Oceaneering International Inc (OII) 2009 Q4 法說會逐字稿

Good morning. My name is Chrissy and I will be your conference operator today. At this time I would like to welcome everyone to the 2009 fourth quarter annual earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Jack Jurkoshek, you may begin your conference.

Good morning, everybody. I would like to thank you for joining us on our fourth quarter and annual 2009 earnings conference call. As usual, a webcast of this event is being made available to the Street Events network services by Thomson Reuters. Joining me today are Jay Collins, our President and Chief Executive Officer, who will be leading the call and Marvin Migura, our Chief Financial Officer. 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 being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. And I am now going to turn the call over to Jay.

Thank you, Jack. Good morning and thanks for joining our call. It is a pleasure for me to be here with you today to talk about Oceaneering.

Our 2009 earnings were the second highest in Oceaneering's history and EPS of $3.40 was only 4% below last year's record result. This was a remarkable accomplishment and particularly gratifying during a time of global economic recession, tight credit markets and declining oil consumption. These conditions led to a reduction in oil industry exploration and production spending and to substantially lower demand for many oil field services and products. However the deepwater market we serve was less vulnerable to these E&P spending cuts.

Our performance in this environment was largely attributable to increased demand for ROV drill support services, and the success of our efforts to control expenses, which enabled us to maintain the operating income margin we realized in 2008. We achieved record ROV operating income performance for the sixth consecutive year. Our 2009 cash flow simply defined as net income plus depreciation and amortization of $311 million was less than 1% below our record high of $314 million for 2008. Compared to 2008, our 2009 performance declined as a result of lower operating income contributions from subsea products, subsea projects and inspection.

Our EPS guidance range for 2010 of $3.25 to $3.55 is unchanged from our last conference call. This reflects our assessment that some deepwater constructions projects will continue to be deferred until there's a meaningful recovery in hydrocarbon demand and our belief that deepwater drilling activity will keep growing in 2010 as rigs currently under construction are added to the worldwide fleet.

The major determinant of the spread in our EPS guidance range is the extent to which deepwater construction activity may or may not pick up over the course of 2010. This will impact demand for our ROV construction support services, subsea products and our deepwater vessel services in the Gulf of Mexico.

Our overall fourth quarter EPS result exceeded the high end of the EPS range we gave last quarter, and included a $1.9 million gain we realized on the sale of the ocean producer. EPS of $0.83 for the fourth quarter of 2009 was below that of the fourth quarter of 2008, due to declines in operating profit from subsea projects, subsea products, and inspection.

Subsea projects declined on a reduction in Gulf of Mexico work associated with 2008 hurricanes, and a softer market for our deepwater vessel services due to lower demand and an increase in industry vessel availability. Utilization of our vessels and saturation diving systems declined year-over-year, and the rates we received in the fourth quarter of 2009 were lower than those in 2008.

The subsea products decline was attributable to lower umbilical plant throughput, and lower demand for our specialty subsea products. Inspection declined due to lower demand for our services in several areas where we operate particularly in the Gulf of Mexico. This decline was largely related to work performed in 2008, during the aftermath of hurricanes Gustav and Ike and lower offshore pipeline insulation inspection demand.

Our ROV business had an all-time high quarterly operating income performance of over $55 million, as we achieved a record number of 17,700 days on hire for our fleet. During the quarter, we put seven vehicles into service and retired two older systems. At year end, we had 248 vehicles in our fleet. Our fleet mix usage during December was 73% in drill support and 27% in construction and field maintenance versus a 69%, 33% mix a year ago. Our 2009 annual EPS decline of 4% was attributable to lower operating income from our subsea products, subsea projects and inspection businesses.

Year-over-year, our subsea products operating income declined due to decreased demand for our specialty subsea products, lower throughput at our umbilical manufacturing plants, and unanticipated costs we incurred on two BOP control systems.Our year end subsea products backlog of $321 million was up 8% from $298 million at the end of 2008 primarily due to two large umbilical orders we secured in the second quarter. Based on preliminary data from Quest Offshore, 2009 umbilical market demand was 9% below that of 2008. Our 2009 award market share was 32%, about the same as the 30% in 2008. Our subsea projects operating profit declined due to lower demand for our shallow water vessel and diving services and competitive pressure in our deepwater vessel market due to an increase in industry vessel availability.

Finally our inspection results decreased due to the unfavorable currency impact of the stronger US dollar relative to the British pound and lower demand for services. Our annual ROV operating income rose for the sixth consecutive year to an all-time high of $207 million, $17 million or 9% over 2008 results. This was accomplished by increasing our days on hire to over 68,700 days, as we expanded our fleet, improving our operating income margin to a record high of 32%.

