Oceaneering International Inc (OII) 2005 Q1 法說會逐字稿

I would like to welcome everyone to the Oceaneering International first quarter earnings release 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. [OPERATOR INSTRUCTIONS]

Thank you. Mr. Huff, you may begin your conference.

Good morning everybody. This is Jack Jurkoshek and I'd like to thank you for joining us on our 2005 first quarter earnings call. I'd like to extend a particular welcome to those of who may be participating in the webcast of the event, which is being made available through the company board room service of Thomson CCBN.

Joining me this morning is John Huff, our Chairman and Chief Executive Officer, who will be leading the call, Marvin Migura , our Chief Financial Officer, and Bob Mingoia, our Treasurer.

Just as a reminder before we begin that 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 thanks to everyone for joining the call. It's a pleasure to be with you here today.

Given the failure of the land [rollis] to defend the OSX yesterday, I'm pleased to bat lower in the order and see what you think of service companies who do not rely on large single-person -- purpose assets can do in an improving market.

Net income for the first quarter was more than double our first quarter performance from last year and was at the high end of our guidance range. Earnings of $10.6 million and EPS of $0.40 per share were both first quarter record-setting achievements. The net income improvement was broad-based with five of six business activities contributing to the increase.

We're off to a good start towards achieving what we believe will be a record earnings performance for the year. The major negative in an otherwise great quarter are the problems we're experiencing with umbilical raw materials deliveries and malfunctioning equipment at our new Panama City umbilical plant. I'll review this issue in more detail later in the call.

The performance of our ROV operation was excellent during the quarter. Year-over-year operating income increased over 50%. Our fleet size is up 20% and we raised our fleet utilization from 69 to 77%. We also improved our average revenue per day on hire to a record $5,890 a day and increased our operating income per day on hire by over 15% to $1,140. Sequentially the profit contribution of ROV's declined somewhat due to a reduced level of construction-related work in the Gulf of Mexico.

Higher R&M expenses in mobilization costs incurred in putting several systems to work. Nothing out of the ordinary, just reocurring(ph) job mix and timing of expenses that we face with running a fleet of our size.

Our Subsea Product segment had what could generously be called a poor quarter. Our OIE specialty products group turned in an outstanding performance, particularly with regard to sales of ROV [twoing], valves and installation work over control system rental services. The culprit was our poor showing in umbilical manufacturing. Both the year-over-year and sequential drops in operating income were entirely attributable to our umbilical manufacturing operation.

The day -- delays we're experiencing with raw material delivery times particularly for super duplex steel tubes, will take some time to work out as our suppliers increase capacity and our customers decide to accept final products manufactured with alternative materials.

To mitigate the steel tube delivery issue we placed orders during the quarter totaling approximately $28 million for tubes to be delivered later this year and in 2006. We believe this will enhance our competitive market position obtaining future umbilical contracts.

The Panama City plant's start-up difficulties particularly the cabling machine underroller and associated component problems, are indeed unfortunate and we are estimating it will take until some time in the fourth quarter of this year before this facility is totally 100% operational.

In the meantime we'll manufacture at this plant deliverable thermo-plastic umbilicals and components required for use in steel tube products delivered by our U.K. and Brazilian plants.

Given these issues we have reduced our 2005 estimate of Subsea Products operating income by 6 to $8 million of which $2 million was included in our first quarter results. We also increased our capital cost estimate to complete the Panama City plant by another 4 to $6 million.

On a positive note, products backlog at the end of the quarter was $91 million and we expect our backlog will grow significantly during the rest of the year, setting a solid foundation for a substantial increase in this segment's financial performance in 2006.

My feeling of market uncertainty for umbilical demand has diminished somewhat by our bidding activity and the recent very dramatic increase in deepwater exploration. Clearly this exploration activity will prestage at least a mini boom in 2000 -- in 2008 for deepwater development.

Our MOPS business continued to produce consistent results during the quarter as all three of our totally-owned units were under contract for the entire period as they were last year at this same time, and we expect them to remain so for at least the remainder of this year.

Our earnings contribution from our Medusa Spar investment, which is reported as equity income from unconsolidated affiliates, came in at a record $4 million, up 1.1 million -- up from 1.1 million in the first quarter of last year and 2.4 last quarter. Both positive comparisons were due to the fact this was the first completely full quarter of production from the six initial Medusa wells.

Our Subsea Projects business which is conducted in the Gulf of Mexico, had an exceptional quarter for this time of the year due to a continuation of Hurricane Ivan repair work by our diving groups and increased maintenance of subsea infrastructure utilizing our larger vessels. Furthermore, we provided the installation services required to tie back the first subsea well to the Medusa Spar.

Our inspection segment reported good results, both year-over-year and sequentially as we are benefiting from our efforts to secure more value-added services and realizing cost savings as a result of actions taken last year to reduce our operating expenses. The profitability improvement was wide-spread, as it came from all the geographic areas in which we operate.

