Oceaneering International Inc (OII) 2007 Q3 法說會逐字稿

At this time I would like to welcome everyone to the third-quarter earnings conference call. (OPERATOR INSTRUCTIONS). Mr. Jurkoshek, you may begin your conference.

Good morning, everybody. I'd like to thank you for joining us on our 2007 third-quarter earnings conference call. I'd like to particularly welcome those of you who may be participating in the Webcast of this event.

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 Mingoia, our Treasurer.

Just as a reminder before we start, 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 am now going to turn the call over to Jay.

Good morning. Thanks for joining the call. It's a pleasure to be here with you today. During the third quarter of 2007, we again achieved record quarterly earnings. This is evidence not only of the high demand we're experiencing for our subsea services and products, but also our strong operational performance.

Earnings of nearly $54 million were 40% above the third quarter of 2006, and more than 10% above last quarter. Our earnings were above both our guidance range and the Street estimate, as all of our operations, particularly Subsea Projects, performed above what had been anticipated.

Both the year-over-year and sequential quarterly net income improvements were attributable to record operating income performances by our ROV, Subsea Products and Subsea Projects segments. Year-to-date, our Subsea Products, Subsea Projects and Inspection businesses have earned more operating income then in all of 2006. Consequently, on a company-wide basis, we have earned more net income in the first three quarters of 2007 than in all of last year, and have already achieved record earnings for the fourth consecutive year.

Given our third-quarter performance and a slightly improved fourth-quarter outlook, we are raising our 2007 EPS guidance to a range of $3.15 to $3.25, a growth rate of approximately 40% over our 2006 results.

Looking ahead into next year, our business prospects continue to look promising, and we are initiating 2008 EPS guidance with a range of $3.50 to $3.80, based on an estimated average of 56.5 million diluted shares. This growth in EPS is anticipated to be led by continued profit contribution increases from our ROV and Subsea Products businesses. I'll talk more about this later. Now I will review our operations for the third quarter.

Our ROV business achieved record operating income. Year-over-year, ROV operating income increased over 30%. We improved our average revenue per day on hire to a record $8600, up 15%, and increased our average operating income per day on hire to over $2400. We also increased fleet size by 10%. Sequentially, ROV operating income increased by nearly 10% on an improvement in average pricing per day on hire and an increase in days on hire. Our utilization rate of 88% for the quarter matched our all-time high, set in the third quarter of 2005.

During the quarter we added four systems to our fleet and retired two. As of the end of September, we had 204 systems available for operation, up 18 from 186 at the end of September a year ago. Our fleet mix during September was 68% in drill support and 32% in construction and field maintenance. This compares to a 67/33 mix in June of this year and a 71/29 mix in September 2006.

Our Subsea Products segment also had a record quarter. Sequentially, segment operating income rose nearly $9 million, up over 40% on higher umbilical manufacturing throughput by Multiflex and an increase in demand for all of Oceaneering Intervention Engineering's specialty product offerings. Year-over-year, the 14 million, or over 90%, improvement in Products' operating income was broad-based, as all of the products we made contributed to the increase, led by installation control services, ROV tooling and umbilicals. At the end of the quarter our Products backlog was 344 million, up over 20% from the 281 million of a year ago, and down 9% from the 378 million at the end of last quarter.

Last week, Quest Offshore, an independent industry market research firm, updated their 2007 umbilical forecast. As a result of delays in the timing of Subsea Projects, Quest reduced their projection for this year. They are now forecasting umbilical orders placed in 2007 will be flat with 2006. The previous Quest forecast projected 2007 orders to exceed 2006 by 40%. As further evidence of project delays that are occurring, Quest's latest forecast indicates 40% of the projected 2007 orders remain to be placed in the fourth quarter, with contracts or letters of intent on about half of those yet to be secured. So it's easy to surmise that availability of resources, people and equipment is causing Subsea Project timing to slip to the right.

While we would prefer this not to be the case, we are not alarmed by this development. The long-term trend for subsea completions is not impacted by slippage of orders from one calendar year to the next, and we believe there will be plenty of work for us in 2008.

For 2008, umbilical orders are currently forecast by Quest to increase 40% over 2007, despite a slightly lower base case preorder forecast. This is attributable to three major assessments by Quest -- first, a carryover of pent-up demand due to order delays; second, anticipation that the average offset distance between tree installations and host platforms will increase; and third, umbilical orders are being placed closer to tree installation dates.

