Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by dailystock_admin    (05-23-08 12:28 PM)

Helix Energy Solutions Group Inc. CEO OWEN E KRATZ bought 84,000 shares on 3-12-2008 at 31.46

BUSINESS OVERVIEW

OVERVIEW

Helix Energy Solutions Group, Inc. (“Helix”) is an international offshore energy company, incorporated in the state of Minnesota in 1979, that provides reservoir development solutions and other contracting services to the energy market as well as to our own oil and gas properties. Our Contracting Services segment utilizes our vessels and offshore equipment that when applied with our methodologies reduce finding and development (“F&D”) costs and cover the complete lifecycle of an offshore oil and gas field. Our Oil and Gas segment engages in prospect generation, exploration, development and production activities. We operate primarily in the Gulf of Mexico, North Sea, Asia Pacific and Middle East regions. Unless the context indicates otherwise, as used in this Annual Report, the terms “Company,” “we,” “us” and “our” refer collectively to Helix and its subsidiaries, including Cal Dive International, Inc. (collectively with its subsidiaries referred to as “Cal Dive” or “CDI”), our majority-owned subsidiary.

Our principal executive offices are located at 400 North Sam Houston Parkway East, Suite 400, Houston, Texas 77060; phone number 281-618-0400. Our stock trades on the New York Stock Exchange under the ticker symbol “HLX.” Our Chief Executive Officer (formerly Executive Chairman) submitted the annual CEO certification to the New York Stock Exchange as required under the NYSE listed Company Manual in April 2007. Our principal executive officer and our principal financial officer have made the certifications required under Section 302 of the Sarbanes-Oxley Act, which are included as exhibits to this report.

Please refer to the subsection “— Certain Definitions” on page 7 for definitions of additional terms used in this Annual Report.

CONTRACTING SERVICES OPERATIONS

We provide offshore services and methodologies that we believe are critical to finding and developing offshore reservoirs and maximizing production economics, particularly from marginal fields. By “marginal,” we mean reservoirs that are no longer wanted by major operators or are too small to be material to them. Our “life of field” services are organized in five disciplines: construction, well operations, drilling, production facilities, and reservoir and well technology services. We have disaggregated our contracting services operations into three reportable segments in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 131 Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”): Contracting Services (which includes deepwater construction, well operations, reservoir and well technology services and in the future, drilling), Shelf Contracting and Production Facilities.

Construction

Since 1975, we have provided services in support of offshore oil and natural gas infrastructure projects involving the construction and maintenance of pipelines, production platforms, risers and subsea production systems primarily in the Gulf of Mexico, North Sea and Asia Pacific regions. Our deepwater construction services include pipelay and robotics in water depth of more than 1,000 feet. We also provide construction services periodically from our well intervention vessels. We perform traditional subsea services, including air and saturation diving, salvage work and shallow water pipelay on the Outer Continental Shelf (“OCS”) of the Gulf of Mexico in water depths up to 1,000 feet through Cal Dive, a majority-owned subsidiary in which we currently own 58.5%. We have consolidated the financial results of Cal Dive as of December 31, 2007. Cal Dive stock publicly trades on the New York Stock Exchange under the ticker symbol “DVR.”

Well Operations

We believe we are the global leader in rig alternative subsea well intervention. We engineer, manage and conduct well construction, intervention and decommissioning operations in water depths ranging from 200 to 10,000 feet. With the increased demand for these services caused by the growing number of subsea tree installations, coupled with the shortfall in Deepwater rig availability, we are constructing a newbuild North Sea vessel and have expanded geographically in Australia and Asia with the acquisition of Seatrac Pty Ltd. (“Seatrac”), an established Australian well operations company now called Well Ops SEA Pty Limited (“WOSEA”).

Production Facilities

We own interests in certain production facilities in hub locations where there is potential for significant subsea tieback activity. Ownership of production facilities enables us to earn a transmission company type return through tariff charges while providing construction work for our vessels. We own a 50% interest in the Marco Polo tension leg platform (“TLP”), which was installed in 4,300 feet of water in the Gulf of Mexico, through Deepwater Gateway, L.L.C. (“Deepwater Gateway”). We also own a 20% interest in Independence Hub, L.L.C. (“Independence”), an affiliate of Enterprise Products Partners L.P. Independence owns the Independence Hub platform, a 105-foot deep draft, semi-submersible platform, which was installed during 2007. The platform is located in a water depth of 8,000 feet, which serves as a regional hub for up to 1 billion cubic feet of natural gas production per day from multiple ultra-deepwater fields in the previously untapped eastern Gulf of Mexico. Finally, through a consolidated 50% owned entity, we are currently converting a vessel into a floating production unit for use on our Phoenix field in the Gulf of Mexico.

Reservoir and Well Technology Services

In 2005, we acquired Helix Energy Limited, the largest outsource provider of sub-surface technology skills in the North Sea. With a technical staff of over 90 employees, we have the resources to provide valuable well enhancement services, which typically increase production or extend the life of a reservoir, to our own oil and natural gas projects as well as to our clients. Each team we assign to a specific client comprises a diverse set of skills, including reservoir engineering, geology, modeling, flow assurance, completions, well design and production enhancement. With offices in Aberdeen, Perth, London, Kuala Lumpur and Perth, we have an established market presence in regions that we have identified as strategically important to future growth.

Drilling

Contract drilling is a service we have not historically provided but have been contemplating since the construction of our Q4000 vessel over six years ago. Dayrates for deepwater drilling rigs have increased dramatically in recent years based on the significant oil and natural gas reserves located in deepwater regions and limited availability of rigs capable of drilling such depths. As a result, the drilling and completion cost of a subsea development can be as much as 50% of the total F&D costs. We are currently adding drilling capability to the Q4000 , a project scheduled for completion in the second quarter of 2008. The type of drilling intended for this vessel is a hybrid slim-bore technology capable of drilling and completing 6-inch slimbore wells to 22,000 feet total depth in up to 6,000 feet of water, which will allow us to drill most of our own deepwater prospects and support the exploration and appraisal efforts of our clients. We expect approval from the MMS for cased well services including completions in 2008 and approval for drilling once we have satisfied MMS requirements.

OIL AND GAS OPERATIONS

We formed our oil and gas operations in 1992 to provide a more efficient solution to offshore abandonment, to expand the off-season asset utilization of our contracting services business and to achieve incremental returns to our contracting services. Over the last 15 years, we have evolved this business model to include not only mature oil and gas properties but also proved reserves yet to be developed. In July 2006, we acquired Remington Oil and Gas Corporation (“Remington”), an exploration, development and production company with operations primarily in the Gulf of Mexico. This acquisition has led to the assembly of services that allow us to create value at key points in the life of a reservoir from exploration through development, life of field management and operating through abandonment. We believe that owning controlling interests in reservoirs, particularly in deepwater, accomplishes the following:


• provides a backlog for our service assets as a hedge against cyclical service asset utilization;


• provides enabling utilization for new non-conventional applications of service assets to hedge against lack of initial market acceptance and utilization risk;

• achieves control of development assets and methodologies to be employed and therefore control costs; and

• adds incremental returns.

As of December 31, 2007 we had 677 Bcfe of proved reserves with 95% of that located in the Gulf of Mexico.

Within oil and gas operations, we have assembled a team of personnel with experience in geology, geophysics, reservoir engineering, drilling, production engineering, facilities management, lease operations and petroleum land management. We seek to maximize profitability by lowering F&D costs, reducing development time, operating our fields more effectively, and extending the reservoir life through well exploitation operations. Our reservoir engineering and geophysical expertise, along with our access to contracting services assets that can positively impact development costs, have made us a preferred partner for many other oil and gas companies in offshore development projects.

