Feb 24, 2011
Executives
Stephen Powers – Director of Finance and IR Alisa Johnson – General Counsel Owen Kratz – CEO Tony Tripodo – CFO Johnny Edwards – EVP, Oil and Gas Alisa Johnson – General Counsel Lloyd Hajdik – SVP, Finance
Analysts
Jim Rollyson – Raymond James Michael Marino – Stephens Inc. Martin Malloy – Johnson Rice & Company Stephen Gengaro – Jefferies & Company Phyllis Camara – Pax World Funds
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Helix Energy Solutions Group Inc.
Review of Fourth Quarter 2010 Results with Investors Conference Call. During the presentation, all participants will be in a listen-only mode.
Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, February 24th, 2011.
I would now like to turn the conference over to Mr. Stephen Powers, Director of Finance and Investor Relations.
Please go ahead, sir.
Stephen Powers
Thank you. Good morning, everyone and thanks for joining us today.
Here with me today is Owen Kratz, our CEO; Tony Tripodo, our Chief Financial Officer, Johnny Edwards, Executive Vice President of Oil and Gas; Alisa Johnson, our General Counsel and Lloyd Hajdik, SVP Finance. Hopefully, you’ve had an opportunity to review our press release and related slide presentation release last night.
If you do not have a copy of these materials, both can be accessed through the investor relations page on our web site at www.helixesg.com. The press release can be accessed under press release’s tab and the slide presentation can be accessed by clicking on today’s webcast icon.
Before we begin our prepared remarks, Alisa Johnson will make a statement regarding forward-looking information.
Alisa Johnson
During this conference call, we anticipate making certain projections and forward-looking statements based on our current expectations. All statements in this conference call or any associated presentation other than statements of historical facts are forward-looking statements and are made under the Safe Harbor provisions under Private Securities Litigation Reform Act of 1995.
Our actual future results may differ materially from our projections and forward-looking statements due to a number and variety of factors, including those set forth in our slide two and in our annual report on Form 10-K for the year ended December 31, 2009 and any subsequent Form 10-Q. Also during this call, certain non-GAAP financial disclosures may be made.
In accordance with SEC rules, the final slides of our presentation material provide a reconciliation of certain non-GAAP measures to comparable GAAP financial measures. The reconciliation along with this presentation, earnings release, our annual report and replay of this broadcast are available on our website.
Tony?
Tony Tripodo
Thank you, Alisa. Let's move to slide five which summarizes fourth quarter results.
I will focus our commentary on sequential quarterly results comparing Q4 to Q3. Quarter four’s revenues decline 22% to $306 million reflecting a sharp decrease in contracting services revenue partially offset by a nice increase in oil and gas revenues.
The largest contributing factor to decrease in revenues directly relates to Helix Producer one coming off BP Macondo spill response activities and on to in-house service on the Phoenix field. Other contributing factors included seasonal declines, plus the Caesar (inaudible) coming out of service for a previously schedule upgrade work.
Oil and gas revenues moved up nicely by 43% in quarter four versus quarter three, reflecting start-up production on the Phoenix field as well as higher oil prices. Our earnings were impacted by the special items noted in the press release and covered on slide six.
So when looking at our results from a cash flow basis, we generated a decent level of EBITDA during Q4 at 95 million. On slide six, earnings were impacted by a few noteworthy items.
First, we took a non-cash charge of $23.9 million associated with writing off to goodwill and related to that some deferred tax to assets for our Australian operations. We concluded that the carrying value of these assets was no longer justified, given the performance of our Australian operations last couple of years.
Second, we suffered a loss of $22.4 million after-tax in the quarter related to the first job performed by the Normand Clough on an abandonment project in the South China Seas for CNOOC, the Chinese National Offshore Oil Company. To establish ourselves in the market, we took on weather and other risk, which obviously impacted our profitability but thankfully we moved off this job now.
Third, we impaired some of the oil and gas properties on the shelf and also rode off some deepwater leases to $215.6 million pre-tax or $10.2 million after-tax. On the positive side, we generated a nice amount of free cash flow in the quarter as our cash balances increased by $66 million during the quarter to $391 million.
Our total liquidity at year end stood slightly below the $800 million mark. We commenced production in the Phoenix field on October 19 and finished the quarter with 13.7 billion cubic feet equivalent of oil and gas production above our previous guidance.
