Oceaneering International Inc (OII) 2003 Q3 法說會逐字稿

Good morning. My name is Shatina I'll be your conference facilitator today. At this time I'd like to welcome everyone to the Oceaneering International quarterly earnings conference call. All lines have been placed on mute to prevent any 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, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. In consideration of other participants, please limit your question to two or three per queue. You may queue in again for additional questions. Thank you. Mr. Huff you may begin your conference.

Good morning this is Jack Jurkoshek. I'd like to thank you for joining us on our 2003 third quarter earnings conference call. I'd like to particularly welcome those of you who may be participating in the Web cast of the event, which is being made available through the company board room service at CCBN. Joining me this morning is John Huff, Chairman and Chief Executive Officer who will be leading the call. Marvin Migura, our Chief Financial Officer and Bob Magoya, our Treasurer. Just as 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'm now going to turn the call over to John.

Thank you, Jack. Good morning. And thank you for joining our conference call. It's a pleasure to be here with you today. We're going to go through some prepared remarks and then we'll be happy to answer questions and take any observations that you have. First of all, we had a good quarter. Our earnings of 37 cents were within the guidance range given last quarter. And met the First Call consensus estimate. Within the context of the generally below-average oil field service market conditions prevailing for the last two years, we believe our overall performance is quite good.

I still remain somewhat surprised by the lack of consistency in work offshore given the prevailing commodity prices. We're seeing more delays in drilling and development programs than I would have expected. Nevertheless, offshore and specially deep water is one of the best frontiers for the industry to lower its finding and development cost one note worthy point is we continue to have a positive profit contribution from all of our operating business segments. To be thoughtful in every segment speaks well for our niche market strategy and we're pleased with these results. Our EPS were down year-over-year and sequentially were up 12%.

As we detailed in the press release. We had as good or better gross margin contributions from all of our business segments with the exception of subsea products as we had projected. On your business outlook for the fourth quarter and 2004 is not as good as it was at our last conference call, and I will elaborate on this in a few minutes. Even though our fourth quarter outlook has been reduced we still expect to have a good 2003. As a matter of interest, we anticipate 2003 to be our third best year ever.

I mentioned this only to show how much Oceaneering has changed over the last several years. We believe our quarterly earnings performance in forecasted results continue to validate our niche strategy in what has become a lackluster market. Our focus on providing products and services for deep water subsea completion and mobile offshore production systems is a good way to play the entire offshore life cycle of exploration through production. When you compare us to larger diversified services and product companies we do extremely well.

And for those of you who have still have us in your construction index, we absolutely shine. All in all, the effect we've created an excellent business model and have executed our business strategies very efficiently. For the third quarter operations review, in the third quarter our oil fleet utilization rate was 71%, up from 65% a year ago and comparable with 72% of the last quarter. As expected, both revenues and gross margins sequentially were flat with last quarter. Gross margin at over $10 million was also comparable to the third quarter of last year.

This is quite a remarkable given the average market for use of floating rigs and consequently the demand for ROV drill support services we specialize in. Available ROV systems remained at 125. To give you an update on our mix of business in the ROV segment. Of our 125 systems, 111 worked during the quarter. 67 in drill support and 44 in non-drill support. This compares to 93 working a year ago where 66 were engaged in drill support and 27 in non-drill support activities.

Again, these were snapshot positions and should not be misinterpreted to indicate any type of permanent fleet mix. As discussed last quarter, there's a clear indication of two trends at work here. The first is a definite shift to construction and production phase work and the second is where we were working harder to make the same amount of profit. I continue to believe our ROV management has done a terrific job of meeting the challenges of a very tough market. With the terms of contracts floating drilling rigs rolling over more frequently it's been a logistical challenge to put it mildly keeping high quality systems and well-trained crews available and ready when they're needed.

We sell quality services and our operations are clearly our major key to long-term success. Nothing replaces execution. While we're pleased with our efforts and our results we're trying to find new ways to reduce costs because only by controlling costs can we influence gross margin contribution in a tough market such as we have. Our subsea products margin revenues and gross margins were in line with what we expected. I had hoped our backlog would increase and in fact our backlog decreased.

Consequently, our fourth quarter financial outlook for our product segment is now down substantially from last quarter's call. I will discuss this further in a few minutes. We continued to work on locating a suitable facility for expanding our U.S.-based umbilical manufacturing operation and I believe we'll have something to announce on this soon. Our inspection services revenues and gross margin continued to grow due to integration of OIS acquisition earlier in the year. This acquisition is caused an increase in SG&A expenses which is in line with what we expected.

