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Executives

Robby Bellamy

Stephen M. Johnson - Chairman of The Board, Chief Executive Officer and President

Perry L. Elders - Chief Financial Officer, Senior Vice President, Principal Accounting Officer and Treasurer

Analysts

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Alan Fleming - Barclays Capital, Research Division

Steven Fisher - UBS Investment Bank, Research Division

Andrew Buscaglia

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

Brian Konigsberg - Vertical Research Partners, LLC

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

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

Robert F. Norfleet - BB&T Capital Markets, Research Division

George O'Leary - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

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

Sameer Rathod - Macquarie Research

Will Gabrielski - Lazard Capital Markets LLC, Research Division

McDermott International (MDR) Q3 2012 Earnings Call November 6, 2012 10:00 AM ET

Operator

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

Robby Bellamy

Thank you, Andrew, and good morning, everyone. We appreciate you joining us today as we discuss our results for the third quarter of 2012, which we released through our press release and in our Form 10-Q yesterday. 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, Chief Financial Officer and Treasurer.

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, all comments will include forward-looking statements and estimates. These forward-looking comments are subject to various risks and uncertainties and reflect management's view as of November 6, 2012. Please review our filings with the SEC, which are available on our website, and our Form 10-K for the year ended December 31, 2011, which 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 law, McDermott undertakes no obligation to update any forward-looking statement.

With that disclosure, please let me now turn the call over to Steve for his opening remarks.

Stephen M. Johnson

Thank you, Robby, and thanks to everyone for joining us today, particularly on election day. McDermott's third quarter results, although they're -- although down compared to the first 2 quarters of the year, have us on pace for a solid 2012 performance. With no particular project or discrete item that needs to be highlighted, we delivered good results across the business this quarter.

During the third quarter, McDermott reported net income of $50.6 million with earnings per share of $0.21, which brings year-to-year -- year-to-date net income through September 30 to $162.6 million or $0.68 per share. Perry will cover our financials in detail. However, we are pleased with the results we have delivered through the end of the third quarter.

Although we didn't announce any significant project awards during the third quarter, McDermott had bookings of about $622 million and a book-to-bill ratio of about 60%. Our ending backlog was $5.3 billion, remaining close to the record levels from the first quarter of the year. The new project awards and change orders this quarter were primarily small to mid-sized bookings across the segments that added up to a healthy amount, and most of these added increased revenue visibility for 2013.

Included in bookings this quarter was our first export project in our Altamira, Mexico facility for the design, fabrication and load-out of a platform and some additional work in Saudi. We're encouraged by the award in Altamira as this is a clear evidence that the yard is gaining traction and our international customers -- with our international customers, and we expect to see similar opportunities ahead. In addition, this quarter's bookings had several change orders on large projects across the segments. Change orders, while difficult to predict, are a normal part of our business and typically present an opportunity for margin enhancement.

Our bids and change orders outstanding grew slightly, ending the quarter at over $7.1 billion. This compares to $7 billion of bids and change orders in the sequential quarter and is about 40% higher than the $5.1 billion from a year ago. To provide some more detail on the bidding and change order opportunities, 3 projects are in the billion-dollar range, about 10 projects are in the hundred million-plus range, with the remaining 20 or so below $100 million. Consistent with last quarter, the majority of these bids relate to the Asia Pacific and Middle East regions, respectively. And while the timing of awards is never certain, almost half of these 30-or-so bids are currently expected to be awarded over the next 2 quarters.

Clearly, there have been some delays on larger bids as some customers struggled to complete either their bid review activity or finalize internal relationships. Our list of target projects remains very strong at $9.3 billion at quarter end. If successful, several of these projects could also be awarded over the next few quarters and contribute to 2013 revenues. 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 over the next 5 quarters. So combining bids and change orders outstanding with backlog and target projects, all as of September 30, 2012, provides a revenue pipeline just below $22 billion. We also maintain a list of back-up projects that may be considered.

As we've indicated several times in the past, our primary goals are maintaining bidding discipline and the execution of quality backlog. We see continued strength in our end markets and remain very encouraged by the amount of bids and targeted opportunities.

I'll now turn the call over to Perry to discuss in greater detail the 2012 third quarter financial results, and at the conclusion of Perry's prepared comments, I'll return for additional operational and other comments, and then we'll open it up to questions.

Perry L. Elders

Thanks, Steve, and good morning, everyone. As we reported, total revenues for 2012 third quarter were $1,029,000,000, almost $150 million above the 2011 third quarter. Compared to last year's third quarter, the increased revenues came from the Middle East and Atlantic segments, which more than offset the decline in Asia Pacific segment.

In the Middle East segment, the Safaniya COP pipeline and KJO Ratawi projects had substantial year-over-year increases in revenues, which more than offset lower revenues from the nearly complete Korean project. The Asia Pacific decline was largely due to lower revenues on the KTT project and the completion of the Platong Gas project, offset by the ramp-up of Macedon in the third quarter of 2012.

Gross profits in 2012 third quarter were higher by $86.9 million as compared to the year-ago quarter. The improvement was primarily due to approximately $50 million in project charges across the segments in the 2011 third quarter results. In addition, the current quarter benefited from increased fabrication and marine activity in the Middle East and Atlantic segments and additional change order activity in the Asia Pacific segment.

SG&A expense increased by about $4 million to $51.8 million as compared to the 2011 third quarter, primarily due to higher employee benefit costs.