During the year, we grew our fleet to 248 vehicles, up from 227 at the beginning of the year. We added 30 new vehicles and disposed of nine older systems. 25 of the new vehicles initially went to work in drill support service, and others went into construction or field maintenance service. In 2009, 17 new floating drilling rigs were placed in service and we had ROVs on 16 of them with two on one rig for a total of 17 vehicles.

Our cumulative win/loss record on new build floating rigs in 2007 through the end of 2009 has been 40 out of 49 or 82%. At year-end, we estimate that we continue to be the largest ROV owner with 35% of the industry's work class vehicles, almost 2.5 times the size of the next largest ROV fleet. We remain the primary provider of ROV drill support service with an estimated market share of over 60%, three times that of the second largest supplier. By our count we also continue to be the largest global provider of construction and field maintenance ROV services.

In summary we believe our annual 2009 earnings performance and cash generation were excellent, given the market conditions. Our focus on providing services and products for deepwater and subsea completions enabled us to participate in the continuation of a major secular growth trend in the oil field service and products industry. During the year, we continued to invest for the Company's future earnings capability. Our capital expenditures were $175 million, of which $147 million or nearly 85% was spent on growing and upgrading our ROV operations. We generated $420 million of EBITDA during the year. Our balance sheet remained in great shape. At year end, we had $162 million of cash, $120 million of debt, $200 million available under our revolving credit facility, and $1.2 billion of equity.

For 2010 we are forecasting EPS in the range of $3.25 to $3.55, about the same as our 2009 performance on an estimated average of 55.5 million shares. Compared to 2009, our guidance range forecast assumptions include achieving profit growth from our ROV and subsea products businesses and is experiencing declines of operating income from our subsea projects and MOPS operations.

Explanations for the annual 2010 versus 2009 business segment changes are as follows. ROV operating income is expected to grow due to an increase in days on hire as we benefit from a full year of operations for the vehicles we placed in service during 2009, and continue to expand our fleet. We anticipate adding 15 to 20 vehicles to our fleet in 2010 and retiring four to six.

For 2010 compared to 2009, we expect our average revenue per day on hire to be about the same. Our fleet utilization to be slightily higher as we benefit from upgrading older systems to improve their marketability. And although the operating margin may slightly decline primarily due to a change of geographic mix. Subsea products operating income is expected to increase as we realized a full year's benefit of improved manufacturing processes, and cost reduction implemented in 2009. Avoid DOP control system cost overruns, increase throughput at our umbilical manufacturing plants and achieve higher ROV tooling rentals and subsea field development hardware sales. We expect our overall products revenue in 2010 to increase and that the operating income margin for this business segment will improve.

Subsea projects operating profit is expected to be lower primarily due to the completion of the performance contract off West Africa and a softer market for our deepwater vessels in the Gulf of Mexico. We also anticipate continued decline in hurricane-related diving work and higher vessel dry dock expenses. We anticipate our projects revenue and operating income margin will decline in 2010. Our MOPS segment profit contribution is expected to decrease due to the retirement and sale of the Ocean Producer in December of 2009 and a lower day rate for the Ocean Legend. For 2010, we expect ROV products and projects to generate over 85% of our operating income, as was the case in 2009.

During 2010, we anticipate generating in excess of $300 million of cash flow, simply defined as net income plus depreciation or more than $400 million of EBITDA. This projected cash flow will provide ample resources to invest in Oceaneering's growth. Our 2010 capital expenditures will be dependent on the amount of investment activity we can deploy into acquisitions. We will continue to fund additional ROV growth and upgrades and maintenance capital requirements including the vessel we are having built to replace the ocean project. Total maintenance CapEx for the year will likely to run between $30 million and $45 million. We will endeavor to invest all of our cash flow and more if the right opportunities present themselves. I believe we are well prepared for the challenge we face in 2010. We are focused on cash flow generation, cost control. We are intensifying efforts to improve business processes and the effectiveness of how we work. We are well capitalized. We have a seasoned management team in place and are confident in our ability to quickly adjust our business plan and take advantage of opportunities.

