Feb 25, 2009
Executives
Tony Tripodo - EVP and CFO Alisa Johnson - EVP, General Counsel and Corporate Secretary Owen Kratz - President and CEO Robert Murphy - EVP, Oil & Gas
Analysts
Jim Rollyson - Raymond James Bill Herbert - Simmons & Company Joe Gibney - Capital One Southcoast Paul Landy Roger Read - Natexis Bleichroeader Michael Bodino - Coker & Palmer Ben Ruf - Credit Suisse Anthony Giggle
Operator
Good morning and thank you for standing by. At this time all participants are in a listen-only.
After the presentation will conduct question-and-answer session (Operator Instructions) I would like to inform participants that today's call is being recorded. If you have any objections, you may disconnect at this time.
I would also like to turn the call to over to your conference host this morning, Mr. Tony Tripodo, CFO.
Sir you may begin.
Tony Tripodo
Good morning everyone and thanks for joining us today. Joining me today here is Owen Kratz, our CEO; Robert Murphy, our Executive Vice President of Helix Oil & Gas; Alisa Johnson, our General Counsel, Cameron Wallace, our Director of Marketing and Investor Relations and Lloyd Hajdik, our Senior Vice President of Finance; Bart Heijermans, our COO is traveling on Helix business in South Asia right now and won't be joining us on this call.
Hopefully, you have had an opportunity to review our press release and the related slide presentation released last night. 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.
Press release can be accessed under recent news and the slide presentation can be accessed by clicking on today's webcast icon. Before we begin our remarks, Alisa Johnson will make a statement regarding forward-looking information.
Alisa Johnson
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 31, 2007 and subsequent reports on Form 10-Q 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 slides of our presentation materials provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The presentation together with the reconciliation is available on our website.
Tony?
Tony Tripodo
Thank you, Alisa. Moving onto slide 4, obviously our Q4 financial results are messy due to large non-cash accounting write offs of $935 million, including writing off the goodwill associated with the Remington acquisition as well as the write-off of certain oil and gas properties, due to the reduced commodity price environment.
However our underlying message in this call is that once we move beyond these matters the company has positioned itself to generate positive cash flow and decent earnings in 2009. Slide 4, essentially summarizes what we have set forth in the press release, so I won't cover it in detail but I will say that Q4 revenues $541 million represented another strong quarter for the services side of Helix while our oil and gas revenues suffered from production short ends resulting from Hurricane Ike as well as much lower commodity prices.
While margins on our contract and services revenue were impacted by very low margins on a pipe lay job in India, we actually expect on a go-forward basis, margins on our contract and service business to revert back to historical levels. Moving to slide 5, in addition to the highlights I’ve already mentioned, let me point out a couple of other highlights.
Our contract and services business had another strong quarter as our assets performed at high utilization levels. Cal Dive which reported their results last week is benefiting from increased activity associated with the hurricane inspection, repair and maintenance work.
While oil and gas production reached only 6.4 Bs for the quarter, we are now at levels in excess of 90% of pre-Ike rates and we expect to exceed pre-Ike levels once the key pipeline is repaired allowing our Noonan gas sales projected 60 million cubic feet a day net to our interests. Presently, Noonan is producing 18 million cubic feet a day.
We expect repairs on this key pipeline to be completed sometime in March and Robert will get into more details on this later. I will turn the next couple of slides over to, Owen.
Owen Kratz
Well the outlook I'm not sure that our crystal ball is very much better than everyone else's but we do expect to have a decent year operationally on the service side of the company. We do expect to be able to generate positive cash and reduce debt going towards, throughout the year and that's without any further asset sales and of course the asset sales would accelerate that process.
We do have good contracting backlog visibility right now. We are I will say that we in our preparations for going forward we are sort of anticipating a softening of the market towards the end of '09.
And we are taking steps to be prepared for that. Switching to the oil and gas for just a second, our production range is now predicted to be in the 50 to 60 Bcf equivalent range.
This is a reduction from previously stated numbers and that's primarily a consequence of the hurricane recovery. But even more so because of the curtailment of capital spending especially on the shelf where capital spending on well operations work offsets the decline.
And so in '09 we do expect decline on the shelf to be at a marginal rate and pace and historically we dealt that investment. I will touch more on the operations later, but for right now I will turn it back to Tony.
Tony Tripodo
Okay. I mean let's turn over to slide 9 now and given the investor focus on liquidity and balance sheet issues.
I would say on a global level and specific to our company I will spend a fair amount of time in next few slides talking about our current and projected situation. Slide 9, shows a net debt position after excluding Cal Dive's debt which is non-recourse to Helix.
Our cash on hand at 12/31/08 excluding Cal Dive's was a $161 million and our cash position today is even higher. As a point of reference, as of yesterday, our liquidity which is defined as cash on hand plus revolver capacity is slightly under $300 million.
