Oceaneering International Inc (OII) 2007 Q4 法說會逐字稿

Good morning. My name is Kristen, and I will be your conference operator today. At this time I would like to welcome everyone to the quarterly earnings conference call. (OPERATOR INSTRUCTIONS). Thank you. Mr. Jurkoshek, you may begin.

Good morning, everybody. This is Jack. I would like to thank you for joining us on our 2007 fourth-quarter earnings conference call, and I would like to particularly welcome those of you who may be participating on 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, remarks we make during the course of this 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 and thanks for joining the call. It is a pleasure to be here with you today.

We had a remarkable 2007. For the fourth consecutive year, we achieved record annual earnings, 45% above those of 2006 on a 36% growth in revenues. This was driven by our strategic focus on providing services and product to support deepwater and subsea completion activity.

Additionally we benefited from performing more hurricane damage projects as we placed the new saturation diving system into service and chartered two vessels and a barge to augment our existing vessel fleet.

Our EPS guidance range for 2008 of $3.50 to $3.80 for 2008 remains the same as our last earnings call. Our first-quarter 2008 EPS guidance range is $0.65 to $0.75. This is consistent with our historical quarterly earnings percentage distribution and the fact that our first-quarter earnings are usually lower than the fourth quarter of the previous year.

We discussed these facts on our last call, but it seems that not everyone heard us. As in our opinion, certain published first-quarter estimates are not realistic in light of the historical seasonality of our business activities. I would like to again remind everyone that over the past six years we have reported less than half of our annual EPS in the first half of the year with an average of 45%, and we don't see any reason to suspect that this year will be any different.

Let me make some specific comments about the comparison of '07 and '08 first quarter. The midpoint of our 2008 first-quarter guidance is 17% better than what we reported for the same period last year. If we beat each quarter by 17% throughout '08, we would be near the high-end of our range by Christmas.

I would also like to point out that the $0.60 reported in the first quarter of 2007 included a gain from the sale of one of our vessels. Some of you reduced these results by $0.04 per share. If you did that, our comparison of 2008 over 2007 for the first quarter would show an increase of 25% year-over-year.

Let me move on to the quarterly review for the fourth quarter. Our record fourth-quarter EPS of $0.81 was at the high-end of the guidance range we gave last quarter. Earnings of $45 million were more than 50% better than the fourth quarter of 2006. Four of our six business operations contributed to this year-over-year improvement led by an increase in profit contribution from subsea projects.

Our ROV business had an all-time high quarterly operating income performance as our average revenue per day-on-hire surpassed the $8750 level, and we achieved over 16,600 days of service for our fleet. Compared to 2006, operating income increased 28%.

During the quarter we put in service seven vehicles and retired one older system. At year-end we had 210 vehicles in our fleet.

Our fleet mix usage during December was 66% in drill support and 34% in construction and field maintenance versus 71, 29 mix a year ago. Subsea Products operating income improved 40% on higher sales of OIE specialty products and Multiflex umbilicals. The OIE increase was across all product lines and attributable to increased demand in product line and geographic expansions.

As stated in the press release, we did experience problems during the quarter at Multiflex which caused a sequential quarterly decline in this segment's operating income margin performance. We believe these were anomalies and not indicative of our operational execution record. We continue to expect our product's operating income margin to slightly improve year-over-year in 2008.

Subsea projects operating income increased more than 150%. This was accomplished on the strength of additional work on hurricane damaged projects. We also benefited from higher use of two of our multiservice vessels on deepwater IRM work.

Inspection operating income increased almost 60% as we increased sales at all geographic areas in which we operate. We performed more work on LNG processing plants and storage and receiving facilities, nuclear power stations, petrochemical plants and offshore production facilities. MOPS results were down mainly due to the decision to move the Ocean Pensador as noted in the press release and a decline in engineering project work. ADTECH operating income declined as a result of the completion of a large engineering project at the end of the third quarter of 2007, which we mentioned on our last quarterly conference call.

Looking back over the entire year, our 2007 annual earnings growth was broad-based with four of our five ortho service business activities setting profit records. The superb earnings performance was attributable to increased demand within our offshore oil field service and products markets, our business expansion strategy and the exceptional operational execution. The market environment was such that we were able to achieve strong utilization of our assets at favorable prices.

