Oceaneering International Inc (OII) 2006 Q2 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the Second Quarter Earnings Conference Call. [Operators Instructions].

I'll now turn the call over to Mr. Jack Jurkoshek.

Good morning, everybody. I'd like to thank you for joining us on our 2006 Second Quarter Earnings Conference Call, and I'd like to, particularly, welcome those of you who may be participating in the webcast of the event, which is being made available to through the Company's boardroom service by Thomson CCBN.

Joining me this morning is Jay Collins, our President and Chief Executive Officer who will be leading the call, Marvin Migura, our Chief Financial Officer, and Bob [Magoya], our Treasurer.

Just as a reminder, remarks we make during the course of the call regarding our business strategy, plans for future operations, and industry conditions are forward-looking statements that we are making 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 Jay.

Jack, thank you, and good morning, and thanks for joining the call. It's a pleasure to be here with you today for the first time, having record results to report is a good way to begin my tenure as CEO of Oceaneering.

During the second quarter of 2006, we set an all time record for Oceaneering's quarterly net income. Earnings of $30.6 million were double the second quarter of 2005 and 20% above last quarter. Our record earnings were above both our guidance range industry estimate as market demand for our subsidiary services and products remain at a very high level.

Both the year over year and sequential quarterly net income improvements were fairly broad based with four of our six business activities contributing to the increases. Our ROV subsidiary projects and inspection businesses achieved record quarterly operating income performances.

We've raised our 2006 earnings guidance to a range of $2.00 to $2.10, up from the $1.60 to $1.95 range as of our last earnings release. With the low-end of our current range higher than the high-end of our previous range.

Our current earnings guidance is based upon expectations that during the second half of this year, we will benefit from an improvement in our Subsea Products operations, particularly, from umbilicals, and experienced a lower profit contribution from our Subsea Project business due to a reduction in the pace of hurricane related work, and because two of our vessels will be dry docked for part of the period. One for regulatory inspection, and the other for upgrades.

In summary, we now expect 2006 EPS to be approximately 70% to 80% above our 2005 record results. Year over year, ROV operating income increased more than 55%. Our average fleet size increased by 12 vehicles, and we raised our fleet utilization from 81% to 85%. We also improved our average revenue per day on hire to a record $7,100 per day, up 16%, and increased our average operating income per day on hire to over $1,950 a day, up 38%.

Sequentially, ROV operating income increased by over 20% on a 7% improvement and average pricing per day on hire, and a 3% increase in days on hire. During the quarter, we added five systems to our fleet, and as of the end of June, we had 182 systems available for operations.

Our Subsea Product segment had a good quarter as our specialty products group, Oceaneering Intervention Engineering, continued to generate commendable results. Year over year, the $10 million improvement in products operating income was predominately attributable to increased ROV tooling sales, and the acquisition of Grayloc which occurred at the end of June 2005.

Sequentially, segment operating income declined on lower umbilical manufacturing [inaudible] due to mechanical problems experienced at our Panama City plant. Consequently, we did not produce enough umbilicals at this facility to cover the costs of operating it. Two examples of problems we encountered as we commenced performing long [wait]continuance operation are, first, the programming synchronization of three different pieces of processing equipment due to adjustment and refinements.

Umbilical components offload from one carousel are processed through the [cabler], and are stored on another carousel in a single synchronized process. The coordination of this equipment is computer control and monitored, and was not working properly. Second example is overheating of a key piece of equipment that makes electrical conductors that also required reprogramming and retesting.

While these problems were, certainly, frustrating we are confident that the profitability of our Panama City plant will improve in the second half of the year, even though we are making an allowance in our current financial forecast, there is slower ramp up of production.

Furthermore, we remain confident that this state of the art facility will become a significant contributor to Subsea Products operating results in 2007 and beyond.

At the end of the quarter, our products backlog was $245 million, more than double, the $112 million of a year ago, and up from the $222 million at the end of last quarter.

Our net new product orders during the quarter were approximately $104 million, over 25% more than the revenue it generated.

With substantial contracted backlog for the umbilicals at the end of June, we are expecting significant improvements in quarterly results for multiplex during the second half of this year.