And despite reduced level of oil and gas production in Q4 due to hurricane shut-ins, our net debt position remained largely unchanged from Q3, and our net debt position is even lower today. We expect to further reduce net debt as the year rolls out.
That's a combination of having a fair amount of our oil and gas production hedged, good visibility on our contracting services side, and taking a sharp and so on reduction to our capital expenditure in '09. So, we really feel we are going to generate positive cash flow and reduce that further.
Moving to slide 10, I think we outlined some of the key steps we have taken to bolster liquidity including the fact that we have hedged as I said 75% of our expected '09 production at prices much higher than the current spot or in the forward strip. And also we have gotten a process of selling our non-core assets with the sale of our interest in Bass Lite which we announced in December and that generated $49 million of cash.
We get a lot of questions about our covenants and whether we are in compliance with our key covenants. So to be transparent here on, listed the key bank covenants or key credit facility covenants and I will go through each one of these and explain where we are at 12/31/08.
The three key covenants are collateral coverage ratio, fixed charge coverage ratio and consolidated leverage ratio. Going to the collateral coverage ratio we require to have collateral in excess of 1.75 to 1.
And there is a basket of collateral that applies to this ratio and as of 12/31/08, our coverage was in excess of 6 to 1. So, we were clearly way above our requirements there.
Our fixed charge coverage ratio is required to be in excess of 2.75 to 1 that really measures consolidated EBITDA to consolidated interest. And again this is another ratio where we are expecting to be at year-end greater than 6 to 1.
So, again we are clearly way above our requirements there. And third key ratio we point out is our consolidated leverage ratio we are supposed to have which is measured by consolidated EBITDA to consolidated debt required to be under 3.5 to 1 and at 12/31/08, we were actually in a mid twos.
Further more our own internal forecast show that we will continue to maintain compliance with these covenants throughout 2009. Moving on to slide 12, slide 12 we already list our debt structure and maturities on our debt and we have no debt maturities occurring till the middle of 2011 when our revolving credit facility matures and we hope by then to have paid off that facility.
So again all of this assumes that we generate cash strictly from internal sources and as we sell none of our non-core assets, so the sale of any of our non-core asset will only accelerate debt reduction and improve our balance sheet and liquidity position even further. I will turn the next few slides over to Owen.
Owen Kratz
All right, well slide 13 is just a recent view of the Well Enhancer and it’s in the Housmann Yard in Holland right now undergoing commissioning of the well enriching equipment placed on board, I will speak to that more in a minute. But that's just a good picture over.
So switching to slide 14 to show some of the backlog in contracting activity that we had going on and I think the take away from this is that, there continuous to be demand in strong utilization on the service side of our company. On slide 15, this gives you a breakdown of the financials for the service contracting side of the company.
One I think which you have to notice is the 15% profit margin under the contracting services. If you switch to the next page, slide 16, you will notice that that primarily occurred in the subsea construction, a portion of the company, the rest is operating fine or as Tony mentioned, we had some issues on the subsea construction side of the company with some contract that was lost due to the Caesar being delayed, created a cost for us, some ForEx impact on some issues within that part of the company.
And as Tony mentioned, we have a low margin project in India, and the accruals have been attempted to be conservative here for going forward with that. And then there is also some impact from Hurricane downtime contributing to it.
I will say that on the subsea construction side, we have restructured the subsea construction group, and will be refocusing our efforts on servicing our Gulf of Mexico clients. Switching to page 17, just reiterates what I said earlier, the utilization continues to be strong and performance is good on the service side of the company.
You will notice quite a shortfall on the Marco Polo throughput and that's Hurricane-related as a result of pipelines are being delayed in going back into service. Switching to slide 18, the major capital projects underway, the Well Enhancer service, as I mentioned is in the commissioning phase of the equipment on the deck, the deck equipment.
Sea trials have been completed. The vessel actually has been delivered to us and the final installation of the well intervention equipment and it should be out operating by the end of the second quarter here.
The Caesar over in China continues to progress. It's still in the shipyard where essentially finished with the mechanical completion of the vessel and we are entering the commissioning phase.
We do not have any contribution towards EBITDA in '09 consideration for this vessel, and it should be out going into the fourth quarter of this year. Helix Producer 1 is in the final weeks of completion in a shipyard in Greece.
The work is going extremely well. We should be heading out on sea trails middle of March some time with the vessel departing early April for a transit to the Gulf of Mexico where it will go to the South Texas yard where all the production equipment has been completed and is standing by for installation prior to its final positioning on the Phoenix field.
With that I will turn it over to Robert to talk through some of the highlights of the oil and gas side.