We have been very pleased with production net at the Phoenix field and our production profile today net is now 63% oil and through Tuesday, we are averaging a 162 million cubic feet equivalent for the month of February with Phoenix production at approximately 12,000 barrels of oil equivalent a day net to our interest. Furthermore, we are pleased to announce that we have received the completion permit for the Little Burn well, a part of the Phoenix field and we expect to bring production from this well on sometime before the middle of the year.
I will now turn the call over to Owen for an in-depth discussion of our contracting services results.
Owen Kratz
Thanks, Tony. Good morning everyone.
Let’s move to slide nine. Helix’s Contracting Services delivered top-line growth year-over-year owing to higher utilization in our well intervention and robotics business.
On a sequential Q3 to Q4 basis, revenues were down as expected coming off of a strong third quarter that was bolstered by Macondo spill containment activity as Tony already mentioned the margins were primarily due to the Lufeng field abandonment project in China. Slide 10 shows the equity and earnings contribution of Independence Hub, Marco Polo and CloughHelix JV.
The results are fairly consistent with Q3 so I’ll leave this slide for everyone to look at as you wish. Over to slide 11, our well intervention business enjoyed 90% utilization in Q4 both the Seawell and The Well Enhancer stayed busy in the quarter despite a delay in the enhances for assuming [ph] upgrade and both circle carry healthy backlogs into 2011.
The Q4 1000 spend most of Q4 working through backlog that have been built up as a result – built up pretty Macondo and delayed due to Macondo. She also has healthy visible backlog for 2011.
The Normand Clough in Australia worked on the Lufeng field abandonment campaign offshore China for CNOOC but as Tony mentioned earlier, unfortunately at a substantial loss and is now working on a construction project in South China Sea which I have to point out the date, really is low rate, day rate contract. Moving to slide 12, as report just as is in our Q3 call our robotics business experiences the seasonal slowdown combined with lower activity levels in the Gulf of Mexico.
As we have adjusted the size of our target (inaudible) fleet and stay on to the current activity levels in the business when interesting component of this business launches trenching and power cable which is being driven by increased demand for Subsea cable better deployed for interconnectons and offshore wind integration project. In 2010, we generated 36.5 million in revenues from this non-oilfield business.
Over to slide 13, the Intrepid and the Express have combined utilization of 97% for the quarter, while the Caesar went into drydock for some planned upgrades after completing a job in Trinidad in November. The Subsea Construction market is currently seeing a significant contraction in activity in the Gulf of Mexico, which is an area of concern for us.
The Caesar currently has no backlog when she comes out of the shipyard next month whereas our near-term visibility for the Express is good. It's a little bit weaker for the Intrepid.
We tactically made the decision in 2009 to focus our pipelay assets in our traditionally strong build in Mexico backyard, but we couldn't foresee the consequences of the regulatory slow down in the Gulf of Mexico. As we look into the near and midterm futures demand for Subsea Construction lags drilling by 12 to 18 months and drilling activity in the deepwater Gulf of Mexico remains on a standstill.
And this is a good lead into our next slide, slide 14. Helix plays a key role in Macondo spill response and some are providing assets and offshore teams to assist in the completion of containment efforts.
Based on the lessons learned and the technologies developed through these efforts, we partnered with a group of independent producers in the Gulf to develop the Helix Fast Response System or HFRS. Last month, we signed an agreement with a non-profit organization called Clean Gulf Associates to make the system available to the participants as the essential component of their deepwater spill response solution should have further future out flow out incident occur.
This resulted in exchange for quarterly paid containment fee. We also signed separate utilization agreements with each participating companies thus find the call out rates for Q4000 and the HP I and the events that the systems ever needed.
As of today, there are 20 companies participating in programs. These companies refer themselves in the drilling permit applications with the BOE MRE as members of the Helix Well Containment Group, which indicates that they have contractual access via their agreements with the CGA and Helix to the Helix Fast Response System as low as over 37 contractors to provide other core services necessary to fully complement the deepwater response.
The third party subcontracted services include fire fighting vessels, personnel systems, support [ph] vessels and alike. We would be coordinated by the CGA along with activation and deployment of our system.
The HFRS stands ready today to respond in the unlikely event of the deepwater blowout. Our current system includes Q4000, a 10,000 psi stacking cap that's capable of operating in up to 3600 feet of water, all the necessary equipment to completely care and close in the well that has mechanical and structural integrity to be shut in and the ability to flow back and flare up to 10,000 barrels of oil per day in 15 million cubic feet of natural gas per day.
