Oceaneering International Inc (OII) 2006 Q1 法說會逐字稿

Good morning, my name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 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 session. [OPERATOR INSTRUCTIONS]. Thank you. Mr. Huff, you may begin your conference.

Good morning, everybody. This is Jack Jurkoshek. I would like to thank you for joining us on our 2006 first quarter earnings call, and I would like to particularly welcome those of you who may be participating in the webcast of this event. 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. This is a reminder before we start 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.

Good morning, and thanks for joining our call. It's a pleasure to be here with you today. During the first quarter of 2006, we set an all-time record for Oceaneering's quarterly earnings. Earnings of $25.5 million were almost two and half times the first quarter of 2005 and nearly 30% above our last quarter. Our record earnings were both above our guidance range and the Street estimates as market demand for our technical, niche market Subsea services and products remained at a very high level. Both the year over year and sequential quarterly net income improvements were broad based, with five of our six business activities contributing to the increase. All of our oil field business activities performed very well during the quarter, particularly Subsea products and Subsea projects.

Subsea products attained record quarterly operating income, and Subsea projects continued to benefit from an intense level of hurricane damage inspection and repair work. Given our first quarter results and an improved earnings outlook for the rest of the year for all of our oil field activities, we have raised our 2006 earnings guidance by 25% to a range of $3.60 to $3.90 a share. This is based on our expectation of achieving higher pricing and utilization of our ROV fleet, continued improvement in Subsea products marketing and operations, and the high demand for our Subsea projects business. Consequently, we now expect to achieve 2006 EPS roughly 60% above our 2005 record results.

This guidance increase is ultimately attributable to Oceaneering's business focus on deepwater and Subsea completion activity, along with an increase in hurricane damage work. Our ROV fleet had an excellent quarter. Year-over-year operating income increased 70%. Our average fleet size increased by 10 systems and we raised our fleet utilization from 77% to 85%. We also improved our average revenue per day on hire to a record $6,600, up 12%, and increased our average operating income per day on hire to over $1,600, up over 45%. Sequentially, ROV operating income increased by over 55% on a 6% increase in average pricing per day on hire and the absence of the $6 million asset writedowns we reported in the fourth quarter. Without the writedowns in the fourth quarter, operating income this quarter was still 8% better than last quarter.

During the quarter, we added two systems to our fleet; and as of the end of March, had 177 systems available for operation. Our Subsea products segment achieved record year-over-year operating income results with both multiflex and OIE, our specialty products group, contributing to the performance of the nearly sevenfold increase. The sequential increase in operating income was attributable to another outstanding performance by OIE, particularly with regard to sales of our ROV tooling and installation work over the control systems [INAUDIBLE]. During the quarter, we commissioned our large cabling machine at our Panama City plant and we are currently manufacturing the first steel tubing umbilical with this new equipment. At the end of the quarter, our products backlog was $222 million, nearly 2.5 times though 91 million of a year ago and up from the 196 million at the end of last year.

Our net new product orders during the quarter were approximately $110 million, 30% more than the revenue we generated. Our Subsea products business, which is conducted in the Gulf of Mexico, continued to perform at a historically high level as we benefited from an unprecedented market demand for hurricane damage inspection and repair services similar to the unusually high level set last quarter. For part of the quarter, we also profited from the charter of the [Botnicrew], a vessel we brought in from the North Sea during the fourth quarter of '05 for a complex deepwater pipeline repair. The [Botnicrew] was released in March. Attesting to the demand for underwater repair is currently 25% of the oil production in the Gulf of Mexico remains shut in.

In response to this demand, in April, we transferred the performer from our ADTECH group to our projects group. The Performer is our ROV support vessel with a moonpool-deployed Millennium ROV capable of conducting technically challenging operations in ultra deepwater. In April, we also chartered the MV Island Ranger, a class 2 dynamically positioned vessel, for a three-year term commencing in February of 2007. The Island Ranger, to be outfitted with two of our high specification ROVs, will augment our ability to perform ultra deepwater IRM projects in the Gulf. This charter is evidence of our belief the deepwater IRM market in the Gulf, with or without hurricane damage related demand, has a promising and sustainable future.

