August 2, 2000

Your company produced strong results during a quarter that proved to be one of the worst ever for the late cycle, Gulf of Mexico marine construction business.  While the subsea and salvage segment was hampered by an industry wide lack of work, upstream activities made a historic contribution during the second quarter. Energy Resource Technology (ERT) carried Cal Dive to a 39% improvement in net income, demonstrating again the countercyclical, revenue smoothing benefit that this production company delivers.  Our groundbreaking effort to establish a new industry model through participation in the Deepwater Gunnison prospect appears to be one of the most significant events in the entire 35-year history of Cal Dive International. This collaborative effort with Kerr McGee has encountered potential reserves of 175 to 250 million barrels of oil which is expected to lead to a major CDI construction project beginning next year.  The ERT and Gunnison developments flow from a corporate strategy which seeks to assure asset utilization to benefit the economic returns of CDI-owned oil and gas reserves.

Net income ran at 9% of revenues, consistent with the first quarter of the year, while cash flow margins (as defined by EBITDA) increased to an all time Cal Dive record of 33%.

• SG&A: $5.0 million reflects a $2.5 million or 100% increase due principally to the ERT Employee Incentive Program, which is tied to that subsidiary. s pre-tax income.  ERT represented $1.5 million of the increase; consolidation of Aquatica accounts for another $700,000 of the variance.

• Liquidity: Strong cash flow enabled Cal Dive to internally fund $29 million of capital expenditures during the quarter, most related to the Q4000.  Since construction of our new multipurpose Deepwater vessel commenced last August, we have funded out of cash flow almost $64 million of its projected $150 million cost.  The close of the second quarter marks three years as a public company, a period in which Cal Dive operated with essentially no debt through one of the most severe recessions to ever impact the oilfield service industry.

• ERT:Our production company commenced operations eight years ago when Cal Dive introduced an entirely new product line; i.e. acquiring mature offshore properties and thereby relieving customers of the abandonment obligation.  Since then, we have acquired interests in 49 blocks on the Outer Continental Shelf (OCS) and have taken a working interest position in three Deepwater blocks (Gunnison). Well exploitation activities have evolved from historically working through tubing on existing wells to last year. s aggressive rig recompletion program.  Those efforts and significant property acquisitions combined to generate a 233% increase in production; i.e. 4.2 BCFe of Q2 production compares to 1.8 BCFe in the same period of 1999.  Natural gas prices averaged $3.40 per mcf during the latest quarter in contrast to $2.10 a year ago, while oil and condensate averaged $26.50/bbl.  ERT has delivered a 25% average annual return on capital employed over its eight years.

• DP Fleet: In 1994 Cal Dive achieved an industry first by permanently deploying a dynamically positioned vessel in the Gulf of Mexico (GOM).  That vessel, the Balmoral Sea, met an untimely end during Q2 as she caught fire and subsequently sank while dockside in New Orleans.  At this juncture we are assuming that the vessel is a total loss; her book value is more than covered by insurance, as are all salvage and removal costs.  The loss of the Balmoral Sea, which was expected to add roughly five cents to second half earnings per share, will probably accelerate the timing of our conversion of the Sea Sorceress to full dynamic positioning.& After working at 100% utilization since coming out of drydock in June 1999 the Uncle John went up in mid May for the long awaited installation of new Caterpillar engines and an entirely new, state-of-the-art electrical system.  In July we decided to accelerate the regulatory inspection required in the first quarter next year so that the vessel can work uninterrupted for the next 12 months.  We expect the vessel to come out of drydock in early August with a substantial backlog of well intervention and coring work& . Similarly, the Witch Queen was taken out of service for all of May and half of June to complete a regulatory inspection scheduled in October so that she can mobilize to Mexican waters in Q3 on a three to four month contract& . With the benefit of hindsight, our purchase of the Cal Dive Aker Dove in Q3 of 1999 was probably a year early.  Utilization of the vessel ran just under 40% during the quarter, resulting in a loss at the gross profit line.  The operating loss is partly related to the sale/leaseback of the vessel; i.e. the financing cost is transferred . above the line. and included in charter costs.  That said, the vessel is developing an excellent reputation and the market for moving Deepwater drilling rigs continues to improve. For the new Deepwater rigs and for field development projects that require moorings or suction pile anchoring, the Dove is one of the few, if not the only, vessel that can handle 10,000 feet of wire in one piece for change outs.

• Horizon Alliance: Our agreement with Horizon Offshore provides access to derrick barge and heavy lift capacity to supplement CDI salvage operations. The Pacific Horizon was subcontracted on a large abandonment project in Q2 which involved the removal of two four-pile platforms for Range Resources Corp.  Another aspect of the alliance is that CDI has the exclusive right to provide dive support vessel services behind Horizon pipelay barges. Over a decade ago we demonstrated to our then largest customer, McDermott, that their operations would be much more effective if the expensive barge spreads simply laid the pipe, allowing our DSV. s to follow along and perform the more time consuming task of commissioning the line.  McDermott sold most of its OCS fleet to Horizon, and thus Horizon has become our largest OCS customer.  The recently announced pipeline contracts awarded to Horizon should translate into improved second half utilization of Cal Dive vessels (principally the Cal Diver I, II and V). 

• Aquatica: We have maintained Aquatica as a separate subsidiary to enhance the customer focused bundle of services which Sonny Freeman and his team provide to the shallow water market. Aquatica will be among the first CDI divisions to benefit from the improved rig count as it is heavily involved in drill rig support.  Aquatica revenues of $5.5 million in Q2 increased 31% over the same period of last year while realizing margins of 28%, very respectable given the tough market.  Aquatica was not consolidated for financial reporting purposes until August 1999, when we acquired the remaining 55% of its stock that we did not previously own.  

Respectfully submitted,