In addition, we're currently working on enhanced solutions that will make the system ready for more comprehensive responses. The enhance system which we're targeting for completion around the end of Q1 as of 15,000 psi capping stack the production capabilities of the HP I and increase of the systems depth capability to 8000 feet.
The enhanced system will be able to shut in a well with mechanical integrity to be shut in and/or produce up to 55,000 barrels of oil and flare up to 95 million cubic feet of gas per day. We believe that our containment system using vessel that provide – provided the capability during this type of work last summer meets or exceeds the regulatory requirements that have halted drilling activity in the Gulf and it is our hope that the HFRS will help this activity restarted very soon.
Moving to slide 15, this slide shows the utilizations we achieved with our contracting assets in Q4 and now I will leave that your reference as you wish. Now for our Oil & Gas business, I'll turn it over to Johnny.
Johnny Edwards
Good morning. Please turn over to slide 16.
Both slides 16 and 17 provide the financial highlights for the fourth quarter. ERT's production for the quarter as Tony mentioned earlier was 13.7 Bcfe and that's compared to 10.4 Bcfe for the third quarter.
The increase in production is mainly associated with the start-up of our Phoenix field. And in the fourth quarter, the Phoenix field produced over 400,000 barrels and 680 million cubic feet of gas and this net to ERT during the quarter.
The production from the Phoenix field changed our production mix for the quarter to 52% oil that's compared to only 46% oil in the third quarter. The increased production and the change in product mix and the higher oil price realization has increased the revenue for the fourth quarter about $41 million up to the $137 million.
In early January, the fourth Phoenix well was bought online and for February now our production rates for Phoenix had – excuse me – for February, our net production rates for Phoenix are averaging 12,000 barrels a day equivalent. Driven by the production from this deal, our current production mix has increased to 63% oil as Tony mentioned earlier.
In February, we received the BOE MRE, which is formally the MMS permit to complete the Green Canyon 238 number one Little Burn well and the Phoenix field. Our plan is to complete the Little Burn well during the second quarter with first production around midyear.
Our expectation is that Little Burn will add 3600 net barrels of oil equivalent per day. Now turning to slide 17, our increase in operating costs is directly associated with the Phoenix field.
Higher production volumes increases our DD&A and that was an increase of $15 million and operating expenses increased by $3 million reflecting the cost of the Phoenix field offset by reduction in Cat Burn expenses. All the other costs from the fourth quarter were in line with the third quarter with nothing unusual.
Turn to slide 18, on December 31, 2010, we had total proved reserves of 376 billion cubic feet of gas equivalent and that's compared to 400 billion at June 30 of our mid-year reserve report. The production for the second half of the year is the principle change between the mid-year report and the end of year report with no other significant changes.
Our reserves comprise 40% oil in our reserve report and 60% gas with a discounted PV-10 of about $1.3 billion of pre-tax based on SEC pricing at $77.55 a barrel and $4.46 per Mcf, about 39% of our reserves are developed and 61% in the undeveloped category. Applying the Forward Strip pricing at 12/31, this gives us a PV-10 of $1.7 billion at 12/31 pricing.
I'll turn it back over to you, Lloyd.
Lloyd Hajdik
Slide 20 is a snapshot of our debt and liquidity position at the end of the year. In the fourth quarter, our net debt position increased about $65 million from September 30 as our cash on hand increased to $391 million from $325 million at the end of quarter three.
Since the end of 2009, our net debt has decreased over $120 million. And based on our outlook for 2011, we expect further decrease in our net debt from the year end 2010 levels.
Tony.
Tony Tripodo
Okay. Move over to slide 22, which provides a general overview of our outlook for 2011.
First, we forecast our oil and gas production at 49 billion cubic feet and up from 47 in 2010. As Johnny mentioned our production is now 63% oil.
We expect EBITDA to increase to approximately $475 million in 2011 up from the $430 million in 2010. And at this stage, I would say there is probably more upside to that figure then we have got on this piece of paper here.
CapEx is pegged at $225 million and with our hedges in place and based on our forecasted production rates, we expect to yield $87 a barrel for oil and $4.80 for natural gas, obviously at today's prices that would be higher than those figures. At the level of EBITDA and with the forecasted of level of CapEx for the year, we should generate nice amount of free cash flow in 2011, allowing us to increase our cash balances from the already healthy $391 million at year end 2010.