In addition to the slippage in industry orders during the quarter, a large $65 million Gulf of Mexico steel tube, umbilical and power cable contract we have been pursuing was awarded to a competitor. We are now projecting our year-end backlog to be comparable to that at the end of June 2007, or approximately $380 million.

There are prospective jobs that should be awarded near the end of the year, or early 2008, which would increase our year-end backlog by up to 10% over our current projected level. However, we believe it's prudent to use the lower figure in our estimate. We remain confident that our Subsea Products segment operating income will improve in 2008, which I will address shortly.

Our Subsea Projects business, which is conducted in the Gulf of Mexico, achieved another record level of profit performance during the quarter, as we continue to benefit from high market demand for our diving and vessel services. This segment performed better than we had forecast due to excellent operational execution and demand for additional services on hurricane-damaged projects, particularly the previously announced BP Americas contract to support platform decommissioning operations.

Sequentially, our Inspection business performed at a very high level comparable to last quarter. This was due to a continuation of high demand for our services in general and in particular by oil refineries, petrochemical plants and power stations.

Year-over-year Inspection operating income improved by 40% on an increase in revenue to 28%. This growth was widespread, as it came from most of the geographical areas in which we operate, and is evidence of market demand growth, our success in securing new contracts, selling more value-added services and increased pricing.

Our MOPS segment had lower results during the quarter as our production barge San Jacinto went off hire as previously announced. We're still investigating our options with respect to this asset and will keep everyone posted once a decision is made. Most likely it will be sold in 2008.

The earnings contribution from our Medusa spar investment reported as equity income from unconsolidated affiliates also declined as the reserves currently being produced are naturally depleting. Once these production zones have been depleted, the existing wells will be worked over to commence production from other zones behind pipe. The Medusa spar continues to produce in line with our original projections.

Our ADTECH non-oilfield business had a good quarter. Sequentially, the slight change in results reflects normal fluctuations in business activity and job mix. Year-over-year improvements in revenue and operating income were attributable to our non-oilfield business -- to most of our non-oilfield business activities. This was led by Marine Projects Group, which performs engineering, build and procurement services for the U.S. Navy. This group did more work on Navy submarines during the quarter this year compared to last year.

I'm now going to turn the call over to Marvin to discuss our unallocated expenses, cash flow, capital expenditures and balance sheet.

Thank you, Jay. Good morning, everybody. Our unallocated expenses were higher both year-over-year and sequentially due to higher incentive compensation expenses. Year-over-year, restricted stock expense associated with long-term incentive compensation awards granted in 2002 was the primary reason for the increase.

As we've explained before, a portion of the expense associated with the restricted stock grants awarded in 2002 fluctuates with the market price of Oceaneering stock, which increased $45, nearly 150% from $30.80 at the end of September '06 to $75.80 at the end of 2007. Our current forecast for the fourth quarter anticipates unallocated expenses at the 22 to $23 million level, down from the 26.5 million in the third quarter. Of course, this will partially depend on our closing stock price on the last trading day of the year.

Now, moving on to cash flow. If you add depreciation back to our operating income, we generated over 110 million in cash flow in the third quarter, 35% more than the third quarter of 2006, and 12% above last quarter. Year-to-date, our cash flow has been nearly 285 million, up 38% for the comparable period in 2006.

Capital expenditures during the quarter totaled $66 million. These investments were predominantly for upgrading and expanding our ROV fleet, the acquisition of Ifokus, which is a Norwegian developer and manufacturer of specialty subsea products, including ROV tooling, and facility expansions in Morgan City and Norway.

Approximately 85% of our investments during the quarter and 80% year-to-date have been in our ROV and Subsea Products businesses, the two operations that offer us excellent growth -- excellent future growth prospects as they are tied to deepwater and subsea completion activity.

We now anticipate investing approximately $220 million this year. This will mainly be for ROV fleet expansion upgrades, facility expansions, acquisitions, including Ifokus, maintenance CapEx projects, and vessel upgrades. We are continuing to look for additional accretive acquisitions and organic growth opportunities with better than a cost of capital return, and intend to use our strong cash flows and balance sheet to further grow our earnings.