Our average ROV revenue per day on hire improved to 2007 to over $4800, 16% more than 2006 (multiple speakers) -- I'm sorry, $8400, $8400 per day, 16% more than 2006.

We also increased our ROV days on hire 12% to about 63,000 days as we increased our fleet size and utilization rate. Operating income rose by over $33 million or 30%. Of the $33 million, approximately $20 million was attributable to improvement in average pricing and $13 million as a result of the increase in days-on-hire. Operating income margin was 27%, equaling the record set last year.

During the year we grew our fleet size to 210 vehicles, up from 186 at the beginning of the year. We added 31 new vehicles and disposed of seven older systems as it is our strategy to operate a modern work world-class ROV fleet. About half of the new vehicles initially went to work in drill support service, and the others were used for construction and production maintenance in the growing number of deepwater field developments.

At year-end we estimate that we continue to be the largest ROV owner, the 35% of the industry's work class vehicles, over twice the size of the next largest ROV fleet. We remained a primary provider of ROV drill support service with an estimated market share of over 55%, nearly three times net of the second largest supplier. By our count during the year, we also became the largest global provider of construction and field maintenance ROV services. We achieved this by increasing the number of vehicles we provide to construction contractors and subsea support vessel owners.

During 2007 Subsea Products operating income increased over 70% on higher sales of OIE specialty products and Multiflex umbilicals. Operating income margin increased to a record high of 18%. We improved OIE product pricing and manufacturing execution through our continuous improvement initiatives. We also benefited from increased throughput and the resolution of 2006 startup problems at our US umbilical plant.

Our year-end Subsea Products backlog of $338 million declined slightly from $360 million at the end of 2006 as OIE backlog growth was offset by a decline in Multiflex backlog. This backlog position is less than we had anticipated as several Multiflex umbilical contracts we have been pursuing and still expect to secure were delayed. These jobs have neither been canceled nor awarded to a competitor.

We believe we will meet our expected 2008 umbilical manufacturing profit contribution. Given these slippages, we're now expecting a stronger second half of the year for Multiflex compared to the first half. Based on data from Quest Offshore, 2007 market demand for umbilicals was about 1200 kilometers or 750 miles. Quest's latest market demand forecast for 2008 prepared earlier this week is 1880 kilometers, a 55% increase over 2007. So our umbilical business seems to definitely be in an improving subsegment of the overall subsea hardware market.

Subsea projects achieved record results on the strength of increased partcipation in hurricane damage projects. Operating income improved over 55% as we benefited from placing a new saturation diving system into service and chartering two vessels and a barge to augment our existing fleet. Our inspection operating income grew by over 50% due to increased demand in all of the geographic markets we serve and our success in selling more value-added services and improving pricing.

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

Thank you, Jay. Good morning, everybody. Unallocated expenses increased in 2007 due to higher incentive compensation plan expenses and higher corporate overhead and IT-related costs to support the Company's growth. To put this in perspective as a percentage of revenue or operating income, unallocated expenses were lower in 2007 than they were in 2006.

Moving on to cash flow, if you add depreciation back to our net income, we generated a record $274 million in cash for the year, $69 million or 34% more than in 2006. If you choose to add depreciation back to our operating income, you get $383 million, up 40% over 2006. Anyway you want to measure our 2007 record cash generation, you will find a substantial increase over last year's record results.

During the year we invested $234 million or 85% of our net income plus depreciation. Our capital investments included ROV fleet expansion and upgrades, facility expansions at our locations in Morgan City, Louisiana; Houston; Scotland and Norway. The acquisition of Ifokus, a Norwegian developer and manufacturer of specialty subsea products, particularly ROV tooling and vessel upgrades. These investments position Oceaneering for increased profitability in the years ahead.

Our balance sheet remains in excellent condition. At year-end we had debt of $200 million and equity of $915 million. Our debt to cap percentage was 18%.

Thank you. Jay, take it away.

Thank you, Marvin. In summary, we believe our record annual 2007 earnings performance and cash generation were outstanding. We achieved increased profit contributions from four of our oilfield business operations and set records in each of them. Our focus on providing services and products for deepwater and subsea completions positions us to participate in a major secular growth trend currently underway in the oilfield service and products industries.

