Oceaneering International Inc (OII) 2002 Q4 法說會逐字稿

Good morning. My name is Brooke and I will be your facilitator today. I would like to welcome everyone to the Oceaneering International earnings release conference call. All lines are placed on mute to prevent background noise. After the speakers remarks, there will be a question and answer period. If you would like to ask a question during this time, press star and 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. In consideration of other participants, limit your questions to two to three per queue. You may queue in again for additional questions. A maximum of three questions per person, please. Mr. Huff, you may begin your conference.

Good morning. This is Jack Jurkoshek and I would like to thank you for joining us on our 2002 fourth quarter earnings conference all. I would like to particularly welcome those of you participating in the webcast of this event made available through the company boardroom service of CCBN. Joining me this morning is John Huff, our chairman and chief executive officer, who will be leading the call; and Marvin Migura, our chief financial officer; and Bob Ngoy, our treasurer. Just a reminder, remarks we make during the course of the call regarding our business strategy, plans for future operations, and industry conditions are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. I will turn over to John.

Thank you. Thank you for being on the call. 2002 was a great year for us. Annual net income of $40.100,000 represented an increase of 28% and was our second consecutive year of record net income. It was accomplished on the strength of record operating performances for our subsea products, offshore mobile production systems, which we use the acronym MOPS, and other services segments along with a 29% effective income tax rate. We finished in a strong financial position. While others lamented the market, we increased net cash by $56 million, we purchased over 400,000 treasury shares, and paid down $52 million of bank debt. We believe our earnings performance validates, again, our technical niche market strategy. Our focus on providing products and services for deep water, subsidy completions, and MOPS is a good way to play the entire offshore life-cycle from expiration through production. As you know, we have not concentrated our investments in a development phase where the competitive environment, at least at this time, is quite severe. Our capital investment strategy is serving us well and will continue to do so in the future. We have now dramatically increased our earnings leverage to include market conditions.

In summary, 2002 was a great year for Oceaneering. We think our 2002 results represents undeniable evidence we are not an offshore construction contractor. If earnings do not differentiate us from this group, our technology should. I know some analysts lump us into offshore construction category, and I never really understood why. I feel strongly we are a small-cap diversified oilfield services and products company dependent on understanding the niche markets and technologies, not an offshore construction outfit. When you look at our business segments and see how many are dedicated to the construction phase of offshore oil and gas fields, you should determine only our other segments is even partially tied to offshore construction activity. Even the small investment in our intervention class vessels, $40 million compared to the triple digit millions by real construction companies, it is pointed at the production phase. Even then improved utilization of our intervention class vessels was mostly the result of doing remediation work on already installed subsidy hardware. Given this segment had record contributions in 2002 it puzzled me to see us referred to as a direct competitor of any sort of offshore construction companies. We think it's our niche markets and technology based solutions with multi-use assets which give us a unique position in the oilfield service industry.

Anyway, looking forward, 2003 is going to be a challenging period. However, I cannot think of any oilfield service company better prepared to weather uncertainty and to optimize upside than Oceaneering. We are looking forward to the opportunities 2003 will bring. Let me review the year in the 1st quarter for you. I will address the reaudit. As we discussed last quarter in yesterday's press release, we commissioned the reaudit of our financials for 2000 and 2001. The audits have been accomplished, and our restated results are included in the press release and accompanying attachments. As mentioned in the press release and discussed rather fully last quarter, the change in accounting for restricted stock was a primary reason for the new audits. Additionally, we adjusted the manner in which we account for Brazillian currency translation and the timing of certain UK pension plan related accruals. The cumulative earnings per share from the accounting restatement from March 2002 was 26% of the previously reported earnings over this time period. Of the 20 cent change over the 2 1/2 year period, roughly 10 cents is attributable to restricted stock expense, 8 cents to Brazilian currency translation, and 2 cents to employee benefit accruals.

With the demise of Arthur Andersen and the change in accounting for restricted stock, we needed newly audited financials for our SEC filings. With this out of the way, we are again in position to quickly issue new debt or equity securities when appropriate opportunity arrives. Let me put this process in some proper perspective from my point of view. The changes made to the financials focused on technical accounting issues, not operational accounting issues. There were no changes to our revenues recognized, no changes to our percentage of completion of profit recognition, and no changes to our operating accruals. After the new orders, we spent countless hours reviewing our records. 2001 remained a record-setting year for Oceaneering, and 2002's 40 million plus of net income surpassed that record by 28%. Please note we have added a new line to our operating segment detail: unallocated expenses. In light of the changed methodology of accounting for restricted stock, it no longer seems prudent to allocate these now more volatile expenses to our various segments, so we isolated all expenses associated with our incentive and deferred compensation plan, restricted stock and bonuses on a separate, nonoperation segment line. The new accounting rules require us to record restricted stock expense in a manner that subjects us to the volatility inherent in cyclical stocks, so we felt the change to stop allocating this expense to each individual segment is preferable to what we did in the past.