Significant financial information relating to our operations by segments and by geographic areas for the last three years is contained in Item 8. Financial Statements and Supplementary Data ‘‘— Note 19 — Business Segment Information.” Within Contracting Services for financial reporting purposes, we have disclosed separately the financial information for Shelf Contracting and Production Facilities.

THE INDUSTRY AND OUR STRATEGY

Demand for our contracting services operations is primarily influenced by the condition of the oil and gas industry, and in particular, the willingness of oil and gas companies to make capital expenditures for offshore exploration, drilling and production operations. Generally, during periods of high commodity prices, oil and gas producers increase spending on our services in an effort to develop new reservoirs and enhance production from existing wells. The performance of our oil and gas operations is largely dependent on the prevailing market prices for oil and natural gas, which are impacted by global economic conditions, hydrocarbon production and excess capacity, geopolitical issues, weather and several other factors.

We believe that the long-term industry fundamentals are positive based on the following factors: (1) increasing world demand for oil and natural gas; (2) peaking global production rates; (3) globalization of the natural gas market; (4) increasing number of mature and small reservoirs; (5) increasing ratio of contribution to global production from marginal fields; (6) increasing offshore activity, particularly in Deepwater; and (7) increasing number of subsea developments. Our two-stranded strategy of combining contracting services operations and oil and gas operations allows us to focus on trends (4) through (7) in that we pursue long-term sustainable growth by applying specialized subsea services to the broad external offshore market but with a complementary focus on marginal fields and new reservoirs in which we have an equity stake.

Our primary goal is to provide services and methodologies to the industry which we believe are critical to finding and developing offshore reservoirs and maximizing the economics from marginal fields. A secondary goal is for our oil and gas operations to generate prospects and find and develop oil and gas employing our key services and methodologies resulting in a reduction in F&D costs. Meeting these objectives drives our ability to achieve our primary goal of achieving a return on invested capital of 15% or greater. In order to achieve these goals we will:

Continue Expansion of Contracting Services Capabilities. We will focus on providing offshore services that deliver the highest financial return to us. We will make strategic investments in capital projects that expand our services capabilities or add capacity to existing services in our key operating regions. Our capital investments have included adding offshore drilling capability to our Q4000 vessel, converting a vessel into a dynamically positioned floating production unit ( Helix Producer I), converting a former dynamically positioned cable lay vessel into a deepwater pipelay vessel (the Caesar), and constructing the Well Enhancer vessel with greater well servicing capabilities in the North Sea.

Monetize Oil and Gas Reserves and Non-Core Assets. We intend to sell down interests in oil and gas reserves once value has been created via prospect generation, discovery and/or development engineering. Through this approach we seek to lower reservoir and commodity risk, lower capital expenditures and increase third party contracting services profits.

As stated previously, we will focus on services which are critical to lowering F&D costs, particularly on marginal fields in the deepwater. As the strategy of our Shelf Contracting segment does not focus on minimizing F&D cost, in December 2006, a minority stake (26.5%) in this business was sold through a carve-out initial public offering. Our interest in CDI was further reduced to 58.5% through CDI’s acquisition in December 2007 of Horizon Offshore, Inc. (“Horizon”). See Item 8. Financial Statements and Supplementary Data “— Note 5 — Acquisition of Horizon Offshore, Inc.” We believe the Shelf Contracting segment is better positioned for growth as a separately traded entity.

Generate Prospects and Focus Exploration Drilling on Select Deepwater Prospects. We will continue to generate prospects and drill in areas where we believe our contracting services assets can be utilized and incremental returns will be achieved through control of and application of our development services and methodologies. To minimize our F&D costs, we intend to utilize the Q4000 for most of our deepwater drilling needs after the drilling upgrade is completed and regulatory approval has been obtained. Additionally, we plan to seek partners on these prospects to enhance financial results on the drilling and development work as well as to mitigate risk.

Continue Exploitation Activities and Converting PUD/PDNP Reserves into Production. Over the years, our oil and gas operations have been able to achieve a significant return on capital due in part to our ability to convert proved undeveloped reserves (“PUD”) and proved developed non-producing reserves (“PDNP”) into producing assets through successful exploitation drilling and well work. As of December 31, 2007, we had 67% of our proved reserves, or approximately 453 Bcfe, in the PUD category. We will focus on cost effectively developing these reserves to generate oil and gas production, or alternatively, selling full or partial interests in them to fund our growth initiatives and/or retire outstanding debt.

International Expansion of the Business Model. Based on attractive opportunities outside the Gulf of Mexico, we will continue to export our unique Gulf of Mexico business model to international offshore regions. We regard the North Sea and certain offshore areas of Southeast Asia as the primary regional targets for expansion. We have built a strong service presence in the North Sea and in December 2006 acquired our first mature oil and gas property in that area. In the Asia Pacific region, we completed two important service acquisitions in 2006 and will seek to grow our business there in a measured way over the near term.

Certain Definitions

Defined below are certain terms helpful to understanding our business:

Bcfe: One billion cubic feet equivalent, with one barrel of oil being equivalent to six thousand cubic feet of natural gas.

Deepwater: Water depths beyond 1,000 feet.

Dive Support Vessel (DSV): Specially equipped vessel that performs services and acts as an operational base for divers, remotely operated vehicles (“ROV”) and specialized equipment.

Dynamic Positioning (DP): Computer-directed thruster systems that use satellite-based positioning and other positioning technologies to ensure the proper counteraction to wind, current and wave forces enabling the vessel to maintain its position without the use of anchors.

DP-2: Two DP systems on a single vessel pursuant to which the redundancy allows the vessel to maintain position even with the failure of one DP system; required for vessels which support both manned diving and robotics and for those working in close proximity to platforms. DP-2 are necessary to provide the redundancy required to support safe deployment of divers, while only a single DP system is necessary to support ROV operations.

EHS: Environment, Health and Safety programs to protect the environment, safeguard employee health and eliminate injuries.

E&P: Oil and gas exploration and production activities.

F&D: Total cost of finding and developing oil and gas reserves.

G&G: Geological and geophysical.

IMR: Inspection, maintenance and repair activities.

Life of Field Services: Services performed on offshore facilities, trees and pipelines from the beginning to the end of the economic life of an oil field, including installation, inspection, maintenance, repair, contract operations, well intervention, recompletion and abandonment.

MBbl: When describing oil or other natural gas liquid, refers to 1,000 barrels containing 42 gallons each.

Minerals Management Service (MMS): The federal regulatory body for the United States having responsibility for the mineral resources of the United States OCS.

Mcf: When describing natural gas, refers to 1 thousand cubic feet.

MMcf: When describing natural gas, refers to 1 million cubic feet.

Moonpool: An opening in the center of a vessel through which a saturation diving system or ROV may be deployed, allowing safe deployment in adverse weather conditions.

MSV: Multipurpose support vessel.

Outer Continental Shelf (OCS): For purposes of our industry, areas in the Gulf of Mexico from the shore to 1,000 feet of water depth.

Peer Group-Contracting Services: Defined in this Annual Report as comprising Global Industries, Ltd. (NASDAQ: GLBL), Oceaneering International, Inc. (NYSE: OII), Cameron International Corporation (NYSE: CAM), Pride International, Inc. (NYSE: PDE), Oil States International, Inc. (NYSE: OIS), Grant Prideco, Inc. (NYSE: GRP), Rowan Companies, Inc. (NYSE: RDC), Complete Production Services, Inc. (NYSE: CPX), and Tidewater Inc. (NYSE: TDW).

Oil and Gas: Defined in this Annual Report as comprising ATP Oil & Gas Corp (NASDAQ: ATPG), W&T Offshore, Inc. (NYSE: WTI), Energy Partners, Ltd. (NYSE:EPL), and Mariner Energy, Inc. (NYSE: ME).

Proved Developed Non-Producing (PDNP): Proved developed oil and gas reserves that are expected to be recovered from (1) completion intervals which are open at the time of the estimate but which have not started producing, (2) wells which were shut-in for market conditions or pipeline connections, or (3) wells that require additional completion work or future recompletion prior to the start of production.