Because we have been able to put our cash flow to work, namely in capital expenditures and Subsea Products raw materials inventory, our debt increased $18 million during the quarter. At the end of September, we had debt of 263 million and equity of 869 million. Our debt to cap percentage was 23%. Our cash balances were about 15 to 20 million higher than normal at the end of September because of large [receipts] from customers at the end of the month.

Now I'm going to turn the call back over to Jay.

Thank you, Marvin. In summary, we achieved a record quarterly net income in the third quarter and have already realized record annual EPS performance in 2007 for the fourth year in a row. Our focus on providing services and product for deepwater and subsea completions is a good way to play the major secular growth trend currently underway in the oilfield service and products industry.

Looking at 2007 EPS outlook, as we said in the press release and as I mentioned earlier, in recognition of our performance during the third quarter, and an improved fourth-quarter outlook, we're raising our 2007 EPS guidance range. We now forecast record EPS for 2007 in the range of $3.15 to $3.25, a growth of approximately 40% over our 2006 record.

For specific fourth-quarter guidance, we're projecting earnings of $0.73 to $0.83 per share. And compared to the third quarter, we expect profit contributions from Subsea Products to increase on the strength of increased throughput at our umbilical manufacturing plants. We're forecasting the operating income contribution from our ROV segment to be about the same. We anticipate our Subsea Projects and Inspection business to seasonally declined. Some of our Gulf of Mexico diving work related to hurricane-damaged projects will end sometime in November. Additionally, we will also be putting two of our dive support vessels into drydock for regulatory inspections during a portion of this quarter. And we're predicting lower results from our MOPS and ADTECH segments, MOPS due to the decline in engineering project work and lower equity income from the Medusa spar, ADTECH due to the completion of a large engineering contract with normal government -- with normal government spending slowdowns. These slowdowns are attributable to the fact that the government appropriations for FY 2008 commencing October 1, 2007 are now being put in place, as well as a seasonal drop in work over the holidays.

Looking beyond 2007, we expect the price of oil will remain at high levels. In this environment, oil and gas companies, our customers, are projected to increase their capital spending, a rising percentage of which is expected to be spent on deepwater fields. Deepwater is one of the best frontiers for having large hydrocarbon reserves with high production flow rates at relatively low finding and development costs.

Specific signs of a healthy deepwater market that will continue to drive demand for our services and products were evident at the end of September. About 75% of the deepwater field discoveries around the world were not yet in production. Over 95% of the existing 203 floating rigs in the world were under contract, and over 75% of these are contracted through the end of 2008.

67 new floating rigs were scheduled to be added to the worldwide fleet through 2011, up from 60 as of the end of June, and up from 42 at the end of September a year ago. 46 of these, roughly 70%, have already secured term contracts with an average length of nearly five years. As a side note, 14 ROV contracts have been awarded on these 46 contracted rigs, and we've secured all of these contracts and will provide 19 ROVs. Since the end of September, two additional new floating rig construction announcements have been made, both without contracts.

Based on Quest Offshore's latest forecast, over the next five years, average subsea production tree orders are forecast to be at least 475 per year, and demand for umbilicals is forecast to average approximately 2600 kilometers per year. These forecasts compare to an average annual demand for approximately 353 orders and 1450 kilometers of umbilicals over the past five years. That's almost an 80% increase in umbilical demand.

In view of these market signs, we anticipate that demand for our deepwater services and products will continue to rise from current levels, and believe that our business prospects for the next several years are excellent. Consequently, we expect our 2008 earnings to be even higher than 2007.

During 2008, we expect the market environment for our deepwater oilfield services and products will continue to be characterized by robust demand. This is being driven by high crude prices, limited non-OPEC supply growth, significant reservoir depletion rates and solid hydrocarbon demand growth. We like our market position, given the future demand visibility of our services and products.

Consequently, as we stated in the press release, we're initiating 2008 EPS guidance with a range of $3.50 to $3.80, based on an average of 56.5 million diluted shares. At the midpoints of our current 2007 and 2008 EPS range estimates, this equates to EPS growth in 2008 of $0.45 per share, or nearly 15%. This growth in EPS is anticipated to be led by profit contribution increases from ROVs and Subsea Products.

We've not yet completed our detailed planning process for next year, but the big picture of the annual 2008 versus 2007 changes we envision occurring can be recast as follows.

