Helix Energy Solutions Group Inc. CEO OWEN E KRATZ bought 91636 shares on 6-13-2008 at 37.55
Helix Energy Solutions Group, Inc. (âHelixâ) 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 (âF&Dâ) 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 âCompany,â âwe,â âusâ and âourâ refer collectively to Helix and its subsidiaries, including Cal Dive International, Inc. (collectively with its subsidiaries referred to as âCal Diveâ or âCDIâ), 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 âHLX.â 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 ââ Certain Definitionsâ 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 âmarginal,â we mean reservoirs that are no longer wanted by major operators or are too small to be material to them. Our âlife of fieldâ 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 (âFASBâ) Statement No. 131 Disclosures about Segments of an Enterprise and Related Information (âSFAS No. 131â): Contracting Services (which includes deepwater construction, well operations, reservoir and well technology services and in the future, drilling), Shelf Contracting and Production Facilities.
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 (âOCSâ) 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 âDVR.â
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. (âSeatracâ), an established Australian well operations company now called Well Ops SEA Pty Limited (âWOSEAâ).
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 (âTLPâ), which was installed in 4,300 feet of water in the Gulf of Mexico, through Deepwater Gateway, L.L.C. (âDeepwater Gatewayâ). We also own a 20% interest in Independence Hub, L.L.C. (âIndependenceâ), 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.
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 (âRemingtonâ), 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:
â˘ provides a backlog for our service assets as a hedge against cyclical service asset utilization;
â˘ provides enabling utilization for new non-conventional applications of service assets to hedge against lack of initial market acceptance and utilization risk;
â˘ achieves control of development assets and methodologies to be employed and therefore control costs; and
â˘ 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 âââ Note 19 â Business Segment Information.â 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 CDIâs acquisition in December 2007 of Horizon Offshore, Inc. (âHorizonâ). See Item 8. Financial Statements and Supplementary Data ââ Note 5 â Acquisition of Horizon Offshore, Inc.â 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 (âPUDâ) and proved developed non-producing reserves (âPDNPâ) 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.
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 (âROVâ) 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 vesselâs 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:
â˘ 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;
â˘ 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;
â˘ 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
â˘ 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 âlife of fieldâ 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.
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, London, England. From 1980 to 1982, he served as Senior Vice President and Chief Financial Officer of Ashland Oil Company. Prior thereto, 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 DGCâs North and South American Group. 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 Baker Oil Tools divisions. Mr. Tripodo also serves as a director of TXCO Resources Inc., an independent oil and gas enterprise with operations primarily in Texas, onshore Gulf Coast region and Western Oklahoma. He graduated summa cum laude with a bachelor of arts degree from St. Thomas University.
Mr. Kratz is President and Chief Executive Officer of Helix Energy Solutions Group, Inc. He was appointed Executive Chairman in October 2006 and served in that capacity until February 2008 when he resumed the position of President and Chief Executive Officer. He was appointed 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 has served 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 majority 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 has been Chairman of the Board, President and Chief Executive Officer of Weatherford International Ltd. since 1998. Weatherford is one of the largest global providers of innovative mechanical solutions, technology and services for the drilling and production sectors of the oil and gas industry. Mr. Duroc-Danner also serves as a director of LMS, a London investment company. 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 and Managing Partner of JVL Partners, a private oil and gas investment partnership. Mr. Lovoi served as head of Morgan Stanleyâs 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 Evergreen Energy, Inc., a clean energy technology company engaged in providing technology and service solutions to the power generation industry and Dril-Quip, Inc., a provider of offshore drilling and production equipment to the global oil and gas business. Mr. Lovoi graduated from Texas A&M University with a bachelor of science degree in chemical engineering and received an 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 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 majority 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. Mr. Watt has been Chief Executive Officer and President of Dune Energy, Inc., an oil and gas exploration and development company since April 2007. 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 from February of 1998 and the Chairman of Remington from May 2003, until Helix acquired Remington in July 2006. Mr. Watt also served on Remingtonâs Board of Directors from September 1997 to July 2006. 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 and Alaska. He graduated from Rensselaer Polytechnic Institute with a bachelor of science in physics.