Robert Murphy
If you would please turn to slide 20, our Q4 financials were severely impacted by two events. The precipitous fall in commodity prices that resulted in the previously discussed impairments and Hurricane Ike.
That reduced our production volume significantly. Our post Ike restoration was much slower than we expected resulting in Q4 production of 6.4 Bcfe.
Prior to Ike, we were producing approximately 159 million cubic feet of gas equivalent per day, compared to the 70 million we produced in Q4. Now our current production rate is about 132 million cubic feet equivalent.
And the principle reason for the slower recovery was related to third-party pipeline repairs that were hindered by a very poor winter weather pattern in Q4. But today most of those pipelines are back in service and operational with the exception of the third-party export line that services Bushwood development.
Those pipeline repairs are near completion and we expect restoration of the Bushwood gas volumes by the end of Q1. With the additional volumes from Bushwood and incremental volumes from new developments being brought on right now in main path and further restoration of Ike damaged fields, we expect Q2 rate to exceed the pre-Ike levels back in Q2, Q3.
So, we estimate for 2009 our production on an annual basis to range between 50 and 60 Bcfe. If you would please turn to slide 21.
Now, our reduced production volumes in Q4 weigh heavily on our per unit presentation of our operating cost. Two categories do stand out when compared to the prior period, DD&A and workover expense.
Now our DD&A for the quarter for Q4 is impacted by two end-of-life producing fields that due to the reduced commodity pricings that we use at year end in our reserve report, it resulted in very high depletion rates for these end-of-life fields. The high workover expense is a result of cost related to Hurricane Ike repairs in the quarter.
$16 million of the $17 million of that workover expense was Ike related. So we expect to be fully reimbursed for this charge under our insurance policy, but that comes in it later days, so we should see that somewhat come up in Q1 and Q2.
In 2009, we will continue to have expense related to the damages from Ike. However, we do feel we are adequately insured to cover all the remaining Ike related expense.
So, slide 22, summarizes our 2009 commodity hedge potion. Our average realized price expectations internally for 2009 with our hedges included in place are $64.78 for oil and $7.08 for gas, and on an average daily basis approximately 75% of our estimated 2009 daily production is hedged, so we have a good hedge position in place during this low commodity price environment.
Tony, back to you.
Tony Tripodo
Okay. Slide 23 and 24 are non-GAAP reconciliation schedules presented for your reference, well I'm not going through this, but if you have any questions please call Cameron and myself.
Owen, closing remarks?
Owen Kratz
Yeah, just a few. I just like to say that the events at the end of '08 certainly tested Helix where it can only be described as the perfect storm with the economy collapse, the debt market freeze, the hurricane impact losing our production and the associated repair cost combining with decline in commodity prices has really given this reason to reevaluate how the company operates on a go-forward basis.
There is obviously lot of concern priced into our stock about our survivability, and I consider today and honestly tell you survivability should no longer be a major concern. My only comments I think that I have today is just to summarize or reiterate what you should be able to take away from this presentation once you look beyond the accounting impairments.
First solvency and liquidity are currently not an issue. We further reduced our capital spending plan.
At this moment in time, we have about $300 million in liquidity against the 180 million in committed spending on a go forward basis in '09. Second, there seems to be a lot of concern about us tripping debt covenants.
We do expect to remain compliant on all covenants throughout '09. The trailing twelve EBITDA coverage ratio is the tightest one that we have, we do have room on that and that cushion should expand to more comfortable levels with any kind of asset sales going forward.
I think very importantly, we have no covenants. We have no debt covenants that tie to share price and I think there has been a few attempts so far.
This is basically for the short sellers out there they have been trying to find some kind of a trigger in our stock. Third, there appears to be a high debt discount priced into our stock.
Our debt levels right now which will recourse to Helix is $1.56 billion. To put it in perspective, our [PB 10] on production loan if even these low commodity prices is $1.9 billion.
We have around six times coverage on our debt service. We have no near-term maturities or rollover issues.
Our operations will be positive cash flowing through '09 and the free cash flow will go towards debt reduction. Our go-forward strategy is to monetize the non-core assets, primarily the EMP assets production facilities in Cal Dive.
We are not in the force sale situation right now and we don't foresee being in one. We will accept some value loss in this current market in exchange for strengthening the balance sheet, but we are not forced to sell it at any price.
We’ll continue to improve the balance sheet, lower our operating costs and improve our performance. We ensure we plan on being around for a long time.
We feel that we are making the proper changes to ensure our ability to operate profitably additional liquidity even through a prolonged softening in the service market and the continuing tight credit market. We are not going to issue earnings guidance at this time.
I think given the uncertainties surrounding the market in commodity price, the strength of the service market going forward and the potential impact of the anticipated asset sales. There is really just no reason to put an earnings number out there.