Our ADTECH nonoil business had another solid quarter and was successful in securing a five-year Navy contract enabling us to continue to provide subsuff -- subsite repairs on nuclear submarines. Oceaneering is one of only three contractors certified by the U.S. Navy to perform such work and is the only nonshipyard company. The year-over-over and sequential changes in revenue, gross margin, and operating income reflect normal fluctuations in business activity and changes in the job mix.

In summary our first quarter was at the high end of what we had anticipated and we are looking forward to higher quarterly EPS and performances during the remainder of 2005.

Our focus on providing products and services for deepwater and subsea completions is a good way to play the entire offshore life cycle from exploration through production. Offshore and especially deepwater is definitely one of the best frontiers for the E&P companies to lower their finding and development costs.

To discuss the financial metrics of the Company, if you add back depreciation to our operating income, we generated $33 million in cash flow for the quarter, 30% more than the first quarter of 2004. At the end of March, we had debt of $148 million and equity of $467 million, our debt -to-cap percentage was 24%. We intend to use our strong cash flow and balance sheet to further grow Oceaneering's earnings.

As we said in the press release, despite our reduced Subsea Products profit assessment, the 2005 outlook for our other oilfield business activities has improved since our last earnings release. Consequently, we are slightly raising our 2005 EPS estimate range to $1.90 to $2.15. Had we not encountered the Panama City plant problems, we would of course be raising our 2005 estimate range to the $2 to $2.30 level.

Compared to our annual business activity profit forecast at the time of our last call, we anticipate a higher profit contribution from our ROV business segment, due to increases in our fleet size, utilization and average pricing. This is being driven by market demand that provide real support services onboard and increasing number of floating drilling rigs going to work sooner than previously anticipated and with longer term commitments for work, which has eliminated some of our vehicle idle times provisions.

In addition to the improved drill support activity, we are installing multiple ROVs on a variety of vessels. These vessels will increase the competition amongst installation contractors in the years ahead. These types of opportunities validate our strategy of expanding our presence in all phases of the offshore life cycle by offering a premium third-party service for ROV intervention to the construction companies during the development phase.

While we will continue to dominate the exploration phase by being the ROV company of choice for the major oil companies in their deepwater and ultra-deepwater drilling programs, we are now getting similar attention from installation contractors. As you know, our ability in the Gulf of Mexico to integrate engineering vessels, specialty products and ROV intervention has already placed us at the front of the line in terms of inspection, repair and maintenance of existing subsea infrastructure.

Our MOPS pre-tax income contribution for the year is expected to be better based on increased anticipated production rates from the initial six Medusa wells and the recently announced tieback of Mississippi canyon 583 for Walter's Oil and Gas some time this summer.

Subsea Projects financial performance in 2005 is expected to be higher on the strength of Hurricane Ivan, diving repair work, growth in single well tieback projects and an escalation in deepwater infrastructure inspection, repair and maintenance activities.

In summary, we're comfortable in raising the bottom end of our EPS range from $1.85 to $1.90, although we are leaving the $2.15 top end in place. Given the general 2005 market outlook for oilfield services, we like our position. Earnings growth in 2005 of 25 to 30% -- excuse me. Earnings growth in 2006. No, excuse me.

Earnings growth in 2005 of 25 to 30% appears to be well within our grasp in today's market for oilfield services, this rate of growth may not seem all that spectacular. However, when you consider this is on top of our record 2004 results, we believe it is a sign of a company that can deliver consistently better results year after year.

Looking further ahead, we believe there is a trend for our customers to invest their enormous cash flows in offshore and subsea-style projects and consequently our 2006 earnings will be better than 2005. At this time, we think there's a reasonable chance for at least a 20% growth led by an increase in Subsea profits -- profit contribution.

Market demand for steel tube-based umbilicals in 2006 is expected to grow to over 1800 kilometers, more than 500 kilometers, or 40% higher than 2005. Our assessment is underpinned by the expectation that hydrocarbon commodity price declines will not break below the $30 a barrel level.

For specific 02 guidance -- Q2 guidance, we're projecting earnings of $0.44 to $0.50 per share for the second quarter. The sequential increase for the second quarter from what we just reported for the first quarter is expected to come primarily from an increase in ROV operating income contribution.

We finished the quarter with 167 ROVs and expect to put four new vehicles into service during the second quarter. We anticipate the quarterly profit contribution from our ROV business to increase predominantly in foreign areas of operation as a result of higher average pricing and utilization and the increase in the fleet size.

Operating income from Subsea Products is expected to improve to a breakeven result on the strength of a continuation of a strong contribution from our OIE division and a reduced loss at multiplex. Our MOPS segments results are forecast to be flat with the first quarter as all three of our systems continue to work under the same contracts. The financial effect of our ownership in the Medusa Spar is reported as equity earnings of unconsolidated affiliates.

In the second quarter we are anticipating this will fall off slightly as production from the tieback of Medusa North is expected to only partially offset the natural production decline from the initial six Medusa field wells.