This quarter, we reported higher equity loss from unconsolidated affiliates compared to a year-ago quarter as bidding activities and associated business development costs have ramped up for our joint ventures in China and Brazil.

Operating income for the third quarter of 2012 came in at $82.5 million compared to $35.2 million from the comparable 2011 period. All segments reported improved operating results as compared to the 2011 third quarter. Operating margins this quarter were slightly over 8%. Our year-to-date operating margins are approximately 9.1%, which is in line with our 7% to 10% targeted range for the full year 2012.

In the other income and expense line, we had an improvement of $1.3 million, primarily due to higher interest income compared to the 2011 quarter. While the net impact of foreign currency gains and losses had little effect on this quarter's results, there were some offsetting items due to our large foreign currency derivative portfolio and foreign-currency-denominated working capital balances. We strive to minimize FX impacts as a U.S.-dollar-reporting currency entity. However, the accounting for foreign currency transactions can and likely will generate some lumpiness in our other income and expense line in future periods.

Our tax provision in the third quarter of 2012 was $29.9 million, resulting in an effective tax rate of 35.5%. We're currently unable to recognize tax benefits associated with certain losses, primarily in the Atlantic segment. If we were able to recognize these tax benefits this quarter, our effective tax rate would have been about 13 percentage points lower. Also, as we discuss regularly, our effective tax rate is somewhat variable since our earnings are subject to various tax rates, driven by the mix of jurisdictions where we work.

Net income after noncontrolling interest was $50.6 million for the third quarter of 2012 or $0.21 per fully diluted share, compared to the $0.04 we reported from continuing operations in the 2011 third quarter.

Moving to the balance sheet. Our liquidity position remains strong with $720 million of cash, cash equivalents and investments at the end of the 2012 third quarter, which is a decline from the year end and sequential quarter, primarily due to changes in working capital and capital expenditures. Although working capital has been increasing, primarily due to net contracts and progress in advance billings, we expect this trend to improve in the fourth quarter.

During the third quarter, our debt position declined slightly to $108 million. As a reminder, at the beginning of the fourth quarter of 2012, we started servicing the North Ocean 105 loan facility in 17 semi-annual installments, so you should expect to see our debt balance start to decline gradually.

Looking ahead, we continue to expect operating margins between 7% and 10% for this year. While we still believe long-term operating margins for this business should be closer to 10% to 12%, until we have better asset utilization and additional roll-off of the 0 margins and deferred profit projects, we expect to maintain the lower range. At quarter end, we are expecting about $1 billion of our existing backlog to roll off during the fourth quarter of 2012, which would put full year revenues in the range of $3.5 billion.

Finally, at the end of the third quarter, we committed to a plan to sell 3 of our older vessels, the Bold Endurance, the DB16 and the DB26. During the quarter, we retained a ship brokerage firm to assist in the process and have received a lot of interest in the vessels, including several offers from prospective buyers. I am hopeful that we will complete the sale of these assets by the end of the third quarter of 2013, including one that we expect to close by the end of 2012. As a result, these assets have been classified as held for sale on our balance sheet and are no longer subject to depreciation. However, since these older -- since these are older assets, the annual savings from lower depreciation costs will be fairly modest.

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

Stephen M. Johnson

Thanks, Perry. As we've discussed on the last 2 calls, we need to continue to fill some holes for 2013 across our segments. At the end of the third quarter, our backlog was expected to generate about $2 billion in revenues for next year, which is an increase of about $500 million from where we were at the end of the June quarter.

We have several prospects on the bid list and target lists, as well as potential change orders that could add meaningful visibility to next year's revenue. And while there are a number of possible outcomes, I'm hopeful that next year's revenue will be in the $3-billion range. However, if awards slip to the right, or we're not successful in securing some of these projects, we have contingency plans in place to manage any gaps in our workload. It's also worth pointing out that we have already almost $2.4 billion of work for 2014 and beyond, so we view this as more of a timing issue than a structural issue.

Now getting back to the quarter, let me highlight our normally discussed operational metrics. During the 2012 third quarter, our activity levels remained mixed. We were at about 120% of our standards in our fabrication facilities, with almost 4.6 million man-hours worked. This is an increase of about 55% compared to the 2011 third quarter and roughly in line with the sequential quarter. Our major work barge days, on the other hand, declined compared to the quarter a year ago at 210 days versus 302. Similarly, compared to 2012 second quarter, barge days were also down about 25%. Partially offsetting this lower level of work from our major construction vessels, we saw increases in our multiservice vessels both year-over-year and sequentially, including the North Ocean 105, which completed her first project in the third quarter.

Let me move to the Papa Terra project in Brazil. And while our 50-50 joint venture contract and related subcontract are progressing well, it remains likely that the total completion of the full field development will be delayed by approximately a year, due to some challenges in other areas which are outside our scope of work. This means that our marine installation scope is likely to be re-sequenced for a later period. This change will move the DB50's marine campaign on Papa Terra to later in 2013 and possibly into early 2014.

While discussions with our customer are ongoing and it's too early to predict outcomes, we don't expect this schedule change to adversely impact our project estimates. However, with the change of the DB50's installation scope moving from the first quarter of 2013 to later in 2013 and possibly into 2014, this may result in a delay in deferred profit recognition on Papa Terra. A noteworthy positive outcome of this situation is that it also presents opportunities to bid and win some additional marine work book-and-burn for the DB50 in 2013.

Following up on some of the strategic thing -- themes we have discussed during the year, I'd like to provide an update on a few of these initiatives. During the quarter, we signed the shipyard contract for the Lay Vessel 108. Based on the current schedule, the first cutting of steel will happen later this month, and we expect to have the vessel in our fleet in the second half of 2014.