However, there are some key parameters that you can apply without production sales; production for the year should be 50 to 60 Bcf. Robert has mentioned the hedge positions which are outlined on the preceding pages.
I think it's significant to note that we are hedged at pretty high levels and one thing to watch for is the sea Robin line coming back on as Tony mentioned earlier we do expect it back on some time in March and that would be a significant increase and take us above our pre-storm levels on production. So with that summary and reiteration of those points, I will open it up for some questions.
Operator
(Operator Instructions). Our first question does come from Jim Rollyson.
Sir, your line is open.
Jim Rollyson - Raymond James
Good morning, guys.
Owen Kratz
Good morning, Jim
Jim Rollyson - Raymond James
Hey, Owen. Tony you'd mentioned on the construction side, you obviously have backlog visibility at least kind of going through the first half and I think you mentioned you are expecting that to weaken a bit in the second half of '09.
I think Tony you said margins kind of going back from the fourth quarter levels towards the more historical number normals. Can you kind of talk about how you see that margin picture in the first half and contrast that in the second half just given your view of the market?
Owen Kratz
Okay. Well, I think typically in this industry you have about six-month visibility, so we have good visibility for six months.
And that is I would say what we normally experienced. But again our margins suffered in Q4 because of the large pipeline job in India, it inherently is a low margin job because we got a lot pass through experiences that go through it.
But we were also taking a fairly conservative stance on our percentage of completion accounting. So, all in all based on what we know is in our backlog and type of work in our backlog, I think we should expect margins to return to more historic levels on the services side.
Back half of '09 we are being conservative because its, what we do not know certainly we have sufficient backlog to carry us through as we normally do in first half of the year.
Jim Rollyson - Raymond James
And just by more historical normal margins, are you thinking more, you have ranged from kind of the low to mid 20s overall to the upper 20s pushing 30%, I remember last year when you were kind of shooting for 30%, as things were pretty strong. So I am just trying to get where in that range you are kind of targeting as a realistic view?
Tony Tripodo
I think realistically we have got some carryover in '09 on this Pipe Lay job in India which will tend to keep margins slightly down from the higher levels you might have seen in the past. But I think the low 20s is a good place to be here.
Jim Rollyson - Raymond James
Okay.
Tony Tripodo
Yeah, I think you should expect low 20s, but it should not be as bad as Q4 only because again we booked some accruals and we took some conservative stances on some of our jobs and I think that will play out to our favor in the future.
Jim Rollyson - Raymond James
Helpful.
Owen Kratz
I took from what Tony just said. We always strive for 30% margins on the full cycle basis.
We have got the India job continuing in the first half of the year. We are expecting some softening in the second half of the year.
So, the little 20s would be a reasonable expectation.
Jim Rollyson - Raymond James
Okay, and there is follow-up here, Owen, you had the one piece of the convertible preferred stock that got redeemed in the early part of this quarter. There is still one piece left out there, can you maybe just talk at what might play out with that?
Owen Kratz
I will turn this over to our preferred stock [inaudible] Alisa.
Alisa Johnson
I guess there is second series that is redeemable or convertible and that is the $25 million tranche. The current conversion price is what 15 or 15.27.
Tony Tripodo
It was 115.
Alisa Johnson
This 115, it’s also redeemable pursuant to formula based on stock price over a 40 day period and that's the way the last series was redeemed based on that stock price. There also is a trigger and this is the only trigger that is not a debt covenants trigger, but is the only trigger that is based on our stock price, preferred stock price.
If the daily weighted average of our stock price on any day is around 2.77, we do have to make an election and that is something we are thinking about internally.
Jim Rollyson - Raymond James
And would that be one that you, I mean last time you settled that in shares, was this something you would settle in shares or cash or how do you think about that?
Alisa Johnson
It’s something, Tony you can speak to this, it’s something we are discussing internally if we do have that trigger.
Tony Tripodo
Right now under our bank covenants Jim we are not allowed to redeem preferred stock in cash.
Jim Rollyson - Raymond James
Okay. Perfect, well thanks for all the information guys.
Tony Tripodo
Sure.
Operator
Bill Herbert, your line is open.
Bill Herbert - Simmons & Company
Hi good morning.
Tony Tripodo
Hi Bill.
Bill Herbert - Simmons & Company
Hi, couple of questions here some which were touched on by Jim. The low 20% margin guidance for the contracting services business, is that for first half 2009 or for all of 2009?
Tony Tripodo
I will just say all of 2009.
Bill Herbert - Simmons & Company
Okay. Great, and then secondly Owen or Tony, with regards to the backlog that is intended to the contracting services business, what exactly does that mean?
Does that mean sort of firm contractual obligations between yourself and your clients or indications of interests, are there any outs on their part which would render that backlog to loose?
