Jul 31, 2008
Alisa B. Johnson
- Sr. VP, General Counsel and Corporate Secretary Owen Kratz - President and CEO Bart H.
Heijermans - EVP and COO Robert P. Murphy - EVP – Oil & Gas
Operator
Good morning and thank you all for standing by. At this time, all participants are in a listen-only mode.
After the presentation, we will conduct a question and answer session. [Operator Instructions].
Today's conference is being recorded. If you have any objections, you may disconnect at this time.
I'll now turn the meeting over to Mr. Tony Tripodo.
You may begin.
Anthony Tripodo
Good morning, everyone and thanks for joining us today. I'm Tony Tripodo, CFO.
Joining me today is, Owen Kratz, our Chief Executive officer; Bart Heijermans, our Chief Operating Officer; Robert Murphy, our President of Helix Oil and Gas; and Alisa Johnson, our General Counsel. Hopefully, you've had an opportunity to review our press release and the related slide presentation that's on our website.
If you do not have a copy of these materials, both can be accessed through the Investor Relations tab on our website at www.helixesg.com . The press release can be accessed under recent news and a slide presentation can be accessed by clicking on today's webcast icon.
Before we begin our prepared remarks, Alisa Johnson, our General Counsel, will make a statement regarding forward-looking information. Alisa?
Alisa B. Johnson - Senior Vice President, General Counsel and Corporate Secretary Thank you.
As noted in our press release and associated presentation, certain statements therein and in today's discussion are forward-looking statements. A number of factors could cause actual results to differ materially from those forward-looking statements.
For a complete discussion of risk factors affecting the company, we direct your attention to our press release and to our annual report on Form 10-K for the year ended December 31st, 2007, filed with the Securities and Exchange Commission. Also during this call, certain non-GAAP financial disclosures may be made.
In accordance with SEC rules, the final slide of our presentation material provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The presentation together with a reconciliation is available on our website.
Anthony Tripodo
Okay. Thanks, Alisa.
Moving over to slide three, slide three is an outline of the presentation we will be providing today. First, we'll review the second quarter results followed by an update on progress towards 2008.
Strategic objectives, we have previously outlined to investors then we will update our 2008 guidance. After that, we will discuss the operating highlights for both contracting services and our oil and gas segments, and then we would be happy to entertain any questions from participants.
Moving on to slide four, quarter two revenues of $540 million represented an all-time quarterly record for the company, as well as a substantial sequential increase of 20% in the first quarter of 2008. In fact, both the Contracting Services segment and the Oil & Gas segment posted record quarterly revenues.
Contracting Services revenues of $400 million benefited from generally high vessel utilization, as well as the additional assets in place resulting from the Cal Dive's acquisition of Horizon in late '07. Oil and gas revenues reached a record of $194 million as a result of the high commodity price environment.
Gross profit for Helix also reached a record quarterly amount at $192 million and this would have translated into record quarterly earnings number, if it were not for the one-time non-operational gains booked in Q4 of 2007 and 2006, resulting from selling down our interest at Cal Dive. The EPS in quarter two did reflect the contribution of $0.10 a share from the sale of an incremental 10% interest in our Danny and Noonan properties, net of a loss on a disposition of all of our onshore properties, which we consider non-core.
You may recall that we booked a gain of $61 million or $0.42 a share from the initial sale of the 20% working interest Danny and Noonan in Q1. Thus stripping out the property sales, the quarter two EPS would have been $0.86 compared to $0.37 in the prior quarter.
Over to slide five. In addition to highlights I've already mentioned, let me point out a couple of other highlights.
We completed the haul and launched the well enhancer in Rotterdam where the vessel is being outfitted and the operating equipment will be installed. The vessel is expected to be placed into service sometime in quarter two of '09.
The Q4000 [ph] finished the marine and drilling upgrades and was back in service in the Gulf of Mexico in June with a nice backlog of work ahead of her. I will turn the next couple of slides over to Owen.
Owen Kratz
Good morning, everyone. Switching the slide six, I'll just have a...
provide a little overview of the strategic update here. Basically what you'll from this slide, the takeaway is that the strategy at the this point remains unchanged.