In September, our board approved the construction of an ultra-deepwater S-Lay vessel. This DP3 combination vessel will be equipped with a 2,000-ton crane for structural work, 450 tons of S-Lay tension with a rigid stinger and a 200-ton crane with active heat compensation for performing subsea work at 10,000 feet of water depth. This vessel is expected to cost about $450 million and is expected to be available in roughly 2.5 years. Based on our study of the global offshore fleet, this is a vessel that will be needed in the marketplace as projects continue to get more complex, and it fits perfectly with our subsea and deepwater strategies.

In addition, we continue to look for opportunities to grow our subsea engineering capabilities. While any investments would be modest compared to a new vessel, they would provide additional services for deepwater subsea technology to support a comprehensive solution for the entire field development.

Deepwater and subsea development represent the largest growth opportunities in the offshore market, and we believe these initiatives will better position McDermott to serve our customers' needs and provide enhanced returns to our shareholders. However, as a result of these initiatives and our ongoing maintenance requirements, you should expect our CapEx costs to continue to trend higher over the next couple of years.

I'll now start to wrap up so we can open the call up for questions. We had a solid third quarter. Like the last 2 quarters, there were no major project issues to discuss; and bidding activities, as does our backlog, remain near record levels. We feel very good about our end markets. Our customers are pleased with our performance on their projects, and we remain committed to our long-term growth strategy to better position McDermott as a leader in the offshore construction market.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tahira Afzal, KeyBanc.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

I guess my first question is in regards to the soft guidance in the sense that it provided you down on the revenue side for 2013. Could you provide us with any color on, as you look at $3 billion for next year, what will make it potentially outperform versus your current expectations?

Stephen M. Johnson

Well, let me begin, and Perry, you might want to add some color to it. As I think about 2013, we are not in a position at this moment to provide guidance for 2013 on a quantitative basis, certainly not to give any speculation at this point on revenues or operating margins, et cetera. I will tell you that, knowing where we stand with bids outstanding and those projects, Tahira, that we do intend to bid, those that are in our so-called target list, there is opportunity to not only achieve the $3 billion that I indicated in the prepared comments I was hopeful of, but also to eclipse that. There's also the risk that if we don't win some of these projects or, as we have seen lately on some of these larger programs, they shift to the right, there's a chance that we could come in below that. So we're not at a point where we can definitize that for shareholders at this point. We are monitoring it closely. I'm frankly very pleased with the last 2 quarters of backlog build that we have indicated is building backlog for 2013. And we're roughly at $2 billion at the end of the third quarter. And as you are aware, we not only have the fourth quarter to build backlog for 2013, we have the preponderance of 2013 to do that same kind of thing with some quick-hitting types of programs. Perry, would you add anything to that?

Perry L. Elders

Yes, just maybe a couple of specific examples, we have been booking just over $500 million a quarter for 2013 over the last few quarters, and hopefully, we'll be able to continue that. But also, as you know, Tahira, we'll get some book-and-burn work during 2013. And particularly, I'm thinking about our major work barges, where we're anticipating we'll finish 2012 at just under 50% utilization, and we're forecasting to be around that neighborhood for 2013, maybe a little above. So that tells you that we've got quite a few days available on those barges in 2013 to sell, which could fill some of that revenue gap and profits. And particularly, what Steve mentioned about the DB50 and the availability of that vessel in a key market, because of the upgrade we've done to that vessel, it should attract some work next year. So there is some opportunity there on the marine fleet. The ship-shaped vessels or the higher-spec vessels are already forecast to be at near 100% utilization, so it's principally the major work barges where we could pick something up.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

That is very helpful. And I have one follow-up, and I'll hop back in the queue. As you look at your market share and your competitive advantage in the Gulf of Mexico region and the Middle East over the last 3 to 6 months, have you seen any change that's notable or concerning? Or as you look forward, do you see that market tightening where the competitive landscape is concerned?

Stephen M. Johnson

Yes, I'll answer that and just kind of to break it down, Gulf of Mexico competitive situation remains stable in our view. We see upside for us from a competitive situation as the Altamira fabrication yard begins to take hold, particularly because of the low labor cost and what we would consider to be equal to or perhaps in out years greater productivity or production out of that yard. But I would consider it a competitive locale, but nothing is material -- changing in a material way, up or down. Middle East, you indicated or asked about, I would say similar comments. We have what I would say is the highest productivity fair market cost fabrication yard in the Middle East with Jebel Ali. We do have the occasional rogue bidder come in and create a spoiler situation. We must remain disciplined as we go up against them. That is not a situation that occurs on every bidding outing, but we do see it on occasion. We feel very good about our strength in the Middle East. We hold what we consider the strongest competitive position because of not only our Jebel Ali facility, but also because of the type of marine fleet we have. And we're expanding, as you know, into the United Arab Emirates with more work, also into the neutral zone with KJO and additional opportunities where we have only one competitor with the so-called LTA program with Saudi Aramco.

Operator

Your next question comes from Andy Kaplowitz, Barclays.

Alan Fleming - Barclays Capital, Research Division

It's Alan Fleming standing in for Andy this morning. I wanted to ask you to comment on the bidding market. It seems relatively decent, especially on the small to mid-sized awards, but it does seem like some larger projects are getting pushed to the right. So my question is, how do you have -- how do you get conviction that you're going to be able to book some larger projects over the next 6 to 12 months? And what gives you confidence that we won't continue to see some of these larger projects slip to the right?