Our MOPS business continued to produce consistent results during the quarter, as all three of our totally owned units were under contract were under contract for the entire period, as they were last year at the same time. We expect them to remain so for at least the rest of this year. The earning contribution from our Medusa Spar investment, reported as equity income from unconsolidated affiliates, came in at around $4 million, about the same as the first quarter of last year. Sequentially, the improvement from 350,000 in the fourth quarter of '05 was due to the hurricane related downtime we experienced last quarter. Full production at the Spar resumed in December 9th of last year and remained so throughout the first quarter of 2006.

Our inspection segment results were good. Year-over-year and sequentially, we benefited from our efforts to secure more value-added sales, and realized a cost savings of actions taken last year to reduce our operating expenses. Sequentially, operating income also improved as a result of normal seasonality. The profitability improvement in both year-over-year and sequentially was fairly widespread, as it came in both instances from most of the worldwide geographical areas in which we operate. Our ADTECH non oil field business had a reasonable quarter.

The changes in revenue, gross margin and operating income reflect normal fluctuations in business activity and job mix, as well as the vessel expenses to transfer The Performer to oil field service in April. Year-over-year, the decline in operating income was attributable to a reduction in the contribution of The Performer. In summary, our first quarter was above what we had anticipated and we're looking forward to achieving a record earnings per share performance in 2006. Our focus on providing products and services for deepwater and Subsea completions is a good way to play the entire offshore life cycle for the explorations for the production.

Offshore, and especially deepwater, is definitely one of the best frontiers for the [INAUDIBLE] companies to add reserves at relatively low finding and development costs. I think we have created an excellent business model and have executed our strategies very confidently. If you add depreciation back to our operating income, we generated over $57 million in cash flow for the quarter, 75% more than in the first quarter of 2005. At the end of March, we had debt of $180 million and equity of 568 million. Our debt to cap percentage was 24%, giving us considerable additional debt capacity. We are continuing to look for accretive acquisitions or organic growth opportunities with better than cost of capital returns. We intend to use our strong cash flows and balance sheet to further grow Oceaneering earnings.

Capital expenditures during the quarter totaled $46 million, of which 21 million was for maintaining, upgrading and expanding our ROV fleet. 12 million was for a tanker we bought, and which we'll be offering for MOPS conversion on pending projects we intend to bid on this year. $8 million was invested primarily in previously announced initiatives for our Subsea products business. As we said in the press release and as I mentioned earlier, the 2006 outlook for all of our oil field business activities has improved since our last earnings release, particularly for our ROV, Subsea products and Subsea projects businesses. Consequently, we have raised our 2006 EPS estimate range to $3.60 to $3.90 from our previous guidance by 25%. 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 utilization and average pricing.

We expect to achieve utilization rates approaching 90% by the end of this year. I'm especially pleased we have been able to increase prices. Since we price the crews separately from the equipment, we have excellent leverage with the more than 250,000 man days year we used to provide our world class ROV services. 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 ultradeep water drilling programs, we are now getting similar attention from insulation contractors and operators to perform construction and fuel production support services globally.

In the Gulf of Mexico, our ability to integrate engineering, vessels and specialty products with ROV intervention has positioned us as the number one choice for inspection, repair and maintenance of Subsea infrastructure. Subsea products' financial performance is forecast to be more than previously expected on an increase in OIE specially product sales at higher margins, particularly for ROV tooling, installation workover control system rental services and clamps. We are building the world's largest inventory of ROV Subsea tools, and expect to create another niche market which will be analogous to the rent tool market on shore, except for the added technical challenge presented by operations in deepwater. Subsea projects' financial performance for 2006 is expected to be higher on a continued strength of hurricane repair work and a general escalation in deepwater infrastructure, inspection, repair and maintenance activities.

In summary, we are raising our EPS guidance range from 3.60 to 3.90. Given the overall 2006 market outlook for oil field services, we like our position. Earnings growth in 2006 over 2005 of approximately 60% appears to be well within our gasp. When you consider this on top of achieving record net income results in four of the last five years in both good and poor markets, we believe it is 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 projects; and consequently, our 2007 earnings are expected to be even better than 2006. The current inventory of deepwater fields yet to be developed, the extent to which floating rigs are already under firm contracts and the market outlook for Subsea trays and umbilicals are all signs of healthy future demand for our products and services.