Proved Developed Reserves: Reserves that geological and engineering data indicate with reasonable certainty to be recoverable today, or in the near future, with current technology and under current economic conditions.

Proved Undeveloped Reserves (PUD): Proved undeveloped oil and gas reserves that are expected to be recovered from a new well on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

Remotely Operated Vehicle (ROV): Robotic vehicles used to complement, support and increase the efficiency of diving and subsea operations and for tasks beyond the capability of manned diving operations.

ROVDrill: ROV deployed coring system developed to take advantage of existing ROV technology. The coring package, deployed with the ROV system, is capable of taking cores from the seafloor in water depths up to 3000m. Because the system operates from the seafloor there is no need for surface drilling strings and the larger support spreads required for conventional coring.

Saturation Diving: Saturation diving, required for work in water depths between 200 and 1,000 feet, involves divers working from special chambers for extended periods at a pressure equivalent to the pressure at the work site.

Spar: Floating production facility anchored to the sea bed with catenary mooring lines.

Spot Market: Prevalent market for subsea contracting in the Gulf of Mexico, characterized by projects that are generally short in duration and often on a turnkey basis. These projects often require constant rescheduling and the availability or interchangeability of multiple vessels.

Stranded Field: Smaller PUD reservoir that standing alone may not justify the economics of a host production facility and/or infrastructure connections.

Subsea Construction Vessels: Subsea services are typically performed with the use of specialized construction vessels which provide an above-water platform that functions as an operational base for divers and ROVs. Distinguishing characteristics of subsea construction vessels include DP systems, saturation diving capabilities, deck space, deck load, craneage and moonpool launching. Deck space, deck load and craneage are important features of a vessel’s ability to transport and fabricate hardware, supplies and equipment necessary to complete subsea projects.

Tension Leg Platform (TLP): A floating production facility anchored to the seabed with tendons.

Trencher or Trencher System: A subsea robotics system capable of providing post lay trenching, inspection and burial (PLIB) and maintenance of submarine cables and flowlines in water depths of 30 to 7,200 feet across a range of seabed and environmental conditions.

Ultra-Deepwater: Water depths beyond 4,000 feet.

Working Interest: The interest in an oil and natural gas property (normally a leasehold interest) that gives the owner the right to drill, produce and conduct operations on the property and to a share of production, subject to all royalties, overriding royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith.

CONTRACTING SERVICES OPERATIONS

We provide a full range of contracting services primarily in the Gulf of Mexico, North Sea, Asia Pacific and Middle East regions in both the shallow water and deepwater. Our services include:


• Exploration support. Pre-installation surveys; rig positioning and installation assistance; drilling inspection; subsea equipment maintenance; reservoir engineering; G&G services; modeling; well design; and engineering;

• Development. Installation of small platforms on the OCS, installation of subsea pipelines, flowlines, control umbilicals, manifolds, risers; pipelay and burial; installation and tie-in of riser and manifold assembly; commissioning, testing and inspection; and cable and umbilical lay and connection;

• Production. Inspection, maintenance and repair of production structures, risers, pipelines and subsea equipment; well intervention; life of field support; reservoir management; providing production technology; and intervention engineering; and

• Decommissioning. Decommissioning and remediation services; plugging and abandonment services; platform salvage and removal services; pipeline abandonment services; and site inspections.

We provide offshore services and methodologies that we believe are critical to finding and developing offshore reservoirs and maximizing production economics, particularly from marginal fields. Those “life of field” services are organized in five disciplines: reservoir and well technology services, drilling, production facilities, construction and well operations. As of December 31, 2007, our contracting services operations had backlog of approximately $1.1 billion, of which approximately $630 million was expected to be completed in 2008.

Construction

Deepwater

Construction services which we believe are critical to the development of marginal fields in the deepwater are pipelay and robotics. We currently own three deepwater umbilical and pipelay vessels. The Intrepid is a 381 foot DP-2 vessel capable of laying rigid and flexible pipe (up to 8 inch) and umbilicals. The Express , which was acquired in 2005, is a 502 foot DP-2 vessel also capable of laying rigid and flexible pipe (up to 14 inch) and umbilicals. In January 2006, we acquired the Caesar , a mono-hull built in 2002 for the cable lay market. The vessel is 485 feet long and has a state-of-the-art DP-2 system. We are currently converting this vessel to a deepwater pipelay asset capable of laying rigid pipe up to 42 inch in diameter. The total estimated cost to acquire and convert the vessel is $172.5 million and the conversion is expected to be completed in third quarter 2008. We also periodically provide construction services from our well intervention vessels, Seawell and Q4000 .

We operate ROVs, trenchers and ROV Drills designed for offshore construction, rather than supporting drilling rig operations. As marine construction support in the Gulf of Mexico and other areas of the world moves to deeper waters, ROV systems play an increasingly important role. Our vessels add value by supporting deployment of our ROVs. We have positioned ourselves to provide our customers with vessel availability and schedule flexibility to meet the technological challenges of these deepwater construction developments in the Gulf of Mexico and internationally. Our 35 ROVs and four trencher systems operate in three regions: the Americas, Europe/West Africa and Asia Pacific. We are in the process of building a new 2,000 HP trencher and a portable reeled pipelay system for the installation of rigid pipe with a diameter up to 6 inch.

The results of our Deepwater division are reported under our Contracting Services segment. See Item 8. Financial Statements and Supplementary Data “— 19 — Business Segment Information.”

Shelf Contracting

Our Shelf Contracting segment consists of CDI, our consolidated, majority-owned subsidiary. In shallower waters we provide manned diving, pipelay and pipe burial services, and platform installation and salvage services to the offshore oil and natural gas industry. Based on the size of our fleet, we believe that we are the market leader in the diving support business, which involves services such as construction, inspection, maintenance, repair and decommissioning of offshore production and pipeline infrastructure, on the Gulf of Mexico OCS. We also provide these services directly or through partnering relationships in select international offshore markets, such as the Middle East and Asia Pacific. Within this segment we currently own and operate a diversified fleet of 31 vessels, including 21 surface and saturation diving support vessels, six pipelay/pipebury barges, one dedicated pipebury barge, one combination derrick/pipelay barge and two derrick barges. Pipelay and pipe burial operations typically require extensive use of our diving services; therefore, we consider these services to be complementary.

Shelf Contracting performs saturation, surface and mixed gas diving which enable us to provide a full complement of marine contracting services in water depths of up to 1,000 feet. We provide our saturation diving services in water depths of 200 to 1,000 feet through our fleet of nine saturation diving vessels and ten portable saturation diving systems. We also believe that our fleet of diving support vessels is among the most technically advanced in the industry because a number of these vessels have features such as dynamic positioning, hyperbaric rescue chambers, multi-chamber systems for split-level operations and moon pool deployment, which allow us to operate effectively in challenging offshore environments. We provide surface and mixed gas diving services in water depths typically less than 300 feet through our 15 surface diving vessels.

On December 11, 2007, CDI completed its previously announced acquisition of Horizon, through the merger of Horizon with and into a wholly owned subsidiary of CDI, which resulted in Horizon becoming a wholly owned subsidiary of CDI. Under the terms of the merger, each share of common stock, par value $0.00001 per share, of Horizon was converted into the right to receive $9.25 in cash and 0.625 shares of CDI’s common stock. All shares of Horizon restricted stock that had been issued but had not vested prior to the effective time of the merger became fully vested at the effective time of the merger and converted into the right to receive the merger consideration. CDI issued an aggregate of approximately 20.3 million shares of common stock and paid approximately $300 million in cash in the merger. The cash portion of the merger consideration was paid from CDI’s cash on hand and from borrowings under its new $675 million credit facility consisting of a $375 million senior secured term loan and a $300 million senior secured revolving credit facility. See Item 8. Financial Statements and Supplementary Data “— Note 11 — Long-Term Debt.”