Looking forward, we believe deepwater is one of the best frontiers for adding large hydrocarbon reserves with high production flowrates at relatively low finding and development costs. Specific signs of a healthy deepwater market that will drive demand growth in 2008 and beyond for our services and products were evident at the end of 2007. About two-thirds of the deepwater field discoveries around the world were not yet in production. Over 95% of the existing 202 floating rigs in the world were under contract, and over half of these are contracted through 2009.

74 floating rigs were scheduled to be added to the worldwide fleet through 2011, up from 45 a year ago. 53 had already secured term contracts with an average length of over five years. As of today, we have obtained 20 of the 21 ROV contracts awarded on the floating rigs under construction to provide 24 ROVs.

19 new rigs are scheduled to be delivered in 2008 according to the ODS-Petrodata. Our assessment is only 15, in fact, will be placed in service this year. 13 of these are contracted to oil companies. The ROV awards on 12 of the 13 rigs have been made, and we have won all of them to provide 15 ROVs. We're negotiating to obtain the remaining ROV -- remaining contracted ROV award and will, of course, pursue the ROV contracts on the other two rigs once they have secured work commitments with oil companies.

According to an international ship broker, there were about 150 subsea support vessels under construction with anticipated delivery dates by the end of 2011. Of these, we estimate that approximately 100 will require at least one ROV each. So the future market demand for field maintenance, ROV services also looks very promising.

Based on Quest Offshore's latest forecast, during the next five years, subsea production tree orders are forecasted to be at least 515 per year, and annual demand for umbilicals is forecasted to approach 3200 kilometers. These forecasts represent increases of approximately 35% and 110% respectively over the last five years. That is a doubling of umbilical demand.

With our existing assets, we are well-positioned to supply a wide range of the services and products required to support the growing deepwater exploration, development and production efforts of our customers. Furthermore, we plan on making additional organic growth in acquisition investments to expand our ability to participate in this market. We were successful in reinvesting our 2007 cash flow and looking for opportunities to do the same in 2008.

As Marvin previously mentioned at year-end, our debt to capitalization was 18%, and we remain committed to using our resources to continue to grow the Company. We believe Oceaneering's business prospects over the next several years are excellent.

Looking at 2008, we are again forecasting record earnings for the upcoming year. We expect our net income to result in EPS of $3.50 to $3.80 on an estimated average of 56.5 million shares outstanding. This remains consistent with the guidelines we gave last November. We continue to anticipate this growth in earnings to be led by operating income improvements from Subsea Products and ROVs.

The big picture of the annual 2008 versus 2007 changes we envision can be recapped 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 in our fleet in 2008. Based on projected timing of new rig deliveries, about 20 are anticipated to be added during the second half of the year.

We have already secured contract commitments for over 20 of our anticipated 30 ROV additions. This reflects the growing market demand for ROV services and our status as the premier supplier. We expect to put about 20 of our 2008 vehicle additions into drill support service. For Subsea Products we expect operating income growth of 30 to $40 million as we exploit continued demand for growth for our specialty subsea product offerings and increased throughput and improved efficiency at our umbilical manufacturing facilities. We are forecasting a 20 to 25% increase in revenue with a slight improvement in operating margin.

Subsea project operating income is expected to decline 25 to $30 million. During '08 we foresee decreasing demand for our shallow water vessel and diving services as hurricane demand projects near completion. 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 mandatory regulatory drydock inspections. While undergoing inspections, we will not only be incurring expenses on these vessels, but we will lose the opportunity to profit from their use.

Our Inspection business is likely to show improvement due to a continuation of broad-based increasing demand for our services and higher pricing. Our MOPS segment profit contribution is expected to decrease due to the absence of the production barge San Jacinto and a lower day rate for the Ocean Legend. Equity income from the Medusa Spar is also expected to decline as annual production throughput will likely decrease.

ADTECH operating income will be down due to the completion of the engineering service contract I mentioned earlier. Our SG&A expenses will increase as we continue to grow the Company. We expect SG&A to grow approximately 15%, about the same as our overall revenue growth. Depreciation and amortization is expected to be 20 to $25 million higher. We anticipate our tax rate to be about 35%.