Our mobile offshore production business had another good quarter. All three of our MOPS units remained under contract for the entire period, and we expect them to remain so for the indefinite future T during the quarter we announced an agreement to invest about $45 million in the Medusa spar subject to certain conditions. We believe the closing of this transaction should occur by year-end and will have a meaningful contribution to our earnings performance in 2004.

We're not going to talk more about our Medusa investment or its expected contribution to earnings until the transaction closes. As we detailed in the press release, the 2004 guidance of $1.40 does not include Medusa or any other acquisitions we may make now, between now and the first quarter of 2004. Our quarterly subsea projects revenues in gross margins increase odd the strength of improved demand for our diving services in the Gulf of Mexico, which is what we had anticipated. Utilization of our ocean intervention vessels was 77%, down from last quarter.

So the good news is that we're continuing to successfully differentiate our vessel-based services and getting work with these assets. But not so good news is pricing is lower and margins are being squeezed. Advanced Technologies had another good quarter. These business operations contributed record revenues and a near record gross margin performance on the strength of additional work for the U.S. Navy. As always, Adtech's results include a mixture of routine and opportunistic jobs. Unallocated expenses sequentially were unchanged in year-over-year increased due to higher restricted stock expense. I'd like to briefly discuss our balance sheet. At the quarter end $115 million and equity of 339 million.

Our debt to cap ratio was 25%. We spent $25 million on CAPEX. In July we replaced our $80 million revolver with a new hundred million dollar revolving credit facility expiring in July of 2007. We borrowed $15 million under the new facility to repay the term loan and have $85 million available for future borrowings. We also had $21 million in cash. Our balance sheet is in great shape and ready to be releveraged as soon as we find investment opportunities which would exceed our costs to capital.

If you add depreciation back to our operating income, you arrive at $30 million for the quarter. And $84 million for the first nine months of 2003. When you take a good look at the cash flows our technical niche, market strategy is generating you should see an excellent business model being well executed. We have a strong company with significant resources consisting of unique technically advanced assets and excellent people who have the ability to significantly leverage these assets as offshore markets improve. Let's take a look at 2003, earnings overall in the fourth quarter. We're projecting earnings in the range of approximately 25 cents for the fourth quarter.

The sequential decline in fourth quarter earnings is expected to come primarily from lower profit contributions from our subsea projects, inspections and Advanced Technologies business segments. We expect the quarterly gross margin from our ROV business to remain at about $10 million level during the fourth quarter by virtue of the programs we have in place to improve our ROV marketing and operational efficiencies. Due to the decline in our products backlog, our outlook for gross margin contribution from our subsea products segment during the fourth quarter is flat compared to what we have reported for the third quarter.

We do expect, however, a substantial improvement in backlog by year-end. Now, some of you were on the call last quarter may remember that I went into some detail about 14 high profile umbilical jobs and let me just sort of bring you up-to-date on those jobs. Of the 14 high profile umbilical jobs with an estimated value of $65 million, I spoke about last quarter, we won 3 and lost 1 as of the end of the third quarter. Since then we have won more. The combined value of these five jobs is $15 million.

The problem here is the 4 out of 5 jobs we won, we only got 8 million of the 15 million awarded to date. Of the remaining 50 million, that is, 7 jobs with a combined value of over $30 million are still pending award, hopefully by year-end. We are optimistic about getting most if not all of these. The award of two jobs with nearly $20 million in value has been deferred to 2004. Based upon the current expectation of the seven jobs I just spoke of will be awarded in 2003 we're anticipating a significant rise in our contracted backlog by year-end. Consequently, we expect our subsea products segment results early next year to start off on a solid basis.

The market outlook for our subsea project segment is difficult at best to forecast, due to the short lead time nature of our customers demands for remedial work. That being said, based on the lack of book work or highly probable work we're forecasting a gross margin decline from this business segment in the fourth quarter. This is due to a very competitive pricing environment for the diving and vessel-based project jobs we perform as well as the seasonal slack period going into the winter months.

