Helix Energy Solutions Group, Inc. (HLX) Q3 2007 Earnings Report, Transcript and Summary

Welcome and thank you for standing by. At this time all participants are in a listen-only mode. During the question-and-answer session [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. And now I'll turn the call over to your host, Mr. Wade Pursell.

Thank you. Good morning everyone. Welcome to the Third Quarter 2007 Earnings Conference Call for Helix Energy Solutions. We appreciate you joining us this morning. With me here today in Houston is Martin Ferron, our CEO; Bart Heijermans, our COO; Robert Murphy, President of Helix Oil and Gas; and Alisa Johnson, our General Counsel. And joining us on the phone is Owen Kratz, our Executive Chairman. Hopefully everyone has accessed to a copy of press release and a slide presentation, which is liked to the press release. If you do not, go to out website at https://www.helixesg.com the Investor Relations page and click on Webcast there. This morning I'll summarize the results and walk through a quick financial overview and then turn it over to Martin for the quarterly highlights in both our contracting services and oil and gas segments. And we will follow this up with a Q&A segment. But before I get started, turning to slide 2, Alisa has a very important announcement for you.

Thank you. As noted in our press release and associate presentations, certain statements therein and in today's discussion are forward-looking statements. A number of factors could cause actual results to differ materially from those forward-looking statements. For a complete discussion of risk factors affecting company, we direct our attention to our press release and to our annual report on Form 10-K for the year ended December 31st, 2006 filed with the Securities and Exchange Commission as amended by subsequently filed Form 10-K/A. Also during this call, certain non-GAAP financial disclosures may be made in accordance with SEC rules, the final slides of our presentation material will provide a reconciliation to certain non-GAAP measures to comparable GAAP financial. The presentation together with the reconciliation is available on our website.

Thank you Alisa. Looking at slide 4 now. For the third quarter of 2007, we reported net income of $82.2 million or $00.88 per diluted share that represents a quarterly earnings record for Helix in terms of earnings and cash flow. This compares to $57 million of net income or $00.60 per share for the third quarter of 2006. The highlights of the quarter involve continuing improved performance and results in contracting services particular the deep water. Martin will get into the detail shortly. On the oil and gas side, we were able to monetize 30% working interest in the Phoenix oilfield resulting in nearly $19 million of operating income in the third quarter. This sale will also most likely result in another $21 million of operating income in the fourth quarter. Consolidated revenues of $460.6 million represented 23% increase over last year's third quarter with the increase driven entirely by the contracting services revenues. Side 5 shows this better. You can see contracting services revenues, the maroon boxes increased about $118 million or 47% before Intercompany eliminations due primarily to the continued strong market demand for our services in the deepwater pipeline and robotics areas as well as well operations. Subcontract in Cal Dive benefited from additional capacity compared to last year's third quarter. Gross profit of $166.3 million was 27% better than the $130.5 million achieved in last year's third quarter. Gross profit margins of 36% were slightly better than the year ago quarter of 35% as this year's results included nearly $12 million of charges, net of insurance proceeds with the clean up and removal of facilities damaged during the 2005 hurricanes. While the 2006 third quarter results included about $16 million of charges for two deep shell dry holes. Regarding the hurricane charges, obviously things were much worst than we expected and once we finalized this process and remaining expenses should be much, much less the worst is behind us we think and most of this will be taken care of in the spring of 2008. SG&A $42.1 million increased $11.8 million from the same period a year ago due primarily to increased overhead to support the company's growth over the last year and increased incentive compensation accruals this year. This level represents 9% of revenues comparable at 8% in the third quarter of 2006. Equity and earnings, another highlight of the third quarter was the well publicized independence hub beginning production. Total equity and earnings of $7.9 million reflects 2.6 million from our share of demand, fees and independence hub and our share of deepwater gateways' earnings for the quarter related to the Marco Polo facility, which was $5.3 million. Regarding the tax rate for the quarter, 33% was two points less than the 35% of last year's third quarter due primarily to increased earnings in our lower rate foreign jurisdictions and also increased deductions relating to increased oil and gas sales. Turning to the capital structure, which is on slide 6, total consolidated debt as of September 30 2007 was about $1.4 billion. This includes $117 million under Cal Dive's revolving facility, that's the blue box. That facility is non-recourse to Helix. We also had $86 million outstanding under the $300 million of Helix revolver, which is the black box. The other components were primarily the Term B facility, which was $827 million, the convertible notes which were $300 million and then the MARAD debt which was $127 million. Excluding on recourse Cal Dive debt at the end of the quarter about half of our debt is fixed at a blended rate of 4.8%. This level of debt amounts to debt-to-cap of 44% as of the end of the quarter and with $772 million of trailing 12-EBITDAX which excludes the IPO gain from last year. This represents 1.8 times trailing 12 month EBITDAX. Summarizing CapEx, total capital invested in the first nine months of 2007 was about $685 million with 59% of that in the oil and gas segment primarily drilling success in Noonan and Danny, the Phoenix development and shelf prospects. The contracting services capital related primarily to the well enhanced new build and conversion cost on the Helix Producer I and Cesar in the Q4000 upgrades. Finally, in the area of breaking news, you might have noticed Anadarko's release last night regarding deepwater royalties. The US district court ruled in favor of Anadarko to claim the department of interior had exceeded its conventional authority by requiring Kermit E [ph] to pay royalties based on price threshold provisions. This includes Beginus and discovery, which Helix owns 20% of. I direct you to Anadarko's release if you want further information. We are obviously pleased with this outcome and will be following further developments closely. With that, I'll now turn it over to Martin with the quarterly operational highlights.