Now I have just given you a lot of detail, and as the year develops, there will be a lot of moving pieces. In summary, we are expected to achieve continued growth in financial results in 2008 and a record annual earnings for the fifth consecutive year. This is primarily attribuable to the secular demand growth occurring for services and products to support deepwater and subsea completion activities, which we anticipate will last for several more years. At present we anticipate spending about $150 million in capital expenditures in 2008. These estimated expenditures consist mainly of additional ROV fleet growth, completion of our capital projects and process at the end of 2007 and about $30 million of maintenance CapEx. Above and beyond this expected level of capital expenditures, we expect to continue to invest in internally generated growth initiatives and pursue accretive acquisitions. To the extent we do not find suitable investment opportunities, we intend to pay down debt. Consideration will also be given to share buybacks in the open market.

Looking at the first-quarter 2008, we are projecting EPS in a range of $0.65 to $0.75. This is better than the first quarter of last year as we mentioned earlier because we expect higher profit contribution from our ROV and Subsea Products segments. We expect a quarterly profit contribution from our ROV business to be higher due to an increase in days-on-hire as we develop a larger fleet and improve pricing. We expect Subsea Products operating income to increase from the higher sales of OIE specialty products.

Compared to the fourth quarter, we are expecting a decline in EPS, largely due to a drop in subsea projects operating income. I would like to remind everybody that the first quarter is the slow period of the year in the Gulf of Mexico for deepwater installation and IRM projects in shallow water diving services. Consequently we're anticipating a 30% decline in vessel days-on-hire and reduced utilization of our saturation diving systems.

Also during the quarter, we will be incurring expenses on the Performer and Ocean Project while they are in drydock undergoing regulatory inspections.

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 short-term and 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. We continue to believe we are in one of the sweet spots of this upcycle. 2007 was our best year ever, and with escalating demand for our ROVs and Subsea Products, we are projecting a fifth consecutive record year in 2008. We appreciate everyone's interest in Oceaneering, and we would be happy to take your questions.

(OPERATOR INSTRUCTIONS). Neal Dingmann.

Nice quarter. Jay, I was wondering are you seeing some of the delays that some of the epic players are seeing in, especially if you look at -- I know a lot of your regions are not quite the same, but if you look for what you are all doing in Southeast Asia or West Africa, some of the deeper areas; are you seeing some of the delays in potential projects and business for you that some of those at epic players are seeing?

Well, I think we certainly are seeing that delay, and I noticed that when I see some of the -- even the tree orders that have been awarded, I don't see the umbilical orders being awarded yet.

I might just mention as I look back over the Multiflex backlog that when I looked at last quarter's call and looked at at the backlog that we projected at that point in time, I reviewed our backlog and saw $150 million of likely umbilical orders. We thought we would close about two-thirds of these by year-end. In reality we only got one-third. The balance of these jobs have not been canceled. They have not been awarded to a competitor.

So when I review the outlook for umbilicals, recently I was still looking at the $100 million of this same potential work. And we believe this work will be awarded in the first and second quarters. So I would say we certainly are seeing slippage not only of big projects, but it seems the tree orders are coming out more in front of the umbilical orders than perhaps they use to.

Sure, sure. And then just one follow-up question. I know it is always tough for us analysts to sort of quantify your pricing, I guess is it fair to say that capacity in a number of regions, especially around the ROV or maybe around the subsea projects business is still tight enough that you're able to continue to push pricing as these new projects come out?

I think certainly on the ROV side, it is still a very tight market, and while not easy, we are dealing with some very tough customers. We have been able to, as you see maintain, our margins, pass price increases along, and as you know, to maintain margins you have to push along even more than the price increases.

So certainly in that business, we have been able to do that on our specialty subsea areas. We have been able to push some pricing forward with Multiflex. I think the umbilical market remains a competitive market.

In projects I think the vessel market is not as tight as it was. As hurricane projects wrap up, we have talked about expecting a decrease in the demand for shallow water vessels and diving. And so I would say that we have enjoyed a very good period of time for the Gulf of Mexico vessels and diving assets, and I don't think it is going to be that type of year in 2008.

Good point, Marvin. Alright, guys. Keep up the good work.

Scott Gill.

Jay, if you could give us a little more color on this project down in Brazil? And along those lines, if you could also talk about, are there any other projects like that in the backlog that perhaps there is not any type of protection for cost escalation going forward?

Sure. I appreciate your question and need for more information. However, I think we really disclosed about all the details that we will in the press release. It is unusual for a job to be awarded in 2005 and then not really happen in 2007.

I will say that the UK job has been completed and delivered and that we believe we've made adequate accruals to reflect increased cost that will occur in Brazil. There are some deliveries left in 2008 on that project, but we think we're well accrued for that. And I would like to reemphasize that we have submitted change orders to recover some of these extra costs. So I think that part is behind us.