ROV operating income growth of 25 to 35 million as we continue to generate more revenue per day on hire and grow our fleet. We expect to add approximately 30 vehicles to our fleet in 2008. However, based on the projected timing of the new rig deliveries, most are anticipated to be added during the second half of the year.

Subsea Products operating income growth of 25 to 35 million as we exploit continued demand growth for our specialty subsea product offerings and increased throughput and efficiency at our Multiflex umbilical manufacturing facilities.

We're forecasting a 20 to 25% increase in revenue with a slight improvement in operating margins. However, Subsea Projects operating income is expected to decline approximately $20 million. During 2008, we foresee decreasing demand for our shallow-water vessel and diving services as hurricane damage projects near completion. This past month, BP did not exercise their option to continue use of either the Ocean Intervention III or the Maersk Attender on their down platform project, as the work to be done is progressing much faster than originally thought. We've notified Maersk that we will not exercise our option to keep the Attender after the initial one-year contract -- the one-year term is completed in June, and we plan on using the OI III on deepwater projects after its one -- initial one-year term is completed in May.

As previously announced, we plan to augment our ability to undertake deepwater work with the Olympic Intervention IV late in the second half of 2008. Additionally, four of our six company-owned vessels, including all three of our deepwater boats, will be temporarily out of service during the year, undergoing regulatory drydock inspections. Accordingly we will not be -- not only be incurring additional expenses on these vessels, but we'll lose the opportunity to profit from their use during these drydockings.

Our Inspection business is likely to show some improvement due to continuation of broad-based increase in demand for our services. Our MOPS segment profit contribution is expected to decrease due to the absence of the production barge San Jacinto and a lower dayrate for the Ocean Legend. Equity income from Medusa Spar is also expected to decline as annual production throughput will likely drop. ADTECH operating income (inaudible) as a large contract for engineering services was completed at the end of September 2007.

Our SG&A expenses will increase as we continue to grow the Company. We expect SG&A to grow at a rate in the 12% range. Depreciation and amortization expense is expected to be 15 to $20 million higher.

At this time we're not going to give out any more detailed information for 2008, nor are we going to address any more specific guidance for the first quarter. For those of you who intend to publish quarterly estimates, I'd like to remind you that historically our first quarter is the lowest of the year due to the seasonality, and that we tend to have high earnings in the second half of the year compared to the first half. We'll give out our first-quarter guidance at our next earnings call in late February of next year.

In summary, we're expecting to achieve continued growth in financial results in 2008, and record annual earnings for the fifth consecutive year. This is primarily attributable to the secular demand growth occurring for services and products to support deepwater and subsea completion activity, which we anticipate will last for several more years.

At present, we anticipate spending about $30 million on maintenance CapEx during 2008, funding additional ROV fleet growth and completing the capital projects in process at the end of the year. The total of this is expected to run in the range of 125 to $150 million. Above and beyond this spending, we intend to continue to invest our cash flow in organic growth and pursue accretive acquisitions. To the extent we don't find suitable investment opportunities, we intend to pay down our revolving credit line. Consideration will also be given to buy back shares in the open market.

In summary, our record quarterly results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well for both the short and the long-term. Our technology gives us operating leverage to take advantage of the high level of deepwater and subsea completion activity currently underway. The market outlook for our deepwater and subsea service and product offerings is excellent, and we continue to believe that we are in one of the sweet spots of this up cycle. We have already achieved record annual earnings for the fourth consecutive year in 2007, and with escalating demand for ROVs and Subsea Products, we're projecting another record year in 2008.

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

(OPERATOR INSTRUCTIONS). Jim Crandell.

Nice quarter, Jay. Jay, could you give us an update on the number of floating rig orders that are out there, floating rigs out there that have now ordered ROVs, and how you continue to do in that segment?

Sure, Jim; I'd be glad to. Let me just check my notes here on that, find the right numbers here.

40% have -- 46 have contracts. 14 have ROV contracts. We won them all to provide 19 ROVs.

That's 46 out of the 69 that we now know of. So it's 69 rigs have been ordered, 46 have operating contracts now. And on those 46, there have been 14 ROV contracts placed. We won all 14 of those jobs, and we're going to provide 19 ROVs on those 14 rigs.

How would you characterize the construction and maintenance ROV market, Jay?