As reported, the individual segment operating margins will go up and down on any particular quarter based on operations and not based on Oceaneering share price. This should make our operating margings easier to understand and -- if we continue to allocate these expenses. Anyone requiring more detail is welcome to discuss this with Jack or Marvin. Quarterly EPS -- let me go through the 4th quarter, and then we will talk a little about the future. Quarterly EPS of 36 cents was within our guidance range and met the street's expectation. These results are particularly noteworthy at a time when many other oilfield service companies significantly underperformed their earnings estimates for the 4th quarter and the year 2002. I am pleased with our performance. Year-over-year, our 4th quarter operating results were slightly improved as the decline in revenues was offset by higher margins for MOPS and other services. Before we take too big of a flyby, our MOPS margin in 2001 was burdened with a million and a half dollar write down to scrap value of a tanker we had been holding for possible MOPS conversion. Other services gross margin improved on an increase in revenue mostly as a result of high utilization of our ocean intervention vessels. Ocean intervention vessel utilization continues to be exemplary at 81% in the quarter. Net income and EPS benefit from a lower affected tax rate. All-in-all, I think we executed very well.

Operationally, Oceaneering's activities are continuing to get safer and more effective. Our quarterly other services revenue and gross margin continue to [AUDIO DROP]. Operationally we were at excellent levels. Utilization the vessels were boost need to make the return, and we continue to work on a specialized engineering and diving project in the Gulf of Mexico. Our subsea product segment had a good gross margin quarter, and our backlog dropped from 29 million at the end of the 3rd quarter to 23 million at year end. In the 4th quarter, however, we submitted over 100 new bids with a total value of $160 million. As of the end of January 2003, our subsea products backlog has risen to $33 million. We expect to book additional orders in the remainder of the quarter and believe the 4th quarter of 2002 was a low water mark for new orders. 2003 may be a year reminiscent of 2001 when the first half was terrible, and we made it all up with work in the second half. Clearly our production capacity is well in excess of our current needs in subsea products, and we have room to expand that business. We continue to believe the long-term prospects for our subsea products segment remain outstanding. A number of announced orders by large subsea tree manufacturers in the past six months will require our products and services; therefore, we expect a significant upturn sometime in 2003. We will bid to improve margins and believe our technology is crucial to the overall project success.

Our MOPS business had another outstanding quarter. All three of our MOPS units were under contract for the entire quarter, and we expect them to remain so for the indefinate future. We see several nice market opportunities to expand these operations, which we hope to participate in during the last half of 2003. In the 4th quarter, our ROV fleet utilization rate increased to 70% from 60% in the 3rd quarter. As we said, we expected the 3rd quarter to the the low water mark for utilization of our ROV fleet. However, both revenues and gross margins sequentially declined. Revenues were down from a lower average day rate. Gross margin decline on the lower revenues and the write off of $700,000 of miscellaneous surplus ROV equipment. We expect the profit contribution from our ROV segment to improve in 2003; however, it will take an increase in the floating rig demand, especially for the intermediate 1,000- and the 3,000 foot water depth ready rigs, for the contribution from this segment to surpass 2001 levels.

At the present time I do not see a dramatic increase in this subsegment of rig demand in 2003, although I see a better 2003 than 2002. To give you an update on the mix of business in the ROV segment, of our 125 vehicles, 100 worked in December: 81 in drill support and 19 in nondrill support. This compares to a like number of 100 vehicles working at year-end, where 83 were engaged in drill support and 17 in nondrill support activities. These are snapshot positions that is should not be misinterpreted to indicate any permanent fleet mix. Advanced technology has had a good quarter. For the year, we had a gross margin contribution from these business acitivies comparable to those achieved in 2001. This was accomplished in spite of the fact that over $3 million in profit contribution from the telecom business was missing in 2002. I believe our ability to find technical business opportunities emphasizes a core strength in being adaptable to optimize to whatever situation we are confronted with.

Now I would like to address our balance sheet. We told you we expected to pay down debt in 2002. At year-end, we had debt of $113 million and equity of 314 million. Our net-debt-to-cap-percentage was reduced from about 40% to 14%. We repaid over $50 million of debt during the year, and our cash balances grew from 10 to 66 million. We also repurchased 417,000 shares of Oceaneering stock. At year-end, our $80 million revolver was undrawn and available, and we had 56 million more in cash than we usually keep for operating purposes. We're in great shape and ready it expand. EBITDA, during the quarter, was over $28 million. Take a hard look at the cash flows of our technical niche market strategies generate. When you understand the visibilities of our earnings and cash flow, I think you will see a strong company with significant resources and the ability to leverage these resources as offshore markets improve. At this time we are widening our 2003 EPS guidance to a range of $1.40 to $1.60. In a macro sense, this range reflects uncertainty at what rate the offshore oilfield markets will recover. For Oceaneering, the question is one of timing.