Okay. What about anything else in the backlog that we should be concerned with where this might repeat itself, or even as you take on future awards, do you have proper I guess risks provisions for cost escalation?

We generally have very good provisions for cost escalations. That is why we refer to this as an anomaly. And I think we have no other issues really to talk about at that point in time. We certainly always have jobs that do not come off as planned for a variety of reasons, so a bad job is not necessarily a onetime occurrence.

We just pointed these out this year because they had such a significant impact on one quarter of our business.

Kevin Pollard.

My question was on your products guidance. Your operating income of I think it was 30 to $40 million is a little higher than last quarter. I was wondering what accounts for the increased outlook in the products business?

Kevin, it is really very simple. Our outlook did not change at all. We just did not do quite as well as we thought in the fourth quarter, so the gap just increased a little bit.

So it was just a push forward of what you thought you would get in Q4?

It really was just a difference between what we did and the '08 plan that we really already thought. So really no difference there. I think we really are excited about the Subsea Products segment of our business. We had a 73% growth in our earnings from '06 to '07, and our range gives us a 33 to 38% growth from '07 to '08. So we are very excited about this segment of our business.

Okay. If I could switch over to the project side real quick, you give a fairly cautious outlook. But I was wondering -- first of all, is your plan to still forge the Ocean Intervention III in the spot market when it finishes this contract for BP?

Absolutely. You know, our original business here was going after the IRM market in the deepwater Gulf of Mexico. As you imagine, every day more equipment is being put on the ocean floor, and we may either be part of putting it down there or going back and dealing with some sort of maintenance issue or checking on that equipment later on.

So that really is -- that and some smaller installation jobs really are our primary business before the hurricane came. So we really were not setting ourselves up for hurricane business in the first place. So that is really what we're going back to now now that the hurricane business is finishing up.

I guess that kind of is where I was going with the question. Based on your experience, was a similar vessel, Ocean Intervention II being extremely highly utilized and such. I'm wondering if there is a potential that that vessel is actually more profitable or at least as profitable as it was under the BP contract and potentially that -- if all goes similar to what you have experienced with Ocean Intervention II that you could actually maybe do better in the projects than your guidance currently assumes.

Kevin, I think you make a good point, but let's just go ahead and look at the overview of the segment. We have talked about the number of boats that are going to be in drydocking, and I think all of those things have been factored into our forecast. And we are projecting a significant number of utilization days on our intervention vessels to the extent that they are available.

So I want to go ahead and respond that we are not really going to -- you are absolutely right about the deep water IRM market and the OI III's opportunities and like the OI II's, but we're looking at the overall segment and seeing pluses and minuses throughout, including the softer shallow water market and the number of days that our boats are going to be in out of service because of regulatory inspection in drydocks.

Marvin, let me add to that. Of our expected decline in operating income that we talked about, 25, $30 million, about $5 million of that is actual drydock expenses. Another $3.5 million is the evidence of the gain we realized last year on the sale of the ocean service, and the balance is split between lost profit opportunity while we're out of service and just a softer market. So hopefully that gives you some feel for it.

No, that is real helpful. I was just trying to understand all the different levers in that segment.

And just last, a real quick housekeeping kind of question. Since you have I guess two of your four vessels in the drydock in Q4, would it be fair to assume that of that kind what you just talked about the $5 million drydock expense plus the lost revenue, a full half of that hits Q1?

Well, we're talking about having them in Q1 (multiple speakers). All the numbers that I just gave you are 2008 effect.

Right.

And I thought and I have to go back to Jay's opening remarks, but I think he said that in the first quarter we will have the Performer and the Ocean Project out of service for regulatory inspection, not in Q4.

Right, okay. That is what I meant, in Q1. Sorry about that.

Okay.

Joe Gibney.

Marvin, I was just curious if you could give us what would have been the impact of the product operating margin absent the anomaly that you recorded in the quarter?

No, we're not going to go ahead and get into the specific quantification of these two jobs. I mean I think you can -- I thought the third quarter 21% record was a really good high watermark because of product mix. But -- and I think that the two jobs accounted for most of the drop in operating income margin percentage.

Okay, fair enough. Any color on the remanufacturing issue here in the UK? Was this sort of a quality control issue? Was there some sort of customer change request? Could you give any more detail there at all?