The near term market outlook for our Subsea Project segment continues to remain strong due to a continuation of Hurricane Ivan diving repair work. However, we do expect the profit contribution from this segment to decline compared to first quarter. We expect inspection operating income to improve somewhat in the second quarter on a slightly higher revenue and improvement in gross margin. This is based on our forecast of selling more technically advanced services, which have higher margins.

Our ADTECH business financial results for the second quarter are expected to be slightly better than the first quarter. These business operations outside of the oil patch continue to be a steady source of income and cash flow contribution to our overall results.

In summary. our record results for the first quarter demonstrate our ability to generate excellent earnings. Our cash flow is strong, our niche market business strategy is clear, it is working very well. We expect to achieve better results through the remainder of the year and in 19 -- in the year 2006.

The problems we are experiencing with our umbilical operations, while unfortunate are solvable. We have operating leverage to take advantage of the upturn in deepwater drilling and subsea completion activity which is currently taking place.

Broader, deeper, longer, any way you describe the current oilfield services market environment, we think we are in one of sweet spots of this upcycle. We believe 2005 will be our best year-to-date results ever and with 2006 even better than 2005. We appreciate everyone's interest in Oceaneering and I would be pleased to answer any questions or get any comments.

[OPERATOR INSTRUCTIONS]

Your first question is from Ian McPherson.

Hey, good morning.

Good morning.

John, I was wondering if you could talk a little bit about your increasing product backlog that -- up to 91 million at the end of the quarter. How would you characterize any way in which your product mix has evolved over the past quarter, or are you -- or are you in -- see evolving over the next quarter or two quarters? And how you see maybe your margins in that segment reacting as a result of product mix?

Great question. Actually at the last conference call somebody asked me a similar question about steel tubes and what that was doing to the whole thing, and I was a little embarrassed, I didn't have the statistics, but I got them this morning and so I'm ready for that question.

In this quarter the steel tube was 35 % of our mix, first quarter of '04 it was 15. And year-to-date in '04 it was 23. In general the steel tube umbilical product will be a little lower margin because of the large buying component of steel material component.

Having said that and having been working in this business for 37 years. And this is probably something that you've heard in some prior telephone conferences, is that this one is really a lot different than what many of you saw in the '97 little mini-blip that we had. This is much more reminiscent of, to me, of the late 70s type of a -- of a sort of across the board ramp-up. This is the first time that I've had that -- that sense in over 25 years. And I've essentially been in the same sort of job for that entire time period. So I think we're going to be able to push prices very dramatically. Before we realized that we had any mechanical issues in our plant in Panama City, we had an order that would fill the plant for at least a year and a half.

We would -- we just didn't feel that the margins in that order were good enough, we think the market's strong enough and we were just not able to be competitive at the price that our competitors were offering. So, I guess what I'm saying here is that once we get things straightened out in our products group, I think we're going to see increasing margins rather than decreasing margins.

I think that when you start with negative you always got a big uplift. I'm really -- really bullish about things at this point, in terms of improving the margin across all the business segments.

Great. Okay. Just as a follow-up, switching to your equity investments with the Medusa and the Medusa North, after that, what's the strategy moving forward for further type investments, do you want to grow your exposure on the production side or keep it opportunistic as it relates to your -- utilizing your construction and subsea assets?

Well, that's a good question, again. And, the only place that we have any construction look-alike, and sometimes we get confused with some of the companies that are really construction-oriented companies, companies that are -- that are more construction-oriented. Construction, for us, is in the segment we call projects. And actual construction work is like 3 or 4% of this Company's business. So, there's really -- there's no strategic relationship in our MOPS business to construction activities at all.

We do not consider ourselves in any way a construction company. The projects that we're doing in the Gulf of Mexico are production phase-related projects. They're -- now, to some extent we get into a little bit of the development phase and clearly a single well tieback is a development phase type of an opportunity.

We're not going to go into more tunneling facilities into the Gulf of Mexico and we didn't go into Medusa investment betting that it was going to give us a lot of additional work. In my mind for a service company to buy that kind of work is just a tough buy. We can't be an oil company that provides internal services for itself and make a living as a service company, regardless of what anybody may think.

Now, I think your word opportunistic is correct. It -- we're well focused on those opportunities more than likely in foreign areas, I think my prediction that we are not going to see a lot of floating production storage operations in the Gulf of Mexico. Shipshape type of structures. Spars are going to be the production facility of choice out there. Spars and subsea tieback opportunities. So, I would love to add another MOPS unit at a good return with a reasonable payout period. So, but we're not going to speculate on it and we're not going to make it a strategic part of our Gulf of Mexico project business.

All right. Thank you.

Your next question is from Andrew O'Connor.

Good morning, guys.

Good morning.

I wanted to know, John, in light of your bullish comments, can you further characterize capacity utilization for offshore exploration services that Oceaneering provides and that -- for competing service providers and how you see this utilization trending?

Thanks.

Well, I think that's a great kind of general question for the whole industry and certainly for us. Let me give you what we're looking at.

