters and hasn’t changed in the last.

Tahira Afzal – KeyBanc Capital Markets

Thank you.

Stephen M. Johnson

Thank you.

Operator

And your next question comes from the line of Robert Connors from Stifel Nicolaus. Please proceed.

Robert V. Connors – Stifel Nicolaus & Co., Inc.

Good morning, thanks for taking my question

Stephen M. Johnson

Hi, Rob.

Robert V. Connors – Stifel Nicolaus & Co., Inc.

I estimate about 339 unutilized barge days year-to-date. Just wondering how much of that is related to the DB50 because it looks like with the Williams Partners announcement in the Petrobras work that's booked for 2013. And then as a follow-up was there any other vessels that you are not looking at selling that are meaningful chunk of that.

Perry L. Elders

Yeah, I think your numbers are right I’m looking at the year-to-date at 60%, which is at 2,000 barge days, a 1,000 in the first half you’re about on target, I think it closer to 400 days. But no is the answer directly to your question, of the underutilized days, and excluding the 50 most of that would be related to vessels that we would be – we’re looking to move because there are three vessels and on a year you’re looking at 2,000 days in total, so 250 on average, so you get there.

Stephen M. Johnson

And the DB50 as you heard us report is out of dry dock, has finished some trials, is just finishing up and she has been out of commission for about a year.

Perry L. Elders

About a year and it’s still 90 day mode to get her back over to this side. So that’s what we’re saying the second half of this year will suffer continue to suffer from that lack of utilization.

Robert V. Connors – Stifel Nicolaus & Co., Inc.

Okay, great. I have other questions but I’ll just contact you offline.

Stephen M. Johnson

Thank you.

Operator

And I would now like to turn the call back over to Jay Roueche for closing remarks.

John E. Roueche

Thank you, Erin. And thank you all again for participating today. I know we had a few questioners, who had to drop off there at the end, so please if they were any unanswered questions don’t hesitate to follow up with me. I also want to remind everyone that the call included forward-looking statements and I want to encourage you to see our SEC filings for more information on these. And Erin, we appreciate your assistance, but this concludes our call.

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