Our Subsea Projects business which is conducted in the Gulf of Mexico achieved record profit performance as we continue to benefit from market demand for hurricane damage inspection in repair services similar to the unprecedented levels of the last two quarters.

Sequentially revenue increased about $2 million, and operating income rose by nearly $9 million. This increase in financial performance was attributable to the two reasons noted in the press release. First, approximately $10 million of revenue during the quarter was obtained on increases in pricing and use of Company owned vessels and diving equipment in lieu of a third party boat. We, typically, make a higher percent margin on jobs where we use our own assets.

In aggregate, this accounted for $4.4 million or, roughly, half of the operating income improvement.

Our current expectation is for continuation of a similar level of demand in pricing for our assets during the third quarter.

Secondly, during the quarter, we booked $4.5 million of profit related to customer approval of change orders on work done in the first quarter, and favorable cost estimate revisions related to work performed in prior quarters.

The projects bid and awarded on a fixed price or lump sum bases, it is not permissible to recognize the revenue on the presumption that the customer will approve pending change orders. We can only recognize revenue on the basis of approved change orders, and that sometimes that approval is slow in coming. Likewise, in our conservative nature, sometimes, we are hesitant to revise the estimated cost until the project is complete, and the final customer sign off has been obtained.

In late June, MMS issued its final report on Hurricanes Katrina and Rita. Shut in production, at the time, was equivalent to 12% of the Gulf's daily oil production and 9% of the daily gas production. The MMS has discussed the overall damage caused by these hurricanes to be the greatest natural disaster to oil and gas infrastructure in the history of the Gulf of Mexico. Over 3,000 of the 4,000 platforms and 22,000 of the 33,000 miles of Gulf of Mexico pipelines were exposed to these hurricanes. They destroyed 15 platforms compared to just seven by Ivan.

Given this damage, we anticipate a substantial amount of remediation work that will last beyond 2008. To date, most of the hurricane work we have performed was focused on inspection and damage assessment along with a few major repairs and abandonment projects. We are aware of, at least, two large jobs coming to market with contract awards expected during the third quarter of 2006. We will commence in 2007 and when we say large jobs in this context, we mean projects that have a duration of, at least, two years and, perhaps, three or four years.

Basically, much of the shut in production mentioned into June MMS report needs to be properly plugged and abandoned. Since the wells are inaccessible due to the tangled mass of toppled platforms above them, these projects will require significant amount of underwater work by divers and ROVs.

In response to this demand in April, we transferred The Performer from Adtech to our projects' group. The Performer is an ROV support vessel with a moonpool deployed millennium ROV capable of conducting technically challenging operations in deepwater. Today, it has been used to perform both hurricane and routine infrastructure inspections. We also have a second saturation diving system being built that we plan to put in service in September. The first job for this [SAT] system, estimated to take a minimum of 30 days will be to install a 20-inch riser on a platform.

In April, we also charted the vessel, Island Ranger, a class 2 dynamically positioned vessel, for a three-year term commencing in February 2007. The Island Ranger will be outfitted with two of our high stack ROVs, will augment our ability to perform ultra deepwater IRM project in the Gulf of Mexico.

This charter is evidence of our belief the deepwater IRM market in the Gulf, with or without, hurricane damage related to man has a promising and sustainable future.

While we expect the level of Subsea Projects profitability to decline during the second half of 2006, we anticipate this segment will maintain a very good book of business, at least, through 2007 and, perhaps, longer.

As expected, our MOPS business has had lower results during the quarter due to a mid-May reduction in day rate on the ocean ledger. This occurred as the primary five-year contract term expired in the first of five previously agreed one-year option period day rate reduction went into effect.

All three of our totally young units were under contract for the entire period as they were last year at the same time and we expect them to remain so for, at least, the rest of the year.

The earnings contribution from our Medusa Spar investment reported an equity income from unconsolidated affiliates also declined at the reserves currently being produced or naturally depleted.

Year over year and sequentially, our inspection business benefited from our inspections to secure more value added sales, and realize cost savings as actions taken last year to reduce to our operating expenses.