Looking forward, we see specific signs of a healthy deepwater and subsea market that will drive demand growth for our services and products. As of the end of December, 90% of the existing 235 floating rigs in the world were under contract. 70% of these are contracted through 2010. 74 floating rigs were on order and scheduled to be delivered through 2012 and 45 of these have been contracted long term for an average term of nearly seven years. During 2010 we estimate that 30 to 35 rigs will likely be placed in service during the year. We have ROV contracts on 17 of these rigs and will perform four of these with existing ROVs. Competitors have the ROVs on six, leaving seven to 12 contract opportunities this year. And we are pursuing all of them. If all of the floating rigs on order are built the global fleet size will grow by over 30% to over 300 rigs.

In addition to the current rigs being built, various industry sources indicate a number of subsea support vessels that will require ROVs are under construction with an anticipated delivery date by the end of 2012. We also particularly like the future prospects of our subsea products business segment. Quest latest forecast for subsea trees is for an annual demand increased of 25% in 2010, versus 2009, and a five year demand increase to 40% in the 2010 to 2014 period compared with with the previous five years. Pre-orders are the primary demand driver for our subsea product line offerings.

With our existing assets we are well positioned to supply a wider range of the services and products required to support the deepwater exploration development and production efforts of our customers. We believe Oceaneering's business prospects for the longer term remain promising. Our commanding competitive position, technology leadership and strong balance sheet position position us to continue to grow the Company and we intend to do so. Our first quarter 2010 EPS guidance range is $0.65 to $0.75. This is consistent with our historical seasonal quarterly earnings percentage distribution, and the fact that our first quarter earnings are usually lower than the fourth quarter of the previous year.

Our first quarter 2010 guidance is down from the first quarter of last year, as we expect declines in operating income from our subsea projects, inspection and MOPS operations, and higher profit contributions from our ROV and subsea product segments. Compared to our fourth quarter of 2009, our first quarter guidance reflects seasonality in our ROV business and lower MOPS operating income due to sale of the Ocean Producer.

In summary, our 2009 results continue to demonstrate our ability to generate excellent earnings and cash flow even in tough markets. We believe our business strategy is working well, over both the short and the long term. We like our competitive position, in the 2010 oil field service market,. Our technology gives us the ability to prosper in what we believe will be another challenging year. We are leveraged to what we believe will be an inevitable resumption in the growth of deepwater and subsea completion activity, a longer term market outlook for our deepwater and subsea service and product offering remain promising. We continue to believe we are in one of the sweet spots of this secular up cycle. 2009 was our second best year ever and we are well positioned to have another year of substantial earnings performance in 2010. We appreciate your interest in Oceaneering, and we will be happy to take your questions.

(Operator Instructions). Your first question comes from Neil Dingmann. Your line is now open.

Morning guys.

Morning, Neil.

Jay, I was wondering. What degree are you seeing from a Sub C product side with umbilical and such? Are you seeing deferrals and how do you see those playing out?

I think not too much has changed on that, Neil. We are still seeing some deferrals. I will say we have seen an increase in demand for smaller, there's more bid activity and smaller jobs in the Gulf of Mexico. So the Gulf seems to be coming back a little bit. I'd say we see no change in West Africa, North Sea, so far. But we are hopeful.

Got you. And just on my second question. I wanted to know how ROV is looking like. I think net you had 21 in 2009. I was wondering where you look. Two questions around that. Retirement, when you are looking at 2010, Will it be around nine or so? Or are you sitting about where you like?

Let me say this.

Just the last part of that question. Sort of pricing, obviously as day rates and such go up for these entire jobs, can we assume a lot of pricing for these ROVs will kind of mitigate and go up along with that?

First let me deal with the number. We plan to build 15 to 20 systems for the year. And we think retirements will be with lower somewhere maybe in the four to six range. Although, it is certainly affected by economic conditions and particular jobs. So that is on the numbers of units. And on the revenue per day I think we would be happy with a flat world. I mean still a lot of pressure to reduce prices. You are right, some new jobs come in of higher prices. Hopefully that all offsets. And we still feed to get some increases from customers who increased the offset increasing cost. I think flat revenue per day, would be where you should put your model.

Got you. Thank, guys. Great job.

You bet.

Your next question comes from the Max Barrett. Your line is now open.

Good morning, guys.

Good morning.

Just sticking with ROVs, you discussed 2010 operating margin percentage down geographic mix. Presumably this is Brazil. Could you kind of walk us through the regions, maybe where you might be seeing pricing improvements?

Well pricing improvement?

Yes.

I think we are not really expecting much in the way of pricing improvement. As I just referred to previously. We still have customers that want discounts. We do have some new system that is have been booked that are coming out,. They're bigger newer units and there may be at higher prices. But again over all, I would say that we look for flat revenue per day of service in total. On the geographic mix, you're right, Brazil is a lower cost area, and so that.