On slide 23 and 24, we provide more color on this outlook. On the Contracting Services side, we expect another strong year in the well intervention in the Gulf of Mexico with the Q4000 and in the North Sea with are two ship shape intervention vessels.
Our vessels carry strong backlog into 2011. Due to the regulatory overhang in the Gulf of Mexico, we expect Robotics and Subsea Construction business to have a down year from 2010.
Again this is baked into the outlook noted on slide 22. Oil and gas production forecast, 49 billion cubic feet has two critical assumptions most significant tropical storm activity in Gulf of Mexico and Little Burn production commencing prior the midyear.
Again, we have secured the permit to complete this well. Our CapEx of $225 breaks down to $65 million for Contracting Services, $160 million for oil and gas.
The Contracting Services numbers contains little spending above maintenance other than some upgrades to the HP I to enhance its spill containment profile and some incremental investment in our historically profitable Robotics business. We assume no CapEx associated with potential for Cat B vessel for Statoil.
The major items in the oil and gas spending, $160 million includes the Little Burn completion and the drilling of two exploratory wells, the Kathleen well in the Bushwood field and the Wang well in the Phoenix field. Both of these exploratory wells target oil and spending obviously is contingent upon securing the necessary drilling permit.
Another general overwriting assumption is that we continue to own the oil and gas business throughout the year. Obviously, if we succeed in selling this business in whole or in part, the numbers reflect in the outlook would change significantly.
Lloyd.
Lloyd Hajdik
Slide 25 represents our commodity hedge positions on both volumes and prices for 2011 and 2012. The 25.5 Bcfe hedge for 2011 covers a little over 50% of our forecasted production for the year.
Of the 25.5 Bcfe and hedges, the splits 57% oil, 43% gas, which is in line with our current daily production profile over 60% oil. Slide 27 and 28 are the non-GAAP reconciliations presented here for your reference.
I'll not go over this in detail in the call. And at this time, I would like to turn the call back over to Owen for his closing comments.
Owen Kratz
Thanks, Lloyd. Bottom line the losses in the quarter were obviously a disappointment that I think as long as you learn from those it is and take the appropriate actions, it's possible to look beyond them.
What should be obvious at this point is that we are successfully working our way out of the position that the company was in. The capital spending discipline and project execution is restored, well ops is operating well and positioned well for future growth.
The Canyon Robotics business is also operating very well and has the potential to surprise the upside of our expectations. ERT production is now operating well.
Surprises have been reduced and expectations conservative. We are generating more than 30 million in cash each month from our new stable production and its becoming more and more oil focused.
Rates will be better managed going forward in Contracting and we don't intend to drill any further 100% production oil. Our challenge is though, our first we've incurred a number of significant losses on a few contracts specifically with HSE pipelay and more recently with an approximate 30 million loss on the Lufeng China project.
We've taken aggressive steps to modify our risk management and operating structure to prevent further occurrences. The total of this kind of loss for 2010 was $60 million in total.
This is a positive looking forward in that field. This is now being mitigated.
HSE pipelay with three major assets in the Gulf of Mexico as their focus is the challenge. The Gulf of Mexico in my opinion will not likely see a normalized market before 2013 due to the impact of the regulatory environment.
I do see a sign of resumption drilling permit process hopefully in the near-future, given the readiness of containment solutions and the work of producer groups to provide the central infrastructure and project management. Work related permits will be issued remains to be seen and this is critical for normalization of the Gulf of Mexico market.
For 2011, our focus will be on first allocating capital production to develop valuable leases as that has the permitting process below. We'll also allocate capital to low risk PUD conversions to PDP.
This is less dependent on permitting with 60% of our improvement roughly in PD or PUD. This is a chance to greatly increase our production and cash flow and the emphasis will be obviously on oil PUD.
This will also enhance the overall value of our production business and its marketability. We'll continue to seek prudent divestment and monetization of all or at least part of our total production as we begin to see signs of drilling resumption and as the market demand improves.
We think the opportunity to affect such a divestment will also improve. We will be patient here.
We'll explore our alternatives for the Gulf of Mexico pipelay business and this includes all kinds of our alternatives partnering with people, divesting of assets, renewal – renewed, better managed international effort or it could also simply be stacking the assets and (inaudible). We will continue to reduce debt as well as seek to make improvements in our debt structure.
Our ultimate goal is the debt to book cap of 30%. We'll aggressively pursue growth opportunities especially in the area of well ops, where we're clearly the global leader.