We've dramatically increased our utilization of our ROVs. We see higher specification ROVs becoming more in demand, puts Oceaneering in a great spot because we've got, at least in our opinion and the opinion of most of our customers, the highest quality technology and the best-trained crews. Our crews are doing a lot, and this is an advertisement for the Company so spare me that.

Okay.

We really have got a premium service.

We are getting better price increases than I anticipated that we would even as short a time ago as February. In other words, my point in that call was, was that we probably as we started to peak out towards the 85% utilization number, we probably were not going to be able to press the price curve the way large single-purpose asset companies can do. We've got a little more leverage there than I expected us to have.

And so, I think that's going to be the reason that we're going to compensate for all the mistakes that we made in Products with the leverage that we're gaining in ROVs. It's -- coming from an old drilling contractor, that was where I started in this industry. This is a time period that we really made a lot of money.

It was the beginning of a cycle, it was inflection point of a curve and you really did price off of the next best alternative where you had the only rig in town and you let the customer bid for your services. That's essentially what happened. Now, we're not at that point. I want to emphasize everybody, at least in my opinion, we're not at that point -- certainly we're not at that point at -- in Oceaneering.

But, having said that I see great opportunities on into the future. The big problem is -- the secret in the drilling business was how you go long near the top of the cycle to get you as far into the valley as you could. No, the thing that I learned in the 80s and the 90s was that hell, I didn't have any clue how to estimate how deep and wide that valley was. We don't have quite the same problem, we don't have quite as match upside leverage, but we've got way less downside leverage.

The operator, this is an integral part of his needs in drilling that well. And then -- and then the real benefit to us is the strategy that we're seeing our customers go to some of the new vessel entrants in the construction market and installation-type market and specifying us as the contractor of preference. And we're putting two vehicles on some of these larger vessel assets.

So, our strategy of being at the high end is really starting to work well for us. And we're moving in and providing a more consistent year-round construction phase or development phase opportunity. I love the position that we're in in the Gulf of Mexico in the production phase, where we're one of the contractors of choice for inspection, repair and maintenance activities. We got all services they need, we got engineering, we got specialty products, we got premium ROV intervention, so we're going to do that. Now, can we export that to Brazil? Can we export that to Angola? Nigeria? That's really the question and that's not an '05 or '06 question, that's a '07 or '08 question.

Okay. So, to sum up. Capacity utilization is tight, but do I hear you say that you think it's peaked?

Oh, no I don't mean that it's peaked at all. I said -- Let me resummarize it for you and apologize for not giving you a good summary. The drilling capacity, I don't see a hell of a lot more upside in that. I do see as these contracts roll over for not only us but the drilling contractors, there will be escalating rights in that. And we're -- we already have more equipment than there are deepwater floating rigs.

So, our ability to shift that equipment and add capacity to the installation phase or the development phase of offshore life cycle, that's what -- that strategy is starting to work real well. And that leverage there is even higher than the leverage in the drilling segment. Because, we're being specified by the customers as an intervention company and that's where our advanced technology, and our simulation capability, our engineering capability, what's happening to the construction phase is these guys are getting some new competition.

The old line construction companies that used to be the pipeline are really getting some competition amongst some of these big boats, from some of the boat operators. You've always had a segment of the marine industry that rolled their investments from tankers to product tankers to LNG tankers to offshore assets, to specialty types of offshore assets and we're seeing that money being invested now in this business and the construction segment for us is getting better and the capacity additions for us are coming in that segment.

And then the last phase of this opportunity for us is going to be there will be additional capacity needs in the production phase. And that's -- so it's kind of a rolling opportunity sphere. Now, what I don't want to do is just rush into that and then have some excess capacity in the exploration phase in 2007. I would prefer to roll that forward. So, we're not into a big expansion program at this time. Internal organic expansion program, although we can ramp it up at any time. We've got our own internal manufacturing capacity and it is a new generation of equipment and that's the important part. And that's -- So, we're going to be modest in adding capacity. But, clearly '06, '07 that capacity addition is going to be warranted.

Okay. That's helpful And then, thanks for that.

And then secondly from a prior -- from a prior call, I think -- I think I'm showing 60 million in CapEx for '05, is that correct? And then what I wanted to know is what range of free cash flow would be commensurate with your earnings guidance of $1.90 to $2.15 a share for full-year '05 and what are the priorities for free cash generated this year?

Thanks so much.

Let me get the free cash. We've been saying internally that it's about 70 or $80 million. And I think that number is probably still pretty good number.

Okay.

The priorities for free cash, up until this OSX and Oceaneering involved in it effecting such a tumble. The priority was to grow our earnings organically or with small acquisitions. But, we're probably in a pretty enticing range for Oceaneering to start spending money, buying its own stock back. It's a good investment for us. So, my guess is that we're going to probably do some of that.

Thank you, John.

Your next question is from Philip Dodge.

Good morning, everybody.

Wanted to follow up on the comment that the margin in ROVs was down a little bit year-to-year because of a decreasing portion of higher margin construction work as opposed to drilling support. John, do you have the numbers on that year-to-year, which of the RO-- how many ROVs in construction market and how much in drilling support?