Tony Tripodo
There are confirmed contractual contracts, there are cancellation clauses, some have penalty, some do not, but we do not state backlog unless it’s under firm contract.
Bill Herbert - Simmons & Company
Okay and with regard to the new builds that you have underway, are there any additional penalties or potential margin impairments as a result with the Caesar in the fourth quarter that could come into play in the event if these are not delivered on time?
Owen Kratz
We have incurred.
Tony Tripodo
We have taken our medicine on the Caesar.
Bill Herbert - Simmons & Company
Okay good, right, and with regard to -- Tony you specified where you stood on the collateral coverage ratio of 6 to 1 and a consolidated leverage ratio 2.5 to 1, where do we stand on the fixed charged coverage ratio today?
Tony Tripodo
Okay first of all let me clarify, if I said 6 to 1, I meant we are about 3.5 to 1 on collateral coverage.
Bill Herbert - Simmons & Company
3.5 to 1
Tony Tripodo
Yeah 3.5 to 1 on collateral coverage, so we are about double what our requirements are. Okay and on the fixed charge, over six times.
Bill Herbert - Simmons & Company
Sorry I got those confused. Okay six times is what you did say on the fixed charge and the collateral coverage 3.5 to 1?
Tony Tripodo
Yeah about 3.5 to 1. I think we are a little better than that actually.
It's based on a basket of collateral and including our E&P business some of our vessels, accounts receivable et cetera. So we are pretty comfortable on that particular coverage.
Bill Herbert - Simmons & Company
Okay and with regard to the targeted asset dispositions, I'm not going to ask you on the call, but I expect to receive an answer with regard to the, specificity or the expectations on your part, but just give us a general update as to how things are progressing and realistically should we expect to see some of these assets, some of these transactions to get consummated by mid year this year?
Tony Tripodo
I still think the best way to talk about that is to say we are working hard at that effort.
Bill Herbert - Simmons & Company
Okay
Tony Tripodo
And that, we will know more I think as next couple or three months roll out. Is it logical to conclude that all of the non-core assets we discussed in our December 11 press release will be consummated, I think it's unlikely in today's market environment I will only say we are working hard at it and the process is ongoing?
Owen Kratz
I think we can be a little more positive than that, we are well along the process.
Bill Herbert - Simmons & Company
Yeah, good.
Owen Kratz
But we are not right at the point of having indicative offers or anything concrete on the table that would give us the basis for making projections.
Bill Herbert - Simmons & Company
Got you, and I appreciate that, would you care to rank, what is most likely to least likely with regards to the different buckets of assets?
Owen Kratz
That's a hard question to answer, because you have to look at the, the positive side is that we have a population of buyers for each asset and then which is better than we have anticipated but then again you have different motivations by different buyers.
Bill Herbert - Simmons & Company
Okay, but would it be safe to say that probably the best capitalized buyer, with attending to this overall process will probably be found in the production facilities maybe deepwater E&P and maybe even the Caesar which you mentioned in your slide show.
Tony Tripodo
I think that's a fair conclusion, Bill. I mean the logical lookers would be categorized as you have.
Bill Herbert - Simmons & Company
Great.
Tony Tripodo
But I think in the end it is a difficult environment, but I will just say we are making progress on the process.
Bill Herbert - Simmons & Company
No question, okay. Thanks a lot guys.
Operator
Joe Gibney, your line is open.
Joe Gibney - Capital One Southcoast
Thanks. Good morning everybody.
Tony Tripodo
Hi, Joe.
Joe Gibney - Capital One Southcoast
Robert, I just want to circle on little bit more I certainly understand there is lot of moving parts relative on per unit basis for some of the cost, but if you could help us a little bit per expectations on DD&A. I know as we move through perhaps a post-Ike recovery year-on-year run rate with Bushwood where it is here in 2Q, could you give us little color there?
Robert Murphy
Right. Once we do get the increased volumes, that will have a downward effect on DD&A because that's bringing in some low F&D cost gas and then two fields that I mentioned in the presentation.
Their end of license and they did not hit the impairment trigger. So, the low volumes were depleted in high rates.
We should see them pass here soon. So that should also bring the DD&A rate down.
So, we really again as said we are not putting out any earnings guidance, but I can say those DD&A rates will come back down in the line as we move through the hurricane repairs and some of these end of life here.
Joe Gibney - Capital One Southcoast
Okay. And in terms of your guidance here for 2009 on your production, could you give us what is the oil and gas split within that production guidance range of 50 to 60?
Robert Murphy
Yeah it’s totally about a third oil and three-thirds gas.
Joe Gibney - Capital One Southcoast
That’s helpful and just wanted to follow-up relative to the last question there on the interested third party they are on a Caesar sale. Curious relative to your expectations for this vessel being core, non-core certainly seems to be on the deepwater standalone marine side where you want be on the robotics in a long-term strategic front.