The Federal Cat B tender award announcement has been delayed by Statoil until the end of March. However, there are other opportunities but these other opportunities are all events beyond 2011.
We'll continue to simplify our business model and operations thus lowering our cost of doing business. There are market uncertainties but we're clear on our path.
2011 should be an improved year over 2010 and there is still plenty of value to further unlock and maybe a more deliberate pace than some may hope but it will be a path based on long-term sustainable growth and improvement. I expect that the same period of year-over-year growth and the shareholder value ahead.
With that, I'll turn it back over for questions.
Stephen Powers
Operator?
Operator
Thank you. (Operator Instructions).
Our first question is from the line of Jim Rollyson with Raymond James. Please proceed with your question.
Jim Rollyson – Raymond James
Good morning, guys.
Owen Kratz
Good morning, Jim.
Jim Rollyson – Raymond James
Owen or may be Johnny, just on the production guidance for a 49 Bcfe works out to about 134 million equivalence a day and obviously running in the 160s in February implies either a pretty strong reduction or decline in production as you go throughout the year, just kind of trying to figure out A, do you think that starts up stronger and weakens throughout the year from a profile standpoint and B, is there a little bit of conservatism, I mean, your guidance do you think?
Owen Kratz
Well, we always like to provide guidance that we think we can meet on the production side, and from that, I guess you can interpret some conservatism, but typically the Gulf of Mexico wells will see at 30% decline per year and we do have some capital money in there, but we also risk weight some of that work as well. So, I think a 49 Bcfe is achievable and possibly beatable.
Jim Rollyson – Raymond James
Okay, that’s helpful. And Owen on the HFRS, I don’t know what you can say exactly, but is it relates to the annual retainers that you guys will get?
Is that something that’s kind of meaningful and starts right away or is it more of small margin enhancer, I guess absent any hopefully none, but any ritual situation in the Gulf?
Owen Kratz
Yeah, yeah.
Tony Tripodo
Jim, this is Tony here. We are under a confidential agreement with CGA.
So we can’t disclose the exact amount. It starts April 1st.
It’s not a large number but I wouldn’t call it insignificant either, so hopefully that answer your question.
Jim Rollyson – Raymond James
Sure. And then last I guess from me for now is well off it seems like you have got pretty good coverage from a demand and utilization standpoint, and you spend maybe a minute just talk about how the margin environment looks – (inaudible) for first quarter in 2011, maybe relative to was in the last quarter too?
Owen Kratz
Looking forward, I think sort of a absent – want to take the Macondo that out of it, I sort of see Seawell offshore [ph] as a pretty steady state robust business year-over-year here with that current asset. That’s mean the opportunity for well ops is not necessary an expanded margin but in the additional asset and further growth.
Jim Rollyson – Raymond James
Okay. Thank you.
Operator
Thank you. Our next question is from line of Michael Marino with Stephens Inc.
Please proceed with your question.
Michael Marino – Stephens Inc.
Good morning. Just a quick point of clarification on the EBIT tax guidance, does that include anything from equity income?
Tony Tripodo
Yes it does Michael.
Michael Marino – Stephens Inc.
Okay. And then on the – the job in China what was the revenue contribution I’m trying to get to maybe what margins could have been absent that job?
Tony Tripodo
The revenues we booked in fourth quarter for that job was very, very small and with the pretax loss of $22 million, so that really did impact our margins quite considerably, Lloyd I think it was only a $1 million or $2 million of revenues that we actually booked in the fourth quarter?
Lloyd Hajdik
That’s right.
Tony Tripodo
And some of that has to do with reduction and scope and the way you handle long-term contracts from an accounting standpoint. You are taking adjusting which you booked previously Michael we shouldn’t get in to it because it’s fairly complicated, but there is very low amount of revenues with the large loss.
Michael Marino – Stephens Inc.
Okay. And then on the Caesar, that vessel was – did that produce any – generate any revenue in the quarter?
Tony Tripodo
A little bit in October, coming off of the Trinidad job.
Michael Marino – Stephens Inc.
And were there costs associated with it, dry docking it that may be once its dry docked there is some costs that go away there, can you quantify that?
Owen Kratz
I think there was a small amount of cost in the interim between the end of the project at the end of October and going into the dry dock or once you went in to the dry dock, the cost would have been capitalized – this dry dock was a further continuation of product completion of work on the vessel. Our lag does if there is another a dry dock period that it’s probably coming off where we are – when the vessel was originally build there were two (inaudible) engines not installed and I think I have mentioned it before, we were planning to do that during this dry dock period but because a lot of the (inaudible) saving the capital and then further engineering what would – could probably be a better solution that work has been deferred until later in the year.