For our MOPS business, we're anticipating slightly lower revenues and gross margins from the ocean legend operation due to scheduled maintenance downtime. We expect to see a decline in revenues in gross margins for our inspection business in the fourth quarter due to the seasonality, the demand for such services, particularly in the North Sea. Our Adtech business for the fourth quarter is expected to be down slightly from the third quarter. This is primarily due to timing of work. At this time our $2003 EPS guidance is approximately one.20 which is down from the dollar 40 guidance we gave you last quarter.

The current estimates reflects materially reduced gross margin contributions from our subsea products and subsea projects segments in the last half of 2003. This is our problem and is the reason for our reduction in 2003 EPS for the last two quarters. We now expect a full year contribution from products to be approximately 40% short of our original market forecast in 2002's actual results. This is a reduction from the 25% decline we anticipated just three months ago.

The additional profit contribution shortfall is being driven mostly by umbilical award timing delays. Our assessment of the gross margin contribution from subsea projects in 2003 has now also been reduced down approximately 20% from what we anticipated during our last conference call. There are simply too many vessels and equipment available competing for a very depressed level of subsea installation inspection repair and maintenance work in the Gulf of Mexico. That being said, we have demonstrated in the past our ability to distinguish our services in this market and remain committed to doing so as we believe the RM market is poised for long-term growth as the infrastructure is being put into place to require deep water production services.

The full year assessment for the remainder of our other business segments remains pretty much unchanged from last quarter. Compared to 2002, the contribution from inspection is expected to be up significantly. ROV in Adtech should be up somewhat and MOPS is projected to be down due to the reduction in day rate associated with the contract extension on the Ocean Legend. We're incurring additional overhead costs stemming from the inspection, reflange and Rotater acquisitions, although in the aggregate we're more than offsetting this indirect cost growth with the gross margin contributions from these operations this year.

In summary, 2003 is still expected to be a good year and will likely be the third most profitable in the company's history. More importantly, we continue to see the earnings power just from our current asset base to be significantly higher in an improved market. When the market is there and all 5 of our oil field segments are performing all out we have great operating leverage to higher activity levels offshore, especially to the big growth markets of deep water and subsea completions. I believe past performance is a good indication of our investment philosophy.

We will continue to invest in technical niche markets. We will continue to be conservative. We will continue to be patient and we will not overspend for the sake of growth without adequate financial rurps we're not afraid of making big investments when opportunities for reasonable returns present themselves in a phrase we will continue to be strategically focused and conservatively opportunistic. Applying existing technology in new ways to solve problems in the deep water and subsea Frontier is what Oceaneering is all about.

Today we had the physical assets and more importantly people strengths to earn well more than we currently see in 2004. The really good news is we're continuously adding capability. Both for small asset additions and especially through improved people contributions. Now, I'd like to spend a few minutes discussing our operating leverage and would welcome your questions or observations on these thoughts when we get to the question and answer portion of this call.

Everyone seems to talk about operating leverage. Although no one really has it in today's competitive environment. The analyst community doesn't usually count it as achievable until you've done it. So let me review what Oceaneering has done. In the past Oceaneering has changed substantially by doing so by adding significant operating leverage. How much could we earn of each if each of our segments had a good year. For this purpose we define a good year as a highest gross margin within the last 3 years. Bear with me as I try to illustrate this point without the benefit of visual aids. At the gross margin line in 2001, the last reasonably good drilling market for floaters, ROVs contributed $48 million.

In 2002, subsea products, MOPS and subsea projects contributed 23, 29 $16 million respectively analyzing the results for the first nine months you get 18 for inspection, 23 for Adtech and 17 for unallocated expenses. If we had that kind of year, our gross margin would total $138 million. Since this is substantially more than the 114 million earned in our record year of 2002. I have never been a big fan of let's wait and see and let's something happen. However I believe it's management's job to make changes which do produce operating leverage.

Anyway, just looking at the last three years of changes we've already made, you can see great operating leverage. And I'll challenge anyone to declare that the last two years have been uniquely wonderful or with above-average market conditions. We know that the past three years have not been a boon. Now the common analysis that I just put in front of you for us to earn 135 gross margin is not our peak earnings capability. With our added strategy of taking a harder look at possible acquisitions, plus our incremental umbilical capacity, I'm confident our next round of major investments, which is presently underway, will carry us well beyond our current earnings records.

All in all, our peak earnings capability, with added capacities and good markets, should be well in excess of this brief analysis. We continue to believe in a strong market growth prospects for our products business segment driven by the rise of the use of subsea completions. This has been because this has been a strong historical correlation between the aggregate number of annual tree orders and umbilical contract awards which we expect to persist in the future. The number of subsea tree orders based on information from quest offshore is now expected to increase from around 228 this year to 330 in 2004, nearly a 50% growth rate.