For specific second quarter guidance, we're projecting earnings of $0.95 to $1.05 per share. The sequential increase for the second quarter from what we have just reported for the first quarter is expected to come primarily from increases in ROV, Subsea products and inspection operating income contributions. We finished the first quarter with 177 ROVs and expect to put six new systems into service during the second quarter. We anticipate the quarterly profit contribution from our ROV business to increase as a result of higher average pricing utilization and the increase in fleet stocks. Operating income from Subsea products is expected to improve on the strength of an increase in profit contribution from multiflex and a continuation of a strong performance by OIE. We expect inspection operating income to improve in the second quarter due to higher revenue from normal seasonal demand and an improvement in gross margin.

The near term market outlook for our Subsea project segment continues to remain excellent; and consequently, we expect comparable quarterly results. Out. MOPS segment results from a forecasted decline is a lower [INAUDIBLE] on the ocean ledge and becomes effective in mid-May. We also anticipate that equity income from our ownership the Medusa Spar will begin to fall lighter 2006 as production is expected to decline as the reservoir is currently being produced to fleet. Because of our contract terms, the astronomical increases the industry is seeing in insurance costs in the Gulf of Mexico for drilling and production assets will not affect our margin per barrel. Our ADTECH financial results for the second quarter are expected to be slightly better than the first quarter. We expect ADTECH to have a run rate of 2 to $3 million a quarter of operating income during the balance of 2006.

These business operations outside the oil patch continue to be a steadily source of income in cash flow to our overall results, as well as a major contributor to our world class technologies. In summary, our record results continue to demonstrate our ability to generate excellent earnings and cash flow from our technical niche market strategy. We believe it is clear our technical niche market strategy is working very well over the long term, as well as the short-term. Our technology give us operating leverage to take advantage of the upturn in deepwater and Subsea completion activity currently underway. The longer term market outlook for our deepwater and Subsea service and product offerings is excellent.

These frontier areas have the lowest finding and development costs outside of the Middle East and former Soviet States. We think technology is a better bet than turbulent geopolitical opportunities in the oil field. Our belief is the majors and supermajors will continue to focus their resources in these areas. Wider, deeper, longer -- any way you describe the current environment ,we think we're in one of the sweet spots in this upcycle. We believe 2006 will be our best year to date; and with capacity additions in ROVs, products and projects, 2007 should be even better. We especially appreciate everybody's interest in Oceaneering, and I'll be pleased to entertain questions, comments and suggestions. Thank you.

At this time, I would like to remind everyone, if you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. As a reminder, in consideration of other participants, please limit your questions to one per caller. You may queue up again for additional questions. A maximum of three questions per person. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Tom Escott.

Good morning, fellas.

Good morning, Tom.

Truly breathtaking, if I have to say so. One question on the ROV fleet. You mentioned -- you know, utilization in the current quarter of the -- or March was pretty much the same as December, about 85%, and you -- and you indicated you thought it could go up as high as 90% throughout the year. Is that just a matter of just really greater utilization or are you getting companies paying, you know, longer term contracts and just continually keeping those busy or -- or how does that utilization get to 90?

Well, first of all, Tom let me say I apologize. I didn't mean to imply it was going to jump up in the second quarter from 85 to 90. What I was trying to articulate is I think that by then of the year we'll be around the 90% mark. I don't know if it stays 85 and then goes 88 and then 90, or it goes to 88 -- I don't know how it's going to work, but generally speaking what is happening for us is that we're getting a really good reception from some of the very complicated installation jobs going on in the deepwater markets, both U.S. Gulf -- [Engull] will be in a big market for us -- we've got a big operation there; similarly, in Nigeria as well as in Brazil. So a lot of that coming on the heels of, you know, the sort of seasonal increase in activity and construction, which is generally the quarter 2 and 3.

The second thing is -- you know, there tend to activate some additional sort of mid-water rigs. You have seen some of the drilling contractors make these announcements, and we're getting a -- I think a -- I think a disproportionately higher percentage of those jobs. As you can imagine with the rates that these -- these companies are paying now for this kind of equipment, you know, any kind of downtime is just almost prohibitive. As a matter of fact, I saw one contract that one of the big companies got, and I -- the middle arithmetic was like almost e $400 a minute. And so at those rates, I think that, you know, it's just good business to hire Oceaneering. So it's just kind of a general reason, and we're seeing it work. I mean, we're seeing the things that we have put into practice for the last several years, we're starting to take advantage of it.

