Oceaneering International Inc (OII) 2005 Q2 法說會逐字稿

Good morning. My name is Tasha, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Oceaneering second quarter earnings released conference call. [OPERATOR INSTRUCTIONS]. Mr. Huff, you may begin your conference.

Good morning, everybody. This is Jack Jurkoshek. I'd like to thank you for joining us on our 2005 second quarter earnings call, and I'd like to particularly welcome those of you who may be participating in the webcast of our event, which is being made available through the Company Boardroom service by 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 Mongoya, our Treasurer.

I'd like just to remind everybody that remarks that we may during the course of our call regarding our business strategy , plans for future operations, and industry conditions are considered forward-looking statements, made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. I am now going to turn the call over to John.

Thank you Jack.

Good morning, and thanks for joining our call. It is certainly a pleasure to be with you today. Our record quarterly financial results exceeded our guidance range, and were above our street consensus expectations. Earnings of $14.7 million were 39% higher than those of the first quarter, 34% better than the second quarter of 2004, and 14% above the previous quarterly record results reported in the third quarter of '04.

Net income of $14.7 million and EPS of $0.55 per share were both a testament to the effectiveness of our technical niche market business strategy, focused on providing worldwide deep water services and Subsea products. The improvement in EPS over our earlier guidance was broadbased with all of our six business activities contributing to the increase, led by the performance of our ROV operations. We are off to a good start towards achieving what we believe will be a record earnings performance for this year.

During the quarter, we announced a twelve vehicle expansion of our ROV fleet and acquired Grayloc Connectors to expand our product offering. These investments are expected to contribute to our earnings growth in the last half of this year and certainly beyond. Our ROV operation achieved an all-time high operating income during the quarter. Sequentially, the operating profit contribution of ROVs increased by 34%, due to an increase in days-on-hire to 81% fleet utilization, and an improvement in average pricing to $3130 per day-on-hire. Year-over-year, ROV operating income increased by 45%. This was primarily attributable to increasing our days-on-hire by 26%, and achieving higher pricing. Our fleet utilization in the second quarter of last year was 67%.

Year-to-date, ROV operating income has risen nearly $10 million. Approximately $6 million is attributable to an increase in days-on-hire and approximately $4 million is a result of an improvement in average pricing. To give you an update on our mix of business in the ROV segment, of our 170 systems available during the month of June, 149 worked, 107 were in drill support, and 42 in non-drill support, a 72-28 mix. This compares to a year ago, when had 159 vehicles with 131 working, 95 engaged in drill support, and 36 in non-drill support, or a 73-27 mix. These are snapshot positions, and should not be misinterpreted to indicate any permanent fleet mix, although I would add that we're placing more new and sophisticated systems on a broad range of larger vessels, as opposed to adding more drill support systems, where we already have a very high market share.

Our Subsea products segment continued to struggle, although operating income was positive, an improvement over last quarter. Our Oceaneering Intervention Engineering Specialty Products Group turned in an outstanding performance, particularly with regard to sales of ROV tooling and Subsea valves. The culprit remained our Panama City umbilical plant, which we discussed at some length in last quarter's conference call. The Panama City plant start-up difficulties are being successfully addressed, and we are now estimating an end of year startup for making steel-tube product. In the meantime, we're continuing to manufacture thermoplastic umbilicals as well as components required for use in file-steel tube product deliveries by our UK and Brazilian plants. Panama City is in operation, our only issue is our inability to cable steel tubes.

On a positive note, products backlog at the end of the quarter was $112. We expect our backlog will grow significantly during the rest of the year upon our anticipation of winning several large umbilical contract awards in the third and fourth quarters. These awards will set a solid foundation for improvement in this segment's results in the second half of this year and a substantial increase in this segment's financial performance for 2006.

Our mobile offshore production systems business continued to produce consistent results during the quarter, as all three of our 100%-owned units were under contracts for the entire period, as they were last quarter and the last year at the same time. We expect them to remain so for at least the remainder of this year.