Since our last conference call, we lowered our expectations for our subsea products and other services business for the start of 2003. Subsea products profitability is expected to decline due to the timing issues related to umbilical orders. We continue to believe in the strong growth prospects for this business segment is only a matter of when in our minds. The market outlook for other services segment is the most difficult of all our oilfield service groups to forecast due to the short lead-time nature of our customers' demand requirements for mostly production phase remedial work. We continue to take a prudent stance on what the demand for these services will be. We are making allowances for lower ocean intervention class vessel utilization and a reduced contribution from our diving operations. The ROV and add tech businesses should have better years in 2003. We expect our ROV gross margin contribution to increase in a flat floating drilling rig market by virtue of the programs we put in place last year to improve both our ROV marketing and operations abilities. We have repeatedly noted our MOP segment results for 2003 are contracted to be down year-over-year due to the ocean ledging contract extension until May of 2006. Daily revenue and operating margins for the ocean ledging will remain flat for the duration of the contract extension term. In the 2003 PS outlook of $1.40 to $1.60, we project earnings in the range of 20 to 25 cents for the st quarter. 2003 is still expected to be a good year and will like be the second most profitable year in Oceaneering's history.

More importantly, since we have provided proven and improving results over the last two years, we see the earnings power from the current asset base at over 2.50 per share in an improved market. When the market is there and all four of our oilfield segments are performing all out, we have great leverage to higher activity levels offshore. Certainly, deep water activities can be curtailed more so than have already been announced; however, my current sense of confidence is high that we will see a reasonable market in 2003 and our execution will persist at an accomplished level. As I get older and perhaps a little wiser, I see the importance of understanding the macroelements in the offshore services business. There is no doubt in my mind the Measures, who provide approximately 2/3 of the funding for all oilfield services companies, will accelerate their investments in finding and developing lower cost hydrocarbons in deepwater frontier areas. This is a thesis I have been reciting for several years, and I think you can see this in recent BP announcement of concentrating their investment in five areas, two of which are predominantly deepwater denominated and all of which are essentially offshore. As our technologies in product and services become more reliable and cost effective, we are sewing the seeds to grow our markets at a more rapid pace than the more commodity driven oilfield service companies.

I think past performance is a good indication of our investment philosophy. If you followed Oceaneering for a while, should you know we take a conservative approach to adding capacity and an opportunistic view to creating new market niches with our technical capabilities. We will not change our investment strategy. We will continue to invest in technical niche markets, we will continue to be conservative and patient, and we will not overspend for the sake of growth with adequate financial returns. We are not afraid of making big investments when opportunities for reasonable returnes present themselves. In a phrase, we will continue to be conservatively opportunistic. Applying existing technologies in new ways to solve problems in the deepwater frontier is what Oceaneering is all about. Like our annual report cover reads, realizing possibilities through practical solutions. Today we have the physical assets and, more importantly, the people strengths to earn more than we have seen in 2003. The really good news is we are continuously adding capacity through small asset additions and improved people contributions. With our added strategy of taking a harder look at possible acquisitions, I'm confident our next round of major investments will take us beyond our 250 earnings capacity.

So far in 2003, we did complete the $27 million acquisition of OIS International Inspection, PLC. OIS is a global provider of nondestructive testing and inspection services. We also repurchased 176,000 shares in the last few weeks. That is, we got 464,000 of the 3 million that's been authorized, or approximately 15%, which is now repurchased. The OIS acquisition more than tripled our international inspection market presence, and the total annual Oceaneering revenues in 2003 from these business activities is expected to be about 120 million. I expect the acquisition to be highly accretive within the next two years. It is expected to be marginally accretive in 2003, principally as a result of consolidation savings through elimination of redundant office personnel and shore-based facilities. The big upside we expect to realize is by offering existing technical capabilities from OIS to our existing customer base and vice-versa. We now have the ability to operate seemlessly around the world. Together with one other competitor, Oceaneering now shares 75% of the niche pipeline inspection market. Both competitors are about the same size; although, we focus more on the offshore and out-of-way pipelines than they do. I believe with natural gas enjoying the clean energy label and with LMG bets being made by the super majors around the world, this niche service segment will benefit from long-term growth.

I would like to summarize our current status. Our results for the 4th quarter in the year 2002 demonstrated our ability to generate record earnings in a tough market. Our business strategy for 2003 and beyond remains clear. At least to our employees and customers, we are not an offshore construction company. Our cash flows are strong. Our strategy is not based on a one-trick pony. The market conditions that we operate under vary, and it is our intent to be profitable and able to grow over time in any variety of these situations. As we said in the past, do not ignore any of our business segments. For instance, our other services segment was a larger contributer to income in 2002 than most investors may have thought possible. As we better define our low cost solutions to the market in all phases of the life-cycle, we expect to be involved in a wide variety of opportunities, especially those unforeseen varieties that occur with newer technologies. We intend to profitably grow our company to help our shareholders increase returns. I believe our hidden asset is the ability to convert immediate cash resources and balance sheet strength into 2004 EPS. It is our intention to be more aggressive in this area. We believe this is what gets us well into the 3, 4 dollar a share earnings range. We have clear objectives to improve our operations. We have outstanding people that execute our acitivies, and we are not satisfied with mediocre results. I genuinely appreciate everyone's interest in the company, and we would be pleased to answer any questions.