It's very strong. I've been surprised that over the last year and a half or two years that actually our mix has shifted a little bit more in favor of the construction and maintenance activities compared to drill support. So while drill support has been moving up rapidly, the vessel and construction-based ROVs has more than kept pace.

Last question. How would you expect at this point your average price increases in ROVs over the course of, let's say, '08, to compare with what you've achieved in '06 and '07?

I'm always reluctant to predict that number. That's what you guys do. We're just going to keep trying. I think our best advice is to bet on continued -- the same margins that we have that we've been achieving. And it's really more of a volume play at this point in time. But it's a hard (inaudible) with the very powerful companies that we work for, but we're continuing to raise our prices every day.

Keep up that 100% market share.

We'll keep trying. Thank you.

Scott Gill.

Jay, if you could just go back to your commentary on your backlog at Subsea Products, I think I may have taken down my notes wrong. I thought I heard you say that you lost a $65 million order to a competitor. Is that right?

It is, unfortunately. I hate to report things like that, but there was an order that we worked hard for, and the competitor got it.

But then you also said that you expect your backlog at the end of the December quarter to be back to roughly 380 million, and could be a little bit higher than that. Right?

Sure.

So what do you have in hand that you're seeing today, also given the fact that you expect those numbers to be up a little bit here in the fourth quarter, that's going to build that much backlog?

We're working on -- we've got a whole list of things that we're working on all the time. We do our internal forecast on a project-by-project basis. I'd say our 380 million we feel like is a little bit conservative. Let me give you a little bit of analysis on the backlog in general here, and particularly as it relates to our forecast of 20, 25% growth, because I anticipate that that's of interest to everyone.

Our 380 million backlog compared to 360, our projection for that at the end of this year, compared to 360 at the end of '06, is only up 5%. However, let me take you through a little analysis.

When we exclude the respective backlog amount that will not be recognized as revenue within the calendar year, both starting '07 and starting -- and for '08, these numbers would change to 335 million forecast for the end of this year, compared to 290 at the end of '06. So that's a 16% increase that really focuses on the next calendar year.

Additionally, to your question, we talked about some additional orders that we think will come right at the end of the year of about $40 million. We did not include those in our backlog figures. (inaudible) end of the year or slide into early '08, that's another 14% on the 290 figure that we had at the end of '06. So, I think, on a real apples-to-apples basis, compared to '06 number, really a 16% increase is more comparable, plus the (inaudible) 40 million would add another 14%. So either by year-end or shortly after, we believe we'll have an order book of the products business totaling 375 million that will be recognized as revenue in 2008. And that's really up 29% from the 290 million we had at the end of '06. Overall, we're quite confident with our 20, 25% revenue growth for this product business.

Jay, as you look at the (multiple speakers) forecast for 2008 versus 2007, I think you said up 40%, do you feel pretty confident that that should be reflective of the type of backlog growth you could see for next year?

I am really reluctant to pick backlog growth. While Quest is an indicator of the market out there, I really wouldn't use their numbers to forecast our numbers.

My last question. Any pricing power on your product side, or is this still pretty much going to be volume throughput driven?

I think this is mostly a volume story, but we did say in our commentary that we expect some slight margin improvement in our products group. As we've moved through '07, we have seen margins go up in that business a little bit, and we think that will continue into '08. So we're a little more optimistic than we were this time a year ago on product margins.

Thank you. Very good quarter, guys.

Marvin's going to comment.

Let me just make sure. What I'm inferring from your question I just want to clarify for the group. We're talking about current backlog, quarter-end backlog, of 344 growing to 380. The loss of 65 million isn't coming out of the backlog.

That's right.

Okay. I just want to make sure that -- okay. So what we're talking about is a 36 million growth in backlog during the fourth quarter.

Right. (multiple speakers) had you won that order, it would been closer to 400 at the end of this quarter, right?

That's why we had been saying on the prior calls that we expected backlog to be meaningfully up by the end of the year, and now we think it's not going to be. It will be flat with June of '06 -- '07. Sorry.

Neil Dingmann.

On the ROV side, is it fair to say that -- is it still a capacity issue, meaning that whatever you could get out the door, the market is still -- would eat up?

I would say so far we've been able to put all the ROVs that we build to work. I would say there is still -- there's a shortage of people as well as equipment. But I think the market -- we're keeping the market just barely supplied would be how I would describe it.