Stephen M. Johnson

Well, as regards these larger projects, I would say this, they are complex decisions for the customers that we're bidding into. They are often projects that are a marriage of a supermajor and a national oil company, and that presents its own administrative issues. So the larger projects that you ask about that tend to slip to the right, it's usually driven by those kinds of things. It is not driven by the bidding community or our competitors. It's driven by internal issues. So what confidence do I have? I can tell you, of the major programs that we're bidding today and those that have moved to the right, I have not seen any indication whatsoever of a cancellation. Period. What we do see is the slippage to the right for those administrative reasons and internal reasons. And I can think about Southeast Asia, I can think about Australia in that light, and also in the Western Hemisphere. I've been around this business for a long time now, and in the offshore upstream business, I'll recite once again that I just don't see cancellations. What I see are slippages to the right. So at the end of the day, it's just a timing issue for us.

Alan Fleming - Barclays Capital, Research Division

Okay. And are you assuming that you're awarded any of those larger projects in that $3-billion revenue number for next year?

Perry L. Elders

Yes, we are. But those bigger ones won't burn much revenue in 2013. So award, yes; revenue contribution, not substantially.

Alan Fleming - Barclays Capital, Research Division

Okay. And if I could ask just one quick follow-up on the Atlantic profitability. It seems like it is getting better. It seems like maybe you're having a bit better fixed cost absorption there. Should we expect a steady improvement going forward, especially as you have had the pickup in bookings? And do you still think that this segment could be profitable next year?

Stephen M. Johnson

"Steady" is not a word that I would apply to the business and certainly not quarter-to-quarter. As regards the Atlantic region, it is going to be lumpy. But I would ask investors not to look at the Atlantic region any more than they would look at the company on a quarter-to-quarter basis. I do still stand by my belief that it is highly likely that we will return the Atlantic region to profitability into 2013. As I indicated in my prepared comments, the pivot point or turning point there could have to do with the Papa Terra program and when we can actually go to work and begin taking up profit. If it occurs in 2013, that's to the good. If it flips over to 2014, we've got replacement activities to try to ameliorate that situation.

Operator

Your next question comes from Steven Fisher, UBS.

Steven Fisher - UBS Investment Bank, Research Division

I know you guys are spending a lot on these vessels, and you mentioned that CapEx is trending higher. Can you maybe just give us a ballpark range for where that CapEx is going to be headed? And then how should we think about when you could become free cash flow positive? Would that be more like 2015 at this point? Or might it be before?

Perry L. Elders

Steven, it's Perry. I'll see if I can help you here. As you know, we are spending kind of maintenance CapEx, if you will, that kind of equals depreciation, $75 million, $80 million, $100 million a year. The programs that we've announced this year, the LV108 and the DLV 2000, will kick up that CapEx over the next year or 2 specifically. So we're kind of anticipating that we could be kind of in that $300-million-ish range this year. It could go north of that. Part of that will depend not so much on those vessel newbuilds, which are pretty much scheduled at this stage, but it would depend on some of the other things Steve was alluding to in terms of our other growth initiative in the localizations, particularly fab and engineering localizations in some of the international markets. So can't give you a hard number there, but given the newbuild program is why we're guiding that we -- you should expect an increase. In terms of free cash flow, once we get beyond these newbuilds, we could be in a free cash flow position, again, subject to further investment selections and growth investments. So as it relates to what we've currently got scheduled and committed, yes, we'd be in free cash flow once we get past these vessel newbuilds.

Steven Fisher - UBS Investment Bank, Research Division

Okay, great. And then, Steve, you mentioned bidding discipline. Can you just give us some sense of to what extent you're actually walking away from bid opportunities now versus a year ago as a result of increased bidding discipline?

Stephen M. Johnson

I'd be happy to do so, Steve. I would say that there are bids that we do walk away from, and I'll put a little color on that. There are also bids that we simply will not follow competitors down on, if that makes sense. So with the former, we maintain a bidding rigor that says, any project of $40 million or greater comes to the top leadership of the company, including myself, for review. We look at contract terms and conditions, cash flows, margins, contingency cover, overall risk, currency issues to make sure that we are bidding appropriately for the risk inherent in the bids and to get a fair return for shareholders. As it relates to those that we have rogue competitors on, we either choose not to bid or we bid it straight up, meaning we might know what the rogue competitor would do, but we simply won't follow them down. And the hope there is that the customer will do their proper adjustment at the end of the day and award to a company that can do the work for the price offered with a fair amount of return and contingency, rather than just to award to the low-price bidder. We simply do not like bidding head-to-head with a -- what I would call a rip-and-read situation, a pure price situation. We have to bid that way in a lot of ways, but our execution plan and our ability to deliver on schedule and deliver a quality product is really what we're selling here.

Operator

Your next question comes from Jamie Cook, Credit Suisse.

Andrew Buscaglia

Actually, this is Andrew Buscaglia on behalf of Jamie Cook. So just quick question, just kind of back to the CapEx. I know you guys announced that you would be building this S-Lay -- an S-Lay vessel. And I'm just curious, what was your thought process in terms of decision to build? And can you talk more about the deepwater market just as it relates to competition in that market and kind of the growth aspects you see there?