The profitability improvements came from most of the geographical areas in which we operate. Sequentially, operating income also improved as a result of normal seasonality. Our Adtech non-oil field business had a good quarter with results reflecting normal fluctuations in business activity, and job mix as the transfer of The Performer to our Subsea Projects business in April.

Sequentially, operating income improved on increased revenue from engineering service work and the US Navy submarine and commercial projects.

Year over year the decline in operating income was attributable to the transfer of the performer.

Marvin, perhaps, you'd like to discuss some of our unallocated expenses, cash flow, balance sheet, and CapEx issues.

Excellent. Thank you, Jay. Good morning. First of all, I'd like to correct something that Jay made a mistake on. Hurricanes Katrina and Rita destroyed 115 platforms. He accidentally said 15. Compared to seven by Ivan. So it really does have-- it is a significant amount of work out there.

Regarding unallocated expenses, these expenses were higher both year over year, and sequentially due to higher restrictive stock expense associated with long-term incentive compensation awards granted back in 2002 and 1999. I say 2002 first because that's, really, where the bulk of the shares-- the unvested shares relate.

The quarterly increases were $6.1 million year over year, and $5.3 million, sequentially. This restrictive stock expense for the unvested portion of the awards fluctuate with the market prized of Oceaneering stock which rose 60% during the quarter. This mark to market accounting treatment was one of the factors considered when we revised our long-term incentive compensation plans in 2006. Awards under the new plan do not require the mark to market accounting treatment and, therefore, will not fluctuate with our stock price.

And while we do not provide guidance on what we believe our stock price might be on the last trading day of each quarter, which is what you have to mark to market on, we always forecast an increase in stock price. However, at this time, we expect our quarterly unallocated expenses will decline in the second half due to lower restricted stock expense. Currently, we anticipate our unallocated expenses will run in the $15 million to $16 million range per quarter for the rest of the year.

Regarding our cash flow, if you add depreciation back to our operating income, we generated over $66 million in cash flow for the quarter, 70% more than in the second quarter of 2005, and on our balance sheet at the end of June we had debt of $195 million and equity of $611 million. Our debt to Cap percentage was 24% giving us considerable additional debt capacity.

Capital expenditures during the quarter totaled $44 million of which $23 million was spent on maintaining, upgrading, and expanding our ROV sleeve. $11 million was invested, primarily, in previously announced initiatives for our Subsea Products business. Of the $90 million in CapEx we've invested in the first half of the year, 70% has been in our ROV and Subsea Products businesses. The two operations that offer us excellent future growth prospects.

For the second half of this year, we currently expect to invest an additional $50 million to $60 million on organic growth, efficiency improvements, and maintenance projects. As in the first half, most of this capital will be invested in our ROV and product segments. We are continuing to look for additional accretive acquisitions and other organic growth opportunities with better than a cost of capital returns, and we intend to use our strong cash flow and balance sheets to further and grow our earnings.

Jay, I'll turn the call back over to you.

Thank you, Marvin. In summary, quarterly net income was at a record level for the fifth consecutive quarter, and we are looking forward to achieving a record EPS performance in 2006 for the third year in a row.

Our focus on providing products and services for deepwater and Subsea completions is a good way to play a major secular growth trend currently underway in the oil field service and product industry. Deepwater is, definitely, one of the best frontiers for E&B companies to add large reserves with high production flow rates at relatively low finding and development costs.

As we said in the press release, and as I mentioned earlier, we've raised our 2006 EPS estimate to $2.00 to $2.10, up from the $1.60 to $1.95 range as of our last earnings release.

Given the overall 2006 market for oil field services, we like our position. We are projecting EPS growth in the range of 70% to 80% for this year. When you consider this is on top of achieving record net income results in four of the last five years, during both good and poor markets, we believe it's the sign of a company that can deliver consistently better results year after year.

Looking further ahead, we expect the market environment for our oil field services and products will continue to be characterized by robust demand and pricing power. This is being driven by historically high crude prices, limited non-OPEC supply growth, significant reservoir depletion rates and solid hydrocarbon demand growth. In this market, we believe, the trend for our customers to invest their enormous cash flows and offshore, and Subsea Project will continue.