We have substantially increased the size of our Shelf Contracting fleet and expanded our operating capabilities on the Gulf of Mexico OCS through strategic acquisitions of Horizon (2007), Acergy US, Inc. (“Acergy”) (2006), and the assets of Torch (2005). We also acquired Fraser Diving International Limited (“Fraser”) (2006).

Shelf Contracting retained our former name of “Cal Dive,” and completed a carve-out initial public offering in December 2006. It trades on the New York Stock Exchange under the ticker symbol of “DVR.” We received pre-tax net proceeds of $464.4 million from the initial public offering (“IPO”), which included the sale of a 26.5% interest and transfer of debt to CDI. After the consummation of the Horizon acquisition, we currently own 58.5% of CDI.

Well Operations

We believe we are the global leader in rig alternative subsea well intervention. We engineer, manage and conduct well construction, intervention, and decommissioning operations in water depths ranging from 200 to 10,000 feet. The increased number of subsea wells installed, the increasing value of the product, and the shortfall in both rig availability and equipment have resulted in an increased demand for Well Operations services in both the Gulf of Mexico and the North Sea.

As major and independent oil and gas companies expand operations in the deepwater basins of the world, development of these reserves will often require the installation of subsea trees. Historically, drilling rigs were typically necessary for subsea well operations to troubleshoot or enhance production, shift zones or perform recompletions. Two of our vessels serve as work platforms for well operations services at costs significantly less than drilling rigs. In the Gulf of Mexico, our multi-service semi-submersible vessel, the Q4000 , has set a series of well operations “firsts” in increasingly deeper water without the use of a traditional drilling rig. In the North Sea, the Seawell has provided intervention and abandonment services for over 500 North Sea subsea wells since 1987. Competitive advantages of our vessels are derived from their lower operating costs, together with an ability to mobilize quickly and to maximize production time by performing a broad range of tasks for intervention, construction, inspection, repair and maintenance. These services provide a cost advantage in the development and management of subsea reservoir developments. With the increased demand for these services due to the growing number of subsea tree installations coupled with the shortfall in rig availability, we have significant backlog for both working assets and are constructing a newbuild North Sea vessel, the Well Enhancer . The expected cost of the new vessel is $198 million. We also expanded our operations geographically in Australia and Asia with the 2006 acquisition of Seatrac, an established Australian well operations company now called Well Ops SEA Pty. Limited.

The results of Well Operations are reported under our Contracting Services segment. See Item 8. Financial Statements and Supplementary Data “— Note 19 — Business Segment Information.”

Production Facilities

We own interests in certain production facilities in hub locations where there is potential for significant subsea tieback activity. There are a significant number of small discoveries that cannot justify the economics of a dedicated host facility. These discoveries are typically developed as subsea tie backs to existing facilities when capacity through the facility is available. We invest in over-sized facilities that allow operators of these fields to tie back without burdening the operator of the hub reservoir. We are well positioned to facilitate the tie back of the smaller reservoir to these hubs through our services and production groups. Ownership of production facilities enables us to earn a transmission company type return through tariff charges while providing construction work for our vessels. We own a 50% interest in Deepwater Gateway, L.L.C., which owns the Marco Polo TLP, which was installed in 4,300 feet of water in the Gulf of Mexico in order to process production from Anadarko Petroleum Corporation’s Marco Polo field discovery. We also own a 20% interest in Independence Hub, LLC, an affiliate of Enterprise Products Partners L.P., which owns the Independence Hub platform, a 105-foot deep draft, semi-submersible platform located in a water depth of 8,000 feet that serves as a regional hub for up to 1 billion cubic feet of natural gas production per day from multiple ultra-deepwater fields in the previously untapped eastern Gulf of Mexico.

When a hub is not feasible, we intend to apply an integrated application of our services in a manner that cumulatively lowers development costs to a point that allows for a small dedicated facility to be used. This strategy will permit the development of some fields that otherwise would be non-commercial to develop. The commercial risk is mitigated because we have a portfolio of reservoirs and the assets to redeploy the facility. For example, through a consolidated 50%-owned entity, we are currently converting a vessel into a dynamically positioned floating production unit. This unit will first be utilized on the Phoenix field (formerly known as Typhoon) which we acquired in 2006 after the hurricanes of 2005 destroyed the TLP which was being used to produce the field. Once production in the Phoenix area ceases, this re-deployable facility is expected to be moved to a new location, contracted to a third party, or used to produce other internally-owned reservoirs.

Reservoir and Well Technolgy Services

In 2005, we acquired Helix Energy Limited, the largest outsource provider of sub-surface technology skills in the North Sea. With a technical staff of over 90 employees, we have the resources to provide valuable well enhancement services, which typically increase production or extend the life of a reservoir, to our own oil and natural gas projects as well as provide these services to our clients. Each team we assign to a specific client comprises a diverse set of skills, including reservoir engineering, geology, modeling, flow assurance, completions, well design and production enhancement. With offices in Aberdeen, London, Kuala Lumpur and Perth, we have an established market presence in regions that we have identified as strategically important to future growth. The results of reservoir and well technology services are reported under our Contracting Services segment. See Item 8. Financial Statements and Supplementary Data “— Note 19 — Business Segment Information.”

Drilling

Contract drilling is a service we have not historically provided but have been contemplating since the construction of our Q4000 vessel over six years ago. Dayrates for deepwater drilling rigs have increased dramatically in recent years based on the significant oil and natural gas reserves located in deepwater regions and limited availability of rigs capable of drilling such depths. As a result, the drilling cost of a subsea development can be as much as 50% of the total F&D costs. We are currently adding drilling capability to the Q4000 , a project scheduled for completion in the second quarter of 2008. The type of drilling intended for this vessel is a hybrid slim-bore technology capable of drilling and completing 6-inch slimbore wells to 22,000 feet total depth in up to 6,000 feet of water, which will allow us to drill most of our own deepwater prospects and support the exploration and appraisal efforts of our clients. We expect approval from the MMS for cased well services including completions in 2008 and approval for drilling once we have satisfied MMS requirements.

OIL & GAS OPERATIONS

We formed our oil and gas operations in 1992 to provide a more efficient solution to offshore abandonment, to expand our off-season asset utilization of our contracting services business and to achieve incremental additional returns to our contracting services. Over the last 15 years, we have evolved this business model to include not only mature oil and gas properties but also proved reserves yet to be developed. In July 2006, we acquired Remington, an exploration, development and production company with operations primarily in the Gulf of Mexico, for approximately $1.4 billion in cash and Helix stock and the assumption of $358.4 million of liabilities. This acquisition led to the assembly of services that allows us to create value at key points in the life of a reservoir from exploration through development, life of field management and operating through abandonment. As of December 31, 2007, we had 677 Bcfe of proved reserves with 95% located in the Gulf of Mexico.

We believe that owning controlling interests in reservoirs, particularly in deepwater, accomplishes the following:


• provides a backlog for our service assets as a hedge against cyclical service asset utilization;

• provides enabling utilization for new non-conventional applications of service assets to hedge against lack of initial market acceptance and utilization risk;

• achieves control of development assets and methodologies to be employed and therefore control costs; and

• adds incremental returns.

Our oil and gas operations now seek to be involved in the reservoir at any stage of its life if we can apply our methodologies. The cumulative effect of our model is the ability to meaningfully improve the economics of a reservoir that would otherwise be considered non-commercial or non-impact, as well as making us a value adding partner to producers. Our expertise, along with similarly aligned interests, allows us to develop more efficient relationships with other producers. With a focus on acquiring non-impact reservoirs or mature fields, our approach taken as a whole is, itself, a service in demand by our producer clients and partners. As a result, we have been successful in acquiring equity interests in several deepwater undeveloped reservoirs. Developing these fields over the next few years will require meaningful capital commitments but will also provide significant backlog for our construction assets.