MANAGEMENT DISCUSSION FROM LATEST 10K
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:
â˘ worldwide economic activity;
â˘ demand for oil and natural gas, especially in the United States, China and India;
â˘ economic and political conditions in the Middle East and other oil-producing regions;
â˘ actions taken by the OPEC;
â˘ the availability and discovery rate of new oil and natural gas reserves in offshore areas;
â˘ the cost of offshore exploration for and production and transportation of oil and gas;
â˘ the ability of oil and natural gas companies to generate funds or otherwise obtain external capital for exploration, development and production operations;
â˘ the sale and expiration dates of offshore leases in the United States and overseas;
â˘ technological advances affecting energy exploration production transportation and consumption;
â˘ weather conditions;
â˘ environmental and other governmental regulations; and
â˘ tax policies.
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 âCal Diveâ 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 CDIâs 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 CDIâs 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 CDIâs 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
Presenting the expenses of our Oil and Gas segment (U.S. operations only) on a cost per Mcfe of production basis normalizes for the impact of production gains/losses and provides a measure of expense control efficiencies.
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:
â˘ 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;
â˘ 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;
â˘ approximately $9.9 million of impairment expense ($9.0 million in fourth quarter 2007) related to our unproved properties primarily due to managementâs assessment that exploration activities for certain properties will not commence prior to the respective lease expiration dates;
â˘ 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 ;
â˘ 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);
â˘ 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 Devilâs 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:
â˘ $2.4 million related to the sale of a mobile offshore production unit;
â˘ $1.6 million related to the sale or 50% interest in Camelot; and
â˘ $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 CDIâs 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 CDIâs 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 ââ Note 11 â Long-Term Debtâ 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 CDIâs underlying equity increased as a result of CDIâs issuance of 20.3 million shares of its common stock to former Horizon stockholders in connection with CDIâs 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 CDIâs 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.
Contracting Services Operations
We seek to provide services and methodologies which we believe are critical to finding and developing offshore reservoirs and maximizing production economics, particularly from marginal fields. Our âlife of fieldâ services are organized in five disciplines: construction, well operations, production facilities, reservoir and well tech services, and drilling. We have disaggregated our contracting services operations into three reportable segments in accordance with SFAS No. 131: Contracting Services (which currently includes deepwater construction, well operations and reservoir and well technology services and in the future, drilling), Shelf Contracting, and Production Facilities. Within our contracting services operations, we operate primarily in the Gulf of Mexico, the North Sea, Asia/Pacific and Middle East regions, with services that cover the lifecycle of an offshore oil or gas field. The Shelf Contracting segment consists of assets deployed primarily for diving-related activities and shallow water construction. The assets of our Shelf Contracting segment are the assets of Cal Dive. Our ownership in Cal Dive was 58.2% as of March 31, 2008. As of March 31, 2008, our contracting services operations had backlog of approximately $1.3 billion, of which approximately $790 million was expected to be completed in the remainder of 2008.
Oil and Gas Operations
In 1992 we began our oil and gas operations 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 returns to our contracting services. Over the last 16 years, we have evolved this business model to include not only mature oil and gas properties but also proved and unproved reserves yet to be developed and explored. By owning oil and gas reservoirs and prospects, we are able to utilize the services we otherwise provide to third parties to create value at key points in the life of our own reservoirs including during the exploration and development stages, the field management stage and the abandonment stage. It is also a feature of our business model to opportunistically monetize part of the created reservoir value, through sales of working interests, in order to help fund field development and reduce gross profit deferrals from our Contracting Services operations. Therefore the reservoir value we create is realized through oil and gas production and/or monetization of working interest stakes.