Stephen M. Johnson

Happy to do it, Andrew. I will try to confine my comments to a few data points here because we went through more than 1.5 years of analysis, not only internal analysis, but using third-party data, customer conversations, as well as competitive [indiscernible]. We looked at the movement of the market from its current point. We looked at capture of a certain segment of the market. We looked at build versus buy versus lease, and we looked at the specification of the vessel, including such things as the size of the lift capability in the vessel, the transit speed of the vessel, the business end of the vessel from a pipelay capability. We put all that together, and we were able to plot the type of vessel and its capability, its regional and global presence, compared that to the competition, compared that to where the market scan said the market was moving in terms of lift, in terms of trunk line installation, in terms of water depth, et cetera, and arrived at our solution and our decision. We went through, as I indicated, 18 months of that analysis. We went through roughly 3 quarters of conversations with our Board of Directors, and I believe we've landed on precisely the right vessel for the future and for this company. It is a big-ticket item. But at the end of the day, we have done our diligence as the management team and believe it's the right solution. And I'm happy to add more color if you have more questions.

Andrew Buscaglia

No, no, that's helpful. And actually, just another comment on the offshore deepwater market. Can you just comment -- I know Heerema and Technip had announced a JV in that market. Can you guys talk about your thoughts on that and just kind of like how you guys are strategizing as it relates to competition there?

Stephen M. Johnson

Happy to do that also. I think that, that link up between Heerema and Technip in the first instance signifies the strength of the deepwater, ultra-deepwater market, and we see it the same way as they do. Secondarily, I would say perhaps similar to the Subsea 7/Acergy combination in recent years, it could be a positive for McDermott and our shareholders, as it does remove one potential competitor and creates the need for another qualified contractor to bid and win work in that particular market. Having said that, I believe, whether it's the North Sea or ultra-deepwater elsewhere around the world or subsea market, there is more than ample space for another 1 or 2 or perhaps even 3 top-tier players in this market. It is the intersection of having the right kit, if you will, the marine assets, plus the engineering capability, plus the technology and then the critical mass and the resume of experience. That is the centerpiece of our strategy, so I believe that the Heerema-Technip alliance is an indication of what I would consider the fastest-growing segment of the market that we all, as pure companies, enjoy in the future.

Operator

Your next question comes from Scott Levine, JPMorgan.

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

Hoping for a little bit more color on the underlying business trends in the Atlantic, deferred profit recognition on Papa Terra's side. I was hoping you might be able to comment with regard to the bid funnel there, and it seems like it's lagging some of the overseas markets in general. But are things picking up in accordance with your expectations? Maybe a little bit more color on Brazil and Mexico and activity levels there. And maybe a bit more color on underlying profit potential in that market, and then whether you see things gaining momentum as you move through 2013.

Stephen M. Johnson

Why don't we start this way? Perry, if it's okay with you, why don't you start off on maybe the quantitative side of Scott's question and how we see the Atlantic region, and then I'll come back with maybe some more strategic and operational comments to help it round out?

Perry L. Elders

Sure. So we do have a nice level of bids outstanding. It's 4 smaller projects, but we also have a deepwater project that we would see coming to award kind of mid-next year, but still kind of in that $200-million range, so not the mega projects. That's kind of in the bids outstanding bucket. And then in the target category, we have a number of projects, kind of a handful of them in that $200-million to $400-million range that, likewise, we think could come to award over the next 5 quarters, next 4 to 5 quarters. So a number of nice opportunities there. And we think we're well positioned, not only with what Morgan City can perform, but now as Steve mentioned, with our first export project in Altamira, well positioned for Altamira to get some of that work. So, Steve, I'll turn it back to you.

Stephen M. Johnson

A couple of operational data points for you, Scott. You may have seen in October, we announced a rig repair project for our Altamira, Mexico facility, which, of course, is part of the Atlantic region. We see that as a significant opportunity for us. We've been focusing on rig repair as an adjunct market for the Atlantic region as we have done a number of other things in the Atlantic region to turn it around, including reducing SG&A and DOE and putting new leadership in place. What we were looking for are -- is another market. That award was for a couple of rigs, and those rigs -- or at least the first of which is on its way or at Altamira now. That is a growth market for us. I would consider it the kind of program which is book-and-burn, and it will help us for 2013, and there are others behind it perhaps. It's somewhat lower risk because of the contracting terms and conditions. And Altamira is suited with its large quayside to do precisely that kind of work. In a more macro strategic or operational way -- or way of thinking about it, that business unit for us, which is Gulf of Mexico, Brazil, West Africa and now East Africa, based upon any prognosticator you listen to is likely to be one of the highest growth markets for the company. So we are -- we have sized that business for the current market. We're poised to grow as these opportunities come forward. We have what I would call -- consider to be the best fabrication yard in the Western Hemisphere when it is built out, not yet fully built out, and we have the right leadership in place. I'm quite bullish on the Atlantic region these days.

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

Yes, no, it certainly sounds like it. Maybe as a quick follow-up, I don't know if this can be quantified, but is it -- you sound like you have some backfill opportunities if indeed Papa Terra is delayed and pushes into '14. Is that a market or a region that could achieve profitability without deferred profit recognition on Papa Terra? Is there enough opportunity there? Or should we be thinking about 2014 here depending on the timing of that project?

Stephen M. Johnson

Look, I'm sticking with my view about 2013 for the Atlantic region until I have reason to adjust. And I don't have good reason to do that. I frankly believe that the Papa Terra program will go forward so that we can capture revenue and earnings in 2013. We wanted to signal that it could flip across the calendar line into 2014. So if it does, are there backups? Yes. Will they materialize in time for 2013? I have to put that in the to-be-determined category, but it is possible, just to be in full disclosure mode, Scott.