Our oil and gas operations have a significant prospect inventory, mostly in the deepwater, which we believe will generate significant life of field services for our vessels. To minimize F&D costs, we intend to utilize the Q4000 for most of our deepwater drilling needs after the drilling upgrade is completed and regulatory approval has been obtained. Our Oil and Gas segment has a proven track record of cost effectively turning prospects into production on the OCS, and we believe similar success will continue to occur in the deepwater. Of the prospects we currently have in the deepwater, we intend to utilize the Q4000 for most of our drilling needs once the drilling upgrade is completed and regulatory approval has been granted. We plan to seek partners on these prospects to enhance financial results on the drilling and development work as well as mitigate risk.

We identify prospective oil and gas properties primarily by using 3-D seismic technology. After acquiring an interest in a prospective property, our strategy is to drill one or more exploratory wells with partners. If the exploratory well(s) find commercial oil and/or gas reserves, we complete the well(s) and install the necessary infrastructure to begin producing the oil and/or gas. Because most of our operations are located offshore Gulf of Mexico, we must install facilities such as offshore platforms and gathering pipelines in order to produce the oil and gas and deliver it to the marketplace. Certain properties require additional drilling to fully develop the oil and gas reserves and maximize the production from a particular discovery.

Within our oil and gas operations, we have assembled a team of personnel with experience in geology, geophysics, reservoir engineering, drilling, production engineering, facilities management, lease operations and petroleum land management. We seek to maximize profitability by lowering F&D costs, lowering development time and cost, operating the field more effectively, and extending the reservoir life through well exploitation operations. When a company sells an OCS property, it retains the financial responsibility for plugging and decommissioning if its purchaser becomes financially unable to do so. Thus, it becomes important that a property be sold to a purchaser that has the financial wherewithal to perform its contractual obligations. Although there is significant competition in this mature field market, our oil and gas operations’ reputation, supported by our financial strength, has made us the purchaser of choice of many major and independent oil and gas companies. In addition, our reservoir engineering and geophysical expertise, along with our access to contracting service assets that can positively impact development costs, have made us a preferred partner for many other oil and gas companies in offshore development projects. We share ownership in our oil and gas properties with various industry participants. We currently operate the majority of our offshore properties. An operator is generally able to maintain a greater degree of control over the timing and amount of capital expenditures than a non-operating interest owner. See Item 2. Properties “— Summary of Natural Gas and Oil Reserve Data” for detailed disclosures of our oil and gas properties.

CEO BACKGROUND


Mr. Kratz is Executive Chairman of Helix Energy Solutions Group, Inc. He was appointed Executive Chairman in October 2006 and Chairman in May 1998, and served as Chief Executive Officer from April 1997 until October 2006. Mr. Kratz served as President from 1993 until February 1999, and as a director since 1990. He served as Chief Operating Officer from 1990 through 1997. Mr. Kratz joined Cal Dive International, Inc. (now known as Helix) in 1984 and has held various offshore positions, including saturation diving supervisor, and has had management responsibility for client relations, marketing and estimating. Mr. Kratz is also a director of Cal Dive International, Inc., our 73% owned subsidiary. Mr. Kratz has a Bachelor of Science degree in Biology and Chemistry from the State University of New York at Stony Brook.



Mr. Duroc-Danner has served as a director since February 1999. He is the Chairman of the Board, Chief Executive Officer and President of Weatherford International Ltd., a provider of equipment and services used for the drilling, completion and production of oil and natural gas wells. Mr. Duroc-Danner previously served as a director of Dresser, Inc. and Universal Compression. Mr. Duroc-Danner holds a Ph.D. in economics from The Wharton School of the University of Pennsylvania.



Mr. Lovoi has served as a director since February 2003. He is a founder of JVL Partners, a private oil and gas investment partnership. Mr. Lovoi served as head of Morgan Stanley’s global oil and gas investment banking practice from 2000 to 2002 and was a leading oilfield services and equipment research analyst for Morgan Stanley from 1995 to 2000. Prior to joining Morgan Stanley in 1995, he spent two years as a senior financial executive at Baker Hughes and four years as an energy investment banker with Credit Suisse First Boston. Mr. Lovoi also serves as a director of KFX Inc., a clean energy technology company engaged in providing technology and service solutions to the power generation industry. Mr. Lovoi graduated from Texas A&M University with a bachelor of science degree in chemical engineering and received a M.B.A. from the University of Texas.



Mr. Porter has served as a director since March 2004. He is the Chairman and a founding partner of Porter & Hedges, L.L.P., a Houston law firm formed in 1981. Mr. Porter also serves as a director of Copano Energy L.L.C., a midstream energy company with networks of natural gas gathering and intrastate transmission pipelines in the Texas Gulf Coast and Oklahoma mid-continent regions, and U.S. Concrete, Inc., a value-added provider of ready-mixed concrete and related products and services to the construction industry in several major markets in the United States. Mr. Porter graduated with a B.B.A. in Finance from Southern Methodist University in 1963 and received his law degree from Duke University in 1966.

Mr. Transier has served as a director since October 2000. He is Chief Executive Officer and President, and serves as Chairman of the Board, of Endeavour International Corporation, an international oil and gas exploration and production company. He served as Co-Chief Executive Officer of Endeavour International Corporation from its formation in February 2004 through September 2006. Mr. Transier served as Executive Vice President and Chief Financial Officer of Ocean Energy, Inc. from March 1999 to April 2003, when Ocean Energy merged with Devon Energy Corporation. From September 1998 to March 1999, Mr. Transier served as Executive Vice President and Chief Financial Officer of Seagull Energy Corporation when Seagull Energy merged with Ocean Energy. From May 1996 to September 1998, he served as Senior Vice President and Chief Financial Officer of Seagull Energy Corporation. Prior thereto, Mr. Transier served in various roles including partner from June 1986 to April 1996 in the audit department of KPMG LLP. In addition to serving on our Board of Directors and the board of Endeavour, he is also a director of Reliant Energy, Inc., a provider of electricity and energy services to retail and wholesale customers in the United States and Cal Dive International, Inc., our 73% owned subsidiary. Mr. Transier graduated from the University of Texas with a B.B.A. in Accounting and has a M.B.A. from Regis University.

Mr. Watt has served as a director since July 2006. He served as Chairman and Chief Executive Officer of Maverick Oil and Gas, Inc., an independent oil and gas exploration and production company from August 2006 until March 2007. Mr. Watt was the Chief Executive Officer of Remington Oil and Gas Corporation since February 1998 and the Chairman of Remington since May 2003, until Helix acquired Remington in July of 2006. Mr. Watt also served on Remington’s Board of Directors since September 1997. Mr. Watt was Vice President/Exploration of Seagull E & P, Inc., from 1993 to 1997, and Vice President/Exploration and Exploitation of Nerco Oil & Gas, Inc. from 1991 to 1993. Mr. Watt is also a director of Pacific Energy Resources, Ltd., an exploration and development company with offshore and onshore operations primarily in California. He graduated from Rensselaer Polytechnic Institute with a Bachelor of Science in Physics.


Mr. Ferron has served as a director since September 1998. He became Chief Executive Officer in October of 2006, became President in February 1999, and served as Chief Operating Officer from January 1998 until August 2005. Mr. Ferron has 27 years of worldwide experience in the oilfield industry, seven of which were in senior management positions with McDermott Marine Construction and Oceaneering International Services Limited immediately prior to his joining the Company. Mr. Ferron is a Chartered Civil Engineer. He is a director of Cal Dive International, Inc., our 73% owned subsidiary. Mr. Ferron has a Civil Engineering degree from City University, London; a Masters Degree in Marine Technology from the University of Strathclyde, Glasgow; and a M.B.A. from the University of Aberdeen.