Thank you, Wade, and good morning to everybody. Before I get into specific quarterly commentary, I'd like to share the observation that at recent investor conferences, it has been a consistent theme that many service companies talk about there leverage to the secular gross story in the international deepwater services marketplace, and most offshore E&P companies describe their leverage to the escalating oil price through deepwater activity. At Helix, we offer investors exposure to both of these growth drivers. On the badgering nature of our performance in the deepwater services segments, it is particularly evident in the record quarter three results. Overall, revenues increased by 47% year-over-year and by 62% in the deepwater service businesses alone. Since the acquisition of Remington there has been intense focus on our production numbers. The details behind these record quarterly results should demonstrate that we are much more than just a production company, and we asked to be judged on our overall earnings performance. Okay, moving on to slides now starting with slide 7 to 13 on contracting services. As expected services growth profit margins returned to $0.35 plus levels and services provided 74% of the overall gross profit of the group. Cal Dive had a very good quarter showing continued earnings growth two years after the peak workload caused by the 2005 hurricanes. They will discuss their results on a conference call scheduled for 11 o'clock today and you can listen in if you wish. We rewarded two very significant international deepwater pipeline contracts with a combining value in excess of $150 million. Importantly, we will not work with out usual profit margin which hopefully will display price and leadership for this type f work. Our report ex-group Canyon followed up their record quarter two with quarter three profit higher by an impressive 63%. They have six vessels on charter due in the quarter. On our earning premium margins due to the high-tech nature of their construction support capabilities. If you see the graph figure of the new 2000 horsepower super trencher shown on the images of the quarter, slide 9. Likewise the sea well had a sequential record quarter on North Sea. Margins continued to improve despite the high third party content associated with well intervention. The Q4000 here in the Gulf of Mexico performed well before coming into port for the extensive marine and drilling upgrade program. On the production facility's front, the much anticipated start of a production at the independence of the [indiscernible] and the rate is already around $640 million a day with bcf a day possible by the end of the year. Long term prospects results also boosted recently when producers spend over $150 million on new leases around the platform. In contrast production of Marco Polo was ramping up at a slower pace but the longer term outlook should be boosted by the enhanced recovery of the claim of 2-4 billion barrels well in place of the area. On slide 13, this a new one. We showed the recent exciting growth of EBITDA and our deepwater services segments essentially we have doubled EBITDA contribution since quarter one '06, which was the time we announced the Remington acquisition and there was meaningfully more to come from asset additions, less plan maintenance and increased production facilities throughput. Just looking at these numbers in a bit more detail here on slide 13. You see the Canyon performance in blue. Their EBITDA in first quarter '06 was $6 million, was $23 million in this quarter. Likewise with low intervention [ph] $7 million in '06 and $23 million in this quarter. So we are growing the contribution from these segments pretty rapidly and you can see on the far right of the slide that's a lot more to come in future through new assets, new production through the hubs and less maintenance on next year. So we are pretty excited about what we are doing in deepwater. Okay, turning now to oil and gas reporting in slides 14 to 21, our production was negatively impacted by actual and forecast tropical weather systems. This particularly hampered our field start-up efforts and we estimate that shut-ins and standards costs us at least 2 bcfe of production. So we are not saying we would have hit the high end of our range but we would certainly would have been within it. If it wasn't for this excessive downtime due to the storms. I think operators during the quarter were very prudent when it came to reacting to forecast and that was a kind of change from what we have experienced in the past years and I think the prudence was very justified. In addition this was a very heavy quarter for repairs and well P&A activity related to the 2005 hurricanes. They started round $14 million of our cost structure but as we have mentioned, the bulk in our work is now behind us. Quarter four production should be meaningfully higher and we will provide an update when we talk about 2008 earnings guidance in mid December. We have also clearly learned a lesson that our 2008 production guidance must be made on the basis of more conservative assumptions. Slide 18 and 19 show the status of our main shelf and deepwater development projects with the top four shelves now online and I'd like to point out that Canyon [ph] 339 we had 100% working interest in that field and it is producing 2000 barrels of oil a day un-hedged. It's been online since 15th of September. So that will be nice a increment for Q4, sorry, for quarter four on its own. I did mention I think there is no change to the deepwater field start-up schedules. Our increasing leverage to oil rather than natural gas is really apparent when you look at the deepwater production portfolio. And this was boosted by recent success of lease sale 205; we were successful with 9 out of 10 bids and subject o MMS approval. We will secure all three oily deepwater leases that we targeted. This demonstrates our ability to protect our deepwater niche even in the present very competitive environments. The relative locations of the new lease is shown on slide 20. I'd also like to use this slide 20 to reinforce the point that we aim to create considerable value from the 100% on prospects as we have done at Phoenix and Danny [ph] in this year. That value can then be realized through the production of oil and gas or the sale of reservoir interest. Such sales will be conducted on an optimistic basis to mitigate risk, share F&D cost and reduce profit to Feros Moss Services group [ph]. Such sales will likely result in operating profit just as production does. Also in the good news category, we secured a drill rig of opportunity to drill a development well at Noonan which could not be addressed by the Q4000. We expect this well to enhances both production and reserve estimates with the production slot of being concurrent with that from the first Noonan well as updated on slide 19. We may also be able to secure a rig to sidetrack and complete our deepwater Devil's Island well in which case production could also be achieved by the end of 2008. For a hedging update please see the new slide 21. It is significant to note that we have less than 10% of our expected year end 2007 P1 reserves hedged at approximately $9.00 per mcfe for minimum volume at the flow of the colors of $579 million. To conclude my remarks with some commentary on quarter four... earnings guidance, we expect our contracting services performance to be seasonally slower and the Q4000 will likely be out of service for the whole period. However, we expect higher production and lower well P&A cost. All things considered, we expect earnings to fall in the range of $00.85 to $01.05 with production volume and natural gas price being the main variables. We look forward to the next conference call on formal 2008 guidance in mid December. With that I'll hand it over to Owen for any remarks he might like to make.