The earnings contribution from our Medusa Spar investment, which is being reported as equity income from unconsolidated affiliates was $3.8 million, up from the 2.5 million in the second quarter of last year, and down slightly from the $4 million last quarter. Production from the second Subsea tieback to the spar from MIssissippi Canyon 583, named Ulysses, commenced on June 19, barely contributing to the quarter's results.

The positive year-over-year comparison is due to the fact that production during the quarter was essentially from all of the six initial Medusa wells in the Medusa north Tieback, with some minor contribution from Ulysses. During the second quarter of last year, we had an average of about 3.5 wells in production. Sequentially, the decline is attributable to the natural deflation of the initial six Medusa wells. Our Subsea projects business, which is conducted in the Gulf of Mexico, had an exceptional quarter, due to a continuation of Hurricane Ivan repair work by our diving group, and maintenance of Subsea infrastructure utilizing larger vessels.

As we noted in the press release, this segment is in the first six months of this year already earned more operating income than in all of 2004. We're expecting a very good second half due to an escalation of installation and IRM work on deep water facilities using our Ocean Intervention class vessels. Our inspection segment reported excellent results both year-over-year and sequentially. We are benefiting from our efforts to secure more value-added services sales and realizing cost savings as a result of actions taken last year to reduce our operating expenses.

The profitability improvement was widespread as it came from most of the geographical areas in which we operate worldwide. As our Subsea project segment, our inspection segment has in the first half of this year, earned more in operating income than it did in all of 2004. Our AdTech non-oil field business had another solid quarter. Year-over-year, and sequentially, revenue gross margin and operating income were good. I'm pleased with the contributions AdTech makes to our financial performance and delighted with the many new ideas that it brings to the Company.

Our unallocated expenses increased sequentially and year-over-year due to higher incentive plan expenses attributable to expected growth in the Company's overall performance performance in 2005 and a higher Oceaneering stock price. In summary, our second quarter was a record-setting performance, higher than what we had anticipated, as all of our business operations performed better than we had envisioned at the beginning of the quarter.

Our focus on providing products and services for deep water and subsea completion worldwide is a good way to play an important and growing segment in the oil field services market. Offshore and especially deep water is definitely one of the best frontiers for A & P companies to lower their finding and development costs. Results for the second quarter continue to demonstrate the benefit of our technical niche market business strategy.

If you add depreciation back to operating income, we generated over $38 million in cash flow for the quarter, up more than 15% sequentially and year-over-year. At the end of June we had debt of $191 million and equity of 483. Our debt to-to-cap percentage was 28%. We intend to use our strong cash flows and balance sheet strength to further grow Oceaneering's earnings.

During the quarter we spent nearly $64 million on capital expenditures, bringing our first half total to almost $84 million. Of the $84 million, 42 was for the Grayloc acquisition, 24 has been on ROVs, of which about 18 is related to our new build program with the remaining 18 spent on a variety of other projects. We're clearly on pace to conservatively spend $100 million-plus this year to grow future earnings.

As part of the full-year outlook, as we said in the press release, based on our first-half performance and our expectation of achieving improved second half results led by ROV and subsea products segment, we are narrowing our EPS outlook range for 2005 to somewhere between $2 and $2.20 per share. Given the overall 2005 market outlook for worldwide oil field services, we like our position. Earnings growth in 2005 of 25 to 40% on top of the record 2004 results appears to be within our grasp.. We are on track to achieve record earnings for the fourth time in five years. We believe this validates Oceaneering as a company that can deliver consistently outstanding results year after year in both growing and declining markets.

For specific third quarter guidance, we are projecting earnings of $0.55 to $0.65 per share with the amount of sequential EPS increase contingent for the most part on the results of our umbilical manufacturing operation. We finished the second quarter with 170 ROVs and expect to put 7 new vehicles into service during the third quarter. We anticipate the quarterly profit contribution from our ROV business to increase as a result of higher average pricing and an increase in our active fleet size.

Operating income from subsidy products is expected to substantially improve on the strength of reducing the losses we have been incurring at our multi-plex umbilical manufacturing operation in Panama City. These losses have been largely attributable to the fact we are not running a sufficient level of work through the Panama City plant to cover its fixed costs and additional manufacturing expenses we incurred in diverting jobs to our UK plant.