And additional growth is anticipated in 2005 and 2006. Compared to the tree order market assessment we gave you last quarter, the number for 2003 is expected to be slightly down but 2004 slightly up so in total there's been very little change for the end of 2004. That being said quest current range of 300 to 400 tree estimates for 2004 has increased to reflect an increased level of market activity. However, even at the 300 trees the market should still grow by over 30%. Our latest assessment for umbilical awards for 2003 is 11 hundred callers. In 2004, umbilical awards are forecast to grow a rate he commensurate with tree orders by nearly 30 to 50% with further growth expected in the 2005 and 2006 time periods.

More dramatically, steel tube umbilical are expected to increase to 28% of the total umbilical market next year and remain at that level on average for next year as compared to less than half market 2 years ago. As with trees this umbilical market for the end of 2004 is pretty much the same as we presented to you last quarter. Consequently, we're acquiring the world's largest steel tube umbilical manufacturing equipment for installation in our multi plex facilities located in the U.S. and Brazil. New machines for this location will quadruple our annual steel tube umbilical capacity. We're in the process of locating a larger facility suitable for the U.S. equivalent and hope to have something definitive to announce on this shortly.

The equivalent of Brazil is expected to be up and running in the second quarter of 2004. The new facility in the U.S. should be open and producing product in the third quarter of 2004. Total CAPEX, equipment and larger facility in U.S., is estimated in 35 to $40 million range. We're also pursuing a few good market opportunities to expand our presence in the production operations area like the Medusa spar and hope to finalize this investment by the end of the year. So far in 2003 we completed 4 acquisitions.

OIS International inspection, a global provider of nondestructive testing and inspection services was closed in the first quarter. Reflange, a specialty manufacturing operation to expand our subsea product offering, and Nauticos to broaden our nonoil field service capabilities were acquired in the second. A manufacturer of subsea control and chemical injections valves was added to our subsea product mix, offering and was acquired in the third quarter. The total CAPEX cost of these was about $57 million. We have also repurchased over 500,000 Oceaneering shares, that is, 790,000 of the three million authorized last fall, or 26% has now been repurchased. Our latest acquisition Rotater is established an leader for solid reputation for high quality products and excess of 10,000 feet. Rotater compliments our engineering products and services strategy focused on meeting the technical challenges of deep water and will further position Oceaneering to participate in the growing markets for subsea hardware installation and remediation.

We're not trying to be a competitor to the major tree manufacturers, we're trying to position Oceaneering to play a bigger role in supplying them with components and our end use customers with replacement parts complemented with our intervention services. As we said in the press release, we're now estimating 2005 EPS of a dollar 40. This estimate is based on expected earnings from our existing business operations and the announced expansion of our umbilical plant manufacturing capability. Our estimate is predicated on a flat market for four of our five oil field segments and growth in the earnings contribution from subsea products.

Even after expensing an estimated $2 million associated with moving our U.S. facilities, we believe the growth in product profits will occur due to increased umbilical sales and more specialty hardware sales from our OI group including the four years benefit from the reflange and Rotater acquisitions. Substantial recovery and market demand particularly for our niche ROV and subsea project segments currently we'll be able to improve on this estimate by utilizing existing extra capacity. Additional 2004 earnings are also possible from further asset and acquisition investments, including the Medusa spar.

The timing and magnitude of these will of course be announced as investments are made. In summary, given the ambiguity surrounding the general 2004 market outlook for oil field services, we like our position. Earnings growth in 2004 of at least 15 percent is well within our grasp and we're positioned to achieve additional upside earnings contributions from one a better market than would allow for which would enable us to use our operating leverage, two additional asset investments like the pending Medusa spar, and three, further acquisitions. Only time will tell. Although I still believe 2004 could well turn out to be another record earnings year for Oceaneering.

Now I'd just like to summarize our current status. Our results for the third quarter again demonstrate our ability to generate good earnings in a tough market. Our cash flows are strong. Our niche business market strategy is clear. Our strategy is not based on a one trick pony. The market conditions we operate under vary and it's our intention to be profitable in virtually any market scenario and able to grow under a variety of situations. We intend to profitably grow our company to help our shareholders increase their returns. I believe our hidden assets are our operating leverage and ability confer to our immediate financial resources and balance sheet strength in the 2004 and later EPS. It is our intention to be more aggressive in this area. We have clear objectives to improve our operations, outstanding people to execute our activities, and we will not be satisfied with mediocre results. I appreciate your perseverance in letting me go through the prepared remarks and we'd like to listen to any observations and answer any questions you may have.