I don't have very many Martin. I'd just like to first of all congratulate everybody at Helix on not only a good quarter but in the way that the whole team is pulling together to stage for the future growth. Just a few takeaways from the presentation that I have... first and foremost, just consideration of meaningful and sustainable growth, I think it is also pretty apparent that we are very much a strong service company, 70% of revenue, 75% of growth profit. And the staging I would referring to is the ongoing capital investment projects. We've incurred debt in the company, I think the word, we had a comfortable balance sheet but we incurred debt of what I believe is the right time and our well along on a lot of projects with highly visible returns approaching such as the upgrade of the Q4000 with its drilling package, the Cesar for deepwater high play, the well enhancer and well ops, Helix Producer I for production facility, the robotics coming and that's not even touching on all of the deepwater production developments underway. It is a pretty exciting time. I think another important takeaway from the presentation is we failed down on Phoenix but I think like you mentioned following the Remington transaction as the model maturity or capturing value in production, the sales fell down and the other methods that you mentioned is going to become greater part of our model going forward. We have strong cash flows and strong balance sheet as I mentioned. I just think we have got a large creative team of managers and employees right now that fully understand the benefits of our hybrid model. The consistent growth results is the bottom line and I think this is going to continue full cycle due to the strength of the hybrid model. Bottom line, it is strong overall corporate performance, it is well hedged to any cyclicality that we might see going forward. I do think that the biggest challenge for us and again Martin you touched on this in the budgeting process is going to be to accurately forecast the timing of all of the good stuff that's coming in the growth ahead. With that I'll pass it back to --

Thank you. I guess we are ready for questions.

