Your company delivered a record setting performance in a year which
began with optimism yet ended in the midst of one of the most severe
recessions ever to impact the oil and gas industry. A year ago we observed
that unsettled commodity prices in 1998 would require that CDI adapt to
changing circumstances on the fly and operate profitably "outside the box."
Although we had no idea how true this forecast would be, Cal Dive stood
head and shoulders above the competition in such a demanding environment.
This proved especially true in the second half of the year as earnings
increased 61% relative to the same period of 1997 while most of our peer
group reported a decline in year-over-year profitability. Highlights of
1998 included:
Growth: Revenues of almost $152 million reflect a compound annual
growth rate of 60% in the three years since implementation of the CDI
Deepwater strategy.
Fleet Utilization: Hurricane Georges and a number of tropical
storms lowered overall vessel usage to just under 70% in contrast to 77%
last year. Still, weather-related reductions of utilization totaling 250
vessel days were more than offset by the 400 days generated by the two new
vessels and the charter of Coflexip vessels.
Gross Profit: Increased 46% to just under $50 million on only a 7%
improvement in vessel days due to outstanding offshore performance,
customer recognition of the unique features of our DP fleet and shortages
of experienced divers which increased rates on the OCS.
Net Income: $24.1 million represents a bottom line margin of 16% of
revenues in contrast to 13% last year with the improvement a result of our
investment in Aquatica and to Cal Dive remaining debt-free all year.
Quarterly Results: CDI set all-time earnings records in each
quarter of 1998.
Cash Flow: EBITDA of $45.5 million enabled the company to add $20
million to cash balances after funding all 1998 capital projects.
This ability to deliver consistent earnings in both good and bad
cyclical periods was one of the key factors underlying Forbes
magazine's selection of Cal Dive as one of the best companies in America.
The accompanying "Box Score" and the discussion that follows reflect our
assessment of the degree to which CDI achieved 1998 corporate goals.
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The Deepwater Gulf technical challenges described in last year's report
caused the industry to retrench with most 1998 development activity
concentrated in water depths from 1,000-2,000 fsw. Nine fields were
brought into the completion and production stage during the year, in
contrast to five in 1997. As a result, the MMS estimates that Deepwater
oil production will more than double from 900 MBOPD in 1994 to 1,900 in
2001. CDI played a major role in commissioning the Baldpate
compliant tower, the tallest freestanding structure in the world, and
supported the construction of the SPAR at Genesis. Other CDI
Deepwater achievements involved geotechnical sampling at the Na Kika
prospect at 6,700 fsw, the deepest coring project ever by a non-drilling
rig, the use of a monohull DP vessel for well intervention and the deepest
ever catenary riser installation and tie-in.
Performance on the Outer Continental Shelf was exceptional as CDI
assets combined with those of Aquatica to generate a 56% increase in revenues in this market. The Cal Diver I saturation vessel celebrated its
15th year in the GOM by turning in her best performance ever, as did our
General Diving profit center (where Cal Dive provides diver-tender teams to
work off of platforms and third party vessels). Aquatica, Inc., the new
shallow water diving company formed by Sonny Freeman, generated superior
returns on more than $20 million of revenues as our two companies gained
significant market share. CDI shareholders received a return of $2.6
million on this $5.0 million Aquatica investment in just 11 months. These
record performances on the OCS reflect our ability to attract and retain
experienced diving and offshore construction personnel even as the severe
decline in commodity prices causes good people to flee the industry.
1998 was not without disappointments. While it was a slow year for the
salvage market (the number of two-pile or greater platform removals
declined by almost 50%), our dominant market position resulted in strong
demand for CDI salvage assets. However, performance suffered as weather
combined with high third party vessel costs to reduce margins below our
expectations. ERT also struggled a bit (although many would not classify
28% gross profit margins a struggle) as a number of key wells went offline
in the second half and natural gas prices declined by 18%. Throughout most
of 1998 acquisitions of mature oil and gas properties failed to materialize
as small, inexperienced E&P companies were offering to buy offshore
properties at prices which did not appear to include the abandonment
obligation. However, the decline of commodity prices resulted in credit
constraints being placed upon those companies as 1998 ended, creating an
open field of opportunities for ERT property acquisitions.
The outstanding results achieved in 1998 and uptempo review of CDI
accomplishments detailed in this report are tempered by the across the
board decline in valuation of all oilfield service stocks, including CDIS.
Your management team is acutely aware of this loss of value as we own 20%
of the company. Through the euphoria of 1997 and depression of the past
year we have been patiently implementing a strategy designed to make Cal
Dive a preeminent Deepwater player in the new millennium.
The prolonged period of depressed oil and gas prices is now driving
customer spending reductions of 20 to 50%, massive layoffs and delays of
Deepwater and OCS construction projects. While negativism is prevalent
throughout the industry, CDI management has targeted an aggressive list of
goals for 1999:
Shareholder Return: Deliver a return on invested capital which
exceeds 12%, the industry average over the past 5 years.
Mature Properties: Double ERT oil and gas revenues through property
acquisitions and exploitation of existing natural gas reserves.
Salvage Operations: Utilize the alliance with Horizon Offshore to
expand our market position so that combined salvage revenues (barge
operations and ERT) reach 30% of consolidated revenues, thereby achieving a
long-term corporate goal.
Continental Shelf: Support Aquatica growth in shallow water and
expand the CDI general contractor role in full field development and laying
reeled pipe.
Deepwater: Develop DeepStar directed technologies and utilize the
DP fleet to deliver innovative solutions to Deepwater challenges.
Q4000: Complete design, model testing, shipyard selection and
commence construction of this revolutionary, semi-submersible vessel.
Few appreciate the damage presently being done to the infrastructure of
the Domestic energy industry. While many in the "oil patch" are looking to
Washington for regulatory relief, there are far more voters thrilled at the
prospect of filling up at 73 cents a gallon than there are those worried
about the current dismantling of U.S. energy capacity. Your management
team successfully guided CDI through the cyclical downturns of 1985-86 and
1992; history has proven that Cal Dive personnel showcase their talent in
such periods. $40 million of cash in the bank and no debt suggest that Cal
Dive will weather the storms of volatile commodity prices better than most.
While it is difficult to forecast the full impact of such a severe cyclical
downturn, we hope to use the coming year to position your company for the
V-shaped recovery that such circumstances have produced in the past.
Respectfully submitted,
Owen E. Kratz
Chairman
Chief Executive Officer
Martin R. Ferron
President
Chief Operating Officer
S. James Nelson, Jr.
Executive Vice President
Chief Financial Officer
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