At this time I'd like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Justin Tugman.

Good morning. Gentlemen, I was wondering if you could help me understand a little bit here on the subsea products business. I know that the orders have been delayed in the second half of this year, but when I look at the Q3 results, we saw a revenue increase, but profitability was down. Is this a mix issue, number one, or is it a continuation of poor performing contract that could impact your results going forward into Q4?

First of all, let me reassure you or assure you that we don't have any poor performing contracts that we've driven losses out on, we don't have any operational mess-ups. So the product mix, you know, has changed. We've got the umbilical businesses is down. And I would tribute it really to two things. Failure on our part to add the steel tube capacity a year ago. We should have probably been on top of that. And secondly, I would attribute it to not as crisp of marketing as I would like to see us do. And so have we made some bad decisions in that area. And so it's just really a lack of capability. Probably there's some costs. We had some additional costs while we were, quote, waiting on some things that we thought were going to happen. And that were not contracted for and we probably sustained some additional costs that in retrospect were not necessary.

And you mentioned that the mix has changed in the business. Looking at the year-ago results, you earned a gross margin of 28%. Is the ability going forward with the changing mix, are you going to be able to get back to upper 20 levels on the margin line?

I don't think so. I think that what's going to happen going forward is that we'll have a larger component brought in materials with these steel tubes. So we probably won't get the 28% level. We will do better than we're doing now. But the big change is going to be in the revenue line, where the valuation of these things is going to go up. So that's really what to look for. I think that in this particular segment, I really do believe that a precursor to better performance is backlog. And this quarter I was really disappointed that we didn't do a little bit better. Having said that, it takes two to get an order. It takes somebody to give it to you and it takes somebody to produce it. And we only missed one of the five orders that was awarded. Now, it was the big order, but nevertheless, you got to give yourself some credit for getting 4 out of 5.

OK. And on the ROVs, you mentioned that you're looking at cutting some cost. Could you give us any specifics there and what type of cost cutting as well as cost savings you may be looking at achieving?

The costs that we believe that we can save money is really from the, our ability to prolong the life of our umbilicals, umbilicals that the ROV uses are the cable that transmits the electrical power. The fiber optic signal to the vehicle itself. These are expensive. They're very, very high value, and we believe that we've got some ways of operating the systems that should prolong the life of these umbilicals.

We also believe that, you know, a standard maintenance program will prevent catastrophic type failures. We've got an excellent training program for our people. And we think we just have a better handle on our maintenance costs than we've had before. Now, what we've got to do, Justin, is we've got to take sort of that same philosophy of preventive maintenance. We've got to ensure that our green activities enjoy that same look at avoidance of catastrophic cost issues. Our diving operations the same thing.

We don't have quite if same amount of leverage in the inspection group. We've got similar issues in our umbilical manufacturing process, where effectiveness is probably more important than efficiency. That is, you can destroy a lot of product with just a small mistake and a long length of umbilical. So we operate under a continuous improvement process. I'll spare you the Speech on it, but it really is an excellent way to socially motivate people. I think it's working well at Oceaneering. We've got some really top technical people that have figured out a lot of things.

OK. Thanks very much.

Next question comes from Mary Sufray (ph).

Hello. I'm wondering the delays from your customers, what are the reasons or can you put your handle on some kind of trend or reasons why you think things are going to improve?

Yeah, I can. I think in the Gulf of Mexico. One trend we're seeing is that we are still -- we are the -- we're sort of at the end of the food chain here and we see our customers dealing with each other on marginal costs versus full costs. By that, what I mean are the arrangements for one operator to use another operators fixed cost production system to put his product through that production hub is difficult. . The owner wants to charge a high rate for that, whereas the producer of that pot of hydrocarbon sees it more as a marginal cost to the operator. So there's a lot of disagreement about that.