Mr. Ahalt has served as a director since July 1990. Since 1982, Mr. Ahalt has been the President of GFA, Inc., a petroleum industry management and financial consulting firm. From 1977 to 1980, he was President of the International Energy Bank, in London, England. From 1980 to 1982, he served as Senior Vice President and Chief Financial Officer of Ashland Oil Company. Prior to that, he spent a number of years in executive positions with Chase Manhattan Bank. Mr. Ahalt also serves as a director of Bancroft & Elsworth Convertible Funds and other private investment funds. Mr. Ahalt received a B.S. Degree in Petroleum Engineering in 1951 from the University of Pittsburgh.

Mr. Tripodo has served as a director since February 2003. Mr. Tripodo is the Executive Vice President and Chief Financial Officer of Tesco Corporation. From 2003 through the end of 2006, he was a Managing Director of Arch Creek Advisors LLC, a Houston based investment banking firm. From 2002 to 2003, Mr. Tripodo was Executive Vice President of Veritas DGC, Inc., an international oilfield service company specializing in geophysical services. Prior to becoming Executive Vice President, he was President of Veritas DGC’s North and South American Group, which consists of four operating divisions: marine acquisition, processing, exploration services and multi-client data library. From 1997 to 2001, he was Executive Vice President, Chief Financial Officer and Treasurer of Veritas. Previously, Mr. Tripodo served 16 years in various executive capacities with Baker Hughes, including serving as Chief Financial Officer of both the Baker Performance Chemicals and the Baker Oil Tools divisions. Mr. Tripodo has previously served as a director of Petroleum Geo-Services, a Norwegian based oilfield services company and Vetco International Limited, a London based oilfield services company. He graduated summa cum laude with a bachelor of arts degree from St. Thomas University.

COMPENSATION

Our non-employee director compensation structure has three components: director fees, expenses and equity-based compensation currently in the form of restricted stock awards. We re-evaluate director compensation on an annual basis based on the compensation of directors by companies in our peer group. The directors (other than Messrs. Kratz and Ferron, who are employed by the Company) receive an annual director’s fee of $30,000, and $1,000 per board meeting for attending each of four regularly scheduled quarterly meetings and any special board meetings. Furthermore, each of the outside directors receives an annual committee retainer fee of $5,000 for each committee on which such director serves and a fee of $2,000 ($3,000 for the Chair) for each committee meeting attended. We also pay the reasonable out-of-pocket expenses incurred by each director in connection with attending the meetings of the Board of Directors and any committee thereof.

Since January 1, 2005, non-employee directors have had the option of taking board and committee fees (but not expenses) in the form of restricted stock, pursuant to the terms of the 2005 Long Term Incentive Plan, as amended (the “2005 Plan”) for grants after May 10, 2005, or the 1995 Long Term Incentive Plan, as amended (the “1995 Plan”) for grants on or before May 10, 2005. An election to take fees in the form of cash or stock is made by a director prior to the beginning of the subject fiscal year. Directors taking fees in the form of restricted stock receive an award for a quarter on the first business day of the next quarter in an amount equal to 125% of the cash equivalent on the last trading day of the fiscal quarter for which the fees are being determined. The award vests 100% two years after the first day of the subject fiscal year. For fiscal year 2006, Messrs. Duroc-Danner, Lovoi, and Transier elected to take board and committee fees in the form of restricted stock. During the year ended December 31, 2006, directors (other than our employees) received aggregate fees of $754,063, which was composed of $345,000 in cash compensation and $409,063 in restricted stock (as described above).

Prior to 2005, each non-employee director received at approximately the time he joined the board, and on each fifth anniversary of service thereafter, options to purchase 44,000 shares of our common stock at an exercise price equal to the fair market value of the common stock on the date of grant. As with our other options, these vest equally over five years and expire on their tenth anniversary. On December 8, 2005, there was a two-for-one stock split that had the effect of doubling the number of options outstanding while halving the strike price. As of March 30, 2007, options for 88,000 shares were outstanding to each of Messrs. Duroc-Danner and Lovoi; options for 50,000 shares were outstanding to Mr. Ahalt; options for 70,400 shares were outstanding to Mr. Porter; and options for 51,000 shares were outstanding for Mr. Tripodo.

In 2005, the Board of Directors, on the recommendation of the Compensation Committee, voted to change the equity compensation of directors such that on joining the board and on each anniversary thereafter, a director would receive a grant of restricted stock; provided, however, that such grants of restricted stock would not occur until such time as any prior grant of options had fully vested. Accordingly, on December 7, 2006, Messrs. Ahalt and Transier each received a grant of 5,642 shares of restricted stock, and on July 1, 2006, when he became a director of the Company, Mr. Watt received a grant of 12,390 shares of restricted stock. All such grants of restricted stock are made pursuant to the terms of our 2005 Plan and vest ratably over five years, subject to immediate vesting on the occurrence of a Change of Control (as defined in the 2005 Plan).

Directors who are also our employees do not receive cash or equity compensation for service on the board in addition to compensation payable for their service as employees of Helix.

MANAGEMENT DISCUSSION FROM LATEST 10K

Our Business

We are an international offshore energy company that provides reservoir development solutions and other contracting services to the open energy market as well as to our own oil and gas properties. Our oil and gas business is a prospect generation, exploration, development and production company. Employing our own key services and methodologies we seek to lower finding and development costs, relative to industry norms.

Industry Overview and Major Influences

The offshore oil and gas industry originated in the early 1950s as producers began to explore and develop the new frontier of offshore fields. The industry has grown significantly since the 1970s with service providers taking on greater roles on behalf of the producers. Industry standards were established during this period largely in response to the emergence of the North Sea as a major province leading the way into a new hostile frontier. The methodology of these standards was driven by the requirement of mitigating the risk of developing relatively large reservoirs in a then challenging environment. These standards are still largely adhered to today for all developments even if they are small and the frontier is more understood. There are factors we believe will influence the industry in the coming years: (1) increasing world demand for oil and natural gas; (2) global production rates peaking; (3) globalization of the natural gas market; (4) increasing number of mature and small reservoirs; (5) increasing ratio of contribution to global production from marginal fields; (6) increasing offshore activity; and (7) increasing number of subsea developments.

Our business is substantially dependent upon the condition of the oil and natural gas industry and, in particular, the willingness of oil and natural gas companies to make capital expenditures for offshore exploration, drilling and production operations. The level of capital expenditure generally depends on the prevailing views of future oil and natural gas prices, which are influenced by numerous factors, including but not limited to:


• worldwide economic activity;
• demand for oil and natural gas, especially in the United States, China and India;

• economic and political conditions in the Middle East and other oil-producing regions;

• actions taken by the OPEC;

• the availability and discovery rate of new oil and natural gas reserves in offshore areas;

• the cost of offshore exploration for and production and transportation of oil and gas;

• the ability of oil and natural gas companies to generate funds or otherwise obtain external capital for exploration, development and production operations;

• the sale and expiration dates of offshore leases in the United States and overseas;

• technological advances affecting energy exploration production transportation and consumption;

• weather conditions;

• environmental and other governmental regulations; and

• tax policies.

Activity Summary

Over the last few years we continued to evolve the Helix model by completing a variety of transactions and events that have had, and we believe will continue to have, significant impacts on our results of operations and financial condition. In 2005, we substantially increased the size of our Shelf Contracting fleet and deepwater pipelay fleet through the acquisition of assets from Torch Offshore, Inc. and Acergy US Inc. for a combined purchase price of $210.2 million. We also acquired a significant mature property package on the Gulf of Mexico OCS from Murphy Oil Corporation for $163.5 million cash and assumption of abandonment liability of $32 million. Finally, we established our Reservoir and Well Technology Services group through the acquisition of Helix Energy Limited for $32.7 million and the assumption of $7.5 million of liabilities. In 2006, we acquired Remington, an exploration, development and production company, for approximately $1.4 billion in cash and stock and the assumption of $358.4 million of liabilities. We changed our name from Cal Dive International, Inc. to Helix Energy Solutions Group, Inc., leaving the “Cal Dive” name in our Shelf Contracting subsidiary, and in December 2006 completed a carve-out initial public offering of that company, selling a 26.5% stake and receiving pre-tax net proceeds of $264.4 million from Cal Dive and a pre-tax dividend of $200 million from additional borrowings under the Cal Dive revolving credit facility.