Having said that, I will say again that all options going forward are on the table and they are being studied and considered. The biggest change between now and the beginning of the year, that you might have picked out on this slide is the fact that...
whereas in the beginning of the year, our budget assumptions assumed to sell down 40% of Danny Noonan, 30% of Phoenix and 100% of our offshore properties, what's transpired is that we have sold 30% of Danny Noonan, we have not sold Phoenix and we've sold the offshore... onshore properties.
So therefore, we have not sold as much of the production as we originally assumed and that in large part is due to commodity pricing and examining our options going forward. Switching over to page seven and give you a little idea of the outlook for the remainder of the year here.
So far we've seen a lot of moving parts, some up, some down and this will continue to be a trend through the year probably. In the first quarter, for instance, the Q4000 was delayed by about two months...
months getting back into work. But the other business units on the contracting side outperformed expectations for a net zero impact.
Cal Dive, of course, was weaker than anticipated. Moving forward into the second half, what we're anticipating and putting into our assumptions is the fact that the Caesar will be delayed.
We are now showing... going to work in '09.
It is just taking conservative approach taking it out of '08. The Helix Producer 1 is delayed, which reduces our expectations by one month of contribution.
So, we will see this vessel contributing in '09. And we have not considered any continuing outperformance by the other businesses units going forward.
So, we've taken a fairly conservative look on the contracting side. Production wise, commodity prices have been exceedingly strong, strong enough that the decision was made to not sell all the production assets as planned at this time.
Commodity price strength was strong enough that it offset the anticipated contribution from gains from the sale of the assets, which contributed to the decision not to sell them. And it has also been strong enough to offset going forward any continuing weakness on the part of Cal Dive or the Caesar delay and HP 1 delay.
Now, on production rates, the fact that we didn't sell all of the production anticipated means that we have more production in service. This offsets the deferred production from Phoenix that was planned to contribute in December.
So, there is a net zero impact on the production rate on an annual basis. But the big takeaway I think from this is that we will make our guidance even without the $0.62 gain from the asset sales that we have not realized to date.
We'll also make the guidance without an assumption of a continued outperformance by the other business units and we will make the guidance with a weaker expectation for Cal Dive going forward. So, all in all, it means the company is performing pretty strongly, that we are able to do this, but it also shows that there is a lot of room for improvement and good things to come.
With that, I'll turn it over to Bart here to walk us through some of the operational highlights by segment.
Bart H. Heijermans
Okay. Thanks, Owen.
Let's go to slide number nine. This slide shows the financials of Shelf Contracting and the Cal Dive and the Helix Contracting Services segment that consists of Helix subsidiary construction, Canyon Offshore, which is our robotics service line, our Global Well Operations business unit, and Helix RDS, our well and subsurface consulting service.
Gross profit of Helix Contracting Services increased 30% quarter-over-quarter and 18% year-over-year, fueled by strong performance of our Global Well Ops and robotics businesses. Margins are flat compared with first quarter and lower than last year's second quarter due to the large number of chartered vessels and subcontractors that we are using on our projects.
Slide 10. I would like to highlight here the improved utilization and point out that we still have capacity to grow.
Well operations utilization was relatively low due to Q4000 being out of service on extensive sea trials until June. It's working now in the Gulf of Mexico.
Slide 11 shows the highlights of the Helix Contracting Services Group. I'm pleased to report that our Global well operation department was active in deepwater Gulf of Mexico, the North Sea and Offshore Australia and delivered excellent results for our customers and for Helix.
The last slide, I'm going to call for is slide number 12, the shutdown of Independence Hub brought [ph] platform due to a leak in Independence Trail gas export pipeline resulted in a loss for the quarter of 2 million of equity in earnings from our investment in Independence Hub. The Platform has been back online an operational since the first half of June and it is operating well.
Turning over to Robert for the oil and gas overview.
Robert P. Murphy
Looking at slide 13, we see revenue and gross profit up significantly as a result of increased commodity prices and the property sales remain [ph] the second quarter. Additionally, our production for the quarter was in line with expectation at 14.9 Bcfe.
Next slide, slide 14 illustrates our cost structure improved relative to Q1 and we expect continued improvement on a pure unit... on a pure unit basis as we bring on new production from the deepwater.
Back to you, Tony.
Anthony Tripodo
Okay. Slide 15 summarizes our hedging positions on our Oil and Gas production, I'll just summarize by saying that we're presently hedged about 45% of the remaining '08 production and about a third of our estimated 2009 production.