I apologize. We normally give out that information and I didn't have it in the statistics this morning. I know we had an unusually strong construction mix in the fourth quarter last year. But, I'll give you that information. I'm sorry I didn't have it in the call.

Okay.

And, then I wanted to make sure I understood the detail on this reduction, 6.8 -- 68 million of what you expect from subsea products. Is that what you think you won't be able to make at Panama -- the difference between -- you won't be able to make at Panama City and you can't make up from the U.K. and Brazil? Is that how you arrive at that number?

Right. It's entirely to do with steel tube production. The cabling machine is the -- is a critical component that's not working properly for us. And, that cabling machine is what wraps the steel tubes into these big bundles. It was -- it is the largest steel tube bundling machine in the world and I will spare you all the agony that I've had as to why and when and who and so forth.

Sounds like torture.

Just suffice to say, our component manufacturing in Panama City will move forward. We will have to do the steel tube cabling either in the U.K. or in Brazil, which still has great capacity for it. We are operating it as a unit. [Whereas] three plants that make a similar product and we can rotate capacity within that unit. But, overall for us, it's our estimate that we're going to lose at the op incline 6 to $8 million as a result of a lost opportunity for the capacity reduction in Panama City.

And that number is net. It's net of what we're going to do in U.K. in Brazil.

What we're going to make up, yes.

Does that assume you'll be at steel tube capacity in U.K. and Brazil?

Probably. We didn't book it as total capacity. But, it will be close.

Okay. Thanks very much.

Your next question is from Peter [Yudo].

Hey, guys. Good results despite the problems at Panama City.

Just on the -- is there any type of insurance that you have, being that it's a design flaw and not a problem that was created by yourselves or is there business interruption insurance? And then I had a couple of follow-ups. Thank you.

I will let Marvin answer that question and then I'll just have one comment about it.

I'll answer the first -- start with business interruption insurance. We are looking at that.

We're not -- at this time we have not included it in our projections, any expected recovery. So the numbers that you see there are full cost. We're looking at our coverage because it broke so early in the cycle. It -- we're going to have to argue that it was interrupted, not that is was just poorly designed to start with.

And as far as the design question, I think this is something that it was an inherent design in the machine and it's something that became apparent very early in the production cycle and we've got to fix it now.

I think as a philosophical tenet to the Company we really don't depend a lot on the insurance. We have large deductibles. And, I don't like our operations people thinking that we can run to the insurance industry to cover operating mistakes. I don't want to go too far overboard, I'm not a cave man about that, either.

Clearly if we've got insurance, we do have property damage insurance that is going to react to some of this, I'm sure. But as far as business interruption insurance, we're just going to take a close look at it, and see what we can do. Bottom line is we're not counting on it. This is a internal issue with me and we're going to fix it and get it done.

I can respect that, but if your insurance does stipulate coverage, then -- ?

Absolutely.

We're going to go for any money, any coverage opportunity we have. This is the very early stage that we're mainlining this. So, I want you to know that we are going to pursue that to the extent that we have coverage and that right now we're talking about 100% of the cost, nothing net of projected recovery. We're not --

Let me put that in perspective for you. This is the twelfth day that I've known about this issue. So, my concern early in the quarter was that we were running a job that we were not doing well on. And, I was indisposed partially at the beginning of this quarter. And my sense was that we needed to shift that to some other manufacturing operations and that would -- and we would just accept that cost penalty on behalf of helping our customer.

That was -- in the end service companies really have to do that. We need to do that. We -- and I was uncomfortable that we hadn't made that decision earlier. As it turned out, what it did is uncover a flaw in our installation, in our operation, it did interrupt our business and we did have to adjust to it. But as far as the engineering side of this thing, I've only been aware of it for 12 days, that we had this type of problem.

I don't want to spend too much time on it, I know you guys will handle it.

Two other quick questions, one on CapEx. Can you just give us what your capital spend plan is for this year? I think you talked about it in the beginning but I must have missed it.

It looks like from the report, you spent 20 million and I'm going back to a prior call. From my notes here, it looks like you indicated that you'd spend 25 -- no more than $25 million for the year.

Peter, if I may, I'd like to adjust that. Your recollection of what our earlier indication was on the call is correct. It's difficult sometimes to break out maintenance CapEx from growth or added capacity CapEx. And what we said is that we can run this Company on a, I think the number was 20 to $30 million maintenance CapEx.

In the $20 million that we've spent in the quarter, the biggest piece was ROV's almost $9 million. And most of that is, as John indicated, adding a few high spec units to take advantage of this incremental work that we are receiving.

Additionally, we added some additional technology to our inspection in automated ultrasonic technology arrays and those -- is really adding -- as opposed to maintenance it's adding additional technology and to our inspection and we said, we're trying to increase the margins by higher value-added services. And then there's some other stuff that would be maintenance, like lease hold improvements and last item would be capital costs that we're spending to implement a new ERP, as we implement PeopleSoft in 2005.