I would like to remind everyone in order to ask a question press star and 1 on your key pad. Limit your questions to two or three per queue. You may queue again for additional questions. We will pause for a moment to compile the Q&A roster. The first question is from Justin Tugman.

I wonder if you can elaborate a little bit more regarding some of the delays you have seen in the subsea products segment and if you can talk a little bit about the impact that that would have on a potential basis on revenues.

Well, it's all in our subsidy products segment. The basic propisition is that the tree manufacturers have longer lead time than the umbilical manufacturers. The fact remains the same that every one of these trees has to be controlled in some fashion. There is a reasonably complex system and fairly detailed technical requirements required to transfer these communications signals from wherever the host platform is to the individual trees. Given the fact that -- and given the background of the management at Oceaneering, who were in the offshore drilling business for a long time -- we saw a lot of opportunities when is utilization was increasing and we were willing to bet higher rates on specific services that the market was going to be confined and at some point in the future. We see the same thing. That's really the essence behind my comment of we're going to bid for margin. We are comfortable that the market's there. They will do something with these trees. They will have to have a way to control them. We are the largest manufacturers of umbilicals in the world. We are comfortable the market is there, and as I said in the prepared remarks, it's a matter of when we get there.

When you look at the sequential decline of revenues, what's on your expectation there built into your guidance?

I would say in the 1st quarter we should be maybe the same or maybe slightly down from 4th quarter. The 2nd or 3rd quarter will be up and then -- somewhere nicely up. As I said in the prepared remarks, I kind of sensed this is going to be more like '01 than '02, where the second half could be a Hell of a barn burner for us. Depending on the schedules, a lot of these things are designed at the last moment. I think the methodology is that the big operators have sort of a general idea how many wells they will have. As they are developing the specific reservoir evaluations, they look at the subsea architecture. I wouldn't be surprised that by the 4th quarter of '03, that we're getting bonuses for deliveries that is won't impact offshore construction schedules.

That would be encouraging. John, let me ask you, regarding your cap ex plans, you generate a lot of cash and have a lot of cash on the balance sheet. If I heard correctly, you are looking for potential opportunities in the MOPS segment the second half of the year. Could you elaborate on those and what other opportunities you are looking? What are your cap ex plans for '03?

That's a great question. I hate to sound like I'm trying to dodge your question. It's a great question. I have been sensitized to the fact that sometimes some analysts will kind of seize on one aspect. A few years ago we had the same thing about MOPS. Right now we are pursuing a couple of great investment opportunities, and I don't want to speculate publicly what the percentage of chance are and what the expected value might be. It's there. As I said in other conferences, this is a big market. What I've said is we will pick out those opportunities in that big market that we can get above average returns. We are not going to compete with the plain vanilla operators. We will compete only in the specific technical and geographic areas that we have edges. We think it's there. I'm not prepared to be specific about anything else.

Okay. Final question then. Marvin, can you give us guidance on your expectation for tax rate in '03?

I would use 35%.

Thank you.

The next question is from George Gasper.

Good morning, everyone. First question is on, John, you mentioned you have a turn around going in subsea products backlog which is nice to hear. Obviously, the forward numbers past the 1st quarter must be dependent on that subsea backlog growing unless there is a sense that the momentum would come from someplace else. I would like to have you answer that, and also could you give us an idea of where the turn around is coming from. Is it domestic or is it international, and as you look forward to all these projects that you are bidding, you mentioned a host of them and a pretty sizable number. How does that break down domestic and international.

I don't have it detailed right now. We are bidding in the U.S. Gulf market in the deepwater areas, and we're bidding out of Aberdeen for a lot of international areas. We probably think about it more in terms of West Africa, deepwater Gulf, Brazil, and other. Right now the Aberdeen plant is doing well. We are not as well on track in the U.S. Brazil is a kind of wait and see. That's a big market there. I think you are right. Our thesis is really very simple. We think that subsea products is going to be better.

It may not be a record in '03 the way it was in '02. It will be good. Other services we think will be good, again, not a record: We think that ROV's will be up, certainly improved over '02. We think MOPS will be consistent, a little bit down in '03. That's why we are about 10% off and we are about -- that also includes a 6% hickey for the tax rate. What we are saying is in about the same kind of market, '02 and '03, we will earn about the same money. Most people are classifying this -- and I think we are all in some quandry as to why when you pull up to the gas pump and you got $2 gas that we don't see the upstream customer spending more money.

I think that the outlook most people have is similar to ours: '03 is going to be an okay year. Frankly I'm mystified as to why the second half of '02 wasn't better. We can see -- I think the difference here is that it's not driven just by a commodity price increase. We see, for instance, in the subsea products, the backlog at the tree manufacturers. That will translate into hard orders for us. Those hard orders translate into other services revenue for us. The expiration in the ultra deepwater is holding up well. Those margins are good. The margins in the thousand to 3,000 feet are not quite as good, but we think those rigs are going to go back to work. Is that --.

That's pretty good. I can assume then that this backlog build is basically more international than domestic.

It is.

Then, secondly, on utilization outlook for ocean intervention, you had pretty good utilization with the 81% you were talking about. How do you sense your utilization to be this year?