We've also had some bad luck geologically. Some of the opportunities -- and we follow these opportunities from, I won't say from studying it. But when we have potentially good news in a customer's drilling program, you know we're there with a full-service viable solution, which includes some installation capability as well as product capability. There's a lot of -- there's better market synergy that we're not using, not doing as well as I'd like to see us do there. The delay in some of the overseas projects, I think these are large massive type of projects. You know, as an example, you know, we know that one of the government agencies in Africa wants the country to have a 15-year production to reserve life ratio.

And what that means is that that's a stimulus to these production sharing agreements, where the international oil company goes in and makes some sort of deal. It means they want them to explore more rather than develop more. Or do it in a balanced way such that the country sees a good reserve ratio production number. Which I think is probably good national policy and in the end probably should stipulate more activity in those areas. I think that's happening all over again.

Would you describe yourself more as reactive there isn't much you can do proactively?

Going to give you a long answer now but the bottom line is yes. The long answer I'd really like you to be patient for just a second is that there are some things that we can do. Since we do, are mostly a S.F. company, we can provide some services with these products that some of the other product companies can't do. This let's us concentrate on some of the smaller operators worldwide. But particularly in the U.S.. and so we're trying hard to find ways to differentiate ourselves from some of the other manufacturers of the umbilical products. We're very differentiated on the basis of our OIE products, some of which are even prototype products. So I think there is some differentiation. But in the end I would have to say that the truth is all oil service companies are reactive to the market T there is really -- that's just a fundamental answer and anybody that tries to deny it is not right.

OK. Thanks a lot.

Your next question comes from Joe Agular.

Good morning, John. Couple questions. First, with regard to your guidance for 2004, it sounds it's pretty simple in terms of every segment being basically flat in your assumptions. I just wanted to make sure I understand correctly in terms of the products guidance. You mentioned, I guess, sort of the idea that you thought your product shipments -- excuse me you your products business would track to the tree business which is up 30 to 50% in 2004. Are you talking orders or shipments and/or revenue.

It will be shipments. That really is the -- we've looked at it. We've looked at some regression models. Even though the models tell us that there's a direct correlation, my sense is that there's probably some lack of coefficient, because the umbilical is used at the installation time. It doesn't generally have near the are long lead time that the tree manufacturers require. So and I think you simplified it Joe and you cut through the whole prepared remarks. And I think 15% is a modest number. And it's all going to come from products. And I feel comfortable about that. First of all, we've got new products that in the second half of the year are going to give us additional opportunity to increase our revenues with.

And secondly, we think we're going to eventually catch up to some of this backlog that has been just slipping out. So I think we're very realistic about it. I apologize maybe if I've been more clairvoyant I would have seen we probably wouldn't have quite got there in the fourth quarter. But I think that over the course of a full year, a 15% increase in net income is highly likely. Now, again, I'd like to emphasize to the participants on the call that I'm not going to call that conservative and say that's very realistic number. But it doesn't include anything that can happen probably in the next four months, maybe five months. But by the end of the first quarter, you know, whatever we have announced or have concluded in terms of investments, whether it's acquisitions or new assets, that is all going to be accretive to our 2004 guidance.

If I could circle back to the products revenue line for a second, if you have a fourth quarter I don't think you gave a specific guidance range, but say around 25 million or something like that, that would put you I guess around 105, $106 million in revenue for the year. Are you saying -- and then also obviously what I wanted to tie into this was the Rotater acquisition, which I think when you all made the acquisition announced about 16 million in revenue including that for a full year and in terms of your guidance of shipments expected, are we looking at maybe about 140, 50 million in revenue out of the products segment next year?

I would hope we would have more than that.

OK. So obviously then your assumption on the margin line is pretty conservative.

I think so.

Great. Thanks. And in terms of 2004 sequentially or however you see the year unfolding, is it sort of back end loaded or is there anything in the first part of the year that you see that would cause the first or second quarter of 2004 to look better than say Q4?

Yeah, I think again I would just say look at the backlog on December 31 and if it's in the $25 million range, then, hey, we're going to get started off OK. And then it's back-end loaded to the extent that our steel tube capacity comes on in the second half. So...

Unfortunately you don't report your December backlog until March.

That's true. Don't we have a call in February or something like that?

It's a 10-K.

I agree with you.

I was trying to get a peak into maybe the first and second quarter in terms of trying to model out --

I understand what you're saying. Joe, that's a good question. Let me take my brain trust and see what we got to do. With all this FD, F 4 and F 15 stuff that's going on, we want to be within all the rules and regulations.