Are you there? Question And Answer

Yes, I'm sir. Thank you very much. We'll begin the question-and-answer session now. [Operator Instructions]. The first question comes from Bill Herbert. Sir, your line is open. Bill Herbert - Simmons & Company: Thanks. Good morning.

Good morning. Bill Herbert - Simmons & Company: Martin and Bart... slide 13 with respect to the recent growth in deepwater services and the two leasing contract wins on the contracting side, which were pretty significant and giving their sort of international breadth. How would you characterize the current bidding climate right now as you are looking at projects and bidding on projects and correspondingly what that means for the continued outlook here for deepwater contracting?

Well, Bill. Thanks for your comment there. We are obviously very pleased with the two recent wins that we announced in the quarter, and we are bidding for other work internationally. I think you will see us show more wins in the coming quarters. Already, the intrap [ph] and the express are pretty well booked well into the future, and we are starting to add a lot of work to the Cesar. So the picture is very nice for the next several years. I don't... Bart, you want to add any additional comments there?

Yes and I think we have strong teams in Pert and in Rotadem [ph] to pursue opportunities in the North Sea, and the math and Southeast Asia. We are seeing a lot of bidding activity and I think also the weakening of the dollar strengthens our competitive position, so overall we are I mean pretty excited about what we are seeing in late 2008 and 2009, 2010. Bill Herbert - Simmons & Company: Is there anyway for you guys to quantify basically the scope of opportunity that you are bidding on today with the mix of assets that you have and you are going to have relative to where you were let's say a year ago?

Yes, I mean I think compared with a year ago I mean Cesar was really not that advanced. We didn't have a backlog for the Cesar. The express was really Gulf of Mexico, I mean in October, November of last year we got the Reliance project awarded. Since than, I mean we really have been put on the math for global contract deepwater contracting services and we've been successful in hiring the people that are needed to support that growth. I think in your last year I mean we have transformed the company into a more global contractor and I think we have the right assets for the type of work. If you look at the Cesar that's really focused on Ashley and lot of our competitors have been building reeled pipeline vessels. We like the Escalay niche [ph] and Cesar being a low cost vessel should be able to generate the margins that are in line with our historic margins. Bill Herbert - Simmons & Company: Okay. And Wade, I've got one for you. I'm not sure if I understood this correctly but you said that the sale of the 30% working interest in Phoenix was going to yield an additional $27 million-something in Q4?

Yes. That's the way it looks now, Bill. I'll give you some color on that. The agreement provided that if certain events.... the agreement we signed in September in certain events didn't occur we failed to include the other gains on certain development wells or exploration opportunities then there was a potential plus of refunds. Bill Herbert - Simmons & Company: Okay.

So that amount of the cash proceeds were received, the gain portion of that was deferred. Bill Herbert - Simmons & Company: Okay.

But I can tell you that in the fourth quarter there's an amendment which is being signed that would remove all of those potential contingencies so the rest of the operating income would probably be released in the fourth quarter. Bill Herbert - Simmons & Company: Okay, so then the rest of the operating income is not necessarily representative of an additional sale?

That's right. Bill Herbert - Simmons & Company: Okay. That's still part of the 30% interest that you sold?

That's correct. Bill Herbert - Simmons & Company: Okay. That's all I have. Thank you guys.

Thanks.

Our next question comes from Roger Read. Your line is open.

Yes, good morning gentleman.

Good morning, Roger.

Really quick and I understand you're cautioned on trying to put forecast out there on the oil and gas production side margin, but what was the exit rate of production in the third quarter?

We were ramping up as you can see on slide 18 you can see that at the... in the month of September we brought on 339 as Martin said and Brat's 436, so if you look at where we were right at the end or looking at October, your just over 200.

Okay. What I was thinking the 170 average for the quarter?

Right. So there is a significant amount of production that's being brought on and unfortunately the weather delays from the tropical activity did delay the construction services that were bringing these on.