I wouldn't be surprised that it's down 10 points. You have to remember that our internal rate of return was built on a lower utilization than that. Dependant on the mix of jobs, it's really hard to predict what the revenue margin number is there. It really is not nearly as easy to predict as a MOPS contract is.

Okay. Then, lastly, on this EPS outlook, the range you are giving at 140-160, if I take your hindsight guidance for the 1st quarter, 20 to 25, if I take 25 cents off, it's 115 to 145 for the rest of the year. If I divide that by 3, the average quarter has to be 38 cents to 47 cents. Those are impressive numbers. To put out that range of earnings numbers, you must be confident you will lock into decent backlog that propels us in the second half of the year.

First of all your arithmetic is outstanding as I would expect it to be. I think, to go back to prepared remarks, what I'm trying to say is this: We are not a construction company. We don't depend on the backlog. This essence of backlog concept and margin embedded in the backlog. A lot of our stuff is call-out type activities. They are short lead-times. Even in our manufactured products, we are building for the first time some prototype products, and I believe the niched market strategy is damn good. Oceaneering has great mechanical engineering quality technologies, and we've got the ability to go in and sort through a lot of issues. The offshore markets have more issues than onshore. The deepwater has got lots more issues than the shallowwater. I think we are really saying we are positioned, that we are comfortable, and it's there. We think our current base assets are capable of earning a lot more in a bigger market. We just announced record earnings for 2002 in which most people considered to be tough market conditions.

We are saying to you that given the tax benefit that we got in 2002, if we had that same benefit in 2003, we might be able to produce record earnings in 2003. That's really what I'm trying to communicate to you. The fact that I broadened out the range of earnings indicates we are taking a more cautious approach. I'm comfortable that our base business is very solid. Our execution is getting better, and we have been very up front with everybody. You go back to 2000, we didn't have as good of execution of our manufacturing processes as we should have. We got that solved. We've got some great people in place. The strength of this company is a lot to do with the people. The people can go out and elicit from the customer the needs they have and create a product and a service that will satisfy that need. That's what I'm trying to get across to the marketplace.

Okay. Thank you very much.

Your next question is from Martin Malloy.

Good morning. I have two questions this morning. The first was I was wondering if you can comment more about the U.S. Gulf of Mexico in your subsea product segment and your competitive position there and where you see that going.

In terms of the ROV 2, clearly we are the dominant dog in that part of the business. As far as innovative type 2 and pig launchers, hot taps in ultra deepwater, we're going to be the product and service leader. We have a great position in the ability to control a completion process. We have a rental fleet of control systems that go out to do that. In terms of umbilical manufacturing, we are going to have to improve our steel tube manufacturing capacity. We have already ordered the long lead-time items for that venture. It's our intent to beef up capacity in that. It appears to us that the steel tube product is going to be the dominant dog in the ultra deepwater. We will have to follow the market. That's the only place I would see us lagging behind, and, frankly, we are okay there. We have sufficient capacity in Aberdeen to supply the market with that type of umbilical, currently. At some point in time, we will see a big boom of a steel tube umbilical orders. We want to be prepared for that.

What would be the target timeframe that you have for being ramped up and able to produce that in the U.S. market?

I am comfortable any time before the end of '04. I don't think that you will see anything that is going to be -- it's going to prejudice us in that marketplace. I don't feel that. This is kind of eventually we need to do it. We are in the process now of doing it in the most economical manner. We are not constrained by a schedule.

Okay. On the ROV front, what have you seen in the market here so far in the 1st quarter? Have you seen activations?

I have. Let me say this. I probably operate more on anecdotal instinctive comments than I might do on just totally analytical information. My sense is talking to our ROV operations that there is a pent-up demand. The drilling people they are talking to are --and I would refer to it this way: I think there is a bigger demand than the statistics, which is sort of historically correlated, would indicate. I'm not predicting a boom. I'm not saying that at all. Even when we get them I can't predict them. My sense is that we are bidding more opportunities; we're talking to people more. There is a consensus out there that do you have equipment ready if? -- that sort of a concept. I think that's a big part of it. I feel real good about that.

Okay. Thank you very much, and congratulations on the quarter and the year.

Your next question is from Brent Rakers.

Good morning. Let me follow-up on the ROV questions that was just asked. It seems like a couple of competitors may be becoming a little bit more aggressive. I know Canyons got some work with Coflexa (ph), but I think Sansub (ph) won some work in the deepwater Gulf. Is that just two isolated projects or is the market becoming competitive and will the market ever become price sensitive? I know you guys, given your positioning and infrastructure, have been immune to it in the past. Is that an issue?

It's not an issue. I think in the ultra deepwater, we will continue to be dominant. It's hard for me to understand how Canyon, with 17 ROV's, is really a competitor. They claim they're construction denominated, and I don't see that as an issue. Sansub (ph) is an issue. It's a good company and they do compete in the drill support market and it has a rich parent. It hadn't been held to high return standards. I think that's, hopefully, changing in that organization. As far as -- I think you mentioned Halbarton (ph) the subsea group?