Understood. One other quick question please. I know you don't want to talk specifics in terms of finances on Medusa, but could you give us an idea of maybe what types of hurdles remain to be cleared and perhaps is there a potential for you to get a full year in 2004 out of the contribution from that investment?

I think that -- let me answer the last part of it and say I'm breaking my rule about not talking about it. My guess is if we didn't get a full year we might not make that investment.

OK. Any comment on what type of issues remain to be cleared here?

Joe, I'll address the first part since John took the easy one. And I'll confirm that I think we'll get it closed in I think we said by the end of this year in the press release and we'll stick with that, and it's just going on through the financing process right now. And these days, getting project financing is a little bit tougher than it used to be. There's a lot of Is that the banks need to the and Ts they need to cross. But we're comfortable right now that it's reasonable to put in our press release that we think we're going to get it closed before the end of the year.

Excellent. Thanks, Mark.

Next question comes from John Harlow.

Would you explain to me what the business model is for the Medusa spar. I don't comprehend the business. Seems like you buy it and lease it back to Murphy and Murphy's partner. Is that correct?

Yes, based on a tariff arrangement and then there's a lot of work around the Medusa spar and area mutual interest and the tie-backs and we think it's helpful to us and we think it fits into our mobile offshore systems and we like the spar technology in the Gulf of Mexico. This isn't going to be the only field that the spar is used on. I mean I don't know how long that this is going to last with Murphy. Hopefully it lasts a long time because it means they're tying back a lot of production and that's a lot of work out there for somebody to get with that work, which we're qualified to do. Then the residual value of the spar is probably, you know, you pick a number and you pick a time and net present value it back and say -- it's a business that we're very comfortable with, and it has a good relationship to what we do with our other services.

Understand your other services but isn't that a bit of (inaudible) iron and a business that doesn't have dumb iron?

I understand your point. I mean all these production assets are dumb iron. There's none to are smart iron in terms of ROV smart kind of things. But the whole game in this mobile production business, and you know some people like it, some people don't, is that on the come out row you want to get as close to payout as you can. Then you want to have as generic a system as you can have in order to be able to move that to a new location. My personal point of view is that I think spar technology in the Gulf of Mexico, because of reliability of subsea hardware, and the ability to tie back from subsea locations, I think that that's going to be the preferred solution of choice in water depths greater than, say, 2000 feet of water. So I think the future of this thing is good. I mean I like it. I do appreciate your comment about dumb iron. I understand it.

I mean your business a lot of your returns being that you like to say being better than others is based on your intelligence quotient I guess is the way to describe it. This just doesn't seem to fit there at all?

If we can generate some additional business activity by being a partner in the spar, you know, that's going to have some value to us. If we can't, then you're right, it will just be an investment and a day rate model of a big asset that the residual value will determine the long-term returns for.

How can you win or expect to win that business without spending 50 million bucks on the spar?

I think -- let me assure everybody on the call that, you know, our bet is not this other business. I think your assumption is perfectly valid. We think we can win that business. We think our technology and our ability to come up with the best solutions for these tie-backs gives us an edge over other people anyway. So all I can say to you is we wouldn't be making this if we didn't have a reasonable return on our investment. That's sort of bottom line. That's what we're in business to do. And we're trying to keep it consistent with the businesses that we're in, and we're in the mobile offshore production systems business. And we're in the remediation and installation business in the Gulf of Mexico provision of products that are integral to that tie-back.

One last question about this. Assuming that this stays at Medusa over its economic life, what's the pay-back here?

Well, let me --

Does it pay back itself before you make the assumption that you move it to some other --

I think it probably would. But let me do this T as soon as we finalize the transaction, if we do finalize the transaction. I mean there's still some doubt about that, but if we do finalize the transaction, you know we'll lay out the whole thing for everybody.

That's what we said we weren't going to talk much more about the Medusa.

I take your comments well. I understand your point of view. I think when we can talk more details about some returns and so forth, you know, I think you may change your view of it.

I really don't have one because I don't understand it, as you see from my questions. I don't know if it's a good idea or a bad idea. But just doesn't seem to fit. Doesn't make any sense. But thank you for answering my question.

It's a good idea.

Your next question comes from Brent Rakers.

Good morning. We never really hit upon this last conference call, but in your ROV segment, this is the second 67 quarter you've had a major expansion in the non-drill support aspect of that. Maybe double over where it had been for the last two quarters ( could you expand where that's going? Is that construction, is that platforms what's driving that growth?