It's obvious that your pricing is keeping well ahead of cost increases, but are you seeing continual creep -- or continual ratcheting up of the cost side of the business, whether it's labor or material or both?

Absolutely. We haven't -- we haven't had quite the drama that, say, some of the drilling companies have had; but we're in for that -- I mean, that is going to effect our margins by then of this year, and the -- the $64 question is, you know, can we keep price pressure, you know, ahead of cost pressure? We have got -- we have got similar cost pressure to anybody else. We have got cost pressure on the engineering side. We have got extreme cost pressure in personnel side offshore. You know, we're seeing that now. One of the things that we have tried to do is that we've had -- we've substituted, you know, large third world contingent in our ROV operations, particularly in the eastern hemisphere. So we -- we saw this coming, you know, several years ago and we were prepared for it. But we're not immune to it. I mean, definitely cost pressures are going to effect our margins later in the year.

Well, again, thanks a lot, fellas, and you know, truly breath taking. Have a good one.

Well, thank you, Tom. It was -- you know, when you hit on all of the cylinders, you know, you can produce some good results.

Your next question comes from [INAUDIBLE].

Hey, guys. [INAUDIBLE] from Simmons. I want to talk about ROVs a little bit more. What -- you talked about utilization getting to 90% by the end of the year. What do you think about day rate progression?

Well, I -- I tell you, I hate to sound like a -- I don't mean this to sound smart alecky to anybody, but the truth is in an upcycle in the oil services business, it's very hard to predict, you know, how high price increases can go. You basically put them out there until somebody chokes. And so far we've -- you know, we've been following a pretty aggressive cost price curve, and -- and we have been successful in doing that. It's really and truly the hardest single thing to predict, is how much is enough. And we think that we should get a premium price. We deliver a premium quality service. I'll spare you the marketing pitch, but the truth is that Oceaneering combines not just ROV services, but we combine, you know, specialty tooling requirements. We do engineering work. We really do offer more of a solution than just a -- a rental service, and I think that value added component there is -- is a big part of our price increase.

Could you give us on -- on a leading edge like your -- your most latest contract on an ROV, where -- where you are in terms of pricing on your revenue per day?

Actually, you know, we -- we put our book rights on -- on our website. You would be well served to go there. I don't have those in front of me right now, and -- and I didn't mean to imply that, you know, that -- that there is an unlimited amount of price improvement out there. You know, obviously there -- there is some; but you know, we're pushing that all the time, and as I tried to say in the opening remarks, we have got two places that we can push price. We can push price one place, in people. Now there's inflation with people, and hopefully you can push at least your margin or improve your margin when that cost pressure hits you.

There's a lot of training that goes into that, and there's a lot of things that the people side can do. For instance, we have this virtual Subsea [signalation] software that we can add to that. Then on the equipment side, there's a lot of adds ons for equipment -- specialty cameras, specialty -- different type of manipulators. Again, a lot of tools go into that. What we're trying to do obviously is add a tooling segment to our ROE business, which would give us a lot of upside.

And what are the lead times now for building the new ROV?

It's about five or six months. You know, we've got a pretty significant inventory of spare parts that we can, you know, either put into production and new equipment or we can use as refurbishment of old equipment. And we're doing both of those now. We're refurbishing a lot of equipment and building some new equipment.

Have you -- have you started to see -- I mean, obviously besides yourself, have you started to see any competitors build --

There's a few, yes. You know, I mean, like in any -- any marketplace, you would be amazed if there weren't some. There's been a couple of the non-oil field type ROV companies that were focused more on oceanographic research and military type operations that will be trying to get into the field, particularly in the Gulf of Mexico, which is really a good spot for us -- I mean, we've very strong in the Gulf of Mexico. There will be some other regional competitors I'm sure, particularly Asia. North Sea would probably invite somebody there. Perhaps even Brazil.

Last question on the Subsea project side. Business is going very well for you guys in terms of hurricane-related work. Any opportunities for -- for significant margin expansion here in terms of cranking up the price a little bit?

I think so. Now that's a kind of a constant internal, you know, debate that's going on. You know, what is the right amount? You know if it's truly hurricane damage related work, you know I think that margins are going to expand on that. What I was trying to say in our -- in the opening comments, though, is we took this three-year charter on this-- on this larger vessel for ultradeep water work that we see coming up. We didn't take that for the hurricane work. Now, my guess is that that vessel is going to start out in some hurricane-related work. It's just sort of natural that it will probably do some of that.