We had not hedged beyond 2009. So, just in summary, 45% of the second half of '08's estimated production in the third of '09.
Slide 16 through 20 are presented for information only, these are NON-GAAP reconciliation schedules, I will not go over these schedules but if you have any questions, feel free to call either myself or Cliff Buster. So with that in mind, we're happy to take any questions.
Question and Answer
Operator
Thank you. We'll now begin the question and answer session.
[Operator Instructions] We do have a question, Jim Rollyson.
James Rollyson
Good morning guys.
Anthony Tripodo
Good morning, Jim.
James Rollyson
In the prepared kind of written commentary, in the press release, you talked about margins, maybe I just thought you had detail the thoughts for margins in the marine contracting space in the second half of the year, just kind of what your thoughts are relative to how things played out in the first half?
Owen Kratz
I think I will let Bart speak to any specifics but in general, I think that our margins are a little off from where they should be. I think we've been very conservative especially here in the second quarter on booking some revenue.
It's a normal course of action for us historically and it's one that we'll get back to and we are going to be very conservative. And we...
the margins were significantly impacted by the fact that the Q4000 was out of service two months longer than anticipated in your assumption. And I think that was the biggest contributor.
James Rollyson
You think... I think your original guidance you are kind of thinking...
kind of upper 20%, 28% margins if I remember you think you will be tracking back towards those numbers?
Anthony Tripodo
I would think so, especially our longer term I think there is... I think the potential for this company to operate at an extraordinarily high-level exists and I think you'll see continual improvement as the course goes on.
Assuming that the market holds as strong a demand as it currently has which we don't see any thing that would indicate that abating.
James Rollyson
Okay, Cal Dive, last quarter somebody asked just kind of your thoughts about the eventual progression of spinning that off, selling it off or exactly however you proceed with that, maybe an update on what you are thinking now given the guidance change, and where the stock is etcetera?
Owen Kratz
I am going to have to just I guess formally saying no to Raymond James offer at $25... seriously we'll just reiterate the fact that we plan to be a rational investor going forward.
Having said that, I think it is obvious that shelf contracting is not core to the strategic future for where this company is going. But at this price, we are certainly not a seller...
and I think the potential for Cal Dive to... you know once I digest the Horizon acquisition and get back to a seasonal norm of operating, I think you'll see Cal Dive return to its normal operating margin, so I think the potential will come, it's just not now.
James Rollyson
I understood and last one, just I think I'll take a shot at this, given the delay, slight delay again in the Helix Producer in the Caesar, and how that play's into some of your production projects as you go into next year. Any initial thoughts on how production growth might look next year relative to this year, since you held this year kind of flat from guidance?
Owen Kratz
Well if you go back and remember the previous quarterly call, I believe, I said that going forward our intention was to sort of manage our production a little differently going forward. We're not really looking for production to grow significantly, production for us is an enabler to advance our...
the growth of our Contracting Services. I'm fine with our production being in the 60 Bcf range on an annual basis and then we'll grow it in step with the...
we'll allow it to grow in step with the Contracting Services. And the way that we'll manage it to keep it at that 60 Bcf level, given the anticipated...
well given the size of our portfolio and the potential of that portfolio, we'll keep it at that level through a series of selling down on a promote basis interest in each of the projects, therefore lowering our risks, lowering our capital and allowing us to have a better return on capital from the interest that we do retain.
James Rollyson
Excellent, thank you guys.
Operator
Roger Reed your line is open.
Roger Read
Yes, good morning gentleman.
Owen Kratz
Hello, Roger.
Roger Read
I guess, question for you Owen or I guess maybe for whomever, in terms of the startup of the Noonan and what you think the volumes there can be... so are we looking at still late September potential for August, what can it do for you in the fourth quarter and are you hedged at all on the Noonan field?
...
Owen Kratz
Bart or Robert you want to give what specifics you can?
Robert P. Murphy
Well, right now, we are installing our pipeline and umbilical to the Noonan field area and things are going well, and I don't think barring any really bad weather, tropical storms or hurricanes that we shouldn't meet our September start-up date. So, we are going to have to bring the field up.