Comparison of Three Months Ended March 31, 2008 and 2007
Revenues. During the three months ended March 31, 2008, our revenues increased by 14% as compared to the same period in 2007. Contracting Services revenues increased primarily due to improved contract pricing and market demand for the pipelay and ROV divisions in deepwater. These increases were partially offset by increased number of out-of-service days for drilling upgrade and regulatory drydock for the Q4000 . Shelf Contracting revenues decreased primarily due to lower vessel utilization related to winter weather seasonality during first quarter 2008, partially offset by revenues earned from assets obtained through the Horizon acquisition. During the first quarter of 2007, Shelf Contracting continued to experience a high level of hurricane repair activity and earned stand-by revenue for many of CDIâs vessels despite winter weather work interruptions.
Oil and Gas revenues increased 31% during the three months ended March 31, 2008 as compared to the same period in 2007. The increase in oil revenues was attributable to a significant increase in oil prices as production was slightly lower than the prior year period. The increase in gas revenues was attributable to higher gas production and higher gas prices realized in the first quarter of 2008 as compared to the same prior year period.
Gross Profit. Gross profit in the first quarter of 2008 decreased 11% as compared to the same period in 2007. This decrease was due to decreased Shelf Contracting profitability as a result of lower vessel utilization and increased depreciation and amortization resulting from the Horizon acquisition.
The decrease in Shelf Contracting gross profit was partially offset by increased profitability in Contracting Services. This increase was primarily attributable to improved contract pricing and market demand for the pipelay and ROV divisions in deepwater. These increases were partially offset by increased number of out-of-service days for drilling upgrade and regulatory drydock for the Q4000 .
The Oil and Gas gross profit increase of $12.8 million in first quarter 2008 as compared to the same period in 2007 was primarily due to increases in oil and gas prices, as discussed above. These increases were partially offset by impairment expense of approximately $16.7 million, of which approximately $14.3 million was related to the unsuccessful development well in January 2008 on Devilâs Island (Garden Banks 344).
Gain on Sale of Assets, Net. Gain on sale of assets, net, was $61.1 million during the three months ended March 31, 2008. This gain was related to the March 31, 2008 sale of a 20% working interest in the Bushwood discoveries (Garden Banks Blocks 463, 506 and 507) and other Outer Continental Shelf oil and gas properties (East Cameron blocks 371 and 381). We sold an additional 10% working interest in the Bushwood discoveries in April 2008.
Selling and Administrative Expenses. Selling and administrative expenses of $47.8 million for the first quarter of 2008 were $17.2 million higher than the $30.6 million incurred in the same prior year period. The increase was due primarily to higher overhead (primarily related to the Horizon acquisition) to support our growth. In addition, in February 2008, we recognized approximately $5.4 million of expenses related to the separation agreement between the Company and Mr. Ferron, our former Chief Executive Officer, as a result of his resignation and the termination of his employment with the Company.
Equity in Earnings of Investments. Equity in earnings of investments increased by $4.8 million during the three months ended March 31, 2008 as compared to the same prior year period. This increase was mostly due to a $5.4 million increase in equity in earnings related to our 20% investment in Independence Hub which began production during the third quarter of 2007. On April 9, 2008, Independence hub platform was shut-in as the result of a leak in the gas export pipeline. The owner of the pipeline expects the shut-down to last until mid-May 2008. Our investment in Deepwater Gateway contributed a $335,000 increase.
Net Interest Expense and Other. We reported net interest and other expense of $26.0 million in first quarter 2008 as compared to $13.0 million in the same prior year period. Gross interest expense of $34.9 million during the three months ended March 31, 2008 was higher than the $23.1 million incurred in 2007 due to overall higher levels of indebtedness as a result of our Senior Unsecured Notes and CDIâs term loan, which both closed in December 2007. Offsetting the increase in interest expense was $11.0 million of capitalized interest and $1.0 million of interest income in the first quarter of 2008, compared with $5.4 million of capitalized interest and $4.6 million of interest income in the same prior year period.