But longer term, I think that the deepwater infrastructure that's being added in the Gulf of Mexico is going to support, you know, a higher capacity vessel, and -- and the two high specification vessels that we have. So I like that niche and I think that we can do a lot more with it with our Subsea rental fleet as well.

And while I don't want to contradict John, to me to continually raise project prices, I would hesitate to encourage anyone to increase our margins. When we get 32% in a quarter in the Subsea project, business that's getting pretty strong. So I mean -- I -- I agree that there's always room for increased pricing. We just don't know how long this frenzy activity -- frenzy level of activity is going to continue; but we see it, as John has said, more than just hurricane related.

All right, guys. Thank a lot.

Your next question comes from Marty Malloy.

Good morning, congratulations on the quarter.

Thanks.

On the Subsea product side, could you talk about what you are seeing there in terms of pricing there and industry capacity utilization?

Well, you know, price is going up. What can I say? And I think that there's -- there's sort of a unique opportunity for us since we build some unique products that are not -- you know, the long lead times that you have with, you know, the basic tree manufacturers. And so we can take advantage of that opportunistic type of price increase. We -- we're in the critical path, but we're not readily considered. I mean, a lot of the things we've built or built to order, and they are only built after the entire Subsea architecture is known. And I think it really just reflects a price escalation that's going on in the whole oil field. I mean, you've got -- you know, machine shops that we use that are increasing the prices. You know, we're increasing the price as well. So I don't know if that answers your question, Mark?

Yes, it does. And then also on Subsea products, can you just talk and the bidding environment and say how it is currently compared to maybe where it was at the end of last quarter?

Well, it's good. I mean there's -- there's a lot of opportunities out there; and what we want to do is match, you know, the best products with the best margins for those products that we can build. And I think, again, you know, our philosophy is to try to seek out a -- a niche segment of any business that we're in, and so we're looking for specific types of umbilicals to build that fit our type of equipment that we're confident that we're not going to have rework with. And so I think that, you know, subsegmenting that market is a good way to play it, and so we're not bidding every single job that comes up. We're looking more at what are the best opportunities for us and so forth. And we're also learning to use the three plants as an integral system where we can build components in each plant, we can improve our scheduling. You know, oceaneering is not an experienced manufacturing company, and we're learning quite a bit about it each quarter.

And I think that we're starting to make significant improvements in our operations there. And that really, again, was reflective of our remarks in the opening statement to say, you know, hey, this is about the fundamentals of blocking and tackling. I don't mean to use a sports analogy here, but it really is about marketing and operations, and so if we can find those particular product opportunities that are best for us, then we're going to do the best for our customer and we're going to make the most money for our shareholders.

And I think having the plant online in Panama City is a good addition to our marketing capability being able to say we do have capacity now. We do have a plant that is in operation. So that's something that has been long in coming, but it is here now.

Right. Thank you.

Your next question comes from [INAUDIBLE].

[INAUDIBLE]. Congratulations on great quarter. John, in the previous quarters, the -- you know, the fact that the Panama City plant was not working was a drag on cost. Costs were higher Have you started seeing the benefit of -- on the cost side from the Panama City plant coming on? Or -- do you think that benefit is going to show up in future quarters?

I think it will be future quarters. Look -- you know, we -- we're just now really moving -- we -- we have been producing thermal plastic umbilicals at Panama City for sometime. We are now building our first steel tube there, and -- but we haven't seen -- and -- and you know, I hate to sound like sort of a government bureaucrat. I mean, I think what we're see here is a slowing of -- of cost escalations, if I can say it, you know, like that. I know that's sort of a funky way of saying it. But I think what's happening is that as we will have more purchasing power, we will be able to negotiate, you know, better supply contracts, you know, from our -- our entire vendor source here and split those between the three plants that have deliveries, do better with our inventories and so forth.

But there's still going to be escalation in them. I mean, that's really -- the problem is that that escalation is going mask how much is the real cost savings to Oceaneering. And that's why we have got to be especially sharp on the marketing side when we price these products that we know exactly what's going into them. The time sequences, work breakdowns and so forth. And I think we're just going to get better and better and better at doing that. And I actually like later cycle product, too.

And increasing the through put through Panama City is going to be able to allow us to more fully absorb those costs, so it will improve our margins.