Consequently, our 2007 earnings are anticipated to be even better than 2006. The current inventory of deepwater fields yet to be development to the extent to which existing floating rigs are already under a firm contract and the announced new floating reconstruction in the market for outlook for Subsea trees and umbilical, are all signs of healthy future demand for our products and services.

For the specific third quarter guidance, we are projecting earnings of $0.55 to $0.60 a share, about the same as it was just reported for the second quarter. Overall, we expect an improvement in Subsea products, lower unallocated expenses that Marvin just explained, and a reduction in profit contribution from substitute projects.

We finished the second quarter with 182 ROVs, and expect to put additional systems into service during the third quarter. We expect third quarter ROV operating income to be comparable to the excellent second quarter results. We see continued growth in days on hire, although, recruitment and training costs continue to escalate as we hire and train additional personnel.

Operating income from Subsea products is expected to improve on the strength of an increase in manufacturing [inaudible] at our multiplex umbilical plant, and a continuation of strong performance by OIE. In fact, we expect to set a record quarterly operating income performance in this sector in the third quarter.

Operating income from inspection is anticipated to increase from our ongoing efforts to sell higher value added services, and ramp up of the North Sea contract noted in the press release.

Operating income from Subsea Project is expected to decline from the second quarter. With that being said, the near-term market outlook for our Subsea Project segment continues to remain excellent. Consequently, we expect very good third quarter results at or above the level of what we afforded in the first quarter of this year.

Our MOPS segment results are forecasted to be comparable to the second quarter as an increase in engineering work is expected to offset the impact of a full quarter of lower [derate] on the ocean ledger.

We anticipate that equity income from our ownership in Medusa Spar will continue to fall off as production is expected to decline as the reservoirs deplete.

We also believe it would be prudent to expect, at least, a few shut in days during the quarter, though, of course, it is the season for hurricanes and tropical storms.

In summary, our record results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well over both the long-term and short-term.

Our technology gives us operating leverage to take advantage of the high level of deepwater in Subsea completion activity currently underway. The longer-term market outlook for deepwater and Subsea service and product offerings is excellent, broader, deeper, longer, any way you describe the current environment, we think we are in one of the sweet spots of this up cycle.

We believe 2006 will be our best year to date and with capacity additions in ROV's products and projects, 2007 should be even better.

Now, we appreciate all of your interest in Oceaneering, and we'll be pleased to answer any of your questions.

[Operator Instructions]. Thiru Ramakrishnan.

I know that pricing's not really the name of the game on the ROV front, but Q2 sure looked pretty good. Talk to us about day rates going forward or, at least, sustainable and where do you think you can end the year at?

I think these rates are sustainable. We continue to push pricing wherever we have an opportunity in the ROV business. I will say that we are seeing a little more resistance from clients, but we believe we will continue to see day rate increases and revenue per day increases as we go forward, and we believe what we have now is sustainable. I'll leave you to project that number, but you can see we steadily increased that number over a long period of time. We expect to continue to do so.

And then on the Subsea Project side, even if you back out the $4.5 million cost estimate gain that you had, your gross margins are still huge step change increase over Q1, and some of your competitors have talked about where they're bidding leading edge margins at, in the mid-forties, are you guys in that same ballpark?

The low forties, that's consistence with what we see in the marketplace. I think we will see some pricing come down in the smaller decimals as a lot of the inspection work is-- there's not the fringe [there] that there was before on the inspection side, but we think margins will continue to be good, but as we say, with the slowdown in the hurricane related work, I think that will slowly decline over the second half of the year, but we have a good book of business right now.

Thanks.

[Stacy Muellet].

You mentioned your plans to add to the fleet. Can you walk us through how many vessels you plan to add over the next 6 and 18 months?

Stacy, we're going to pass on making forward projections on their fleet size. So we just decided, I think, last quarter that we would just announce the addition to our fleet as we do them. We'll tell you we are building systems and we will continue to add, and if you look at number of drill rigs out there, we're trying to get as many of those jobs as we can. So, we're going to decline to project our fleet size going forward, but can tell you we are building systems, and you can look at historical rate if you'd like to, if you want to make your own projections.

And, Stacy, we're declining because of for competitive reasons. We don't want to announce to our competitors how many ROVs we're building.