Provision for Income Taxes. Income taxes increased to $43.6 million in the first quarter of 2008 as compared to $33.1 million in the same prior year period. The increase was primarily due to increased profitability. The effective tax rate of 36.6% for the first quarter of 2008 was higher than the 33.8% for the first quarter of 2007. The effective tax rate for the first quarter of 2008 increased as a result of the additional deferred tax expense recorded as a result of the increase in the equity earnings of CDI in excess of our tax basis. This increase was partially offset by the benefit derived from the Internal Revenue Code section 199 manufacturing deduction primarily related to oil and gas production and the effect of lower tax rates in certain foreign jurisdictions.
A. Wade Pursell - Executive Vice President and Chief Financial Officer
Thank you. Good morning everyone. Thanks for joining us today. Joining me today on the phone is Owen Kratz, our CEO, here in Houston; Bart Heijermans, our COO; Robert Murphy, President of Helix Oil & Gas; and Alisa Johnson, our General Counsel. Hopefully everyone has access to the copy of the press release and the slide presentation which is linked to the release. If you don't you can go to our website at www.helixesg.com, then the Investor Relations page and click on the webcast presentation there.
So we will start going through that presentation now, and starting with slide 2, I turn it over to Alisa for an important announcement.
Alisa B. Johnson - Senior Vice President and General Counsel
Great. As noted in our press release and associated presentations certain statements there in and in today's discussion are forward-looking statements. A number of factors could cause actual results to differ materially from those forward-looking statements. For a complete discussion of risk factors effecting the company, we direct your attention to our press release and to our annual report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission. Also during this call certain non-GAAP financial disclosures maybe made. In accordance with SEC rules the final slide of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The presentation together with their reconciliation is available on our website.
A. Wade Pursell - Executive Vice President and Chief Financial Officer
Thank you Alisa. Slide 3 shows the outline for this mornings call. I will summarize the financial results and turn it over to Owen for a quick strategic update which will be followed by a Q&A segment. And as we did last quarter we have included a section in the slides on operational highlights with some financial break downs for both contracting services and oil and gas. For your reference these are at the end of the presentation and we are not going to go through these slides on the call.
So, looking at slide 4, for the first quarter of 2008 we reported revenues of $450 million which is 14% more than last year's first quarter as we saw continuing strong demand for our services in the deepwater, offset a seasonal decline in contracting services on the shelf and our oil and gas production division generated about the same production as last year's first quarter with higher commodity prices. By the way the production levels generated this quarter exceeded our budgeted expectations.
With respect to the more traditional seasonal decline in activity on the shelf which is about 58% interest in Cal Dive, I would point out that they issued their earnings release last night as well and will be having their conference call at 11 o'clock similar time later this morning. So, I would defer specific questions regarding that business to the management team.
Turning to operating cash flow we generated nearly $239 million of EBITDAX during the quarter which was 43% more than last year's first quarter. In addition to the increases generated from the revenue increases just discussed we were able to sell 30% working interest in our Danny Noonan discoveries in two separate transactions for a total of approximately $165 million plus their obligation to pay 30% of all future related CapEx and an obligation to pay up to $20 million in the future of certain production milestones in there.
The first transaction for 20% closed at the end of the first quarter resulting in a gain of over $61 million, the other 10% closed last week which will result in additional earnings for the second quarter. I should also remind you that on the oil and gas side $14 million of impairment was recorded in the first quarter for Devil's Island which we disclosed to you on the last earnings call few months ago.
Diluted EPS for the quarter was $0.79 per share which was 32% more than last years first quarter, that increase is less than the operating cash flow increase due mainly to higher interest expense of $26 million versus $13 million due to increased debt levels to fend our large capital program, nearly all of which is not yet contributed to earnings. And a higher tax rate this year of 36.6% versus the 34% last year due mainly to our providing a non-cash deferred tax for Cal Dive earnings this year as our book basis has now exceeded our tax basis.