No really more detail. I would say it was an unusual occurrence, and our process has been improved to prevent that from happening again, and that is all I will say about it.

And the best news is you did mention the product has been shipped, and that problem is behind us.

Absolutely.

Okay, fair enough. Jay, could you help us a little bit with the seasonality within the inspection business? Obviously pretty well disseminated for the downtick here on the subsea project side, but how should we think about inspection here in 1Q?

Well, there is definitely a seasonality. This tends to in the UK part of our business is very much oriented around the shutdowns of big facilities like chemical plants or nuclear facilities, and these shutdowns tend to be summer activities. So I think that is a primary seasonality of it.

Some of the offshore pipeline inspection work that we do tends to be related to the offshore construction sections, the seasons of the world, West Africa and the Gulf of Mexico. So I think those are the big seasonal factors right there.

I do want to add just a little bit of color for anybody who has been following us for a long time would remember that the first quarter for inspection was usually a lost quarter and/or barely a breakeven quarter. Because of the increased value-added services that we provide now, you just don't even see that in it. And the seasonal work is not as anywhere near as extreme as it used to be. But, as Jay explained, just with your UK base and you know the weather there, it does have a significant impact.

An offset to that is work we do in pipe yards that could be good in the first quarter getting ready for late operations in the summer. So (multiple speakers) a lot of moving parts like quite a bit of the business here.

I appreciate it. Just one last question, and I will turn it back. You guys detailed some of your manufacturing execution in the quarter. Obviously backlog burn rate was up pushing some more product out the door. I'm just curious if you could comment a little on what some of those improvement initiatives have been doing and what you're doing to improve that throughput. I appreciate it.

We just -- we are very committed to analyzing all of our business processes and getting people together in teams and looking at how we do work, where the problems are, what causes rework, and tracking these problems back and eliminating them and going to the next problem. So I don't have any one thing to tell you about other than just kind of a relentless pursuit of solving problems and having people who do the work, work together to improve the way that we do it. So I think it is more of a philosophy and just a bunch of small things that add up to something at the end of the day or a several multi-year period, rather than any one thing that I can point to.

Joe Agular.

Thank you all very, very much for all the detailed information you gave in your outlook for 2008. It was very helpful. Just on that note, I guess on your product side, Marvin, if I'm sort of doing the math correctly, it seems like you all are kind of implying margins of around low 20s, 21% or so for products in '08.

Well --

You do not have to comment on that if you don't want to, but --

No, we said a slight improvement in (multiple speakers).

Well (multiple speakers) if you just take the revenue growth of 20 to 25%, take that operating income improvement, you get to the numbers, and I think it comes out to around 21% or so.

I think -- I mean that is -- yes, we're going to let everybody do the math. You know, here is what we have done for the last couple of years. We give you the answer of what we think our model shows in operating income increases year-over-year, and this time we gave you the 20, 25% revenue growth in products. So --

You do the math.

You really cannot go too far off if you do the math. But I mean that's all the guidance we want to give.

I understand. I understand. I was just I guess trying to figure -- it seems like it is fairly consistent with what happened in Q3. It does not really assume a whole lot of improvement in what you did in Q3, just kind of carrying that forward into '08.

Well, I think what we really need to focus on, and we don't want to wear this part out about there is a lot of moving parts, but as we increase umbilical throughput, we do influence the mix of margin percentages. Because OIE is about two-thirds of our business, and their products and services sell at a higher margin than what umbilicals do primarily because of the steel tube content, which is such a high input cost.

So, as the growth of umbilicals occurs as we expect it to, the margin mixes. So to maintain and slightly improve margins, we have got to count on a little bit better pricing, a little bit better execution, a little bit better contract protection, and all of those things have been factored into our guidance.

Okay. A real quick question on the drydock schedule. If you could remind me again, how long a vessel is in drydock typically for you guys depending upon I guess whether it is a rig inspection or whether there is some work done?

You know, that really covers a wide range. I think it could be a short as --

Two weeks.

Maybe two weeks to a month. And a more extensive thing could be, yes, it could be another two or three months.