We've got two wells we are bringing on and so, we'll bring one well on and let it line out and then bring the other well on. So, our full ramp up, we won't see probably until mid-to-late October, but from a rate standpoint, I think we had said we were looking somewhere north of $90 million a day from the two wells.
But again, we really want to see the wells come on first and from the hedging strategy. We do have hedges in place but they are not specific to any in that field.
So, it's just the group [ph] production. Bart, do you want to comment on the installations?
Bart H. Heijermans
Yes, I mean, the flowline for Noonan has been installed. We are now in the process of installing some of the jumpers and then the harder testing and the pre-commissioning of the flowline system is going to start.
The umbilical, we are half way, making some good progress there, plus the modifications almost finished. So, as Robert said earlier, I mean, everything is on track for September start-up assuming that the weather cooperates.
Owen Kratz
And I believe in the slides, we did reiterate that September as the start-up.
Bart H. Heijermans
Yes.
Roger Read
You did... just going back to...
could it be any earlier, is that just in keeping with the conservatism in general on your forecast?
Owen Kratz
We'll let you know in the next quarter.
Roger Read
Is it 90 million cubic feet a day, is that net or is that gross?
Robert P. Murphy
That is gross and we hope that that's... we're trying to be conservative with it.
Roger Read
Yes, that's fine. All right.
Well, then I guess looking at the Caesar and the Helix Producer 1, it sounds pretty... I guess the Helix Producer 1, once you get it here you are in pretty good shape and I guess it's the same issues that were going on in Croatia or as anything else crept up, I mean, is it a higher cost on the vessel or just the delays in getting the work done?
Owen Kratz
Well, let me address that a little bit, because there was some rumors spread by one of the publications as to what was going on in the Helix Producer 1, so let me just put a little light on it. The Helix Producer 1 is a jointly owned vessel between us and the shipowner.
The hull modifications were undertaken by the shipowner, the topside modifications undertaken by Helix. The hull modifications went exceedingly smooth with the exception that Croatian law requires only Croatians to work in the country and all the Croatians have been subcontracted to other shipyards.
So there has been an extreme shortage of labor over there and that set things back on progress, but there weren't any problems. The mechanical, the hull and everything went exceedingly well.
We did... our engineers did find an engineering error in the superstructure and this goes back, I don't know what, two or three months ago.
The superstructure needed some modification, the fix is relatively simple. We're now waiting class approval of the remediation and then that will progress and that's really the main cause of the delay, not allowing us to get it in service as assumed.
But it's not a big issue, all of the projects that was managed by Helix has been finished, all of the top sites are waiting... being stored and waiting for the vessel to arrive and it should go very slick and smooth once the vessel is in our possession in the U.S.
Roger Read
Okay. And then looking at the balance sheet and your expectations for CapEx for the full-year, where it appears to have come in in the second quarter.
Do you think at this point and then maybe this ties into your hesitancy to sell some of the oil and gas assets at this point beyond just what the commodity prices are? Do you think the balance sheet debt has essentially hit its peak.
I mean we were down a little bit here at the end of the second quarter from where we started or is it, we may see an additional desire to sell assets in order to keep the balance sheet from getting any more levered up?
Owen Kratz
If I had any control over it what so ever you will not see the balance sheet levered up any further.
Roger Read
Should we expect that to continue to come down from here then and in the absence of asset sales?
Owen Kratz
I think the strategic analysis going forward at this point I think it's obvious that there is great value to be unlocked in the company though recapitalization exercise which would lower the debt. I think that's one important step that needs to happen and it's one that we will be looking at very seriously and trying to accelerate to the greatest extent possible.
Having said that... we do have a significant amount of free cash flow, in the years coming.
There is several options to consider but it just depends on how fast we want to do it and personally my preference is to see it done as quickly as possible.
Anthony Tripodo
Yes, Roger our own modeling suggest that we will get down to desired debt levels organically without having to do any significant asset sales but as Owen said, the quicker we get there the better, so that's why all our options are on the table.
Roger Read
And is any of that you think at this point in terms of asset sales, is it still dependent to some extend on the timing of the Noonan field, the timing of Phoenix, the timing of whether it's the Well Enhancer or Caesar etcetera or is it... somebody walks up makes a good enough offer, you'll do it tomorrow?
Owen Kratz
I think it is market depended, not dependent on anything internal.
Anthony Tripodo
Yes.