Turning to slide 5, a few months ago we shared our outlook for 2008 with you which is essentially our internal budget where the solid first quarter exceeding our budget expectations. As usual there are lot of moving parts with respect to our initial assumptions both positive and negative. You might recall that $3.66 per share budgeted amount for the year included $2.21 per share of base earnings and the remaining $1.15 related to increased earnings from oil and gas sell downs.
At this point we are comfortable reaffirming the base earnings number and that's without consideration of positive commodity price impact versus all exceptions and we are currently reviewing the extent of further oil and gas sell downs. With that I will turn it over to Owen for further discussion.
Owen Kratz - President and Chief Executive Officer
All right I will speak beginning from page 7 on the slide show. I think that the thing that I am most pleased about with the first quarter is that we have executed what we said we were going to do. On the left you can see the objectives that were stated previously and on the right a little bit of an update, and then to give a little color to those, we did sell down Danny Noonan as Wade mentioned. This one deal alone is a little over 50% of the production that we said that we would be selling down. I can't... I will tell you the onshore properties looked like they probably will close soon and things are progressing well there.
On the... on the next objective, it was to complete our service assets. On the Q4000 it is out of the shipyard now. It's on sea trials but having said that I do have to let you know it is about a month late. But at least we're out of the tunnel and we're in the final stages. The Caesar, it looks like at this point that it will be late coming out of the China shipyard and I know that there has been rumors about problems with our stinger, I just wanted to show you... shed a little light about what's actually going on. The stinger is fine, the hitch blocks that go on the back of the vessel that supports the weight of this stinger, we basically lead. Welding procedure was not done adequately and we rejected it and that's required us to go back and have new stinger blocks fabricated and that is a major delay. So, I just wanted to clear that air and we will be giving you further updates as to what that means for the schedule.
Moving on to the Helix Producer 1, I believe many of you will remember, I've mentioned that I was concerned about the progress of the work in the Croatian shipyard. The milestone to look for would be the vessel leaving in May to transit to the U.S. where it's under our control and we can progress things with a little bit more visibility. At this point I would still have to say that it's looking probable that sailing date maybe late. But again we'll give updates as we go there.
On a brighter note we did have the opportunity to acquire a new ROV's without the long wait of manufacturing and they immediately go into our fleet which was a recent treatment transaction. And the Noonan development looks like it is progressing well and could possibly be ahead of budgeting schedule. And then the Phoenix project, that's really dependent on the HP, the Helix Producer 1 schedule which will have to be updated later on.
Then the thing that pleases me most I think is that we are out performing our guidance. We had some negatives in the first quarter, the Q4000 was out for the full, but let me just say that the negative that I'm mentioning here are negative that we did anticipate and were fully considered in our expectations and guidance. The Q4000 was out for the full quarter and the shipyard having upgrades done, Devil's Island dry holes. The remaining part of that hit in the first quarter. We had the CEO severance paid and we were expecting the Cal Dive seasonal slow down.
Having said that there is even, I think while I am on the negatives, if you look year-over-year I think the major impact between last year and this year is the seasonal slowdown of Cal Dive, Devil's Island, Q4000, and the severance issue. Beyond that we had even stronger positives though. We had most of the contracting groups producing at stronger than expected performance levels. We had strong commodity pricing, but I would like to mention that when I'm talking about relative performance, I am watching the company, I am really talking about without commodity price. And finally we did we have stronger than expected production rate which is very pleasing.
Its been a really good start to the year but as Wade mentioned there are issues going on both positive and negative mostly issues with the shipyard which we will clarify when we can. But we still believe that we'll meet or exceed our guidance and again that's without the help of commodity price based on stronger performance better than expected and sufficient contingencies that were built into the plants. And almost certainly we will meet or exceed the expectations of commodity prices hold at these levels. But until there is a little bit of visibility on the quantification of both positives and the shipyard impact, we're not quite prepared yet to say if or how much we're going to beat the guidance. These things keep trending the way they are right now which is the great thing. I will probably be ready say more at the next earnings call. And with that I'll just open it up for questions.