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

Yes, no, that's fair enough. One quick one follow-up if I may. In terms of closeout opportunities for next year preliminarily, would you guess or estimate that it would be roughly comparable to this year? Or is it too early to really tell?

Perry L. Elders

Yes, I'd say order of magnitude, yes. We've got some jobs maturing, so we didn't have any huge pick-ups in '12 and not anticipating anything substantially different in '13.

Operator

Your next question comes from Brian Konigsberg, Vertical Research.

Brian Konigsberg - Vertical Research Partners, LLC

Maybe just first on tax. You noted that it was a bit high in the quarter because you were unable to recognize some of the deferred losses due to the lack of profit in the Atlantic. I guess, how should we be thinking about that going forward in 2013? I know you won't -- don't want to give specific guidance, but should we anticipate that once you do hit that kind of profit level, we should see a downtick in tax rate and maybe kind of balance that with what you're seeing in the other regions as far as profit generation?

Perry L. Elders

Yes, you're right. It is hard to predict, and we can't really give guidance on it. Certainly, if we turn the corner and get to profitability, which we expect to achieve, and depends on when that happens, the U.S. portion of those profits will come through untaxed, which will benefit the tax rate. But really, a more kind of pervasive factor is the mix of work we do. And to the extent we're doing a significant amount of work, for example, in Australia, which is a high tax rate jurisdiction, it can have an offsetting effect. And so it's a hard one to call. I can tell you on isolated factors like your question, sure, if we make profits in the U.S., it will lower the tax rate if all other things are equal. But unfortunately, all others things are rarely equal.

Brian Konigsberg - Vertical Research Partners, LLC

All right. And just on the vessels that were placed in available for sale, so I assume those were actually marked-to-market during the quarter. Can you give a little color on how much that was marked up?

Perry L. Elders

Well, you -- from accounting, you do not write them up to market. You would only write them down if your estimated sales price was lower than their book value, which was not the case for us. So there was no onetime pickup or charge in the third quarter related to classifying those vessels as held for sale.

Brian Konigsberg - Vertical Research Partners, LLC

I got you. And I just want to check, you didn't mention it, but any impact from Hurricane Sandy that might affect the Q4 results?

Stephen M. Johnson

None at all.

Operator

Your next question comes from Martin Malloy, Johnson Rice.

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

Just looking at the barges -- the large barges that you have, and I think you said utilization should end up this year somewhere around 50%, and it's, I guess, preliminarily looking about like that for next year. Can you talk about the bidding environment for these barges and the opportunity to get some additional vessel days for them?

Stephen M. Johnson

Yes, I'd be happy to, Marty. Almost have to take them barge by barge, as you know. The bidding environment for those barges, especially those that are combination barges and for the larger barges like the DB50 that have dynamically positioned capability, the opportunity to win work and to draw work is still very good. We do have, as you know, plans for taking the LB32 into drydock. And, in fact, she's headed towards Singapore now for drydock. So call that November, and won't be able to work probably until Q3. So that's an out-of-commission situation with the 32. The DB30 that we've talked to about committing to drydock, we haven't actually scheduled that yet. I would say that likely won't begin before the fourth quarter of next year, so she's available for work and does have some booked work. Some of the other vessels, 2 of which -- of the 3 that are held for sale, are simply unlikely to have material increases of booked work for the fourth quarter and into 2013. So having said all of that, I would say the DB50 has some real upside as we bring her back to the North Gulf of Mexico, have her do work that is already planned for -- planned -- in the plan and pick up work. I think there's some upside there. And that would probably be our biggest, biggest opportunity. Perry, anything you'd want to add quantitatively to that?

Perry L. Elders

Just a specific fact. Those vessels held for sale that we mentioned, the 16 and the 26, we are excluding those from our utilization statistics going forward so we have lower available days. And that's in part why I said that it could be slightly over 50% in '13 compared to slightly under 50% in '12. But the primary drivers are what Steve mentioned.

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

And is there any maybe preliminary help that you can give us on '13 in terms of the margins or the direction of margins there, without some of the problem projects in the Atlantic that hurt you in the first half of this year, and then you've got the DB50 and the 105 helping to contribute? When we think about the 7% to 10% guidance that you gave us for this year, can you directionally give us some help for next year?

Stephen M. Johnson

We're simply not in a position yet. We will be at this time next quarter to certainly put a lot more color around that. So what I would say is, we're just not in a position to do that. There are a lot of possibilities that still exist on the margin side, as well as the revenue side. And it's interesting how this 2013 is unfolding for us, and that is in the fourth quarter, there will be a number of what I'll just call moving parts here that I think will have some significant effect into how we predict 2013.

Operator

Your next question comes from John Rogers, D.A. Davidson.

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

Couple of things. First of all, Perry, I don't know whether you can answer this, but the $28 million that you've -- or $29 million in assets held for sale, I realize they aren't marked down, but would you expect to book gains on these sales? Could you give us a sense of what the market looks like? I'm just trying to think about the cash flows.

Perry L. Elders

Yes. Well, obviously, implicit in my answer to the earlier question is we think we'll at least realize at book value and, obviously, I want to be careful because there may be sellers listening in. In that case, sure we expect to book gains. So -- but that is not -- the potential gains from those sales is not reflected in our kind of earlier comments about 2013 that's upside to margin.

