Operational Highlights

• Deepwater Market: The Q4 performance of the Uncle John at the Troika development capsulizes our entire Deepwater strategy. The vessel was able to lower its drill string faster than the nearby rig as a result of a proprietary mechanism on its derrick. While initially contracted only for four days, performance of the vessel was such that the customer was able to release the drill rig while the Uncle John set the largest (170 foot) spool pieces ever installed from a DP vessel in water depths greater than 1,500 feet. Given the massive reservoirs and the long lead time necessary to bring Deepwater reserves into production, current commodity prices do not appear to be a consideration as our customers set exploration and development plans for these prospects.
• ROV: The two work class vehicles acquired as part of the Coflexip transaction were heavily utilized during the quarter. In December the 100 horsepower ROV installed on the Uncle John operated flawlessly as CDI set a world record while conducting geotechnical sampling at the Na Kika prospect.
• Continental Shelf: The completion and construction services provided by CDI come at the end of the oilfield service cycle; i.e., after the risky exploratory and developmental drilling phases. This work typically comes six to eighteen months after the drilling of a well and represents the last step prior to initial cash flow. The offshore mobile rig count in the Gulf has run at full practical capacity (160 to 170 rigs) in each of the last two years. This generated the strong demand experienced in the fourth quarter and suggests continued activity at such levels. In addition to an increase in the number of wells drilled on the Shelf during 1997, a significant portion of CDI work involved reconfiguring the infrastructure (built over 50 years for natural gas) to accommodate the oil being produced from the Deepwater Gulf.
• Saturation Vessels: Fourth quarter gross margins of our two sat vessels, the Cal Diver I and II, were off 5% from last year due to the impact of weather, offshore performance not what it might have been, and certain billing issues which we had to resolve.
• Shallow Water: CDI assets working in water depths to 300 feet were the only area where we noticed quantifiable rate increases - utility boat (Cal Diver III & IV) revenues were up 40% on the same number of utilization days and General Diving rates were driven by (extremely limited) crew availability. Our decision to make an equity investment in Aquatica Inc. represents a means of benefiting from a market segment experiencing strong growth while at the same time keeping the focus of CDI management personnel on the Deepwater.
• Salvage Market: Cal Dive entered this market in 1989 as it represents a regulatory business which serves as a hedge against fluctuations in commodity prices. Specifically, once a field has depleted, MMS regulations require that the wells be plugged and abandoned, the platforms removed and the seabed cleared of debris, all within an 18 month period. We were turning down work for our salvage assets (Cal Dive Barge I and Well Servicing equipment) throughout the fourth quarter and thus are pursuing a number of options to add capacity in this area.