Switching gears to Panama City. When should we expect this facility to be fully operational? Can you walk us through the timing of the ramp up in the back half of the year?

Well, let me say that I am confident that we're going to continue to get better every quarter and operating this facility. Some of this equipment is very complicated and we are getting better all the time. We will improve each quarter and our [inaudible] and our productivity is going to increase every quarter. I fully expect us to be fully operational some time the later half of this year, but we're getting better all time. It is very frustrating to see some of these mechanical problems and some are manufacturing related, impede our progress here, but we have a great dedicated team of people here, and we're working through all these problems and continue to make umbilical just not as fast as we like.

You recently received an award for a BOP. Can you walk us through the timing of that project, and any potential future BOP awards that you're currently bidding on?

We received an award for a BOP control system. This is a relatively new business for us. We've been in the business of making replacement pods and components for control systems for the past two or three years, and now we're moving into the full system, and we think that's going to be a very good little business for us. We're entering as a small player in the market, but we believe we have some great expectation this business than we can easily build a couple of systems next year.

And most of the income will come in 2007.

Yes. It'll be a 2007 income.

Thank you.

Tom Escott.

Following up on the $4.5 million gain on the change order or recovery in the period with you forecasting a sequential decline in earnings in the third quarter from second, I'm assuming it looks like you're not expecting to get several million of new change orders falling into this cart, period. That seems like what the assumption is.

That's right. We're taking that $4.5 million distinctly to zero with our forecast. Other than that, we think it's a relatively stable business of some decline longer-term in the year but no expectation of another $4.5 million or any change orders in the third quarter.

Well, I guess my question, and you've touched on it there, but the question here on the table is you clearly don't expect to have any in the third quarter, but is there a dollar amount, a million, $10 million, some other number that is still hanging out there that you're in negotiations with customers about other projects at other times?

No, I don't think so. There's no other shoe to drop on that issue.

Thank you.

We got to make the hard way on a day by day basis.

And while you back out the $4.5 million as a prior quarter thing, also know that the unallocated expense is coming down, at least, in equal amount.

Yes. There's clearly a few moving parts in here. Some were up, some were down, and that's going to change going forward. So that's what we're trying to get out here.

Understood. Thank you.

Phillip Dodge.

You mentioned that in the quarter it'll be a vessel down for upgrade. Could you give some more details on that?

Actually, we'll have two vessels that'll have-- that'll be in dry dock. You're right. One for upgrade, The Performer, that we brought in [inaudible].

Yes. I was thinking of the upgrade.

Yes. The upgrade. The Performer is the vessel we're going to make it into a VP2 vessel which is what we really need in the Gulf of Mexico. We get close to platforms. So it's an older vessel, and we'll completely put in new control systems, and it'll be able to be a fully satisfactory VP2 ROV sport vessel at the end of the dry dock period. We think it'll happen-- and be completed in the fourth quarter, but it might slip over into the first quarter of next year.

Jay said in the second half not, necessarily, in the third quarter, and it is not forecasted to be in third quarter, just in the fourth quarter, but it may step over as Jay said.

Does that answer that question?

Thanks for the clarification. Thanks.

Joe Agular.

I guess my one question topic would be Subsea Products and, specifically, Panama City plant. Was that-- I know how you all are reluctant to give specifics, but was that plant a money loser or did it contribute to the bottom line in the quarter?

I think you can assume that the decline in that business segment was attributable to Panama City quarter to quarter.

Joe, it did lose money. As Jay said, the [inaudible] was not sufficient to cover it's operating cost. So, yes, it lost money.

The improvement from Q2 to Q3 that you all are forecasting, do you think that Panama City will be profitable?

Yes.

Is there any way to-- any hint you want to give us as to what revenue was lost in the quarter because of the [inaudible] issues?

I think that's what Jay-- you know we don't talk about below segment lines and, specifically, by plant. So we're not going to get two levels below segments, but as Jay said, the decline in Subsea Products can be 100% attributable to Panama City.

Well, let me ask you a different way, also. Is Panama City expected to, once it's fully functional, will it be running at capacity, basically?