Okay. And Jay, I guess one bigger picture question for you. The Company over the years has I think oftentimes described itself as a niche product and service company. As this cycle is unfolding, deepwater drilling and certainly infrastructure is becoming a lot more mainstream in the industry. And I just am trying to think through with the direction with all this growth that you're getting in the rig count, the number of installations, all the products that go in do it, if there is strategically some direction you think the Company could go in that might fit in with where the industry is going, what that might mean in terms of either acquisitions of product or service assets.

Again, I'm not looking for anything real specific. I'm just trying to understand where you think the Company fits in today with the trends of the industry overall?

Sure, Joe. Well, I think our real focus as we have said is deepwater and anything associated with deepwater. You can see we are definitely pushing the ROV business. We're very aggressive in trying to maintain a very large share of the ROV both drill support and construction market. Then you see that our acquisitions have primarily been in the product, Subsea Products area.

So I think we see that as the target-rich environment out there. A lot of new things happening, a lot of new requirements for subsea equipment and more technology and more complication of things on the ocean floor. We think that plays to our strength, and so our challenge is to try to find those companies that will continue to grow in this subsea arena and add those to our Oceaneering fleet of products and services.

So I think it is sort of a niche philosophy. Some of these companies are not necessarily all that large or that niche may not be very large, but if it is serving a deepwater market, then it can have a good growth rate going forward.

So I think that is our focus. You will see it in the fourth quarter. Our product revenue slightly exceeded the ROV revenue. So we see a lot of opportunity in the deepwater product sector.

Okay, that was all I had. Thank you very much.

For example, the ROV tooling company that we bought this year in Norway, Ifokus, and an internal growth initiative of BOP controls, both of those fit right in the middle of where our focus is.

Marvin, if I could just ask you one -- a different way maybe one more time. I guess the other thing I was wondering is, the oil companies have tended to contract with different companies for different pieces of all this puzzle here of deepwater. I guess what I am trying to figure out, is there an opportunity to become sort of more vertically integrated or more -- broaden out the service line to where you might be more of a one-stop shop for some of these jobs that are out there?

Joe, I really cannot speculate much on the market, but I don't see us becoming like an epic contractor. And, first of all, in the subsea development arena, it starts with the tree, and we're not going that way. I mean we are not headed to be a tree manufacturer. And so if you don't have trees and you don't have rigs, it is pretty hard to be a one-stop shop.

We really like being what we consider sort of the independent provider of products and services on the one hand to the construction companies, which in cases may be the big epic contractors, and then the other case to the equipment suppliers, the tree manufacturers who often captured a larger equipment products groupings like a big West African product.

So we view both the OEM players and the construction companies as our customers. So within that framework, we are happy to expand our scope, and certainly when you get down to smaller projects, 10, $15 million project, we can be a one-stop shop. But we really do not want to see that grow and compete with our customer base.

Okay. That is very well put. Thank you so much.

Waqar Syed.

My question is on the fourth-quarter earnings. If I exclude the $2.8 million charge for mobilization of Pensador and some of the operational issues on the product side, I'm estimating that your earnings in the fourth quarter could've been in the $0.95 to $1.00 range. Is my math correct?

So you're saying about 14% -- $0.14 for those two?

Right.

I think that would put you -- to do that you must be assuming that products would have had about a 21% margin in the fourth quarter had it not been for those two issues that we discussed?

Something along the lines, maybe slightly lower than 21%?

Okay. Well then, that really is -- your numbers hinge on that assumption. And I'm really not going to go into specifically identifying -- everybody knows the 2.8 has been identified, and if I give you what the other EPS effect was and everybody can kind of say, oh golly, that must have been an (inaudible) number. So we are not going to back into it that way either.

We have already addressed that, I think.

Okay. On the Pensador, what is the outlook there? What do you think is likely to happen?

We have no new information for you other than Singapore is a better place for it to be. If we do find a project, that is where the shipyards are, or if we ultimately do not find a project and we sell it, that would be a better place to make a sale from. So we continue to look for appropriate projects for the vessel. So we're looking and again if we don't find them, we could ultimately sell it. When I have news, I will give it to you, but nothing specific to tell you.

It is a single hull tanker, so is the market likely to be -- if it happens -- West Africa, and what would the general investment range would be in leadtimes should you happen to get an FPSO contract?

I would think (multiple speakers) I would have to speculate on that. I think certainly a FPSO project could take 18 months from the date of signing before it actually went to work and probably north of $250 million plus. But I would say we're not certainly close to any kind of deal like that. But I would say that is sort of the industry deals are in West Africa that we have seen in the past.