Yeah.

I think the confluence of DSND, Halbarton (ph) and all the issues they have, this is not a major concern to Halbarton (ph). They have older equipment, but good equipment. It's a good company. It's well run. The joint venture will be competitive with us. My overall position being you are always concerned about competitors. We are not going just give up our marketshare to anybody. We think our Norwegian operation is a kind of thing we would like to project worldwide. These guys have phenomenal up-time and reliability. We use that. We cleared up any issues we had in West Africa, and we are still dominant in the Gulf of Mexico. Having said that, we have given up a little margin in other places in the world to take on a little more utilization. I don't know if that answered your questions.

That's great. The other questions I have are just housekeeping clarification issues. Earlier in your comments you said right off of 700,000 old equipment ROVs. Was that Q4?

That was Q4.

Secondly, the -- out on the subsea products, the backlog was into January. That $33 million number, is that a pure backlog in terms of you factored the work off and all that, also?

No, that is net. That's what you are asking.

Factor the work off.

The backlog has gone up $10 million. That's the answer to your question.

The last question, we talked about a pullback in the subsea products revenue or subsea products business as a whole in the 1st quarter. A little while ago, you suggested that the the numbers would be flat to modestly down sequentially. Does that beg then that the margins will pull back significantly at the 1st quarter or --.

I wouldn't say significantly. I wouldn't use that word. We may see some margin erosion, but I don't think it will be too bad. I guess what I'm trying to communicate to everybody is really this: Our bet is that activity levels are going to be there for this product. We see the inventory of trees that are in the hands of the big operators, and we expect them to do something with that in the next 10 1/2 months. Our bet is that we can improve margings by the end of the year. That's what we are saying.

Okay. Thanks a lot.

Your next question is from Brad Handler.

Good morning, guys. I was hoping to come back to the subsea product category and talk about the Gulf a little bit. I may have missed the earlier conversation, and if so, I apologize. The -- I thought I heard that BP was doing a tender for its Gulf of Mexico in total. I was wondering if you can confirm if that's true, if you are still in the running for that, are there some other operators that are doing the same thing, and when we may -- several questions here and I apologize -- but when we may hear about the results of some of those tenders.

What you are probably referring to is BP drill support tender. That's what is it. It's about -- at least that's my understanding. I don't know what other --.

I'm sure you're -- you're much more in tune.

We don't think we are in the lead to win that. Let me reiterate to you our desire to win jobs based on operational capabilities and not to win jobs based on price. We may lose a job here and there. We don't think it will be the end of the world. As a matter of fact I would go back to the gloom and doom in our organization several years ago when we lost the frame contract, or the whatever it was that they called it, with a large, large operator in the Gulf of Mexico. They had more leases in the Gulf than anybody else, deepwater. They were the dominant dog in the hunt. Today, we are on every single rig they operate in the Gulf of Mexico, and at a higher rate than if we won the contract. That's the kind of position we take, and I guess the concern that I was trying to express with Brent is that as other people get to be capable and reliable in ROV operations, we may have to take a closer look at the price. Right now we are proud, and we can show over an operational cycle that a few hundred dollars here and there is not important when you are protecting the downtime of a half million dollar a day operation. We are real comfortable that in the end operational superiority will be good.

Okay. That's helpful. I'm wondering, coming back to the issue, I misunderstood the BP situation or misheard it or something. Are there any such kind of frame agreements in play on the subsea products side, and, I guess, if not, has BP started tendering for its Thunder Horse or Atlantis?

What you may be looking at there is that BP has framework contracts or partner contracts in the tree business.

Exactly. I was wondering if they were bringing the same approach to the other stats. They have done it for several bit and pieces.

I'm not aware of any that's there.

Okay.

You have to remember our biggest competitor in the umbilical market is an installer of these umbilicals.

Understood.

We don't sell to them, and they don't buy much from us. It gives us everybody else that is an installer. It's a nice market place to be in really.

That makes sense. Is there any tendering going on for the major projects in the Gulf that are picking up the pace?

I don't have any detail information on that, but I have to say, based on prepared remarks, we made 160 bid last quarter. That's a lot of bids going on.

That's helpful. I guess I had missed the first part. Thanks very much.

The next question is from Victor Marshon.

The first question is just on the Gulf of Mexico umbilical market. You mentioned you ordered long lead-time items to have steel tube capability. I wonder if you can expand on that. Is that indicating construction of a new facility or enabling the current facility to manufacture steel tubes?

It's one or the other. We haven't made a decision on a new facility, whether we need one or not. We need the steel tube capacity at sometime in the future, so we went ahead with the lead-time item.

If there was to be construction of a new facility, would that be in the 25 to $30 million range?

I would say so.

The second question was a follow-up regarding the MOPS, the opportunities you see in the second half of this year. Could you give an indication if this would be Oceaneering owning and operating a MOP versus providing private management for the conversion of a vessel into a MOP without owning it?

All of the above.

All options are open?

Yeah.