Okay. So assuming you can maintain the 200 kind of level... you got depletion but you also got other fields coming on like I mean the 18 bcf equivalent or better, it looks like a reasonable Q4 expectation?

Well, we will let you come out with your numbers but I think from the slide 18 you see we still have some other things to bring on, but I mean things happen. Right now we are going into the... unfortunately it's not tropical weather, it is just called winter weather that can hinder your rent time performance. So I think in any type of projection when we look at the months between November and March, there is a run time that you have to... that you have the run time decrease. If you take our exit rates that we are talking about at the end of the third, add the new projects in, factor in depletion and the runtime, we were in the ballpark.

Okay. And then as I look at the three items at the bottom high at 466 on down, did delay 30 days. Is that delay 30 days from a Q4 start or is it an incremental 30 days or a delayed 30 days and therefore it is in Q4 '07?

What's happening there? Since Cal Dive was the ones switching on the top stage of the construction work, the delays in quarter 3 have a knock on effect during quarter four. And we are allowing a bit more weather downtime for the reason what we mentioned, winter weather these quarter four start-ups and the bottom one the main past project, that's one of the situation. We are not in charge of that development and just pointing out that one is actually 275 days late.

Okay, so delay 275 days not 275 from a Q1 '08 start, right?

Correct. The blue is the estimated first production.

That's what I wanted to make sure. Switching here to the offshore construction site, tremendous quarter there. In the Canyon segment, do you still have ROVs to add to that business such that we should expect continued growth there not just sort of pricing gains but also volume gains as well?

Yes, if you look at slide 13, Roger, on the right hand side we are showing in blue what difference we are going to make to Canyon to further grow it, okay. So we have new vessels coming on a charter basis, the new share. We are going to do some real pipe play with Canyon also support the Cesar operations and add new ROVs, so we are going to continue to grow this business as we have over the last 18 months or so, over the last several years actually.

And how should I think about that in volume terms relative to sort of existing infrastructure there?

Well, let me give guidance for '08 in just over a month's time. We will put more color on that for you.

So you are going to make us wait.

I'm going to make you wait.

Okay. And then just looking at the well intervention segment during the quarter I know the Q4000 went down like late August, early September but it had a tremendous quarter. Can you give us a little idea of the relative contribution of the Seawell versus the Q4000 there?

You got those numbers there

The Q4000 did about $12.5 million of revenues, Roger.

Okay, great. Thank you.

Next question comes from Stephen Gengaro, your line is open.

Thank you. Just a follow up on the sale of 30% interest in the Phoenix that 20 million-ish of operating profit expected in the fourth quarter, is that part of the guidance range you gave?

Yes.

Okay. And then the other question and I am not sure how much, if you don't want to answer this but when you look at the assets you're adding right now, can you give us any sense for the kind of overall revenue impact they could have in '07 versus '06 or even just those assets we have in regards for growth. What kind of revenue potential they have on an annual basis?

Again Stephen, I think we'd rather wait until we give you our formal guidance for '08 and will give you a lot more color on that, because many of these assets are going to hit the water during the '08 timeframe. You can see from the growth on slide 13 that we are expecting a meaningful extra contribution from these assets.

Okay. And that's helpful. And then the follow up question is just in general on the deepwater contracting services side, you are obviously seeing lot of activity, what's pricing doing in general. Are you seeing kind of continued uptick here. Is it seeing on the higher level, can you give us some sense for that?

Well, we continue to push margin where we can, I think importantly and I pointed this in my remarks, we won the international pipe lay with our Gulf of Mexico margin and I think that should be good point to other participants in those areas, if we can continue to add international work on same, we are going to be very happy.

Okay, very good Thank you.

Michael Verdino [ph], you may ask your question.

Good morning gentlemen.

Hey Michael.

Couple of questions with the opportunistic rig that you picked up, how do we think about your full year capital budget now? How is it going to change for this year?

We said before that our total capital this year would be around $1 billion and I still think we are going to be pretty close to that number, it might be a little above. The oil and gas side of that we'll be a little bit more than it what had been otherwise. I think last time we said it because of the 50/50. That's the general answer.

All right.And with this opportunistic rig, how long do you have it beyond the Noonan development well?

It's for one well.

That's it. And one of the things that we were thinking about relevant to next year may be you had a development well in Noonan. Does this impact your deepwater drilling program at all for '08?