I think that depends on the market out there and where the jobs-- where we win jobs. So, I would say, it will ramp up over time, and we'll just see what jobs, what work we get for the plant in the second half of this year.

On a short-term basis, Joe, we've got a lot of good backlog to put it through but we need to book additional jobs for the U.S. Gulf of Mexico to be talking about capacity on a sustained basis.

I'm trying to get to the point where there is upsides still in that plant from both the revenue side as well as an earnings side and, obviously, the market we all expect a lot of subsidiary field developments so, probably, over the next few years and so forth, and I'm just trying to make sure that we understand that we're not dealing with a situation where there's not a lot upsides still left out of that one facility.

They'll be significant upside in 2007 for this plant.

Thank you, very much.

Waqar Syed.

Have you missed any delivery schedules in the quarter because of problems at the Panama City plant, and are the problems affecting your ability to bid on new projects?

Certainly, we've had some jobs that have been delayed, and I think customers can see that we've got a great factory full of terrific people, and we have produced some umbilicals out of there, but I think we have demonstrate continued performance in that plant and produce umbilicals on time, but as you see in our backlog growth we are continuing to book significant amount of orders. So I don't think we've lost orders at the moment because of that but, clearly, we have to perform to show customers that we can deliver product on time in Panama City.

I don't know if we have slipped past any delivery dates. I know that we have delays as Jay said. So, but that is one of the issues that we are wrestling with, but at this time I cannot recall us missing a delivery day.

On the ROV side, can you indicate where the leading edge [inaudible] are for personnel and for the equipment or even if you could give what the rates are for top 10 rates for-- 10 rates or something average?

I'm sorry. We really don't give that information out. I refer you to our webpage where we publish our book prices on our webpage, so I refer you to that instead.

In Norway there was a wage increase recently. Have you been able to pass that on to the customers as yet or when you do expect that to be passed through.

Yes. A good question. The strike has ended, as you know, in Norway. The agreement was a 12% increase in wages over two years effective the 24th of July. We have escalation clauses in several of our-- in our contracts but, in some cases, those will not begin until January. On the other hand, we are adding significant numbers in Norwegian personnel into our organization, and we'll have high utilization so we, actually, think our Norwegian profitability will be very good in the second half of this year.

Thank you, very much.

Victor Marchon.

First question I had was just on one [inaudible] your intervention vessels, if memory serves, was on a one-year contract through this September. I wanted to see if there was an extension possible with that or if you guys would be able to put that in the stock market?

Unfortunately, Victor, there is an extension possible on that with the small increase, no giant pick up there, although, it's not the type of vessel that works every day.

Is that for another year?

Yes.

I would say we haven't received a notice of an extension of that contract but you asked, it is possible that the oil company has a right to extend that for another year if they want, and we assume they will, but we have not received any such notification.

The second question I had was just on the tanker you guys had purchased last quarter. I wonder if you guys had moved [inaudible] plant on a conversion of that?

We have not. We're looking in the market to see what projects are out there that it might fit, and so we're looking into that right now, but we like owning that tanker. We think it's a good asset and, probably, is increasing value since we bought it, but we're not going forward with any project on spec, and we'll wait and see what's out there.

So you guys would need a contract in hand just to confirm that?

Yes. That's correct.

Thank you.

[Operator Instructions]. Tom Escott.

I wanted to talk about Medusa Spar just for a second. My understanding when you got in this project that a few years ago that you had additional capacity in the line in the Spar, obviously, the Murphy was the major operator there, and major [inaudible], but that there was additional capacity that can be sold to other parties to get higher utilization and, of course, from that higher revenue, higher earnings out of that asset. With Medusa, with the reserves and production declining from Murphy, is there any progress or any prospect of selling additional capacity of that line to other parties operating in that region or should we look forward to continuing downward or depletion from the earning power of that asset over time?

For the rest of this year and 2007, I think we will see the decline. There is capacity and there are some possibilities around there but with the shortage of drilling rigs it's going to be a slow process, I think, to get some of these prospects drilled, and then have them successful, and then reconnect. As you know, we connected to tiebacks to the Medusa platform after we first joined the project in the first year or so, year and a half, but I don't think anything will happen in the near-term of this year or the first half of '07 that would impact '07 earnings. So we are, certainly, working with that and with Murphy, and I hope we get it done, but I don't think it'll affect the next year.