Roger Read
Okay thanks.
Operator
Joe Gibney, your line is open.
Joseph Gibney
Good morning everybody.
Owen Kratz
Good morning.
Joseph Gibney
Just a quick question on the Caesar cost and those in the commentary there just a discussion of the increasing but still competitive costs, just a little bit more color there? What it's taking upon to get Caesar wrapped up and out of the door?
Bart H. Heijermans
I mean the best way to say it's still in Nantong, north of Shanghai and I mean conversion is going on. I mean all [inaudible] equipments has been ordered, has been delivered to the yard and so really I mean at this moment it's for the yard to perform and get this vessel our of there.
There are 600 people, they are working on this vessel, productivity has been lower than what we had hoped for. The yard is very busy has bounced back with a lot of work.
Also with customers in the Western Europe and the North America, so the reputable customers there and I mean all these customers are shivering from the yard contracting too much work and so the productivity has been low. But I mean, we're going to get there and I mean the majority of the commitments...
the vast majority of the commitments have been made and so now it's I mean [inaudible] variable cost on a go forward basis, is our monthly burn rate on our... on our, I mean, site team and insurance and that type of stuff.
So--
Owen Kratz
Just to give a little more color, the issues with the yard in China are nothing technical. The conversion of the vessel and outfitting is going as planned technically.
The problem is the same as in Croatia. It's a systemic problem with shipyards.
When we made the contract, there was no backlog, they've since booked up backlog in excess of their capacity to handle. We should be having 900 to1,000 people a day on board and we get 600.
We constantly complain about it, but the problem is, if you do get the 900 workers on board, there is a shortage of middlemen... middle-level supervision and therefore, your productivity drops.
So, it's a matter, you are trading bodies for quality. Therefore, we're just sort of...
believe it or not, there is a labor shortage in China.
Joseph Gibney
Okay. Bart...
Owen spun up as part of the question on the marine market and following on the margin question earlier. This commentary out of [inaudible] really or is there any season relative to this for the deepwater well intervention market?
They had some concerns relative to near-term incremental capacity, some inexperienced operators kind of coming into the fray, any concern here relative to... any change from...
that you're seeing relative to bidding activity, deepwater, pipeline demand that's there, just kind of I'm curious broader take relative to incremental capacity of equipment out there?
Owen Kratz
I think, first of all, you've go to recognize that the well intervention market is not one market, but it is actually four separate markets. You've got the low NPNA [ph] work, you've got the middle life intervention work, you've got the non-diver intervention work, Norwegian class, and then you've got riser deployed in oil tubing [ph].
So, there is several sub-sectors of that market. I think the utilization expectations from well intervention, especially the light well intervention market are grossly misunderstood by the industry.
So, therefore I do think that you're going to see an oversupply in that middle sector. As far as we're concerned, that doesn't represent any great threat to us.
I think as long as we maintain the quality of our work and our leadership role and we have not gone all the wild in overbuilding our own capacity. So, I feel comfortable with our position.
As far as the inexperienced operators with the extra assets coming into the market, I just feel that is a future potential opportunity.
Joseph Gibney
Got it, helpful guys. I appreciate it.
I'll turn it back.
Operator
Stephen Gengaro, your line is open.
Stephen Gengaro
Hi, thank you. Good morning, gentlemen.
Owen Kratz
Good morning.
Stephen Gengaro
A couple of quick questions. One, as far as your expectations for the year and you're assuming no more asset sales, is that any change in your mindset as far as your desire to sell down properties or is it just the timing in the market?
Owen Kratz
There is no change in our desire. I think sell down of properties takes the form of...
in two categories, one is on an ongoing basis how are we going to operate and manage our production. And I think I have been really clear that we're going to be lowering our risk profile and capital outlay by taking on partners on each of our future development on a promoted basis if possible.
The other category is recapitalization and as Tony mentioned, our desire is to delever the balance sheet and to the extent that we can do this on an accelerated basis by selling down further production, we will certainly consider it, but that just depends on the price that we are able to receive in the market.
Stephen Gengaro
And when you say recapitalization you mean...you mean using proceeds from asset sales to delever not issuing equity?
Owen Kratz
Well, definitely not.
Stephen Gengaro
Okay, just wanted to clarify that one. And then do you still view, or maybe I shouldn't say still, but do you view the shallow water production assets as non-core going forward like you...like you mentioned on...