So I am just curious your stance there a little more color on entertaining the possible sale of this vessel and how that fits in with where you want to be here once all is set and done in next couple of years.
Owen Kratz
The Caesar is a little departure from our normal and historically we are a self contractor doing in fields small diameter flowing on it. With the arguably the strongest demand cycle we have seen in our lifetime it made sense for us given the opportunity to acquire a pretty intact high quality engineering group to build the vessel to go into a new market niche which would be the longer linked transmission large diameter, deepwater lines.
It made sense at the time but now it’s a different world and with a contracting, softening market we feel that its better for us to instead of, the idea was that we could tune our low risk contracting style in the face of the strong demand market with the transmission Pipelay vessel given the fact that the market is softening, it’s less likely that we would be as successful with our contracting style, it’s more probably an asset more conducive to some of the ethic contractors. And given the risk in penetrating a new market which we felt it was prudent to regroup the capital versus trying to go into a new market at this time.
Joe Gibney - Capital One Southcoast
Okay. Fair enough.
I appreciate it. Thanks.
Operator
[Paul Landy] Your line is open.
Paul Landy
Hi, good morning. Can I ask you on the covenants, when and to what level are your next step downs?
Tony Tripodo
Sorry, can you repeat the question?
Paul Landy
In your presentation, you discussed the covenants as they stand today. Wondering when they step down and to what levels?
Tony Tripodo
Step down in terms of I'm not sure what you mean by step down.
Paul Landy
When does your collateral coverage ratio go up, your fixed charge ratio go up?
Tony Tripodo
These ratios stay fixed throughout the term of the credit facility.
Paul Landy
Okay. Thanks.
In terms of your expectations for the second half, I understand, certainly reasonable, it’s difficult to give guidance today, but as you said, you have six months out where, at a point now, where six months takes us mostly through the third quarter. Do you have any view on third quarter, you can give us qualitatively?
Tony Tripodo
No. I think that we're assuming the market is going to get a little softer in the second half of the year.
But again, as I mentioned earlier, you typically do not have visibility in this business beyond six months. So, we have no concrete evidence to say what it's likely to play out in Q3 and Q4.
So, we are just going to assume it’s soft only, because commodity prices are so depressed.
Owen Kratz
Let me, I will give my opinion there but that’s not worth a whole lot in this market with all the uncertainties, but what I'm sort of preparing for is trying to structure the company to be able to operate profitably through the worse. And to me, what I think, might be the worst case scenario, we are facing here is a continued soft commodity price through '09.
I think decline at some point both the demand issues or the supply issues start to overwhelm the demand noise that is currently in the market. But when that happens, I am not sure, but when it does, it then depends on a second uncertainty and that’s the unfreezing of the capital markets, because without a restoration of the capital markets, I think the producers are going to be.
Let the little short on being able to react to a spike in demand or a drop in supply whichever way you want to look at it. So I think that has knock-on effects to a, what could possibly be a prolonged softening in the service market.
But that's all dependant on when the supply overcomes demand issues and what the state of the capital markets are when that happens. That's why it's hard to pick a time, a point of time as to when this, when this happens.
Paul Landy
Thanks I appreciate that. The exploration expense in the quarter $27 million was a little higher than we expected what was driving that?
Tony Tripodo
Those were actually, it was driven principally by two wells that were in a suspended well category from 2.5, about 2.5 years ago that were drilled in deepwater that have a future use. So, they can be reentered to, both have unfound reserves but we never put them on the book.
So those are wells from a prior period, they were not in 2008. So the economics of them are such that we do not have capital allocated for those wells to be reentered in our site track this year.
So we took the charge against them.
Paul Landy
Okay thanks and lastly, you mentioned in terms of asset sales that you are willing to accept some value loss. I just want to clarify is that loss against your basis or loss against current value as calculated either in your collateral ratio, or current market value to have that stock or what have you?
Owen Kratz
What I was referring to was relative value versus what the margin may have historically applied to those assets. I think the actual mix relative to book value will be mixed.
Paul Landy
Great, thank you.
Operator
Roger Read, your line is open.
Roger Read - Natexis Bleichroeader
Yeah, good morning.
Owen Kratz
Good morning.
Roger Read - Natexis Bleichroeader
I guess the question I have, Owen, your comment during the overview, $300 million of current liquidity and $180 million of committed spending for the rest of '09. How does that $180 million compare to the $300 million full year capital expenditures excluding Cal Dive?
Owen Kratz
$180 million does not include everything that's in the $300 million. I think it's about $70 million short of that, which if we had to we still consider that as discretionary.
Our plans are to spend the 300, but if we had to, we could pair that back.
Robert Murphy
And Roger, we expect to generate positive operating cash flow. So we are not looking to fund CapEx out of our current liquidity.