During 2006 we committed to four capital projects which will significantly expand our contracting services capabilities: conversion of the Caesar into a deepwater pipelay vessel, upgrading of the Q4000 to include drilling capability, conversion of a ferry vessel into a DP floating production unit ( Helix Producer I ) and construction of a multi-service DP dive support/well intervention vessel for the North Sea ( Well Enhancer ). During 2007, we successfully completed the drilling of exploratory wells in our 100% owned Noonan and Danny prospects located in Garden Banks Block 506 in the Gulf of Mexico. First production for Noonan is expected in the second half of 2008 and Danny is expected in the first half of 2009.

In June 2007, Cal Dive and Horizon announced that they had entered into an agreement under which Cal Dive would acquire Horizon for approximately $650.0 million. CDI issued an aggregate of approximately 20.3 million shares of common stock and paid approximately $300 million in cash in the merger. The cash portion of the merger consideration was paid from CDI’s cash on hand and from borrowings under its new $675 million credit facility consisting of a $375 million senior secured term loan and a $300 million senior secured revolving credit facility, each of which is non-recourse to Helix. As a result of CDI’s equity issued, we recorded a $98.6 million gain, net of $53.1 million of taxes. The gain was calculated as the difference in the value of our investment in CDI immediately before and after CDI’s stock issuance. The transaction closed on December 11, 2007.

Results of Operations

Our operations are conducted through the following lines of business: contracting services operations and oil and gas operations. We have disaggregated our contracting services operations into three reportable segments in accordance with SFAS No. 131. As a result, our reportable segments consist of the following: Contracting Services, Shelf Contracting, Production Facilities, and Oil and Gas. Contracting Services operations include services such as deepwater pipelay, well operations, robotics and reservoir and well technology services. Shelf Contracting operations represent Cal Dive, in which we owned 58.5% at December 31, 2007. All material intercompany transactions between the segments have been eliminated in our consolidated results of operations.

Comparison of Years Ended December 31, 2007 and 2006

Revenues. During the year ended December 31, 2007, our revenues increased by 29% as compared to 2006. Contracting Services revenues increased primarily due to improved contract pricing for the pipelay, well operations and ROV divisions. Shelf Contracting revenues increased primarily as a result of the initial deployment of certain assets we acquired through the Torch, Acergy and Fraser acquisitions that came into service subsequent to the first quarter of 2006 as well as the Horizon assets acquired in late 2007. These increases were partially offset by two vessels CDI did not operate (one owned and one chartered) in 2007 that were in operation in 2006 and an increased number of out-of-service days for regulatory drydock and vessel upgrades for certain vessels in our Shelf Contracting segment.

Oil and Gas revenues increased 36% during 2007 as compared to the prior year. The increase was primarily due to increases in oil and natural gas production. The production volume increase of 33% over 2006 was mainly attributable to properties acquired in connection with the Remington acquisition, which closed on July 1, 2006.

Gross Profit. The Contracting Services gross profit increase was primarily attributable to improved contract pricing for the pipelay, well operations and ROV divisions. The gross profit increase within Shelf Contracting was primarily attributable to increased gross profit derived from the initial deployment of certain assets we acquired subsequent to the first quarter 2006, offset by increased out-of-service days referred to above, lower vessel utilization as a result of seasonal weather in the fourth quarter 2007, and increased depreciation and deferred drydock amortization.

The Oil and Gas gross profit decrease in 2007 as compared to 2006 was primarily due to the following factors:


• impairment expense of approximately $59.4 million (all recorded in fourth quarter 2007) related to our proved oil and gas properties primarily as a result of downward reserve revisions and weak end of life well performance in some of our domestic properties;

• an increase of $91.0 million in depletion expense in 2007 because of higher overall production based on a full year of activity from the Remington acquisition as compared to only half a year of impact in 2006

including approximately $12.5 million of increased fourth quarter 2007 depletion due to certain producing properties experiencing significant proved reserve declines;


• approximately $9.9 million of impairment expense ($9.0 million in fourth quarter 2007) related to our unproved properties primarily due to management’s assessment that exploration activities for certain properties will not commence prior to the respective lease expiration dates;

• approximately $9.6 million additional impairment expense in fourth quarter 2007, as we increased our future abandonment liability at December 31, 2007 for work yet to be done for certain properties, partially offset by estimated insurance recoveries of $4.9 million related to properties damaged by hurricanes Katrina and Rita ;

• approximately $25.1 million of plug and abandonment overruns related to properties damaged by the hurricanes, partially offset by insurance recoveries of $4.0 million ($6.6 million of overruns in fourth quarter 2007, offset by $2.1 million of insurance recoveries);

• the gross profit decrease was partially offset by lower dry hole expense in 2007 of $10.3 million, of which $5.9 million was related to our South Marsh Island 123 #1 well, as compared to $38.3 million dry hole expense in 2006 related to the Tulane prospect and two deep shelf wells commenced by Remington prior to the acquisition.

As a result of our unsuccessful development well in January 2008 on Devil’s Island, we expect to expense an additional $13 million in the first quarter of 2008. Costs incurred as of December 31, 2007 related to this well were charged to income in 2007 and were included in the 2007 impairment expense described above.

Gain on Sale of Assets, Net. Gain on sale of assets, net, increased by $47.6 million during 2007 as compared to 2006. On September 30, 2007, we sold a 30% working interest in the Phoenix oilfield (Green Canyon Blocks 236/237), the Boris oilfield (Green Canyon Block 282) and the Little Burn oilfield (Green Canyon Block 238) to Sojitz for a cash payment of $51.2 million and recognized a gain of $40.4 million in 2007. We also recognized the following gains in 2007:


• $2.4 million related to the sale of a mobile offshore production unit;

• $1.6 million related to the sale or 50% interest in Camelot; and

• $3.9 million related to the sale of assets owned by CDI.

Selling and Administrative Expenses. Selling and administrative expenses of $151.4 million were $31.8 million higher than the $119.6 million incurred in 2006. The increase was due primarily to higher overhead to support our growth and increased incentive compensation accruals. Further, in June 2007, CDI recorded a $2.0 million charge for a cash settlement with the Department of Justice. Selling and administrative expenses as a percent of revenues were 9% for both 2007 and 2006.

Equity in Earnings of Investments, Net of Impairment Charge. Equity in earnings of investments increased by $1.6 million during 2007 as compared to 2006. Equity in earnings related to our 20% investment in Independence Hub increased $10.5 million as we reached mechanical completion in March 2007 and began receiving demand fees and tariffs as production began in the third quarter. In addition, equity in earnings of our 50% investment in Deepwater Gateway increased by $2.2 million in 2007 as compared to 2006 due to higher throughput at the Marco Polo TLP. These increases were offset by second quarter 2007 equity losses from CDI’s 40% investment in OTSL and a related non-cash asset impairment charge together totaling $11.8 million.