Yes. Okay. Good. And then, John, on the -- your inspection business, there was -- you know, you were going through restructuring overall getting all of some of the low margin businesses. How is that-- that going?

It's going well. I mean, we -- we're pretty much through it. I mean, we have got -- we have done extremely well in the North Sea, we have got some types of contracts in the North Sea that I like to export to particularly the Gulf of Mexico. In the Gulf of Mexico, our inspection business is more integrate with our diving business. So we've probably got a better data set on platforms in the Gulf of Mexico than anybody else in the industry. We -- we use the term for mudline to [INAUDIBLE], where we can provide a more universal service. That's what we mean by value added -- we're adding equipment to the operators.

We do a lot of rope access type work in the North Sea, and we got out of some of our places where we were, you know, basically just manpower providers. It was very difficult to, you know, keep the margins up with -- with just sort of a commodity manpower where the operators really knew who they wanted and they were using us as a labor contractor. We have largely exited that sort of business.

Then by my account about 30 deepwater floaters that are under construction for start up in '08, '09 kind of time frame. One typically, how many ROVs are generally stationed on the deepwater floater? And then at what point in time do discussions start on -- you know, on what -- placing ROVs on this new projects or new product that are going to be constructed?

Well, I mean, we're starting to have some discussions, now but it will be end of this year, next year, before these contracts are awarded. A lot of them will be awarded with very sophisticated launch avenue recovery systems. It will be installed as integral part of the shipyard work. Mostly speaking, the industry is continuing to look at sort of a one rig, one ROV operation. My guess is that the model in Norway where you have an additional observation ROV, that that might become a little more common. I mean, you have got these rigs that are costing $.5 billion. You know, too ROVs is not an overkill. And we're seeing that in the installation side as a much more common practice. It virtually eliminates any downtime on -- on the system. And -- so my guess is of the 30 units that are-- roughly 30 units that are in some phase of construction, a third of those probably have more than one ROV.

Okay. And then what proportion of your ROVs were involved in support work during the quarter?

Well, I just happen to have that. I didn't put that in my opening notes, but 156 out of the 177 were -- were working. 112 in drill support and 44 in non-drill support. 72/28 mix.

Okay. Great. And then just one final question. What's the CapEx budget for -- for this year now?

Well, we -- we have -- we don't have a complete budget. My sense is that we -- we announce it, you know sort of a piecemeal because we don't take a -- we make a very opportunistic view of trying to build assets. We'll probably build some more ROVs. My guess is that we'll probably put some debottlenecking into our manufacturing capabilities. Probably expand some of those capabilities. We will probably have some additional project type hardware that we will put in for some of the infrastructure type of remediation type jobs. And we'll add to our rental tool fleet. I think that will be a big -- a big part of the '06 CapEx. And then you know, looming on the horizon is always huge CapEx expenditures for MOPS if we got a new contract for something like that.

Okay. Any -- any dollar number that you want to throw out just rough, you know?

No, I'm sorry, I don't have that right now.

Okay. Thank you very much.

Thank you.

Your next question comes from Phillip Dodge.

Thanks, morning, everyone. My estimate was low. John, could you elaborate a little more on this tanker that you purchased? How much of it might cost to upgrade it into a MOPS, and how many projects are you looking at out there that might fit in?

Great question, Phil; and I'll have to say that, you know, occasionally you have been more aggressive than I thought you should be, and this is occasioned, and I think your confidence in our ability to produce results was well-founded. The tanker that we bought was from a supermajor oil company and it is currently stacked on the West Coast of the United States. It's a -- 1.3 million barrel capacity tanker, which is about three times the size of our ocean producer currently working in Angola. It is -- we have three jobs on the horizon that -- and again, I'm not going to get into any details about those or where we are or what we are in the budding process. It was -- I can't remember the exactly number -- I think it was a $12 million purchase.

Uh-huh.

$12 million purchase. That pales in comparison to what the conversion costs would be. Somewhere in the 200 to $300 million range. Again, that depends on what type of reservoir is being developed [INAUDIBLE], what would be required. We tend to look at, you know, West Africa as being our sort of market for that. We think that crude is going to be sold more in $1 million barrel packages, so you need excess of 1 million barrels storage on board the vessel. You know, there's a lot of opportunity there. But we're not counting on that, and it was kind of a defensive move to buy the tanker. It gave us a very positive relationship to one of the bids that we were thinking about making, and given scrap tanker prices and given demand for [FESOs], if we don't get a job, then I think disposing of it even at a profit is -- is highly likely.