No. it's really... from a opportunistic circumstance, I think a lot of credit goes to the team that they could get it together this quick but what we saw out there is a well that was very needed as we bring one that field next August. And the fact that the rig market is so tight that we think that what we are going to see over the next year is that we'll see many of these opportunities come to us.

Do you have a rig secured next year for any drilling activity in the deepwater or --?

No. We don't have any rig under contract but we've got the Q4000, which we plan on using quite extensively.

Yes, so any wells that we can't address in the queue, we will try and get opportunistic ones for... that's the way we'll play it.

My last quarter this year obviously with the little activity on the NP side, there has been a lot of usage of the pre-equipment on that segment, how are you approaching this business going forward or are we going to continue to see a lot of work in-house or we are going to continue to see a lot more third party work going forward?

Well, I think next year with what's going on in deepwater, you will see the deepwater assets really swinging to action, bringing Noonan and Danny on in record time. We got the Cesar to lay those pipelines and you are going to see other deepwater assets play a big role in bringing this production on. So you probably see more internal work next year than you have this. As we always been mentioning we have 100% of Danny right now and we might consider a sell down there on right terms, which will reduce the profit of the firm.

Understand. Thanks. I will let somebody get in the queue.

Thank you. The next question comes from Joe Gibney [ph]. Your line is open.

Good morning, guys. Just a quick question for you and most of my questions have been answered. I just wanted to follow up relative to how we should look at independence and Marco Polo for you guys going forward and how that sort of fits into your overall asset mix as we look to 2008, just if we can get some update there. I appreciate it?

Yes. I think we have been clear on the role recently that these two assets are not on the call to our future, so in the right circumstances we might be sellers of those assets and we started the ball rolling in terms of interest. So on the right terms we could sell these assets or even put them into our own MLP. We are running that perhaps on a lot of different ideals right now and again in December, we hope to add more color to that situation.

Okay, fair enough. Thanks guys. I'll turn it back.

The next question is from Michael Merino [ph]. You may ask your question.

Yes, good morning guys. I had a follow up on the Q4 guidance, you all gave. You said included the gain from the 30% interest Phoenix, but does it also include some charges as it relates to clean up and removal or things on the shelf?

Yes it does but to a lesser extent than we experienced in quarter three.

Okay. And then also just to kind of follow up on deepwater construction margins in the quarter were a little lower year-over-year and I just wanted to get a better feel for what's going on there. Is it mix? Is it kind of the investment increases that you all are making from personnel side and from an asset side the downtime of the Q4000. Is it execution? I just want to get some more color maybe on where those margin... or why those margins are where they and kind of where they are doing, if we can expect them to go towards the may be where the shelf construction margins are?

Well, a lot of it is mix certainly in deepwater. We have a lot more third party content then we use to especially with well intervention, and I think you are going to see more third party content on some of the pipe play awards too. Obliviously, Cal Dive's margins came down from the peaks that were experienced in 2006, so all in all we are pretty pleased with 36% in comparison to our peer groups certainly.

I think also if you look at Canyon I mean they have 6 vessels on charter for the quarter and because of the vessels they have in charter and the margins are lower.

Okay. So those chartered vessels were in the deepwater construction segment.

Yes.

That's what I was specifically commenting on with the deepwater construction just to be clear? Thank you.

Philip Dodge, you may ask your question.

Yes, good morning. Thanks for the comments. The question is specifically on the Q4000 and that has going to be used to develop Noonan and my question is that something that changed regarding Q4000 that you are adding less capability or something that changed at Noonan?

No. We always plan to Noonan with the third part rig.

Right. It is a capability issue. It is a depth issue.

Okay, understand.

So we have plenty of other prospects that the Q can do.

That's why we choose to do, I don't know if you remember, Phil, we choose to Noonan rather than the Bishop first. We can drill the Bishop at Q.

All right, that's clear. Thanks very much, Martin.

Jim Rollyson, you may ask your question.

Hey, good morning everyone.

Jim.

One quick question, what was the oil, gas mix this quarter.

Why don't you give that

It was 60-40. It will be a little more oily next quarter.

and it seems like going into next year or the year or two as you bring on some of these deepwater fields, your mix is going to increasingly go towards oil, is that --

Most of the 50-50 by the end of the '08-'09.

Yes.