Continued strong performance by our Oceaneering Intervention Engineering is also anticipated. Our MOP segment results were forecast to be flat with the second quarter as all three of our systems continue to work under the same contracts. The financial effect of our ownership in Medusa spar is reported as equity earnings of unconsolidated affiliates. In the third quarter, we anticipate Medusa spar's contribution to earnings will be at a lower level.

Production through-put from the Triback Medusa North and Ulysses is expected to only partially offset the natural production decline from the initial six Medusa field wells. The near-term outlook for our subsidy project segment continues to remain strong as an escalation in deep water installation and IRM work is expected to more than offset a decline in Hurricane Ivan diving repair work. Consequently, we expect the profit contribution from this segment to be higher than the second quarter. We expect inspection operating income to decline in the third quarter on substantially lower revenues. This is due to the fact that several large jobs for 2005 have already been completed. We are looking for ways to expand this business.

Our AdTech financial results for the third quarter are expected to be lower than the second quarter due to the fluctuation and the timing of work. These business operations outside the oil field are consistent with our mechanical engineering expertise and continue to be a steady contributor of income and cash flow to our overall results.

Looking into 2006, we believe there is a trend for our customers to invest their enormous cash flows in worldwide offshore and subsea projects, and consequently, our earnings next year are expected to be even better than 2005. At this time we're establishing an EPS guidance range of $2.40 to $2.70 per share, led by profit contribution increases from subside products, particularly our manufacturing umbilical operation and ROVs. This guidance takes into account an expected decline in 2006 pretax contribution from our MOPs activities of between $7-8 million.

The anticipated decline is attributable to an expected lower ocean legend day rate going into effect in mid-May which is predicated on our customer executing or exercising its fixed price renewal option to continue production beyond the initial 5 year term, and an anticipated reduction in Medusa spar production throughput. Our overall 2006 assessment is underpinned by the expectation that hydrocarbon commodity prices will not decline below the $40 barrel level.

Several prominent and very well run oilfield service companies of the 1980s are still basically the same companies in 2005. For example, some rig and boat company fleets presently include a number of the same assets they operated in the past. They simply play the cycle and ride it like the tide. While an excellent strategy, this is totally opposite to what we have done at Oceaneering. During the past 20 years we have changed our service and product line offerings to meet the evolving needs of our customers.

During the 1980's, Oceaneering was primarily an oil field diving company. This service line today only contributes 4% to our total revenue. Today Oceaneering is focused on promising niches associated with finding, developing, and producing oil offshore, particularly in deep water bases worldwide while we use advanced subsea technologies.

Clearly, our expected 2006 EPS growth is closely tied to the deep water and subsea services and products we offer. These business offerings have significant operating leverage to the demand growth underway in anticipated continued during the next several years. In the first half of this year, our oil rig and subsea products segments contributed over half of our revenue and are expected to be larger contributors in 2006 and beyond. We think this quarter, along with our estimate for 2005 and 2006 shows what we can do on a good market, particularly with a focus on worldwide deep water and subsea activities.

We have nice opportunities in each of our niches to invest our cash flows and continue to grow earnings. We believe our series of earnings records and market positions in important areas of opportunity warrants more attention. We feel historical multiples may not apply to a company that has undergone some significant changes and we believe is in the sweet spot of offshore market. I don't believe we're the same old Oceaneering.

In summary, our record results for the second quarter continue to demonstrate our ability to generate excellent earnings. Our cash flow was strong and our investment opportunities are good. Our niche market business strategy is clear and is working very well. We expect to achieve better results during the remainder of this year and in 2006. The problems we are experiencing with our umbilical operations, while unfortunate, are solvable and are in the process of being remediated.

We have operating leverage to take advantage of the upturn in worldwide deep water drilling and subsidy completion activity, which is currently taking place. Broader, deeper, longer, any way you describe the current oil field services market environment, we believe we are in the sweet spots of this upcycle. We believe 2005 will be our best year to date and 2006 will be even better. Finally, we believe it is worth your while to take a deeper look at Oceaneering. I appreciate your interest in being on this call, and we'd be pleased to hear your comments and answer any questions, thank you.