That was in my youth when I was too aggressive on the earnings. One -- one other question, if you'll allow. Do -- are you expect anything large awards of umbilical contracts over the balance of 2006?

The answer is no. My preference is that we try to build some specific smaller ones; but you know, I mean, if we get a shot at a big one, you know my intuition was last year that, you know, we were a little bit optimistic -- or overly optimistic -- about, you know, our ability to actually perform. And -- and we backed away from a very large order in the Gulf of Mexico because we didn't want to, you know, put anybody -- or any customer in -- in harm's way. Right now I think there's just a lot of great opportunities for small, medium sized orders out there and -- but having said that, you know, look, if a big one comes along and it's a good person, hey, you know don't think Oceaneering is not going to be bidding on it.

It will depend on the margins too. The one last year there was a low margin, high risk job that we passed on, so the pricing environment is completely different this year.

I hate to sound like I'm not trying to answer your question. I mean, we really do treat every opportunity as a specific analysis. You know, we don't have a -- a pricing policy and procedure. I mean we -- we use a lot of common sense. We'e got a lot of market damage because of our Six Sigma activity with the ability to exchange marketing activity between the segments. We think that we've got a pretty good handle on, you know, who's going to be doing what and when, and we think that gives us an advantage over -- and I'm saying this, and I don't mean to sound like we know more than anybody else, but I think we've -- everybody has got the knowledge, but somehow Oceaneering, I think, is able to assume more and use that knowledge more efficiently than some companies do. Some companies just take orders. We go out and we find out where are the best orders to get.

I understand. Thanks very much.

Thank you.

Your next question comes from Andrew O'Connor.

Good morning, guys. Great quarter.

Thank you.

John, you have already talked around this: I was trying to get a better sense for the strength of your end markets. Were there in fact any projects or opportunities that Oceaneering turned down during the quarter? And if so, can you speak to that -- or, you know, as a general characterization, would you say you are turning business away at this point?

Well, I think that -- when you answer that in sort of the broadest form, I think the answer is yes, we were turning business away; but it was because we really weren't rigged up to make steel tube umbilicals in Panama City, and so that was -- that was an issue for us. If you answer it I think it in a little more narrow fashion, and I think that's probably where you were headed -- we weren't turning orders down on a wholesale basis. We -- first of all, we don't keep that statistic. I know some of the pressure pumping companies, you know, keep a statistic like that -- jobs that they turn down because of scheduling problems and issues like that. It's a great statistic to use and it certainly gives you a -- a great preleading indicator for capacity additions. For us, you know, being in a little bit later phase of the Subsea architecture, we have a little better chance to see what is most likely going to fit our capabilities, and then spend a lot of marketing effort on certain types of projects. And so that's really the way we approach it as opposed to, you know, just saying hey, we are all things to all people; and therefore, we could keep a -- a valid statistic on -- on sort of a stock out inventory approach to -- to consumption here. And I don't know if that answered your question or not, but that's the way we work.

Utilization could be a lot higher if you were to take some-- some jobs that might not meet your margin criteria. I mean, is that a fair statement?

Exactly. And I think, you know, you're always fighting at that natural trade off of -- of, hey, I need to cover and absorb my costs. If -- if you adopt a true manufacturing mentality, what I have seen in manufacturing mentality, that, you know, this concept of standard cost, cost absorption, utilization, you know, I'm coming at this more like a drilling contractor does. I'm looking at it as trying to find those jobs that fit me, and you know, I want some coverage of my -- my -- my asset capacity, but I don't want it all covered. I want -- I'm like, you know, the airlines. I mean, there's a few first class passengers that show up on the last day, and you make more money on that first class full fair seat than you do 10 guys [INAUDIBLE] that you have induced to get on the plane to go to Cancun. So I think that we play that pretty well. I mean, I think we see that in a little more creative way, little more innovative way.

Thank again. Nice quarter.

Thank you.

Again, to ask a question, that's star then the number 1 on your telephone keypad. And at this time, we have no further questions.

Okay. Well, let me thank everybody again for an opportunity to visit with you and -- and appreciate this -- this conversation .

This concludes today's Oceaneering International conference call. You may now disconnect.