Net Interest Expense and Other. We reported net interest and other expense of $59.4 million in 2007 as compared to $34.6 million in the prior year. Gross interest expense of $100.4 million during 2007 was higher than the $51.9 million incurred in 2006 as a result of our Term Loan and Revolving Loans, which closed in July 2006, and CDI’s revolving credit facility, which closed in December 2006. Offsetting the increase in interest expense was $31.8 million of capitalized interest and $9.5 million of interest income in 2007, compared with $10.6 million of capitalized interest and $6.3 million of interest income in the same prior year period. We expect interest expense to increase in 2008 as a result of the Senior Unsecured Notes we issued in December 2007 and the Term Loan CDI entered into as a result of the Horizon acquisition. See Item 8. Financial Statements and Supplementary Data “— Note 11 — Long-Term Debt” for detailed description of these notes.

Gain on Subsidiary Equity Transaction. We recognized a non cash pre-tax gain of $151.7 million ($98.6 million net of taxes of $53.1 million) in 2007 as our share of CDI’s underlying equity increased as a result of CDI’s issuance of 20.3 million shares of its common stock to former Horizon stockholders in connection with CDI’s acquisition of Horizon, which reduced our ownership in CDI to 58.5%. The non-cash gain is derived from the difference in the value of our investment in CDI immediately before and after the acquisition. In 2006, CDI received net proceeds of $264.4 million from the initial public offering of 22.2 million shares of its common stock. Together with CDI’s drawdown of its revolving credit facility, CDI paid pre-tax dividends of $464.4 million to us in December 2006. As a result of these transactions, we recorded a pre-tax gain of $223.1 million ($96.5 million net of taxes of $126.6 million) in 2006.

Provision for Income Taxes. Income taxes decreased to $174.9 million in 2007 compared to $257.2 million in the prior year. $126.6 million of the income tax expense decrease was related to the CDI dividends paid to us in 2006. This decrease was partially offset by increased profitability in 2007. The effective tax rate of 33.3% for 2007 was lower than the 42.5% effective tax rate for same period 2006 due primarily to the CDI dividends of $464.4 million received in December 2006. We expect our 2008 income tax rate to be higher than it has historically been as a result of providing a deferred tax liability on the difference between the book and tax basis of our investment in CDI.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS
Our operations are conducted through two lines of business: contracting services operations and oil and gas operations. We have disaggregated our contracting services operations into three reportable segments in accordance with SFAS 131. As a result, our reportable segments consist of the following: Contracting Services, Shelf Contracting, Production Facilities, and Oil and Gas. The Contracting Services segment includes services such as deepwater pipelay, well operations, robotics and reservoir and well tech services. The Shelf Contracting segment consists of assets deployed primarily for diving-related activities and shallow water construction. See “—Note 4 – Initial Public Offering of Cal Dive International, Inc.” for discussion of the initial public offering of CDI common stock (represented by the Shelf Contracting segment). All material intercompany transactions between the segments have been eliminated in our consolidated results of operations.

Comparison of Three Months Ended June 30, 2007 and 2006

Revenues. During the three months ended June 30, 2007, our revenues increased by 35% as compared to the same period in 2006. Contracting Services revenues increased primarily due to the following:
• improved contract pricing for the pipelay, well operations and remotely operated vehicle (“ROV”) divisions due to continually improving market conditions;

• higher utilization in our well operations division, as the Q4000 was out of service during a portion of second quarter 2006 for thruster related repairs; and

• increased revenues related to our ROV division for ROV support work and pipe burial projects in second quarter 2007; partially offset by

• lower pipelay vessel utilization in second quarter 2007 as a result of a planned drydock.
Shelf Contracting revenues increased primarily as a result of the initial deployment of certain assets we acquired through the Acergy, Torch and Fraser Diving International Limited (“Fraser”) acquisitions that came into service subsequent to first quarter 2006. These increases were partially offset by an increased number of out of service days for regulatory drydocks and vessel upgrades for certain vessels in our Shelf Contracting segment in second quarter 2007.
Oil and Gas revenues increased 75% during the three months ended June 30, 2007 as compared to the same period in 2006. The increase was primarily due to increases in oil and natural gas production. The production volume increase of 82% during second quarter 2007 over the same period in 2006 was mainly attributable to the Remington acquisition. The Oil and Gas revenues increase was partially offset by lower oil prices realized in the second quarter of 2007 as compared to the same prior year period.
Gross Profit. Gross profit in the second quarter of 2007 increased 8% as compared to the same period in 2006. The Contracting Services gross profit increase was primarily attributable to improved contract pricing for the pipelay, well operations and ROV divisions. The gross profit decrease in second quarter 2007 as compared to the same prior year period for Shelf Contracting was due to increased out of service days referred to above and increased depreciation and deferred drydock amortization. Shelf Contracting gross margin decrease in second quarter 2007 as compared to second quarter 2006 was due to increased out of service days, certain lower margin contracts in the international markets and increased depreciation and amortization related to deferred drydock costs on newly deployed vessels and other vessel upgrades.
The Oil and Gas gross profit increase in second quarter 2007 as compared to the same period in 2006 was primarily due to higher oil and gas production as discussed above, partially offset by higher depletion expense as a result of the Remington acquisition. The lower Oil and Gas gross margin in second quarter 2007 as compared to 2006 was primarily due to higher depletion expense.
Gain on Sale of Assets, Net. Gain on sale of assets, net, increased by $5.7 million during the three months ended June 30, 2007 as compared to the same prior year period. This increase was primarily related to a gain of $2.4 million for the sale of a mobile offshore production unit and a $1.6 million gain related to the sale of a 50% interest in Camelot . In addition, we recognized a gain of $1.6 million in the second quarter for the sale of a saturation system owned by CDI.
Selling and Administrative Expenses. Selling and administrative expenses of $33.4 million for the second quarter of 2007 were $6.0 million higher than the $27.4 million incurred in the same prior year period. The increase was due primarily to higher overhead to support our growth. Further, in June 2007, CDI recorded a $2.0 million charge for an anticipated cash settlement, subject to final negotiation of a court-approved settlement agreement, with the Department of Justice related to a civil claim alleging that CDI violated the consent decree entered into in connection with the Acergy and Torch acquisitions by failing to divest certain divestiture assets in accordance with terms of the consent decree. Selling and administrative expenses decreased slightly to 8% of revenues in the three months ended June 30, 2007 as compared to 9% in the same prior year period.
Equity in Earnings (Losses) of Investments, Net of Impairment Charge. Equity in earnings (losses) of investments decreased by $9.3 million during the three months ended June 30, 2007 as compared to the same prior year period. This decrease was primarily due to equity losses from CDI’s 40% investment in OTSL and a related non-cash asset impairment charge both totaling $11.8 million. As a result of the impairment charge, the carrying value of CDI’s investment in OTSL was reduced to zero at June 30, 2007. This decrease was partially offset by a $2.2 million increase in equity in earnings related to our 20% investment in Independence Hub as we reached mechanical completion in March 2007 and began receiving demand fees.
Net Interest Expense and Other. We reported net interest and other expense of $14.3 million in second quarter 2007 as compared to $3.0 million in the prior year. Gross interest expense of $23.2 million during the three months ended June 30, 2007 was higher than the $5.1 million incurred in 2006 as a result of our Term Loan, which closed in July 2006, and CDI’s revolving credit facility, which closed in December 2006. Offsetting the increase in interest expense was $6.4 million of capitalized interest and $1.9 million of interest income in the second quarter of 2007, compared with $1.2 million of capitalized interest and $644,000 of interest income in the same prior year period.
Provision for Income Taxes. Income taxes decreased to $33.3 million in the three months ended June 30, 2007 as compared to $35.9 million in the same prior year period. The decrease was primarily due to decreased profitability. The effective tax rate of 35.0% for second quarter 2007 was higher than the 33.9% for second quarter 2006. The effective tax rate for the second quarter of 2007 was increased by equity in losses and impairment of CDI’s investment in OTSL, which had minimal tax benefit, and by CDI’s accrual for the anticipated settlement with the Department of Justice, which had no tax benefit. These increases in the effective tax rate were partially offset by lower effective tax rates in foreign jurisdictions.




SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

2141 Views