[OPERATOR INSTRUCTIONS]. Your first question comes from Phillip Dodge.

Good morning, everybody. First question on the ROV segment. I believe John, last call you told us that you might expect an increase in the portion of ROVs in drill support rather than non-drill support and that could have a net negative effect, slight negative effect on margins, but from the June quarter figures, you gave us this morning, it doesn't sound like that's happened yet. So the question is, do you still anticipate that later in the year?

No. I think that the biggest surprise I've had is our ability to pass through some price increases. That's been a very pleasant surprise.

Phil, this is Jack. I'd just like to remind you that during the first quarter-- and we talked about it on the call-- that we had incurred something, quite a few bit of expenses in moving new units back into service and some unusually high R & M expenses, so that is definitely one of the things that is driving the percent margin improvement on a sequential basis.

Yeah, but as far as the mix, you expect it to remain about the same? Between drill and non-drill?

My gut feeling is that it may skew not in the third quarter or maybe not the fourth quarter, but into '06, it will skew more into a construction mix for us. I think we may have more sophisticated systems on some large vessels, particularly in west Africa, and these are jobs that are usually very difficult, require a lot more personnel, sophistication, there's a certain amount of pull-through for our ROV tooling business. I think it all kind of bodes well for us. The 12 vehicles that we're building are sophisticated systems and they're largely focused on that segment of the market.

Okay. My other question is, give us an estimate of the amount of umbilical contracts that you expect to be awarded-- or you expect to be awarded in total in the second half.

Phil, I understand the question and I-- my guess is a little bit of experience talking. Years ago, I got into a discussion about anticipation about things, and I virtually had a run-in discussion with a the financial community on a negotiation we were having on a mobile production system, and it was probably the wrong thing to do, and so you know, what I'm anticipating is that there's some big orders out there.

We hope we're in line for some of them, and really the crux of what I'm saying is if you see an end to the third quarter a nice move in our backlog, hey, this is what you need to be watching. We're not bidding backlog to just have work to do. I mean, I'm totally convinced that this is a real, real big business, and there's no sense in winning stuff if you don't make money at it.

So that really is a signal I'm trying to get to you, is that if you see an announcement of a big contract, hey, this is a way we're going to communicate it to you and I would prefer to do that rather than try to keep you up-to-date on all the bids we have and all the people we're talking to.

I understand. Thanks. Sounds like things are going well.

They are. Thank you.

Your next question comes from Martin Malloy.

Hello?

Your next question comes from Martin Malloy.

Okay.

My question was on the ROV side. The margins, they are still quite a bit below where you were in terms of peak back in 2001. I was wondering if you could maybe discuss your ability to get back to those kind of levels.

Great question. I mean, clearly we're headed in that direction. I think that the type of work that we're moving into-- I guess, as I answered with Phil's question, I've been a little surprised that we've been able to press the price advantage as much as I thought. I thought that the margin expansion was going to come more from-- and it has come more from-- the utilization number. But I'm comfortable that we're headed in that direction now.

I just don't know how to handicap how fast we get there and when we get past it. I wish I could help you with a little closer guidance on that, but right now, all I can say is-- and the way I kind of keep up with this is that I don't want to win all the bids. I want to get on the edge of this thing and lose a few. We're comfortable that the opportunities are there, and so we're trying to find where the limits are.

At the same time, we've got some really good things going for us, so the first thing is that we did seven, eight years ago realize that this was going to be a really big business, ROVs, and so we've got a reasonably standardized fleet that's pretty modern, and so we have a lot of commonality in our R & M expenses. The reason for some variability in that are when we have large umbilical failures. These are the connection between the fish that's in the water and the power source on the rig or vessel.

Now, these are very large expenditure items and we expense these when this happens. So there's some variability in margins as a result of that. We have more people involved in this which have lower margin number, and that's going to reflect in the total mix of '01, but I think your comment is well taken. I mean, you could certainly draw some inferences between possibly '06 and '01 in margin numbers. We've been trying to forecast it in a conservative way. We basically just profit margin tied to the utilization rate.