The last question is just on the MMS, that they had put out an MTL to operators regarding inspections; that it needs to be done for pipeline and platforms in the Gulf by the beginning of May of this year. I wanted to see if you were seeing incremental activity for that.

Not now. We haven't seen a whole lot of incremental activity.

That's all I have. Thank you.

Thank you.

We have a follow-up question from George Gaspar.

A little bit more on the sense that you have on this ROV market going forward. Are you beginning to see potentially more work from the work oversight of the well hit market as some of this production in deeper water matures? Is there a dimension on that at this point?

Yes. I think what you are referring to, George, is perhaps our alliance with Superior?

Yes. The reentry.

We have got, I think, one job scheduled. We have a couple of P&A jobs that don't require reentry, but my guess is that -- I mean, again, without answering your question as well as I wish I could, there is no question that as the installed base gets bigger, there will be the opportunities. Where I would like to differentiate is our bet is the things that can be done from a $20 million asset are going encompass quite a bit of the wire line and electric line type work. Things that will require more than those sort of rudimentary activities, change in production zones and things like that, more than likely will be done by the big drilling rigs. Our bet is -- the niche there is it will improve the utilization of the intervention class vessels and provide a new service for us which would be subsea reentry into wells. Thats the business we are in: identifying that niche market.

Our bet is that a $20 million asset will be able to do those rudimentory things that allow for an operator to file a plan of production with MMS that says, I will produce these three zones; and I'm not going to won't have to depend on a $200,000 a day drilling rig to come out here and open up the second and third zones. I can do that from a smaller vessel. That's what we are trying to sell. I think, obviously, these are fairly high depletion-rate wells. There will be a lot of tree recoveries. I think there will be an active market in used equipment in the next five years. There will be a lot of P&A work. The answer is we expect to have some of that business this year. Absolutely. As opposed to last year when we didn't have any.

I have a second question in the area of space program. The recent Columbia situation, does that create any anything for you in terms of what you have been working on in the space area?

You mean opportunities for us?

Yes.

First of all, let me -- some of the listeners may not be as familiar with our space activities. Let me, first of all, caveat it with this: 3% of our total exposure to Oceaneering, perhaps less than 3%. Given that, there two opportunities that I think that we may see. The first is in the acceleration of the reusable rocket program. We have offices in Huntsville, Alabama; and we are a thermal protection systems manufacturer and engineerer to that program. I think it's possible that the reusable rocket significantly lowers the cost of resupplying the space station or putting telecom satellites or other DOD-type satellites in orbit. That could get rejuvenated. That's an interesting proposition. Secondly, we just won a contract in conjunction with Raytheon to provide operations in engineering for the neutral buoyancy lab at Johnson Space Center. That will be an interesting point of view.

The space program, like just about all government programs, they do an immense amount of training. Sometimes we think that training is -- in private business we probably wouldn't do as much. On the other hand, the idea that the more you train, the less chances you have of making any mistakes. It'll be interesting to see how that goes forward. That could either be postponed depending on the revival of the shuttle program. My bet is the shuttle will continue to fly. I think it will be a fairly rapid inquiry. We have a lot of stuff left undone in the space program, or particularly in the space station, so I'm betting that that something good is going to happen there. Actually, George, neither of those will be material to Oceaneering's results.

Thank you for that.

The next question is from Joe Agular.

Good morning. Have you given cap ex guidance for 2003.

We didn't say anything. I guess we implied, Joe, we spent $27 million to buy OIS in January. That was the only change we made in our strategies, we are taking a harder look at acquisitions. I don't see the ability to plan cap ex in acquisitions as well as you can plan it for organic growth. Organic growth, the long lead-time item on the steel tube umbilicals for subsea products, is in the works. There will probably be a couple more ROV's that will built. Clearly there is special purpose opportunities out there that I would be surprised if we went didn't win. We are not going to build any more boats or vessels; although, there are some longer contracts that could be there. The maintenance cap ex is about $20 million. That's probably the best guidance I can give right now.

Looking back, last year you probably did about 15 million or so of growth type cap ex and 20 million maintenance, in '02?

I guess so.

My -- I wanted to tie this in to some of the guidance that you gave with respect to $1.40 to $1.60 range and relate it back to how much of a swing in that range depends upon stock repurchases with the strong free cash flow you have and how much of it is a marketer's or combination of both?

That's a great question. That's a great question. I will see if I can answer in good shape for you. If the market doesn't -- if it's not the same in '03 as '02, whatever that means, if it's not the same, we will be at the $1.40 end of the range. If the market is the same, we will be in the middle of that range. We will be at the top of that range depending on how many shares we buy back, and if we don't have any current use for our surplus cash resoure, that's a good opportunity for us. Then we could, even in the same market, move closer to the high end of that range.

We think given the situation that we see, there are significant investment opportunities in MOPS that, if they would work, we would do that over anything because of the rates of return are good. The ability to consolidate an additional market with inspection services may become available by mid- to end of the year. We are seeing noise that there may be ROV opportunities out there. There is a lot of movement in that direction, and there could be some big deals that, to me, or probably intriguing to us. I think I would summarize what I went on and on about to say, bottom of the range if the market is not as good as '02; and the top of the range if the market is as good as '02 and we hit all of the intermediate targets for accretive acquisitions and share repurchases that is we kind of see on the horizon.