'08-'09:

And it is obviously to early but thoughts on start to look at hedging that or is that more just kind waiting until everything comes back on and it gets online and on track with scheduling?

We have been pretty active on hedging in the last several weeks. We have a lot of positions in '08 and '09. As we get more confidence about the start-up of these projects, we will add some more. We certainly like the gas hedges we see out there and we look at the oil hedges from time to time also.

Yeah and a lot of what we have added recently is oil, so you can see it on the slide.

Perfect. And then just last follow up here, can you characterize... you kind of talked about highlighted some the international contracts you picked up during the quarter as you guys are now breaking some of that out or at least giving us a sense of backlog. Can you talk about margins and generally how pricing looks in some of these markets compared to what you have been seeing in the last year or two?

Yes, Jim. I mentioned that we went into international work on very similar margins and we are enjoying in the Gulf of Mexico, so we are very pleased with that because we expected given the competition in those areas, margins might suffer. But we won these introductory jobs with similar margin and therefore we are hopeful we can continue with our success.

Very good. Thank you.

Stephen Gengaro, you may ask your question.

Thank you. Just two quick follow ups. First, I think Wade you mention the Q4000 contribute about $12.5 million in the quarter?

Yes.

Could you tell us... was that, did they work two months out of the quarter roughly or --?

Just that two months.

Okay. And then my second question, you've had just tremendous earnings growth for the last couple of years and you are trying to get a soft patch in '07, just in general should we expect a material reacceleration next year?

We are going to give that formal guidance in December season, but I think we sort of set our sole out in terms of the new assets that are coming on the contracting side, also the new fields that are coming on the oil and gas side. So if you look our investments, '07 has really being a transition year for us in terms of getting ready for the next step in the growth ladder, if you like. We are very hopeful that we can show meaning earnings growth next year but just ask you to be a little patient and let us set that out for you formally in December.

Okay.And then just one final general question. You mentioned sort of the storms had a material effect on production growth in the quarter, do you feel comfortable right now that you have sort of the staff and personnel in place in the oil and gas side where you really are sort of prime to see that strong growth occur in production and getting your goals?

Yes, I couldn't be happier with the effort that's being put into this production growth. I took some of the responsibility here for setting expectations too high. I have pushed these people very hard to grow shell production and that has been a major chance for us. I think the focus next year is going to be more on deepwater production and that's where you are going to see a major difference with single projects making an excess of $100 million a day to our production.

Okay. That's helpful. Thank you.

Michael Verdino, you may ask your question.

Just a quick follow up. I have got to ask the obvious question for you in this conference call about acquisitions. What are you seeing in both segments of your business and is there anything out there that's hard and heavy over?

We were trying not to look is my answer to that. We are very busy fulfilling our organic growth program here. We don't need to make anymore acquisitions. We are just delighted with the two that are adding to our contracting toolbox. And also the prospects that we have internally on the oil and gas side, so we are not really looking for the acquisition market right now.

But we were happy with our acquisition of the last lease sale.

Oh, yes, lease sale. That pulled up organic growth.

But you are really focused more on longer term inventory not shorter term inventory. I know there has been some discussions about maybe one of your partners, small partners on the shelf, exiting the shelf and things like that are obvious easy bolt-on if the price is right.

Yes, it could be. We'll obviously look at that on an opportunistic basis, but it is an interesting point on the lease sale results, and we will be deliberately focused on trying to find all prospects. And we did on 3D four leases and we won all three of them. And we can address those oily prospects anytime we wish now. We just got to make the drilling plans. All of them can be drilled with a Q4000, so we can switch attention to those new prospects if we choose to. So we were pretty excited about that success.

And then moving on more internationally, would you all look at something internationally to accelerate your entry into some of these international markets?

Owen, would you like to comment on that one?

Well, a pattern that we have established in the past is looking for smaller companies already established within a market with strong management and then using that with acquisitions coupled with organic potential of the region to accelerate the growth, I think we have already made some of the acquisitions that give us enough to work with for the time being, of course you always keep your eyes open, and you are always talking with people looking for it, for potential but right now I wouldn't say that there is anything immediately on the horizon.

All right. Thanks very much guys.

At this time, there are no further questions in the queue.

Okay. Well, thanks everyone for joining us today and we look forward to getting back together in December to discuss the outlook for 2008. Thanks again.