And we've been watching more of the absolute profits than opposed to the margins. I think a lot of things have changed since '01 with the incremental invested that we have in the new ROVs. We've got a higher depreciation base, the jobs are becoming more complex, so people are a more important percentage of the revenue base, and I think John's right on, we're trying to move that margins back up and we've had some success, but I think the record earnings just sort of speak for themselves.

Okay. And just one last question. The inspection business has been more volatile than I would have expected. Can you comment there on what's causing that volatility between quarters?

Timing of the jobs.

A lot of it is the timing of the jobs. We had to dismantle a bigger fixed cost structure than I really recognized when we purchased OIS a couple years ago, and it took us a lot longer to do that than I thought it would, and we had to really revamp the whole thing while we integrated our business into that business. Primarily, it's sort of half the business from the UK, North Sea area and half from the rest of the world. You know, there's a lot of opportunities in this thing, and we've had some personnel changes. I know this sounds kind of almost like excuses, and I hope you don't regard it that way; it's something that we've got our hands around now. I'm looking for ways to expand this.

I agree with your assessment. It should be a little steadier and I think the bigger we can make it, the more steady it will become. We are trying to move away from just the people-dominated services. We're trying to add assets to those people, value-added integrity management and so forth. I think that that's where we're headed in this deal. So it's got a good return on capital. I mean, the segment itself is producing good results for us.

Thank you very much.

Your next question comes from Tom Escott.

More follow-up on the ROV segment. You're up to 81% utilization in the period. As a practical matter, what can peak utilization really be on any consistent basis?

Well, I think mid-to higher 80s would be kind of the number. I mean, I think it would fluctuate around that, say 85 to 88, something like that.

Okay. And then related, you said you've got 170 out there now and you'll have seven more delivered in the third quarter. I guess the question is, beyond that, realistically what would be a target or what opportunities do you see out there for the ability to add those over the next 12 months? I mean, are there potential jobs of another 10 or 12? Is it zero, is it 20?

Well, let me stop you there and reiterate the comment I did made earlier, Tom. And first of all, I've been a little surprised by the growth in the vessel fleet and we have been very fortunate and we have targeted that segment and we've gotten onto-- I think we're the vender of choice kind of worldwide, and so these guys are speculating in vessels that have multiple tasks. We've captured a lot of that business, and that little sub-segment has grown a lot faster than I've expected it to.

How fast is it going to grow? I don't know, but I know it's going to continue to grow. I know there's going to be nice opportunities in that as it grows. You're seeing a few semi-rig orders that are there. We're seeing another subsegment develop, and that's this Spar TLP Production Platform Business. That's working well.

There's some geographic areas that are stimulating this Boat business,principally in West Africa. So I think definitely this segment is going to grow in size again. Now whether we'll do 12 at one time, I don't know, or we'll just build to suit on certain vessels. I mean, we've got into pipeline now a lot of onesy-twosy jobs that we're looking at. Definitely, it's going to grow --

Okay, thank you. And then related to that, as you add these additional units, is they're brought on-line and put into use, how difficult is it to find and train these operators to be able to execute this to the standards that you are accustomed to?

That's a great question. I mean, that conceivably could be a bottleneck for us. Right now it's not, but we're operating at all-out capacity. Our average ten-year has dropped dramatically. Fortunately for us, and this is a benefit that Oceaneering has, we've got a great worldwide infrastructure, and it's almost sort of flavor of the month to mention, but we're outsourcing technical expertise from India, from South Africa, from the Eastern Bloc countries.

We've got great recruiting efforts. I mean, we have people from Zaire and Lithuania, so we're running at full speed to do that. We've got 12 ROV simulators. We have schools set up in Indonesia, schools in Dubai, schools in Angola, we have schools in Brazil, we have schools in Aberdeen, Morgan City.

We're doing what we can to accelerate the training capabilities of existing personnel and move them into more supervisory, senior positions and bring in competent, new recruits, but I think this is the first time in since the last boom that I've really been focused on people as a constraint, and I think you're absolutely correct when you say if you're going to have a high standard and you're going to charge a premium you've really got to perform, and we've got some risks in that, and so we're spending some additional money. Our training costs are definitely going to escalate.