Michael Marino – Stephens Inc.
Okay. And finally you’ve mentioned the Intrepid, I think previously you’ve mentioned that potentially had some work outside the Gulf of Mexico, could you update us on this outlook for that vessel?
Owen Kratz
Right now, she pursue have a contract in California to do some IRM work out there and replacing control loss and other work in the California field. That when she actually goes is still subject to achieve getting all the permits and everything required in the final contract.
So I think right now the date is something like…
Johnny Edwards
May – mid May of the earliest.
Owen Kratz
–
Michael Marino – Stephens Inc.
Okay. And how long does that work last?
Owen Kratz
The actual contract is 80 to 90 days. But the transfer is going to be fairly extensive and then once we get out there is additional work out in California, which we will be well positioned into start building a longer campaign.
Michael Marino – Stephens Inc.
Are you getting pay to mow [ph] correct?
Owen Kratz
Yes.
Michael Marino – Stephens Inc.
Okay. Thank you.
Operator
(Operator Instruction). And our next question is from the line of Martin Malloy with Johnson Rice & Company.
Please proceed with your question.
Martin Malloy – Johnson Rice & Company
Yes. Can you update us on your outlook for when you might do with the Caesar?
Is it something that you are still perhaps interested in selling or is it – are you looking to leave it at the yard if there is no work to be found for?
Owen Kratz
Probably yes it’s all the options. We’re – it’s a very changing market conditions out there.
Right now we’ve no visibility for. So our definite plan and what we budgeted for is to put her back in the dry dock, finish the structure and then following that – our intention will be to cold stack it and just wait.
Alternative to that would be to seek partners that wish to collaborate with us on working her and contracting her and also sale of the assets. So yes, it’s all the options and we’re pursuing each of those.
Johnny Edwards
And Marty just from a outlook standpoint our own assumptions assume no positive contribution from the Caesar in 2011. So any work we wind up getting would be upside.
Martin Malloy – Johnson Rice & Company
Okay, okay. And is there any update that you can provide us with additional information on the sale process of the E&P assets in your outlook there?
Johnny Edward
Marty as Owen says I think we need to be patient here because of the regulatory overhang. I’ll say this, our data room is still open and we continue to stay focused on ultimate disposition.
And in the meanwhile, we’ll enjoy the high oil prices and high production.
Martin Malloy – Johnson Rice & Company
Thank you.
Operator
Thank you. Our next question will come from the line of Stephen Gengaro with Jefferies & Company.
Please proceed with your question.
Stephen Gengaro – Jefferies & Company
Good morning, gentlemen. Two things?
Tony, can you give us any sense for the breakdown of the EBITDA guidance between contracting services in the production?
Tony Tripodo
Yeah. I would say certainly this year with expected down year particularly in the Gulf of Mexico on contracting and also coming up off of all nice EBTIDA we earned from Macondo last year are going be down on EBITDA on the services side, and substantially up on EBITDA from the E&P side.
So, we are definitely well over 50% EBITDA coming from oil and gas I’ll just leave with that.
Stephen Gengaro – Jefferies & Company
Okay. And just as a follow-up as I think about that and how it would impact, sort of, your quarterly distribution of earnings normally you gets from Mike, I would think more seasonality in the contracting services business, would this change the quarterly progression of earnings because it’s sort of heavier E&P and E&P sounds like it’s going be low into the back half of the year than just beginning in the year?
Tony Tripodo
Yeah. I think it’s a good way to look at it.
You know, a lot depends on commodity prices, Steven, as you know, but we expect an improving year in services as the year rolls out. And we expect, as Johnny mentioned, with decline rates in the latter half of the year maybe EBITDA to be less strong for oil and gas in the second of year than in the first half of the year.
Little going will help somewhat, but again, we sort of expect kind of improving for contracting services as the year rolls out and a slight decline in oil and gas from EBITDA standpoint.
Stephen Gengaro – Jefferies & Company
Okay. Thank you.
Operator
Thank you. (Operator Instructions) And our next question is from the line of Phyllis Camara with Pax World Funds.
Please proceed with your question.
Phyllis Camara – Pax World Funds
Thank you. Good morning.