Are those directed or going towards different areas, or sort of the same core areas that you've had in the last couple quarters?

In terms of the (multiple speakers) where the ROVs are going to work?

Correct.

I don't think we -- we are not seeing our mix change very much. So I think we anticipate the mix to stay about the same.

(multiple speakers)

On the Subsea Projects business, obviously, with some of that hurricane work winding down a little bit, are you shifting and scheduling some things to take the place of that, or are we just going to see that slide down a little bit?

I think we'll just see a smaller amount of shallow water diving work, and that's kind of what we're reflecting in our forecast for lower business. So I think that there is really nothing to take the place -- on the shallow water diving side, nothing to take the place of that hurricane business.

On the deepwater side, we see that certainly as a continuing growing market, and that's why we're bringing in another deepwater vessel that will come in the fourth quarter of '08. So on the one hand, we see a shallow -- slowdown in the shallow market due to -- there's not as much hurricane work, but we see the deepwater market continuing to look good.

And we think, as you mentioned, the OI III will go from project -- hurricane project work to deepwater work.

That's right. Thank you, Marvin.

Last question. On acquisitions, you mentioned you are looking at some, obviously, with your cash position. Jay, what are you seeing in the market as far as -- now that, I guess, some of at least the land guys have softened, are we seeing any of that with some of the subsea acquisitions and companies you're looking at? Or is the market still, I guess, as frothy as it has been over previous quarters? Just wondering if you can give us some color there.

I think we still see it pretty strong on the -- anything related to subsea area. We really don't look much on the land drilling and land side. So I think we haven't -- we're not really anticipating taking advantage of the softness in the land market in our acquisition work, so we're still looking hard for products and things that fit, and things where we can add enough value to be able to pay the market price for an acquisition. So that's really the challenge.

Thanks and keep up the good work.

Joe Agular.

Jay, could you -- given, say, a 40% kind of growth rate in industry orders next year for Multiflex, could you just kind of remind us what your view is of industry-wide capacity to handle the kind of order increases that are anticipated?

Sure. I would say at the moment there is excess capacity in the industry. Our UK plant is going all out. It's got all the business it can handle. Brazil -- there's plenty of business, but it could do a little bit more in the future. And we still have excess capacity in our plant in Panama City. So I believe that instant ramp-up to 40% -- I don't know if there's that excess capacity in the market, but I believe that there is excess capacity in the market. And I think we will be able to meet demand throughout '08. At some point, if it keeps growing, these lines may get capacity constrained in the next two or three years. But I don't think that will happen in '08.

Why shouldn't your ROV business be a leading indicator for your products business two or three years out?

I think there's no reason that it's not. Put all these 67, 69 drilling rigs to work, I think that's got to generate business for us and all the subsea players.

Just one last point on the products in the quarter. Obviously, strong results. You mentioned in your remarks kind of OIE and Multiflex both was kind of equal in magnitude in terms of the improvement, or did one do a little bit that you expected?

I'd rather not get into more detailed discussions of the segments, but I will say OIE continues to do very well. We think [there are] great business segments in that group.

Bill Sanchez.

Jay, I was curious, of the 19 ROVs now that have been ordered for the newbuild construction on the deepwater side, are all of those -- are you intending on delivering all of those next year to floaters coming out? Is that part of the 30 vehicles that you're taking delivery of in '08?

No. You really can't trace them that way. Some of these rigs that have committed are ones that are not coming out until later in the cycle. So you really can't trace them like that. As you might imagine, we're building ROVs that are having to go to shipyards to be put on rigs that may not come out until '09. So there's a lot of logistics going on behind the scenes. So we're just reporting to you ROVs that we're trying to put in service.

So there's no real consistent leadtime between the ROV order and the delivery of -- the ultimate delivery of the rig?

Unfortunately not. Some people are happy to work two or three years in advance, and other people tend to put it off to the last six months.

One other question. You've mentioned the '08 forecast of 40%. I'm just curious as we look to the back -- the balance of '07, 40% now of umbilical orders expected to come in per the Quest data. How comfortable do you feel in that, Jay? Do we possibly see that number coming in less, and therefore, the growth year-over-year '08 versus '07 is actually going to be higher?

You're saying what if the Quest number is wrong and it's not -- umbilical orders really aren't at 40%?

Yes. No, that you don't get 40% of the '07 expected orders in the fourth quarter here, I think, if I heard you correctly earlier.