Okay. Thanks very much. And then just a last comment. Since the last conference call, stock's up 10 points. Should we be straight-lining this another 10 points by the next conference call or is that probably optimistic?

You're the one that's supposed to be telling me that.

I'm being a little facetious.

Well, I did put in a lick for a higher multiples, Tom, you probably noticed that. It wasn't very subtly.

You did, and I'm just being facetious, but I think we're all loving what's going on here.

It really is a new company. I mean, it's a lot different company, and this is what I've been saying for years, and I think we've got more leverage in the up cycle than I sort of intuitively felt.

And that's been a real positive because I've concentrated on not having so much leverage in the down cycle, and so I was worried that maybe I had left something off the table in the up cycle, but I think that given the worldwide presence that the Company has and our ability to know the market, particularly in the deep water areas of Brazil, West Africa, we're operating great, great capabilities. We're starting to get recognition for some of that.

Now, demand is the god of our business for sure, and we're really in a sweet spot with this offshore and deep water and subsea technology focus, so I think we're starting to really take advantage of this cycle.

Thanks, and I'll pass the baton to somebody else.

Your next question comes from [Victor Washon].

Good morning. Congratulations on the quarter.

Thank you.

First question I have is just on the ROV side as well, and what you're seeing from the demand side going forward. What are you seeing your competitors doing on the capacity side? Are you seeing any of your competitors at capacity right now, and can you sort of put that in the context of what they are doing to address the demand?

Well, excellent question, Victor.

Let me just sort of review for you the competitors that we have. The two really major competitors we have are both associated with construction companies, and their principal concern is the ROV technology that's used in their construction activities, and I think that they're not, they don't see this the same way we do. In other words, their principal market is, hey, let's don't mess up a mega hundred million dollar type of job by not having our equipment and not having our people, our best people. And I think that that's sort of-- and that's a natural reaction. I don't mean that as a criticism. That's exactly what I'd be doing.

I mean, if our ROV technology was focused internally, hey, I would be doing the same thing. I wouldn't be worried about a third party market, and I think that's the reason that we're capturing a lot of these competitors that are entering the ROV vessel market, and they're on a periphery of competing with the construction companies.

They're certainly not in the big derrick barge business, but they're competing in a maintenance role, particularly in the West African marketplaces, so we're not seeing a real big change in the third-party services of our two large competitors, and I certainly don't blame them to keep their eye on the ball. I'd keep my eye on the ball on my construction business more than I would worry about renting an ROV to somebody.

And switching gears to the Panama City facility. Are you guys taking orders yet for a steel tube for '06 work or are you taking a wait-and-see to get the plant ramped up or to get operational before you start taking orders?

No, we're in a process of bidding jobs right now. I mean, we're comfortable that the fix that we have on the cable machine is going to work. We just had some design problems and installation problems and we recognized them on the first order that we had, and we transferred that order to Aberdeen, and that order is on schedule now to be delivered in the next few days. I'm not afraid of the business. I mean, we're already building thermoplastic umbilicals in Panama City. We've got our cable machines for our thermoplastic reinforcement--

Operators.

-- are just going full out, and we're braiding hose for both Brazil and the UK in Panama City, so I think that that will be also an announcement event for us, and when we get another order for our first order there in Panama City, that will be a good omen for what we're seeing.

And the order flow that you guys see occurring in the second half of this year in the umbilical business and the aggregate, is that being primarily driven by Petra Brass and if it is, do you guys have any sense on how that tender is progressing from a timing standpoint or is it just a wait-and-see?

Oh, it's wait-and-see. Petra Brass is always wait-and-see. Petra Brass is the largest consumer of umbilical and flexible pipe products in the world, so Petra Brass s definitely one of our key customers, no doubt about it.

That's all I had. Congrats on the quarter again.

Your next question comes from [Daybert Wagner].