DVR?
Owen Kratz
Yes, if we don't have DVR and I don't think it's any secret that eventually we will not have our interest in DVR. Then it begs the question why do we, if production isn't enabled for our contracts and services and we are no longer a shelf contractor, then why would we retain our shelf production.
Stephen Gengaro
Okay, that's...that's helpful. And then one final and excuse the jackhammer in the background, but one final question and that is when you...when you look at the HP1, can you give us any sense for the production rates we would expect out of the Phoenix field.
When I look back to history and kind of what it was producing pre-damage from storms, is that a good proxy, will it be below that, I mean can you give us a sense for kind of the deferred production or the least production we should expect when the HP1 is operational?
Robert P. Murphy
I'll let Robert speak to the specific, but keep in mind that the Phoenix field was in rapid decline. It's got a high productivity rate initially, but it's very quickly declining, but it is a very very rapid payout on cash.
Then the field also has several potential prospects then for continuing to increase or to add production, which then extends the life of the Helix Producer 1 on site. So if you back historically at the field made about 50 million barrel equivalents, but it had as Owen just mentioned it has had ups and downs on it.
Our mission here is to strike quickly and get it out. And that's going to be made possible by using a floating production unit.
The rate at which it was at prior to Hurricane Rita was about, between 14,000 barrels or 13,000 barrels a day. We feel our capacity on the HP1 is about 31,000 barrels a day.
Depending on when we get some of the things tied in, we hope to see this well in excess of 20,000 barrels to 25,000 barrels a day in the beginning but it will fall off rather quickly. We have to go out, we do have some very low risk [inaudible] opportunities that we want to get in during the initial period of the production.
So, we hold that production constant.
Owen Kratz
Keep in mind also that Phoenix field is a very important development for us because it sort of the combination of our model. The future work that Robert is alluding to there a lot of it is within the capacity of the Q4000.
And because of that it allowed us to make the capital investment to quickly rolling on the Q4000. So, it's a very strategically important project for us.
Stephen Gengaro
And then just finally an update on the Q4000 it sounds like its operational and working and the upgrades are solid and how does the workload look for that going forward?
Bart H. Heijermans
Yes, the vessel is working and it's working well. It's really at this moment it's working on well, dimension [ph] work because we have them in backlog when we enter the shipyards and we have to work that backlog.
The vessel is performing well. I mean the upgrades that we have made, they mean lower as a fuel cost and increased its productivity and efficiency of the vessels, so we are very pleased with that.
And then I mean we still have for 2009. I mean we still have the Shell contract here in the Gulf of Mexico, a minimum of two months a year for 2009 and 2010.
Then, I mean, we have other work contract that are ready for external work contract within 2009 for some certain third parties on drilling work, I mean, one project for Chevron in deepwater. And then we have the internal opportunities.
So, I mean, soon we're going to have make a plan for 2009, how much internal work are we going to do with partners and how much external work and then we have the Shell work as more or less an annuity for the next couple of years.
Stephen Gengaro
Thank you. And then just an administrative question, in the back of the presentation you provided.
Are you going to give details on deepwater contracting services any more or are you are going to leave it as a whole? Because you used to breakout the three divisions?
Anthony Tripodo
I think we are going to summaries it from this point on, Stephen.
Stephen Gengaro
Okay. Thank you.
Owen Kratz
I will add, by the third-quarter, right now we're working on our drilling program for the next couple of years. So, by the third quarter there should be a lot more color being able to be added as to what the Q4000 is going to be doing in, for instance what's happening on Phoenix field.
Operator
Mike Jones [ph], your line is open.
Rehan Rashid
Actually this is Rehan Rashid. Thanks for taking the call.
Question is for Robert. Robert what do you think about what gas prices are?
Robert P. Murphy
Hello? Rehan?
Anthony Tripodo
Rehan, you are cut out maybe you can...
Rehan Rashid
Sorry, I'm back. A quick question Robert, what do you think is the marginal cost for your reinvestment rate in the Shelf, so does gas have to stay at or go below eight bucks before you start reconsidering how much you would invest in Shelf if you continue to be there?
And also maybe from the aggregate standpoint, if you guys could tell me what would the other operators consider as a kind of point to consider from a gas price stand point?