I was curious how does your response system defer from the one that I believe Exxon has got going or built or put together?
Owen Kratz
Let’s say, I would refer you to the NWCC website for details on theirs. Ours has a little different to the (inaudible) I believe, whereas the NWCC, if you considered the wells in the Gulf of Mexico like a pyramid with high pressure, high volume, (inaudible) cap at the pyramid I think the NWCC approach is for a more comprehensive approach to all wells, where our approach is based on what’s available today and what can we do now, and then to build on that capability overtime.
Having said that our systems again is based on existing asset, the Q4000 and the HP I, which are currently in service and therefore a low cost option for the producers that are available that are proven. We’ve – essentially the way the two systems work is identical (inaudible) staggering fact that’s capable of closing in a well assuming (inaudible) will allow that and then you further the casing integrity won’t allow that, because you have the ability to pull it back to circus.
The difference is just in the assets deployed to do that.
Phyllis Camara – Pax World Funds
Okay. So basically if there is a blowout, would you guys be like competing with their systems or work or…
Johnny Edwards
No, no I don’t – yeah I am sorry, I don’t see us competing at all with the MWCC. The industry needs redundancy, it needs capacity, it needs reliability and to the extent that ours is by its name Helix Fast Response System ours may be a little simpler but faster to mobilize [ph] whereas there’s more comprehensive.
So I think they two complement each rather than compete.
Phyllis Camara – Pax World Funds
Okay, okay. And then next question, have you guys had any width [ph] price oil doing what it has been doing lately?
Are you seeing anymore interest in your operations in the Gulf or just in general is there anymore activity?
Owen Kratz
I’ll just answer it by saying we think that the environment will be getting better in terms of being conducive for ultimate disposition of our oil and gas business.
Phyllis Camara – Pax World Funds
And then what plan what do you plan to do with, with the cash that you’ve got if you were to sell it?
Owen Kratz
Pay down debt.
Phyllis Camara – Pax World Funds
Okay. Good answer.
Thanks so much.
Operator
Thank you. Our next question is a follow-up question from the line of Michael Marino with Stephens Inc.
Please proceed with your question.
Michael Marino – Stephens Inc.
Good morning again. Real quickly on the CapEx side what’s the estimated dry hole cost for Kathleen and Wang net to Helix?
Tony Tripodo
Our estimated dry hole cost, Johnny about 60?
Johnny Edwards
That’s the gross, well yeah that’s a net (inaudible) from both wells. But we are in the process of selling down some of that interest.
So we’re trying to minimize that on the dry hole cost on, we only have – we sold on it two for one on Kathleen. So we have 30% of that 40 is 12 million of dry hole, and on the Wang that’s about 30.
So it’s maybe in the $40 million range total for the dry hole, but these are not typically just exploratory even though we categorize on there in field wells and both the Bushwood field and the Phoenix field. So, I wouldn’t look at them just typically and exploratory nature.
Owen Kratz
Also in the CapEx – (inaudible) we’ve given we’ve assumed the dry hole cost for our complete interest in the wells yet like as Johnny said are essentially (inaudible) down, but that should make capital available for other things or less capital per year.
Michael Marino – Stephens Inc.
Great, okay. And as a follow-up to that maybe this is for Lloyd, but on your budget what do you estimate cash taxes are in 2011?
Lloyd Hajdik
It’s pretty low, Michael. Our cash tax will be pretty low in 2011.
Michael Marino – Stephens Inc.
Okay. I mean any more color – I mean I’m just trying to work towards a free cash flow number, that’s all?
Tony Tripodo
Okay. I’ll just say yes, just so because I think we’re going to get asked on my prior comment that we expect to generate a fair amount of free cash flow.
I think the way that number is looking now we should generate more or less a $100 million of free cash flow in 2011.
Michael Marino – Stephens Inc.
Okay.
Tony Tripodo
Which would be inclusive of any cash taxes we pay.
Michael Marino – Stephens Inc.
Okay, okay. Sounds good.
Thank you.
Operator
Thank you. (Operator Instructions) And there are no further questions at this time.
I’ll now turn the conference back over to our host to continue with the presentation for closing remarks.
Owen Kratz
Okay. Well, thanks everyone for joining us today.
We very much appreciate your interest and participation and look forward to having you participate on Q1 call in a couple of months.
Operator
Thank you. Ladies and gentlemen, that does conclude the conference call for today.
We thank you for your participation and we have as such disconnect your lines.