Thank you.

Joe Agular.

Jay, in your commentary you mentioned that there were some large projects out for bid in the Gulf of Mexico, and I was wondering if you might just expand on that a little bit and give some understanding of what the scope of those projects might be.

One of the projects is a major oil company that we've been told is allocated a billion dollars to clean up platforms that were toppled in these hurricanes and this project won't even begin until late next year, and could go on for two to four years. So that's one example. Another one is a similar type of project that's, probably, in the range of $150 million to $200 million. That, also, will begin sometime, we think, mid to late next year. Well, that's really the problem is we mentioned 9% to 12% of production that shut in, still, we understand from many of our oil companies [inaudible] that most of that production it's never coming back, and so now it needs to be, the debris needs to be cleaned, the wells needs to be plugged and abandoned, and in some cases, that's not a very easy thing to do given the bent metal and twisted metal there. So does that give you some feel for that?

Yes. I just wondering, do you anticipate bidding as a subcontractor or would you be any position to run an entire project like that?

I think, certainly, on the billion dollar project we will be a subcontractor on the one that-- the other one I mentioned that's the $150 million to $200 million multi-year project. We can potentially do that project. We can be the prime on that.

Do you have all the services needed for that or is there just some parts you may have to [inaudible]?

No. We would not have all the services for that. So, the [inaudible] and the big wreck removal we don't have [inaudible] barges or a well-killing of capability but we can still run it.

Historically, we have not been the prime on that, so I think you would have a, probably, a safer bet that we'll continue to be a subcontractor on these projects.

In which services would we be-- it should involve the IRM stuff and then ROVs?

Yes. There should be vessels. Vessels, ROVs, saturation diving. Pretty much our Gulf of Mexico offerings.

Is this part of the reason why people expect the Gulf of Mexico to stay busy for a number of-- for a period here or is this incremental work or is this just what you mentioned, where you're moving from the inspections page to the repair clean up phase?

I think it's the latter. When we started another project this year in the spring, late spring, that was going to go on for another two to three years. So some of this capacity is getting put away for quite some period of time and the diving side, the Gulf of Mexico is 100% busy, and we've imported people, and other people are brought in capacity from other areas, and vessels from the North Sea. So I think it's now the longer term grind of repairing these, and cleaning up these facilities.

On the ROV side, I know you didn't want to mention numbers but, let me ask it this way, there are, obviously, a lot of deepwater drilling rigs being constructed today, and how many contracts have been awarded for those particular drilling rigs. Is it still too far away for you all to bid on a project like that or when do, exactly, the rig companies or the operators of those particular drilling rigs, under contracts, start to look for ROVs?

I think of the ones though that-- the new rigs that we saw that have been ordered, I think it's a relative handful, maybe, five, six, seven, eight, some number like that that, actually, have customers that are assigned to them, and so eight we say. So those are the ones where we really have a customer to go sell to, but in all cases, or in any cases, as many as we can, we are talking to the drilling companies about how are all they will fit on their rig, and making sure that it's designed for an Oceaneering ROV. So I think it's a little early yet, but we're starting to talk to any customer that is assigned. So a little bit early.

We tend to get more than our share of that work.

Absolutely.

So it's still out there?

It's still out. Oh, absolutely.

Thanks, very much.

And we'll be happy to build our ROVs to serve those-- that business as well. We tend to be ready for it.

Thanks.

Tom Escott.

Marvin, how did DD&A go down sequentially from March to June with total assets being up so substantially over the period?

What we had was in the first quarter we had some additional depreciation related to equipment that we didn't think was being carried on our books [fairly]. So we had a little right now, not material but the decline was related to that.

So what's the go forward rate then? More like $19 million a quarter or is it closer to 20 a quarter or what is that?

I think if you looked at-- we went down $800,000 about, right?

Yes.

And I would look at $20 million being the run rate, and as you said, increasing.

Thank you.

We have no further questions in the queue at this time.

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Thank you, ladies and gentlemen. This is the conclusion of your conference. You may now disconnect.