Robert P. Murphy
Well I think, as historically we've seeing the gas price because the high flush nature of production in the Gulf of Mexico, it has a little better tolerance than some of the onshore things we are seeing. But it really depends on the prospectivity, what size prospects and what type of risk are you willing to take to go get it, because we do have a strategy that is taking into it out into the deepwater where the risk on the front-end is less but it's greater risk getting it out.
But with the combination of the model that we put together here as we are hopefully going to illustrate here at Noonan, that if you do find something and it's not necessarily a gigantic field like Noonan, that you can go out drill it, complete it and get it on production in less than two years. And that's what we're trying to achieve with the deepwater.
So the economics again are time value of money. From the shelf the recycle rate or whatever you are looking at right now you see the cost has gone up significantly because the deposits were smaller.
And you see that reflected in DD&A rates for Shelf companies, which we are also a Shelf company, kind of a hybrid changing, but you did see those rates going at, pushing $4. So looks like your finding cost...
just your finding cost is north of $3.50 for Shelf gas.
Rehan Rashid
And then what kind of operating cost would you throw on top of that to get to a number, just rough numbers?
Robert P. Murphy
Just rough numbers depending on whether it's a legacy or brand-new. I would say you're looking at $2 off cost.
So, you are looking at about a 550 basis.
Rehan Rashid
Okay. Perfect.
And is that kind of what... I know you've got a size advantage and all the other stuff that's part of your business plan, but would it be roughly the same for somebody who doesn't have Helix as a, [inaudible], would other smaller operators have a much higher number, you've a competitive advantage here of some sort?
Robert P. Murphy
Well, I think one advantage that we have like in the Noonan field for example, just the turnaround. So it's really a PV advantage because we can get things on quicker.
Unidentified Analyst
Got it. One last question on Independence Hub, what do you guys think in terms of volumes for the third quarter, any guidance there?
Bart H. Heijermans
I mean in our budgets, I mean we are assuming $800 million a day of throughputs. And if you look at our earnings from that investment like 50% of that is in demands, payments and the other 50% is, I mean, volumetric.
So $800 million a day is what we're using in our budgets.
Rehan Rashid
Got it. On that topic one quick second from what I'm heard, it seems like a lot of methanol is being used to kind of clean up and get the operations going.
Is that indicative of maybe freezing happening a little bit more often quicker or is that something that you really can't use to judge anything else?
Bart H. Heijermans
Yes, I think you probably need to ask Anadarko or Enterprise that question.
Rehan Rashid
Okay. Thank you.
Vinit Sethi
Vinit from Greenlight Capital. Your line is open.
Vinit Sethi
Hi, guys. I just wanted to follow up on a question related to the strategy update, I think you addressed questions related to DVR being non-core and your shelf production potentially being non-core, if you dispose off DVR.
I think you also implied that you think the stock price is ridiculous in terms of where the shares are trading relative to kind of what you own. Can you give us your current thinking then on kind of the necessity for the deepwater services business to be together with the...
the deepwater E&P side?
Owen Kratz
I think... I am a big believer obviously of the hybrid model.
I think there are a lot of benefits for having the production as an enabler for the services and vice versa. Having said that, I think it is obvious that if we're going to be looking to grow the service side, especially through M&A, you've got to have a multiple that's competitive with the peers and that's not the case.
Well, that is the downside to a hybrid model. And that then opens up the question as to is there not a chance to accelerate service side growth through a separation of the two, and whether or not that happens depends, I think, on whether or not you can maintain the benefits of the hybrid model through a contractual relationship and those are sort of the exercises that we are currently going through.
Vinit Sethi
I mean, don't you believe both segments will benefit independently from being arms length from one another or at least, not part of the same corporate umbrella?
Owen Kratz
I think there are obvious benefits that would suggest that both would benefit being separated, that's countered by the benefits of the hybrid model. And again that the...
I think the ideal solution would be to have a separation, if you could maintain the benefits through a contractual relationship.
Vinit Sethi
Okay, got it. Thank you.
Operator
And at this time, I'm showing no other questions.
Anthony Tripodo
Okay, if there are no other questions, I'll say in closing. We appreciate everybody's participation today and look forward to present it again next quarter.
Have a good day.
Operator
Thank you. This does conclude today's call.