We're really looking at real jobs in our numbers. So we're not really depending on Quest forecasts for that kind of answer. We're looking at real jobs, and Quest can be right or wrong. And really, it depends on us winning specific jobs.

Fair point. Thank you.

Joe Gibney.

Just wanted to follow up on the earlier question related to the construction (inaudible) maintenance side on ROVs. Curious how you see that mix kind of progressing over the next couple of years. (inaudible) sort of holding the line with the drilling, but it seems to be picking up a little bit. Just kind of curious how you see that shaping up, and kind of geographically how within the construction ROV side your product mix is currently.

It's easier to talk historically. Let me do that first. I guess we were a little surprised over the last year and a half that there were as many opportunities for us on the vessel-based projects and vessel-based services in West Africa. There were several large vessels that would -- wanted two ROVs on board. So that area was -- grew faster than we thought.

Going forward, I think it's difficult to project long-term in that as to how many vessels are going to need ROVs, but there seem to continue to be field maintenance vessels that get established, and these deepwater fields all need to be serviced. So I think our -- we have been pleased that the vessel maintenance business has been as strong as it has been, and I think we're expecting that mix to really stay the way it's stayed, somewhere in that same range, for the next couple of years.

You guys booked some BOP control system awards during the quarter. I was kind of curious your outlook within that market, maybe kind of market share expectations you think you might be able to garner there going forward.

I really don't have any market share information for you. This is a relatively new start-up business for us that's been very successful in achieving some new orders in the market. We're really optimistic about this business. It started from a low base, but hopefully it will grow nicely over the next two or three years. We've got to get our product out in the market in these full systems and see it work, and let the customer see what we think is going to be the best system in the marketplace. A little too early, I think, for market share and so forth. Let's get out in the market and get our year's experience, but we're very optimistic long-term about that business.

That's helpful. One last question. You mentioned the San Jacinto charter, obviously, wrapping up last quarter. Just kind of curious how you're looking at the broader MOPS segment overall, and kind of how that plays into your strategy moving forward, I guess timeframe and looking at some of your other assets in there, and what you plan to do.

As you know, we do have a tanker that we bought that will be an excellent asset to turn into a MOPS job. We continue looking around the world to see if we can find a particular job that works for us. This has been a very episodic kind of investment opportunity for us. It's not essential that we find such an investment. If we conclude we can't find the appropriate investment, we might sell that tanker in the future. But we're looking for the right investment. Maybe we'll find it. It's an opportunistic kind of play for us. And if we find it, fine. If not, we probably have a gain in the vessel right now.

The other two assets that we have, the Ocean Legend and the Ocean Producer, are on contract and significant contributors to cash flow.

That's right.

Fair enough. I appreciate it, guys. Good quarter.

Thomas Escott.

A couple more things about the Subsea Products. Obviously, it was just an outstanding quarter. With revenues up sequentially from 117 million to 145 million from June to September, was there one or two big lumpy shipments, big monster projects that got shipped in the period that sort of helped account for that, let's say, significant performance? Or was it just a whole multitude of many projects and no one specific job?

On the big, huge, monster projects, we do those on a percentage of completion anyway. So it wouldn't be a shipment issue. So, just to make sure that we remind everybody that we do use -- on most of the large or umbilical contracts, we use percentage of completion accounting for those. So it goes in. It's not tied to shipment dates; it's tied to as we progress the project.

I think that's probably the best answer. We think it -- as we said during the year, we forecast a 30 to $45 million improvement in operating profit from products. And I think so far through three quarters, we've delivered 33 million out of that 30 to 45 million range. We anticipated this would be a growing business segment for us throughout the year.

No doubt. You've segued into the next question that relates to that, and that is this margin issue. Obviously, the headline operating margin goes from 18% to 21% in the period. But just on a sequential basis, incremental gross margin from June to September on the incremental dollars was like 35% incremental margin. Is that indicative of the strong pricing that you have embedded in the backlog in new orders, or was there anything unusual to make these margins be so big in that period?

I wish I could tell you it was some great new pricing figure strategy that we had. But I think as Marvin said, I think it's just -- just a combination of a bunch of small projects that we put together. I will say that we did complete during this quarter two projects in Multiflex that were just short of $30 million projects. As Marvin said, we do accrual accounting. One of these projects was in the North Sea in (inaudible) in Scotland, and the other in Panama City, where we completed [a] project to our customer's satisfaction pretty much on time and within our own financial expectations. So we had good results, and I think we said earlier, we expect margins to be up slightly in '08.