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

Right. Obviously, more about the cash flow side of it, okay. And then, Steve, I guess just going back to the 2013 again, I know you're not giving guidance, but the $3-billion revenue number that you mentioned there, can you -- I guess, how competitive do you have to get or could you have to get in -- especially in early 2013 in the bid market, to fill that up? And would that have a meaningful impact on margins?

Stephen M. Johnson

Yes, it's a fair question, John, and I'm sure I'm not going to satisfy you completely here. But I will tell you that it's not, in the first instance, about being competitive in terms of taking cost out of a bid or shaving margins or not putting the appropriate amount of contingency. That is a very rare thing that we would do. Having said that, there are opportunities that allow us to kind of fill the hole up to or around the $3-billion range that we are aware of, that have some negotiation component to them, meaning we're in a negotiated situation, so there's still some of those left that could help us out. There are also those where I believe we have a competitive advantage in terms of our technical solution or our project execution solution that won't cause us to have to take skinnier margins or not have the right risk cover. But the preponderance of why I feel reasonable about $3 billion, sitting at $2 billion in terms of backlog build today for 2013, is that pipeline of opportunity. We win our fair share, then I think we will be in that zip code.

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

Okay. And one other thing, if I could. In terms of your -- I think last quarter, you indicated that on some of the work out into -- beyond 2013, 2014, you have about 50% of the costs contained or contracted. Is that still a good level? Or has that changed at all?

Stephen M. Johnson

No, that's still about the same. And if you're referring to the large INPEX project in Australia, no change in the quarter. I would tell you we're proceeding with that work on not only buying out all the procurement and subcontracts -- we've done some more of that during the quarter -- but we have also landed on with our customer a more definitive engineering solution for the program. And I think as time wears on, that will tend to de-risk the program. I do not have, at this juncture, significant concerns about that program. But it's only in the 1% to 2% complete stage, and it's a $2-billion program, and we monitor it closely month-to-month.

Operator

Your next question comes from Rob Norfleet, BB&T Capital Markets.

Robert F. Norfleet - BB&T Capital Markets, Research Division

Just a quick question. I think, Steve, last time, you somewhat helped break this out a little bit. But when you look at your revenue pipeline or bid opportunities, can you give us kind of an idea of the breakout between conventional shallow and SURF and deepwater? And also, has there been any meaningful change when we look at your bidding on deepwater work in terms of hit rate? Meaning, since you're a little bit newer in this area, are you having to discount work, thus your hit rate's lower?

Stephen M. Johnson

I'm going to let Perry do the breakdown this quarter, Rob, if that's all right, but I'll just handle the latter question here. In my view, of all of the subsea programs and the more deep-sea programs, we are not doing anything significant to discount either our cost or our overlay, meaning our margin or contingency. And quite the contrary, we're trying to make sure that we understand the market, that we're not going to be a spoiler in the market to be frank with you, and at the same time make sure that we have the right risk cover and the right return for our shareholders. So we're not doing anything inordinately different on any one of these bids. And we're not new to this market, as some would have you believe. We've been around this for many, many years. We do now have better capability, engineering and marine assets to do this work, and we've learned a lot about how to bid these programs. Perry, you want to give the breakdown?

Perry L. Elders

Sure. Just think of the pipeline on a couple of dimensions: one a geographic and the other is an end-market dimension. And we give the geo in the Q. But just as a reminder on the backlog, the Asia Pacific, because of the INPEX project, is the biggest chunk, 60% of the backlog. Middle East is about 1/4 of it, with Atlantic being the remainder. And then from an end market perspective for backlog, the SURF is the largest part. Again, INPEX is the biggest driver at about 55%. The conventional business is just under 40%. And there's some floating and other charter business in there for the residual. And then moving to the bids outstanding to -- directly to your question, Rob, is that the -- from a geographic perspective, the bids outstanding are almost 70% Asia Pacific and 27% Middle East, with Atlantic being around 4%. And then from an end market perspective, as we talked about last quarter, the conventional is about 70% of the bids outstanding, and the SURF business is almost 1/4, with the floaters being almost 10% of the bids outstanding. And then if you go beyond that and look further at these targets, fairly balanced geographically between Middle East, Asia Pac and Atlantic. And then from an end market perspective, closer to 2/3 on the conventional side and 1/4 in floating and about 15% in the SURF business.

Robert F. Norfleet - BB&T Capital Markets, Research Division

Great, that's helpful. And just quickly in terms of a follow-on. Steve, just a quick question, just your thoughts on consolidation, and I mean it from the standpoint -- we've been talking about this huge amount of growth we're expecting to see in the SURF and deepwater market. And clearly, that's going to result in more competition. But you've got a lot of competitors that don't have assets. They don't have fab yards. They don't have boats. They're having to do JVs and take smaller pieces of the work. I mean, do you think given the growth that we're seeing in the deepwater markets -- you would think there would be some semblance of wanting to be able to participate at a higher level on this market. And clearly, they're not that many people that have the assets that you all do. Do you see that as a trend going forward potentially?

Stephen M. Johnson

Yes, I do. I wouldn't want to add too much color to that, wouldn't want to send any signals before our strategy is developed from a McDermott standpoint, but I absolutely agree with you. A consolidator strategy makes a lot of sense.

Operator

Your next question comes from George O'Leary, Tudor, Pickering.

George O'Leary - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Maybe digging down into bids and just a little bit more detail, following on that last line of questioning regarding kind of the work that -- you mentioned some work. You expect a material amount of awards to hit in the next 6 months, the next 2 quarters. Can you talk about maybe the breakdown by end market and geography of that work in particular, or maybe just give a little bit more color qualitatively around that?