So, I think the 2 -- $20 million isn't far away from the 20 to 30 of maintenance CapEx because we are intending to continue to grow our profitability and by adding organic growth, new assets or higher technology whenever we get the opportunity.

Yes, what I -- I. I think what Marvin said, is that in the CapEx that we spent this quarter, probably 3 to $5 million is maintenance CapEx. And then there's a million and a half, $2 million that we're spending on a PeopleSoft system. Frankly to me that's maintenance CapEx. I don't know how other people would appreciate that. I've seen estimates that internal rate of return on these new systems is 50%. Personally, I don't buy into that. But, is that an efficiency improvement in the Company that translates into higher margins? I don't know.

Well, guys, I wanted just to understand then, what is the total CapEx that you are going to spend for 2005?

I don't think there was a distinction last time between maintenance and growth and then -- which brings up another question. How are you going to do 70 to $80 million in free cash flow if you're going to spend whatever number you're going to tell us in terms of CapEx? I apologize for -- because I'm getting frustrated.

Precisely what we said last time on the call, we expected our maintenance CapEx to be $25 million and after making an allowance for some working capital needs this year, the net uncommitted cash was around $80 million.

Okay. And what we said is that we had no CapEx plans specifically laid out for anything else other than the issues that Marvin just brought up, is that we would spend money on as-needed basis to modernize and grow the ROV fleet, and any other opportunity within any other operation that we have that might require more capital. And our plan since that time has not changed.

I don't want to quibble with semantics, but when we talk about free cash flow, we are not subtracting any potential acquisitions that we may make or any additional organic growth opportunities from it. It is, as Jack said, a better way to use -- to describe it is uncommitted cash flow.

I think his question is right on, though. What everybody wants to know, is what are we going to do with that money to grow the earnings in '07 and '08. Maybe some in '06. What we have given you a peek at is in the first quarter we've added $10 million of capability to the Company to grow earnings, grow it in the ROV segment and in the inspection segment. We've got -- we're looking at several acquisitions, smaller types, we're looking at probability of increasing organically again, ROV segment throughout the year. If we continue to get the same type of opportunities in the development phase, by going on these new vessels with high spec equipment, that's going to be a great investment opportunity for us.

And then, I certainly alluded to the fact that at $31 a share, Oceaneering represents an attractive investment for us. So, I don't have a whole lot of problem saying that we can use that money. I do have some problem committing to you or anyone that we are definitely going to use that money. I can promise you we are not going to spend that money unless we believe that it's going give us a high rate of return. As you move up in these cycles, that high rate of return just gets a little harder to do.

Fortunately I think we're going to have a little more growth opportunity in ROV business than I envisioned, even as short a time period ago as February. And that's a good sign and that's really what I was trying to relate my earlier comment to. Is that, this is more reminiscent to me of a late 70s, early 80 time period than it is the '97 time period. And by that -- I think that's probably underlying a lot of people's thoughts in the marketplace, of "Hey, you know what happened in the late 70s, early 80s is that the entire industry -- oil services industry went berserk."

We added capacity at a phenomenal rate and then it took us 20 years to get that capacity out of the system. So, I don't think many of the managements that saw that phenomena of 25 years ago, are going to rush into the marketplace here without contracted requirements.

In ROV segment, we'll have contracts on that. We're not going to just build equipment and inventory it. We're building equipment for specific contracts. So, I'm pretty -- at least at Oceaneering, I think that hey, we got a great business in front of us. Let's be conservative -- let's continue to be conservative.

It's worked well for us, we've gone from a diving company to a high technology company in the last 19 years. Let's continue our growth. Let's don't get carried away. But let's continue to look for some big opportunities, particularly in the MOPS area, production work. They're going to be there and let's take advantage of them when we're ready, when an opportunity presents itself and let's don't force the issue here.

One last question, guys, just on the share repurchase. Will you do enough to offset, it looks like, increasing share creep. Shares went up about -- over 2% sequentially. If you're looking at share buyback, I guess my -- as a shareholder would love to see the shares actually go down.

Yes. I think what you get is a natural phenomena. People are exercising options. They'd done that last fall, and early part of this year. And clearly we've -- I'm a significant shareholder. So, I agree with that comment. We do want to bring in some of this stock. But, I think it's more predestined as an investment as opposed to just a creep in the -- in the share [block] -- in the share dilution.

On both counts, CapEx and share buyback, I think that's what we've got to talk about, is where there's no predetermined hurdle rates or predetermined commitments and if we're going to be opportunistic and take a look at every day, whether -- what's the best use of our cash on an outlook basis. And I share the same concern, I would like the denominator to go down, too. It helps -- EPS is definitely as accretive.

I think it's a great question. I think that's a central question, not only at Oceaneering, but in the whole industry. What are you going to do with this cash flow that you've got? Hell, let's go -- what is Exxon going to do with the $40 billion in cash that it has currently in various bank accounts? If you tell me that Exxon is going to ramp up it operation and go in Nigeria, deepwater Gulf of Mexico, then hell, I'm going to ramp up right behind them.