The news on the Ocean Pensador is that when we bought it in the Pacific Northwest, we knew there was no market there. And when we bought it to compete for a specific FPSO contract and we've disclosed that and we did not win that, so it was inevitable that we needed to move it closer to better position -- closer to the shipyards to better position it in the marketplace as we disclosed in the press release.

We do not want anybody to read anymore into the Ocean Pensador move than that. The stacking cost outside of Singapore is much cheaper than they are in Oregon.

Sure. Thank you very much.

Jim Crandell.

Marvin, just one question. I apologize if this has been asked. But why were unallocated expenses down $7 million quarter to quarter?

Man, is that a good question. Because our Oceaneering stock price dropped from $75.80 at the end of September to $67.35 at the end of December.

And that made up all $7 million?

Very much so.

Okay.

So one of the things that I want to go on then is like, well, then when will the variability of our restricted stock expense end? And I will say that the last portion of the restricted stock awards made in accordance with the 2002 plan vests in 2010.

So some of you have a long-term perspective on Oceaneering stock. You know that management has a little bit longer term in plan because these were 2002 awards that fully vest, and they have been vesting, but they finally vest in 2010. So our current mark-to-market accounting would end at that time, has no awards subsequent to those of 2002 require such accounting. And in 2008 one-half of the remaining unvested shares will vest, so the degree to which our unallocated expenses are tied to the quarterly fluctuations of our stock price continues to decline.

Okay.

I don't know if that helped or not, but I wanted to say it.

Jay, one for you. Jay, do you feel bad about finally losing in ROV contracts?

I certainly do, Jim, and I have been talking to our people about not letting that happen again.

I understand if you would not want to comment on it, but when you lose a contract, does it usually -- does price come into it?

I would say that is always an element. We generally are not going to be the lowest price, but usually it's relationships. We have good competitors who do good jobs, and if they are doing well for a customer with a great relationship, that gives them an advantage perhaps. So realistically, of course, we never expected to win all the work, but we have been having a great run. But it is an indication that it is competitive out there, and this is not a lay down for us to win most of these jobs.

[Victor March].

The first question I had was just within OIE on the BOP control systems. I just wanted to see if you could talk on how the recent contract I think you guys announced back in September or so, how that has progressed? I want to see if you can comment on taking a look at that business on a go-forward basis as into the opportunities.

I do not have any comments on the particular contract, but we were very pleased with the progress of the BOP business. We have secured I think four jobs, and these are major jobs in the range of $10 million plus for BOP systems. And we think with the rigs being ordered out there that there are other opportunities out there for us. A chance to put our system in the marketplace here later in '08 and let everybody have a look at it. We think it will be the best system on the market, in the market.

So we were very encouraged by that business. We think it is moving along nicely, and so we're very pleased.

And just the other one I had was just on the Olympic shipping vessel. I wanted to see an update on the delivery of that vessel and how marketing was going?

It is going to come in early in the third quarter is what is it expected to be delivered now, and I think that is still very consistent with the earlier expectations when we announced a contract. And then remember, we do have to mobilize it and outfit it with an ROV. So while we get the charter starts in the third quarter, there will be no profit contribution until the fourth quarter.

And then it will work in our spot market in the Gulf of Mexico and basically our IRM business. So we're not anticipating a long-term contract for that vessel. It will just be part of what we use to do our work everyday.

Okay. And the last one I just had was just on people. I wanted to see how the people issue was. Is it still as tight as it has been over the last 12 months, or has there been any slack in the system, particularly as it relates to the ROV business?

I feel very good about what we accomplished in '07 in the ROV business with regard to personnel. We hired approximately -- and trained approximately 500 people. We had to identify and train almost 100 supervisors to continue to grow that business. So I think we have good processes and training systems in place to do that. Obviously these people were hired all over the world in West Africa and Asia, South America, as well as the United States.

So I think we are meeting our demand for people, and we think we are on track with good solid processes to continue to do that through '08, '09. The market is tight. There are really not enough people for everybody, but we seem to be satisfying our need and think that it is expensive. We have seen our costs go up causing that to train, but we see the ability to recruit and train people in the ROV business to be a real strong competitive weapon and strength of ours.

(OPERATOR INSTRUCTIONS).

Okay. Well, thank you very much, and we appreciate you being part of our call.

Bye bye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.