Perry L. Elders

So kind of from an end market perspective, I would say, out of -- Steve mentioned about half of the quantum of projects are expected to be awarded in the next few quarters. That's half the number of jobs, probably closer to 1/3 or so of the dollar amount of those jobs. And then looking at it from an end market perspective, as I mentioned a moment ago, the majority of that is in the conventional side, the vast majority.

Operator

Your next question comes from Robert Connors, Stifel, Nicolaus.

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

I think I understand the impact on the D&A line with the pending sale of the 3 vessels. But are there also some sort of maintenance crew and drydock expenses that disappear once those vessels are sold? And is it material?

Perry L. Elders

Yes and no. Yes, it is -- there is cost. No, it's not material.

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

And then I believe that the DB16 had some Jack/St. Malo work to be done in early 2014. Is it still scheduled to be done on that vessel? Or has the work been transferred to another vessel?

Stephen M. Johnson

There's no prospective work for the DB16 at the moment.

Perry L. Elders

That's the 102 that's going to do that job.

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

Oh, okay, okay. And then just regarding Papa Terra. What is the percent complete now? And just assuming it does go forward within 2013, what are you guys estimating as the percent complete when you exit the year?

Perry L. Elders

We're just almost 60% complete from a financial standpoint, but it's the marine campaign -- that's the majority of what's left -- that's shifting around. So really it just depends on what Steve's already covered, which is when that marine campaign with the 50 occurs. So if we get that into the fourth quarter, it could be substantially complete by the end of the year.

Stephen M. Johnson

I would add, just so everybody's aware, the topsides and the hull for the TLP, which is largely our portion, our joint venture's portion of the program, is largely on schedule, where other contributors to the overall development in the program are causing this consternation around delay or timing of first oil. Our particular project scope is likely to be moved to the latter part of the year in order to allow some early first oil this summer if Petrobras can achieve that, which puts us in a position where we would then need to work with our customer to recover costs associated with that delay. Just to add clarity so that you can, as investors, understand the difference between what you read in the trade materials versus what we're saying.

Operator

Your next question comes from Sameer Rathod, Macquarie.

Sameer Rathod - Macquarie Research

I just wanted to focus in on the China joint venture and the FPSO market. It seems like the Koreans want to play a big -- be big players in this market. And given their history of being pretty aggressive, how do you see this market shaping up?

Stephen M. Johnson

Well, I think you've stated it well. The Koreans are aggressive. We built that fabrication yard for FPSO topsides construction and integration, with our Chinese partner building the hulls. That yard can certainly do that, and it can also do more conventional or traditional work, which is what it has been doing in the early stage projects. So that fabrication yard is quite a full service yard, so I want to make sure that everybody looks at it that way, even though the advent at that yard was it's initially an FPSO facility.

Operator

Your next question comes from Will Gabrielski, Lazard.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Can you talk about in the Gulf of Mexico right now some of the bigger topside jobs that are out there, and whether or not you're bidding those with Morgan City or Altamira and/or both, and what the strategy might be for those types of projects going forward on the U.S. side?

Stephen M. Johnson

I can -- if you don't mind, I'm not going to speak to the specific named projects from a competitive standpoint, but I will tell you that any of those projects that suit us, we will bid, and we will bid fabrication alternatively with Morgan City or Altamira. I will say that one of those big topsides is perfectly suited for Morgan City. A couple of them are perfectly suited for Altamira. So it depends upon a number of things: what's the technical suitability; and then the other is customer preference; and then thirdly is cost. And we can likely get lower cost out of the Altamira facility, all underpinned by the fact that we haven't completely built out the Altamira facility, and we're building it out on a just-in-time basis. As these topsides come forward, we speak to the customers about our plans for building it out so that it is completed before we need them.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay, great, and I apologize if I missed this update. But did you talk about the prospects of building out any fabrication capacity in Brazil and whether or not you've been notified yet on any of the FPSO modules you were bidding?

Stephen M. Johnson

I don't think the question came up or we mentioned it with any kind of color. Well, I would simply state that we are still bidding. We have not been given any notification of an award. But our plans are still in place and still in effect for a build-out of a fabrication yard after being notified of an award.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay. And then lastly, can you go back through Ichthys and the way you're working with Heerema on that project, how the relationship is structured and how the risk sharing is structured, now that we kind of have another reference venture in the market with them and Technip? I'm just wondering how that might differ or what you guys are doing to insulate yourself from execution risk around the Heerema side of the project.

Stephen M. Johnson

Yes, well, it's a bit of a different structure. It's a project-only relationship with Ichthys. And we, McDermott, are the prime contractor. Heerema in this particular instance is a subcontractor, a dedicated subcontractor to McDermott with a fixed price and date-certain type of risk associated with it. It is not a broader-based type of relationship, which appears to be the Technip-Heerema type of arrangement. But it does use the Aegir vessel, which was also mentioned in the release between Technip and Heerema.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

But in terms of the risk sharing on that, on the execution side of the project, how does that work between yourselves? And how do you align the interests between yourselves and Heerema?

Stephen M. Johnson

Each party is responsible for their work scope. The risk that goes associated with it, time risk, cost risk, goes to the party that's doing the work.

Operator

And we have no further questions. So I would like to turn the call over to Robby for closing remarks.

Robby Bellamy

Thank you all again for participating today. I want to remind you that this call included forward-looking statements, and I encourage you to see our SEC filings and yesterday's press release for more information on these. Operator, this concludes our call. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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