Underscore slightly.

Underscore slightly. We're talking (multiple speakers)

We're not talking about huge pricing (multiple speakers)

Not huge changes. So I think it's incremental, and (inaudible) we had good performance and good execution in the quarter. We're hoping that -- we expect that to continue.

That's the bottom line on this is the point of these two questions gets to that issue. And that is that the performance we saw in September (inaudible) was not an unusual strange event, and it was not nonrecurring items, it was continuing, repeatable, sustainable business with embedded higher margins in that backlog.

I think if that wasn't the case, we wouldn't be able to project the growth for '08, and expect, as Marvin said, slightly increased margins over '07.

Waqar Syed.

I have a question on the Subsea Projects. You mentioned that BP has not exercised its option to extend contracts in the vessel. Is it for both vessels or just one vessel?

For both vessels. Both vessels.

Okay.

Basically we're going to be -- we've pretty much done the work faster than we thought.

So it would be fair to assume then that most of the $20 million shortfall is going to be in the second half of '08? That's when these contracts -- the contracts expire in May and June of '08.

I don't think that would be a fair assessment. I know the contracts do expire in May and June. As Jay said, we're going to release the Maersk Attender in June after the one-year initial term, and we're going to put the OI III after the initial term is up in May; we're going to put that into deepwater work. And the OI IV comes in in the fourth quarter, so I wouldn't model it in the second half.

Looking at the $20 million projected shortfall, one of the things that I want to remind everybody is we're not going to have 3.5 million of the gain that we had on the Ocean Service, and that was in Q1. And then we're estimating about 5 million of drydock expenses. And the remaining 11.5 balance is split between lost profit opportunity while the vessels are out of service, and a softer shallow water diving market.

I know it's difficult to predict into '09, but you think you could level off, then, '09 '08? Do you see continued declines in this business if you don't see any hurricane -- additional hurricanes?

As we've said before, we obviously have confidence in the deepwater part of this market, and we wouldn't be bringing in the OI IV coming in in the fourth quarter of -- second half of '08. So we see the deepwater support market that we've been part of as a continually growing business here. So we're not really making any forecasts for '09, but we're very happy with the base level, growing base level business (inaudible) the projects part of our company.

Would it be fair to assume that maybe half of your income in the business comes from the deepwater part, and the rest is more kind of hurricane related work?

We're really not going to try to break it down any finer than the product groupings that we give you. Sorry about that.

And then, on the umbilical side, you mentioned that orders could be up, according to Quest, about 40%. Could you divide that between what's the order flow between steel tubes versus thermoplastics?

You'll have to call Quest and buy that from them.

Thank you very much.

That's Jack.

I know.

Pretty good answer, Jack.

[Jordan Chenar].

Good quarter, guys. Just wondering if you can comment at all on the number of hires and where you are at your target. In Q2, you talked about on target for the year 400 people, and where you are at that, and if you can give some guidance going forward.

I think that we were talking about needing to hire 400 ROV pilots during the year, and we're quite well on target to do that. We're, I think, having excellent success in what's a very difficult goal of hiring and training ROV pilots. And what is even (inaudible) every one of these new jobs has to have new supervisors. So you have to promote and train supervisors as well. So I don't have numerical number for you, but (multiple speakers) we are very much on track to do that. And we are manning our jobs and very focused on training. And as I said earlier, previous call, we view this as a competitive advantage that -- our training programs and the quality of our crews, and that we can hire and train people all over the world and many nationalities to run our ROV businesses. So it's expensive, but we view it as a competitive strength.

Do you see no, then, issues going forward with the large rollouts of the ROVs then, to man these then?

It's just a lot of hard work and expenses. But we think we're on track and we're confident we can accomplish that task.

Just on the drydock, can you give some exact timing of when you expect those drydocks, and how long the expectations are for those?

No. We're not going to get into vessel-by-vessel comments, or any sub-segment discussions.

(OPERATOR INSTRUCTIONS). At this time there are no further questions.

Thank you very much.

Take care.

Look forward to talking to you next quarter.

This concludes today's conference. You may now disconnect.