We are looking to fund CapEx out of our current liquidity and operational cash flow. So we have a lot more to deal with than just the $300 million.
Owen Kratz
I think the takeaway on the $300 million is if you contrast that to the $163 million cash on hand reported at the end of the year, our liquidity is improving.
Roger Read - Natexis Bleichroeader
Okay. And other thing on liquidity front kind of talking little more about the oil and gas operating cost environment, insurance recoveries, I mean, clearly you had some repair and maintenance expense that's higher than the normal, how does the insurance recovery picture get in, or how does that impact the production cost as we look into the first half of '09 or second half whenever that should come in if any?
Robert Murphy
Well, we end up being out of phase, that the work is done, we submit the claim, the claim is paid. So you are about 60 days out of phase from the work that was done in December, the claims are put in and we should see reimbursement in Q1.
Owen Kratz
And we are starting to see reimbursements now.
Tony Tripodo
I might point out the way that we plan this is we allocated a certain amount of capital to Hurricane repair ahead of the insurance proceeds rolling in. At a certain point, we are going to govern the pace of the repairs to be inline with the receipt of insurance proceeds.
Roger Read - Natexis Bleichroeader
And so did the total CapEx number include the repair and maintenance expenditures, or is that netted against the insurance recovery as you expect? In other words is $300 million understate, will it be spent because of the insurance recoveries?
Owen Kratz
Yeah, the insurance recoveries at this point with them rolling in should net out to zero going forward, but they are not a capital expenditure. It's a repair and insurance expenditure, so it's not included in the $300 million.
Tony Tripodo
Yeah, and just to clarify, Roger, as Robert mentioned, we booked about $16 million, operating expenses in Q4 related to hurricanes even though we know we are going to recover that in quarters one and two. So there is a timing lag, but net, net is as Lloyd and Owen mentioned net, net we don't anticipate a net P&L expense other than what we booked in Q3 when we booked a deductible in Q3 related to the policy, but there may be timing differences but net, net on a go-forward basis, zero P&L impact.
Roger Read - Natexis Bleichroeader
Okay. And the final question along the oil and gas front, 50 to 60 Bcf equivalent range, what would impact the high and the low end there, it's relatively wide percentage change even if the absolute number is not that big?
Tony Tripodo
High and low if I could take this, Robert and maybe you can help me here. The high and low is dependent upon, you can call it Gulf of Mexico storm disruption is a part of it.
Part of it’s due to really the timing of when the Noonan well comes on, but we are assuming some hurricane disruption in the hurricane season. And frankly, we had an estimated date for Noonan recovery, so that could impact the high and the low.
Owen Kratz
And just to add to that, there is a significant amount of downtime put into the 50 to 60, so that's why the range is great for the percentage, the percentage range is great.
Roger Read - Natexis Bleichroeader
Okay, and if I understood correctly the Danny field is now 2010 start date, not in '09 in fact?
Owen Kratz
Correct
Roger Read - Natexis Bleichroeader
Okay
Owen Kratz
The 50 to 60 has no Danny production in there.
Roger Read - Natexis Bleichroeader
And you are not scheduling it for '09 either at this point?
Owen Kratz
Right now.
Roger Read - Natexis Bleichroeader
It's not only in the numbers.
Owen Kratz
It's not in our production numbers, correct.
Roger Read - Natexis Bleichroeader
Okay. All right, thank you.
Robert Murphy
Roger, there also is, the 50 to 60 number has no contribution from Phoenix as well.
Roger Read - Natexis Bleichroeader
Okay.
Operator
Michael Bodino, your line is open.
Michael Bodino - Coker & Palmer
Thank you my questions have been answered.
Operator
[Ben Ruf]. Your line is open.
Ben Ruf - Credit Suisse
Yes. Hi, this is Ben Ruf from Credit Suisse on the buy side.
Just a couple of housekeeping questions, was there capitalized interest in the quarter?
Tony Tripodo
Yes there was.
Ben Ruf - Credit Suisse
Do you know roughly how much, or how much your fully loaded interest is about?
Tony Tripodo
The full year cap interest was $42 million.
Ben Ruf - Credit Suisse
Okay.
Tony Tripodo
So it's split pretty evenly over the quarters. It accumulates during the year as you are increasing your basis in those assets towards your capitalizing interest, but the full year was $42 million.
Ben Ruf - Credit Suisse
I got you. Now on your potential for assets sales, when you make those asset sales, are you required to pay down your term loan?
Tony Tripodo
It depends on the type of asset sales. Certain assets are in the collateral basket, certain are allowed to be sold up to X amount.
It's fairly complicated, and I would say it's so complicated we shouldn't get into it in this call, but it depends on which asset gets sold.