But, I've got to see Exxon doing that. And I'm using them figuratively here, not as a specific example. But, that's where we got to go. Oil service companies have got to be reactive to their customers' requirements. And so, I have been continually amazed that there hasn't been more outside money entered this cycle

That was one of the hallmarks of the late 70s, early 80s is you had enormous amount of limited partnership funds coming in both into the E&P side side and into the oil services side. And that was probably one of the instigators of the overcapacity of our industry. And people lost enormous amounts of money making those kind of wild investments.

This cycle should be driven more by industry players and we just got to see where in the hell they're going to go and then be right in there behind them as quick as we determine that those are the places they're going to be.

Clearly they don't have a hell of a lot of options. You got the supermajors worried about the [impossibilities] of their investments in Russia. You got technical operating challenges in the ultra-deepwater at 7 to 8, 9, 10,000 feet. You got oil sands that are now being looked at as a new opportunity. We just got to be -- Where is the money going? We've got to be there simultaneously in order to profit from it.

Thank you, guys. I hope you get paid for your services. You provide a great service and it's a shame to see the stock price being only one of the oil services down for the year.

I understand and we're cognizant of that and I appreciate your comments.

All right. Thanks, guys.

Your next question is from Tom Escott.

Good morning, fellows. I think you probably already addressed this. But, I guess, specifically on this cabling umbilical problem.

Is is -- is it -- was it an execution problem that Oceaneering people did in designing this incorrectly or installing it incorrectly, or was this basically the fault of the vendor that provided that machine?

Did he -- did the vendor do something wrong? Clearly the implication is, is there recourse to the vendor that provided this equipment?

Well, Tom, it's a good question and you probably knew my answer to it, is that whatever goes wrong, as far as I'm concerned, I'm accountable for it and we're going to have to fix it. As far as any recourse to the vendor. It's probably going to be limited. It's a weak vendor. I think we made a poor choice on the vendor. But that's just a lesson that we learned. I think that some of the things that were done certainly could have been done better.

That was a combination of vendor and Oceaneering design and installation. So, we're certainly taking this on ourselves to sort out the issues. And hell, it's awful -- we got as good a engineering capability as anybody in this industry, and we're talking about one cabling machine.

When you keep this in some perspective of -- at least my own personal experience, I can remember back in the mid-70s we used to have drilling rigs that would double in cost , that would essentially be delayed by one, two or even three years and this is much less of an issue than anything like that. But it is an issue. It is an issue that I feel accountable for. We're going to make it work and bottom line on the thing is, is that we're going to spend more money than we expected to. We're going to delay that capacity addition. The good thing is, is, is that hey, I would rather have capacity come online at the highest point in the cycle, than I would --

We all know that internal rate of return is driven more by how fast the cash flow comes out of it in the first two or three years, than it is by the absolute minimum CapEx that you put into it. Now, I don't want to minimize overexpenditures. I'm not making any excuses. I'm disappointed in our having to spend additional money to make this thing right, and I'm disappointed that we don't have the capacity now.

But I, in a way, and I hope this doesn't sound like I'm being defensive, because I'm -- I really am not. It's almost fortuitous, Tom, that, in fact, the gut instincts that we had when we were bidding this really large job, were such that it is really hard to manage a divisional operation that for 16, 18 months has looked at a order as the single source of the savior for their investment.

And for you to come in and say we are not going to take an order at that margin level, because we believe the market is going to get better, is going to be there.

And I certainly didn't believe even as short a time ago as three or four months ago, that we were going to have the type of market that we seem to be moving into today. So, we pulled them back from that. And, hey, I'm happy. Because I think by the fourth quarter of this year we're going to have better opportunities. Of course, we were really lucky, because we didn't have the capability of performing that order.

But -- So, anyway I'm not sure that answered your question. It sort of helped me with the catharsis of explaining it, anyway.

That's exactly what I was looking for. And, in fact we'd like you to keep on talking. In the time you've been talking, the stock went from down $1.50 to up $0.85. So, if we can keep this going longer, maybe you can get back to $40.00 today.

We'll be here. As you'll also note, Tom I don't take credit for it going up or down. It's -- you know me. I'm just trying to tell everybody what the situation is. We've got a great Company. We've got some outstanding people. We've clearly got a mistake that we're accountable for in the product segment that we're going to fix. I'm not uncomfortable about our ability to do it. I'm not happy about it.

On the other hand I think that six months in the scheme of your life compared to where the market most likely is headed is not going to be a bad issue for us. And our ROV business is getting better. It's going to improve. I wish we were making 230 this year, too. But, hell, we're going to make even more in '06. I think the idea that you can take an oil service company and consistently react to the market and you can have high profitability and increasing profitability through a series of market [stings], I think is enormous.

I can tell you, if I was still running the drilling company that '06 comes, and somebody tells me are you're going to continue with these enormous profit increases? I'd say hell no, I can't do it. Most of the drilling contractors are probably already stocked out of capacity in '06. So, I like our game in town. We got a great game. Anyway, hopefully that's what I'm able to articulate.