I'm from Cheney Capital in London. The first question is, as I recall in the third quarter of last year, you benefited significantly from hurricane recovery-type activity, and I'm wondering to what extent that represents a difficult comparison for you this up-coming third quarter? And the second question is, would you discuss how much the guidance that you updated today is benefiting from the Grayloc acquisition and what that transaction is doing strategically for the growth of your business?

Okay, two good questions. I'll answer the first question, actually our business from Hurricane Ivan was more of a fourth quarter phenomenon for us, so you won't see much of a mismatch in the third quarter comparisons this fall. The second question is we expect Grayloc to make at least $0.05 a share next year. I'm sorry, last half of this year. $0.04 to $0.05.

And the hurricane work is only in the Projects segment, so it was readily identifiable. I mean it was a fourth quarter '04, and I don't think there's any difficulty in getting an apples-to-apples comparison.

And let me before we get too excited about the hurricane and what does a hurricane do and is it a non-recurring event or is it a recurring event and so forth. The hurricane for us was more of a diving-oriented job, and diving is 4% of our business, so we got to keep in mind that this is not driving Oceaneering earnings.

This is just, this is one of the places. We've literally got in each segment six business segments, we've got numerous sub-segments in each of these businesses, and we're right now at a point where we're talking about a sub-segment Gulf of Mexico diving that is related to less than 4% of our business that is a sub-segment of 4%. in addition to Hurricane Ivan, our diving activities in the Gulf are broken into two other types of small markets one of which is the platform inspection network, probably has the largest database in the Gulf of Mexico of having to perform platform inspections, it's kind of a steady dive and the reason that we haven't totally exited the diving industry.

It's a great little niche market, and the second one is a saturation diving capability coupled with a very, very sophisticated engineering capability that when people have very unusual activities under water, Oceaneering has got metallurgists, we have practical people, we've got structural engineers, we've got a cadre of people that we use in a variety of other activities that we call on that can design very unique-type diving jobs that would utilize our saturation diving capability.

And then we also have some interconnect between our Gulf of Mexico Diving business and work that we perform for the U.S. Navy. Now, all of that is sort of surrounded by 4% of our total revenue base, but I think it gives you a snap shot of how we run the business that we really do segment our markets very carefully and we try to pick out that part of these markets that has a definite advantage for Oceaneering.

On the Grayloc issue, as a follow-up, do you expect any cost savings as you integrate that business, and what kind of organic growth do you think that business is going to bring to you in '06 and beyond?

I think it's a great question, and first of all, there's no real cost synergy between Grayloc and Oceaneering. We didn't buy it saying in we're going to eliminate x amount of administration. The synergy-- first of all, we brought a brand name product that was measured on trying to you know, maximize its cash flow, owned by a private equity, and we bought it for the fact that it works well, it's a brand name product, it's got a huge market share in the business that it's seeing and we think we can do two things with Grayloc: First and I think most important for us is that we think we can take some of the Grayloc quality and we can apply that to our own pipeline connector business, our own flange business, we think that we can take some of the processes and management in Grayloc and we can integrate that backward into Oceaneering and we can learn something from Grayloc and they're going to teach us how to make shows products better, and we think that we can get a bigger share of those sort of micromarkets in the Products area. Pipeline connectors and flanges.

And the second thing is that I have this inbred belief that I think that Grayloc can tremendously expand the market for connectors versus flange connections in the existing market. I mean, there's a steady increase in the amount of downstream activity as well as upstream activity. Grayloc products are well known throughout the world, and I think that if we can educate the engineering public that our connectors, with the quality that they have and the capabilities that they have in excess of what flanges are, so what I'm probably talking about is spending some money on advertising, spending some money on promoting the Grayloc brand.

My sense is that if we do that, then in the second half of '06, we should have significantly increased the size of the market that Grayloc participates in, and therefore, '07, '08 have a much better business. We didn't just buy it to have an annuity from their product.

Okay, thank you.

[OPERATOR INSTRUCTIONS]. At this time there are no further questions.

Thank you very much for coming to our conference. We know we were in competition with Chevron today and we appreciate you listening to us. Thanks.

Thank you.

Thank you, ladies and gentlemen. This concludes today's Oceaneering second quarter earnings release call. You may now disconnect.