Ben Ruf - Credit Suisse
I understand. So as I recall, you did sell Cal Dive stock and that doesn't trigger it right even though it's a, I guess it's theoretically a collateral asset.
Well like the assets that where the vendors have PP&E, Planned Property and Equipments, so like the oil and gas properties and that kind of things probably would trigger a pay down now.
Owen Kratz
Yeah, there are still like Tony said, there are certain basket limitations on the various asset groups that we are looking at selling.
Ben Ruf - Credit Suisse
I got you.
Owen Kratz
Just like you said on the Cal Dive proceeds, that does not trigger a mandatory prepayment and certain others do. And then we have a license to make under those mandatory provisions, we are paying down debt for the investment for CapEx or like kind of assets.
Ben Ruf - Credit Suisse
I got you. On the lenders, I apologize for the question I am in equity call, I apologize for that.
Also just finally on the assets under construction, are these assets being built on spec, or do you guys have these things contracted up or sort of how does that work?
Tony Tripodo
See, it's little bit of a mix bag. We don't do anything purely on spec.
The Well Enhancer has a partial utilization contract commitment underlying the decision to go forward with it and then that's for X number of days each year for I believe it is.
Owen Kratz
180 days for 2009.
Tony Tripodo
For two years. And that underpins the construction and then we drill in the rest of the utilization in the open market.
The Caesar, we had a backlog due to the delay in the vessel, we have basically have lost that backlog. So Caesar would be the closest thing to being a spec for right now.
And the Helix Producer 1 was being built specifically for deployment on our Phoenix yield.
Ben Ruf - Credit Suisse
Got you.
Tony Tripodo
And that would be a three-year deployment.
Ben Ruf - Credit Suisse
Got you, and these contracts are with I would assume sort of larger clients. Just given the specialized nature of these vessels?
Tony Tripodo
Yes, the Well Enhancers is with Majors.
Ben Ruf - Credit Suisse
I got you. Okay.
Thank you very much.
Operator
[Anthony Giggle], your line is open.
Anthony Giggle
Yes, good morning. I wanted to see if you could quantify.
I understand some layoffs have occurred as a result of restructuring the subsea construction group including the closing of some international offices. I am just wondering if you could quantify that and if that's part of this renewed focus on Gulf of Mexico clients?
Owen Kratz
It's an ongoing process, so I don't think I will get in to try to quantify it. I will say that we had some disappointments on the international subsea construction efforts, and quite a while ago we curtailed any further bidding until we were able to assess lessons learned as to what was going on and we have made adjustments.
I will say that the layoffs that we have incurred were not specifically to remedy that. The layoffs were a ongoing process of lowering our operating cost, which we feel is prudent given trying to set the company up to be able to operate profitably in a softening market.
Anthony Giggle
Okay. And as far as the Caesar, can you give us some sort of idea, the level of interest at this point as far as third-party interest in acquiring the vessel, and would you expect that you could possibly close the deal this year and how much of your construction cost would you be able to retrieve from selling the Caesar?
Owen Kratz
I would be hopeful that there is enough interest that we could make an arrangement this year, what form that takes is quite very depending on the party you talk to and there are multiple parties with interest in the vessel. And as far as what we are able to recoup, it depends if we sell 100% or 50%, but I think either way we should be able to get out of the Caesar hole.
Anthony Giggle
Okay and then lastly the spool based, the property in Ingleside, what are your plans going forward for that?
Owen Kratz
When the Express returns, one reason why the Express is over on the international pipe lay job in India is, because of the draper climates for it to be able to spool in the Gulf of Mexico. There just simply wasn't the spool base with deep enough draft.
So we are timing the completion of our spool base in Ingleside to coincide with the return of that vessel to the US, and this precise timing of that depends on how the backlog shapes up. First of all, when, how long does the contract in India go, and is there work to be done on the way transiting back to the Gulf.
Anthony Giggle
Okay. But then, whenever the Express returns, you would expect that it would be more active in the Gulf of Mexico as opposed to any more international deployments?
Owen Kratz
Yes. We're really going to focus on our core markets again, Gulf of Mexico clients have been very good to us in the past and hopefully it has been reciprocated.
We probably would have thought long and hard about sending the Express anywhere if we could have spooled it in the Gulf of Mexico, there just wasn't a spool base. So as soon we can get it back here, our primary focus will be back on the Gulf of Mexico.
When I think of the Mexico, though, I'm talked about the extended geographic region, which would include Mexico, Trinidad for instance.
Anthony Giggle
Okay. Okay, thanks.
Operator
We show no further question.
Tony Tripodo
All right. Well, thanks for everyone joining us this morning.
And hopefully, we have enlightened you as to the state of the company. And we look forward to seeing you all through the year and talking in the next conference call.
Operator
Today's conference has ended. You may disconnect at this time.