It's all the above. It's a mix of work, both in the production remediation off of our vessel and vessels of opportunity. It's construction installation support. And it's some TLP and spar type of units that have gone on. So it's a -- I think really, Brent, obviously I don't want to sound like a smart ass but it did remind -- my answer was going to be that who is that guy Willy Brant the bank robber why do you rob banks he says that's because that's where the money is. The reason that we have a larger percentage of work now in the non-drilling segment is that's where the work is. And I think that's part of what I've been bragging on is that we do adapt to the marketplace. I mean those of you that followed Oceaneering for a long time know that I came out of the drilling business and I don't like assets that you can only do one thing. I like assets that can do lots of things. And I think we really are proven in our capability in doing that. I think ROV management has done a terrific job. So again it's not a permanent mix. Although we are building up more capacity, more capability and again I think what's driving that for us is our engineering and the integration of our tooling business, our Oceaneering intervention engineering came from ROV tooling side. And so I think all of that is a real plus for us.

I appreciate that. Can I get you to expand a little bit though I guess on the construction specifically. What sense do you get of seasonality in those areas are they supporting ships in the Gulf of Mexico and North Sea that might have a winter downturn?

Yeah, I think so. I don't have a list in front of me, Brent. But no question that the ones that are supporting pipe lay activities are going to have a winter downturn in the Gulf, as well as I mean North Sea there's probably not a lot going on. A big part of it would probably be west calf ka. We moved an enormous amount of equipment into those areas in west Africa. We're building in Brazil. We've got I guess about half of the rigs that have gone to Mexico. So...

Then I apologize if I missed this earlier. Did you comment at all on the share buy back or shares bought during the quarter?

We didn't buy any shares during the quarter. I just mentioned again that we bought about 25% of the 3 million authorized at the beginning of the year.

Last question, we talked -- you talked a lot about how the market continues to shift more to the steel tube side. Could you give us a sense of maybe what Oceaneering's historical market share was in steel tube and then whether your growth is predicated on agreeing that market share or just participating in the growth of that market?

Man, that is a -- well, we think -- we definitely will grow our market share. We're not going to quadruple our capacity in the steel tubes and one plant we have to do that in Scotland no question we're going to grow our market share in steel tubes. It's not as highly a competitive area. I mean there's only two other manufacturers. And so I think that the growth in the market is going to give us, you know -- we're doing the same thing -- let me say this, but I think we're doing it about a year late. We're doing the same thing we did in the ROV business. We captured a lot of the growth in the market and that's how we built our share in the ROV business. Starting in 1997, we saw the drilling market for deep water operations was going to be dramatically changed.

We jumped out in front of everybody and built out equipment. Now, it was probably a little easier for us because it was more of a core capability, core capacity, core whatever you want to call it. Whereas manufacturing is a new item for us. And so I probably was a little more tentative about trying to grab the growth of that steel tube market. And I didn't want to do it while we were trying to build a plant in Scotland and Brazil. And in hindsight I probably should have been a little more aggressive.

Thanks, John.

Your next question comes from Stacey Williams.

Good morning, John. A question on products revenue into the fourth quarter. Could you quantify what the impact of the Rotater acquisition was in the third quarter and then help us out as far as does it seem reasonable to add four to five million in the fourth quarter? And then a second question, kind of a follow on to what you were just speaking to on the steel tube side, but could you discuss the timing of getting contracts where your steel tube works for your new facility and also what your sense is of this marketing effort at this time? Thanks.

Let me take the first one the easy one. Rotater didn't have any appreciable poor (inaudible) revenue at all one month in the third quarter. And I think 4 or $5 million is an easy number to see. In terms of our marketing strategy for steel tube growth in 2004, first of all, let me say we already are in the steel tube market. We already are knowing all those customers and it's really a matter of the same customers that we're using thermoplastic change in from thermoplastic to steel tubes. So I don't think there's going to be a big shift. Although I think there will be a hell of a lot more effort, energy put into selling our product than we've done. We can do better than what we have been doing.

OK. Thank you.

Once again, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad.

Let's make this the last question. We kept you all for an hour. And I appreciate your patience, and if there is another question.

At this time there are no further questions. Will there be any closing remarks?

No. Thanks very much for being with us. We appreciate your patience and look forward to talking to you again. Thanks.

Thank you for participating in today's Oceaneering International quarterly earnings conference call. You may now disconnect.