That's great. Thank you.

Your next question comes from Blake Hutchinson.

Hi, guys.

Yes. Hi.

First question, just to be clear, hate to harp on the issue, but this is not the -- the umbilical manufacturing issue doesn't have to do anything with --anything -- the structural integrity of anything that's been delivered to date? There's no problem, there's not a problem that's going to creep up in terms of stuff that's in the field already?

No, that's -- that is a good question. That's not a frivolous question at all. The answer is, no. This is strictly our ability to not tear up the cabling machine while we cable these steel tube umbilicals. That's all it's about. It's our equipment. It doesn't have anything to do with prior product quality or anything.

Okay. Secondly, obviously you mentioned that you're maxed out on steel capacity at your other plants.

How does this affect your bidding position looking into '06 and maybe as a little color on that, does a market that -- represented by 1,800 kilometers of steel tube represent a market that it doesn't really matter if your bidding position here is somewhat diminished because everybody's got to get their fair share? And I realize it's only been 12 days. But, how does this affect your ability to take new orders in essence?

Well, I think that's also a good question.

My initial assessment is, is that hell, we may be penalized in order to put some capacity into Panama City because somebody's going to be serial number one. And the guy that was serial number one at least we've demonstrated to him that it's not the Panama City plant that he's buying. He's buying Oceaneering, and Oceaneering, like any capable company, is able to back up the capacity at any one plant by doing the product at some of their other places.

That's not our preference because our margins are going to be decreased because of transportation costs and so forth. Having said that, I think, bottom line is, hell, 1,800 kilometers covers up a lot of sins. And we're not going to give our products away.

There is no question in my mind that -- I don't know that I would characterize it as a stampede, but my guess is that serial number one is going to get a hell of a deal in Panama City, and serial number two, three and four are going to be in line with the rest of the marketplace. So, I don't think there's a big issue here.

Okay. Great. Thanks a lot, guys.

Your next question comes from [Gayber Bogner].

Hi. Last quarter you gave a fairly detailed breakdown by operating segment of your backlogs. Could you walk through that again, please?

I'm sorry. I don't have that in front of us. We only -- we normally only give a breakdown on the backlog for the products group. That seems to be a metric that many of the shareholders and analysts use to -- in their forecasts. We don't keep ---

But in your SEC filings you had breakdowns for the other segments, as well.

We do that annually for the -- to meet the requirement of the SEC. I think when we've looked at it, we don't monitor internally our backlog for ROVs or MOPS or projects because it's just not very meaningful. And so, but we are required to include that in our 10-K and that's the only reason that we do that. So, we don't do it quarterly internally. It's not like we're keeping information from the street. We're providing what we think is meaningful.

I see. The second thing I wanted to ask is, on the ROV side, the day rates have been showing accelerating growth. And, I'm wondering how much further acceleration you're looking for, say by the end of this year?

I think -- I thought John covered pretty that well in his discussion of about how we are moving day rates. I think -- we do not have a model that anticipates or projects the acceleration. We are looking at every ROV contract that turns over and trying to make sure that we extract from it what the market gives us. I wish I could give you a better answer than that.

Sorry. What I'm trying to understand is, what growth of day rate does your EPS guidance embody, essentially?

I think the best answer to that , we usually provide in analyst conferences and we have done that on a conservative basis, and that is we're really [subjecting] utilization improvements, as opposed to leverage in pricing. And so, I don't think we have much factored into that. Although, that's really what I was trying to say earlier and give you a feel for it. And that is, that we are in fact at leverage.

So essentially you're assuming today's day rate for the rest of the year with whatever capacity utilization improvements.

No. We have 167 units. Our day -- our EPS calculation in six segments doesn't go into that level of detail. We have some level built in but it's not exactly quantifiable. I think there's a good chart that shows our operating income leverage if we maintain $1,200 per day on our website that we use in our presentations but I can't say that includes a price book increase of 15% and a 25% signup for that. It really doesn't work that way with 167 units.

Well, I think there's two issues here. One of them is that we are increasing the 167 number first of all, so we have more ROV. Secondly, we are improving the utilization , and the the chart Marvin was referring to that was in our last, I think at the Howard Weil conference was -- we certainly used it at other conferences, I don't know, but --

It was there.

It gives you a good sense of constant [inaudible] with improving utilization and that gives you a sense of what the leverage is for the EPS. What I was saying in the opening remarks is that , hey, we're getting a little better margins going forward with the utilization, so we are experiencing some of the dynamic of the -- this large asset companies. That's all I was trying to --

Yes, thanks. I understand that. That was reflected in the Q1 results. I was just trying to get better color on how you constructed the EPS guidance? But, I think your answer does it. Thank you.

At this time there are no further questions.

Okay. Well, listen, I want to thank everybody for participating. As usual we'll certainly get back to you with the one question that we didn't answer. And then secondly, if anybody's got any thoughts or comments, please contact Jack and we will deal with them. Thank you very much.

Thank you. Bye-bye.

Thank you. This concludes today's conference call. You may now disconnect.