Could I follow-up on one or two things? The ROV market, I think you summarized by saying you expect to be at least what it was in 2002, in 2003.

I think it will be better.

Better? Are you seeing something in the intermediate depth semi-market that is giving you hope for that or is it --.

I think the number one forecast here is that the ultra deepwater will continue and there will be additional equipment for that. That's item one. Secondly, what I said earlier was that I'm getting from our ROV group this anecdotal thing. I tend to pick up a lot of information from a lot of places: Aberdeen, Norway, Singapore, and Morgan City. In the aggrigate, I'm seeing more talk about stuff that could happen. I am not seeing in any of the statistics -- there's no trend apparent that the thousand to 3,000 foot rig count will go up. I certainly am not predictioning a marked increase in that. I'm trying to relate to you that my sense of the market is that there is a pent-up demand in that thousand to 3,000 feet that, I would not use an inflamatory word like erupt, but it could grow. That's what I'm saying.

That's what you base it on.

Like Mexico for instance. Mexico has got the same -- it's got almost the same amount of money spent offshore that they spend in all of Canada. That's a hell of a lot of money. Some of that money will head out to deeper and deeper water in Mexico. By the second half of '03, who knows. Brazil. Petraglass (ph) is sitting there. They are thinking hey, we had some bad raps. We got a lot of opportunities out there. If they get cut loose by the new government, hey, that's a jump off. The new government has shown that it may not be as liberal as it was pictured as being. They may cut those guys loose.

That's a huge foreign currency change for Brazil. A big stabilizener in that economy. We think there's things happening in West Africa where -- there's good things and bad things. Who knows what happens in the Nigerian strike situation. Angola has made internal changes that certainly indicate to me they are accelerating the expiration and development off shore. That's, again, both ultra deepwater and marginally deep water, 1,000 to 3,000 feet. In Asia Pacific, we are getting the same sense. Murphy has a big discovery in Malaysia, and they tend to put the money in that direction. Over all I'm not as gloomy about things as maybe some people are.

One other final question if you don't mind. The MOPS potential, refresh my memory. You all have any rigs in inventory still? I don't recall.

We got rid of that last year.

I thought so. Would this be something that would be, sort of, like, maybe, what you did on the upgrade of the Ziphero (ph) producer or would it be something that you might take title to and refurbish?

Let me say all of the above. I don't want to incite anybody to think that we are about to sign a contract. Secondly, --.

I'm asking in terms of strategy what direction you are going. Will it be an engineering consultanting project manager type on an upgrade or looking to do the same thing you have done on the other jobs, the Legend (ph) --?

We are in the market for both directions. Clearly one is a noninvestment great margin kind of job, and the other is an investment at adequate and above rate of return. That's were we spend our time. I think the priorities for our MOPS group or to find us the right investment opportunity and secondly to keep us in the market. This is what one of the reasons we are in the MOPS business is that it keeps us active in every market that we can sell products into and keeps us active in a lot of subsegments of the markets that we can offer interesting services to, and then the engineering side of it from the feasability to the workover capacity required is a great opportunity for us.

Thanks, John.

We have a follow-up question from Brent Raker.

Two questions. Can you explain maybe in a basic explanation the sequential change in MOPS revenue and MOPS margins, what was driving that?

Could I ask Marvin to get back with you on that?

Absolutely. I will ask one other question.

Hang on. Sequential change in MOPS. Remember that we had the -- in the 3rd quarter -- the million three settlement in 2001.

That's perfect. Lastly, what was the average price paid for repurchase of shares in Q4 and thus far in Q1?

Cheap.

I don't have that. I tell you what --.

We are not going to get into what price we are buying at.

We are not looking at a price, but that's public information. It will be. Let me make one last comment and then we will close the call. First of all, let me thank everybody for being on this call. We had a lot of comments about the subsea products area, and those were good constructive comments, good thoughts from our investors. My sense is that the products business is going to be flat to down in the 1st quarter for sure. The first half probably and significantly up in quarter three. There was a certain amount of buzz around, how do you know that, and I'm not sure I articulated very well that I do know that.

The fact that the tree manufacturers got this sold inventory out there in the hands of the users now will drive a lot of activity, whether it's the 2nd and 3rd quarters or the 3rd and 4th quarters or the 1st and 4th quarters, it's hard to predict that. The bet we are making is that we are not going to let your margins erode by betting that it's all going to happen in the 2nd or 3rd or 4th quarter. That's not going to be the case. So we feel that the margins will improve towards the end of the year, and that's what I want to explain to you. Over all, we are going to be -- we gave guidance for the 1st quarter, 20-25 cents. That's less than the required run-in rate to get to the top of the range. We are comfortable by the second half that the run-in rate will be a little bit higher than that. So, anyway, with that comment, I want to thank you for being on the call. We do appreciate all of the comments that you make to us, and we use that information diligently in the company. Thank you very much.