1998 THIRD QUARTER REPORT |
November 4, 1998 |
To Our Shareholders:
The record setting performance outlined in this
report was achieved in the face of Hurricane Georges and three tropical storms which
combined to basically shut down operations for much of September. The 51¢ earned is in
line with original analyst estimates for the quarter; we stress original as Cal Dive is
one of only a handful of companies in the energy sector that have not had 1998 earning
estimates slashed in response to falling commodity prices and the adverse weather. This
ability to deliver consistent earnings in both good and bad cyclical periods is one of the
key factors underlying the Forbes magazine selection of Cal Dive as one of the best
companies in America. Unfortunately, these positives were largely ignored by investors as
the price of CDIS plummeted from $30 at June 30 to a low of less than $11 at the end of
the quarter. More recently the price has recovered somewhat along with all energy service
stocks and in response to a Raymond James sponsored Road Show which took the CDI story to
the Midwest and West Coast. While the Road Show emphasized the six factors which
differentiate Cal Dive from its peer group, our outstanding performance in the third
quarter can be boiled down to a single, often overlooked explanation: people who are
highly motivated, creative and unique to the industry. Cal Dive excels in turbulent market
conditions just as we did offshore in the rough seas of the third quarter.
Financial Highlights
The $7.6 million which Cal Dive earned in Q3
represents over half of the $14.5 million of net income reported for the entire year 1997.
|
Third
Quarter |
Nine
Months Quarter |
|
1998 |
1997 |
Increase |
1998 |
1997 |
Increase |
Revenues |
$42,913,000 |
$28,859,000 |
49% |
$114,596,000 |
$75,931,000 |
51% |
Net Income |
7,577,000 |
3,983,000 |
90% |
18,774,000 |
10,473,000 |
79% |
Diluted Earnings Per
Share |
0.51 |
0.27 |
89% |
1.25 |
0.82 |
52% |
- Revenues: The nearly 50% improvement in revenues was generated by our fleet of
dynamically positioned, deepwater vessels. New assets (Sea Sorceress and Merlin) accounted
for $5 million of the $14 million increase with the balance due to customer demand for the
Uncle John, Witch Queen and Balmoral Sea. This record level of sales was achieved without
any contribution from Quantum, our joint venture with Coflexip. Changing market conditions
have resulted in no EPIC projects being awarded to Quantum, a situation not expected to
change in the near term.
- Gross Profit: 35% margins are particularly impressive when you consider the
sub-par performance of our salvage operations and less than expected progress on the Terra
Nova project. Excluding Genesis and Terra Nova, Cal Dive worked on 123 different projects
which ranged in sales value from $1,000 to $1.9 million, averaging just under $250,000 per
Q3 job. The entrepreneurial drive of our employees and scheduling flexibility afforded by
the CDI fleet enable the company to generate such high returns in the Gulf of Mexico spot
market.
- SG&A: $4.4 million includes an incremental $1 million of incentive
compensation and the cost of an Arthur Andersen supply chain consulting study, with the
latter expected to produce meaningful 1999 margin improvement.
Operational Highlights
- Genesis: The Uncle John was engaged to provide logistical support to Chevron for
the construction of the spar at Genesis, a four month project which commenced on July 13.
As a semi-submersible, the Uncle John was one of only a handful of vessels available on
the worldwide market which could conduct operations in such close proximity to the spar.
One unique feature demonstrated in Q3 was the ability of the Uncle John to simply detach
and move away during rough weather, at times riding through 35 to 45 foot waves. Customer
expectations were far exceeded as the vessel proved to be an outstanding
"Flotel" for deepwater development.
- Osiris: Elf Aquitaine awarded CDI a project to lay 20,000 feet of 8 inch pipe and
a control umbilical from a platform to a subsea tree in Viosca Knoll 944 on the edge of
the Outer Continental Shelf (OCS). Cal Dive subcontracted the Gulf Horizon to lay the pipe
and perform the "J" tube pull. Cal Dive vessels Balmoral Sea and Merlin handled
the tie-in of the 8 inch line and umbilical at the subsea tree and seven pipeline
crossings using a combination of saturation diving and robotic support. The low cost basis
of our DP fleet enables the vessels to "backup" and work effectively on the
"Shelf".
- Terra Nova: On August 29, the Terra Nova Alliance decided to suspend 1998
operations citing two hurricanes coming up the North Atlantic coast and concerns about the
lack of progress in the dredging of "Glory Holes". As a result, CDI basically
broke even on third quarter activity. To improve performance next year, Cal Dive has
offered to implement portions of the Sea Sorceress conversion program which will improve
the vessel's station keeping ability and to deploy one of our DP vessels to Canada. With
the Sea Sorceress becoming available, the vessel was engaged in October to salvage the
wreckage of Swissair Flight 111. About 90% of the plane remained to be recovered and the
pending onset of winter weather added a note of urgency to complete salvage operations
before the plane debris was permanently scattered.
- Salvage Operations: Operations of our most weather susceptible vessel, the Cal
Dive Barge I, were curtailed while still incurring fixed third party costs for chartered
tugs and material barges. In addition, several key Energy Resource Technology wells
remained offline as workover operations were delayed first by a lack of available
equipment and then by weather. As a result, combined gross profit of the two salvage
activities was only 14% in Q3. On a positive note, we can confirm that the credit spigot
that has funded the many small companies acquiring mature properties has been shut off;
i.e., in the last 30 days a flood of buying opportunities have been presented to ERT.
- Outer Continental Shelf: The third quarter marked the demise of a longtime
competitor, American Oilfield Divers (a.k.a. Ceanic). For a better part of two decades,
Cal Dive and AOD went at each other in a fashion reminiscent of the boxing matches between
Mohammed Ali and Smokin' Joe Frasier. The acquisition of Ceanic has created a void in the
shallow water market (i.e., from the shore to 300') which Sonny Freeman and his Aquatica
team have moved aggressively to fill. Another OCS change evident this construction season
involves the sale of J Ray McDermott barges that operate in the shallow to mid-water Gulf
of Mexico to Horizon Offshore. McDermott has been our largest customer each year in the
past decade, typically representing 20% of revenues. That 20% position has now been
replaced by three customers (Chevron, Shell and Horizon), making for a broader customer
base.
Respectfully Submitted,
Owen E. Kratz
Chief Executive Officer |
S. James Nelson, Jr.
Executive Vice President |
Forward looking statements and assumptions in
this report and press release that are not statements of historical fact involve risks and
assumptions that could cause actual results to vary materially from those predicted,
including among other things, unexpected delays and operational issues associated with
turnkey projects, the price of crude oil and natural gas, weather conditions in offshore
markets, change in site conditions, and capital expenditures by customers. The Company
strongly encourages readers to note that some or all of the assumptions upon which such
forward looking statements are based are beyond the Company's ability to control or
estimate precisely and may in some cases be subject to rapid and material change.