Lower price.

Lower price area. So that may drag us down a little bit but we have new systems coming in other places. So on margin side, when we say down, we just had a fantastic year for being up from the 30% to 32% margin. We get great results, great cost control and execution. So just say, hey, maybe 31 os a better model than 32, which is not a big change. Just saying that we are not necessarily sure we can repeat such an extraordinarily good performance.

Moving to subsea projects, how much visibility do you have for up coming work. And is the increase in Gulf of Mexico drilling driving any incremental work?

I don't think so. This looks like a down year overall, more competition, no big giant projects out there. Less big project that we had last year. Last year we had some tail of the hurricane work, and some larger oil company projects. Both will be reduced this year. So I think we are out there fighting it out for a lot of smaller jobs. There are smaller jobs, and we have great position in this market. But in visibility, this is a few months ahead is all we ever really have.

This is a call out market. We don't even track backlog.

It is a call out market. We fight everyday.

Great. Thanks a lot.

Your next question comes from the line of Chris Gleenstein. Your line is open.

Good morning.

Morning.

Quickly on the rigs to be delivered in 2010, the 30 to 35. Did I hear correctly? You have contracts now on 17 of those?

Yes. That's correct.

And competitors have contracts on six of those?

Yes.

Now, is that, I think last call, you guys had quoted that competitors had contracts on eight of those. Did they lose two, or were two of those delivered in 2009 rather than 2010?

Actually in the fourth quarter, Petrobrast canceled four contracts that they had previously awarded and they had been awarded to our competitors. So, four competitor contracts did go away.

Okay.

Very perceptive on your part. Good question.

Second question, is thinking about the industry in general, you are planning to add 15 to 20 units this year. What's your senses as to what your competitors are planning to add with regard to ROV vehicles in 2010?

We really don't have good information on that. It's just difficult to come by. We seem to be the only people that publicly disclose all of that information. Our competitors as you know, our major competitors are construction company's and survey companies, and they have vehicles probably working more for their own account than they do the third party world. So, they're serving two markets, the third party market and their own market. So, even if we knew you what they were doing, we wouldn't necessarily know which market they were planning to put their equipment into.

Just on the glebal fleet, the 35% is best we can estimate. Our fleet count is the same as it was last year. So you can surmise from last year's activity, everybody expanded about the same rate. But as Jay said, it doesn't necessarily mean increased competition. A lot of that gets used elsewhere.

Okay: that' s very helpful. Thank you very much.

You bet.

Our next question comes from Stephen Gengaro. Your line is now open.

Thank you. I guess the, the first thing I had was when you look at 2010, and you look at your ROVs which are on rigs which have potentially can have contract which are rolling, can you give us a sense for what that number looks like?

Sure. I will be happy to. We have on 18 rigs that will have contract term expirations in 2010. Of these eight are fourth and fifth generation semi's or DP drill shifts. We really think those are highly likely to keep working with little or no down time. The other ten older rigs, we are watching those each one individually. Talking to the drilling company. And while some of those may go idle, we really not sure. We factored obviously something into our planning with regard to those rigs. I am just saying in total of all those ten rigs that went down, that's only 4% of our fleet. We really don't think that's going to happen. But anyway those are the numbers, 18 in total, eight fourth and fifth generation, and ten older rigs.

That's helpful. And then just a second question, I know this is probably a little, a little granular but when you look at the ROV business, and the margin in fourth quarter, it was pretty healthy given particularly the utilization slid a little sequentially. I know they are both small (inaudible) But I was just kind of interested. Is that efficiencies? And if it is, what's there that makes you think maybe these margins are not sustainable?.

Our people did a great job this year. We are pushing very hard at Oceaneering for what we call continuous improvement, process improvement, find the waste and get rid of it. And they just had a very successful at reducing their costs and getting rid of some waste in their operations. And obviously some of that will continue. There are other areas costs are continuing to press up. We operate in some of very high cost places like Nigeria and Angola, Ghana and Brazil. There are places where costs are not going down, they're going up everyday. Our customers are., we certainly can get some cost increases, but other places we have happened to give some discounts. You factor that together,and we just had an extraordinarily good result. And then I'm just cautioning that we might not be able to quite repeat that. But, we're only talking about 1% for your model.

Yes, that's helpful. I was just curious. That was useful information. Thank you.

Your next question comes from Victor Mershon. Your line is now open.

Thank you. Good morning.

Morning, Victor.

First question is on utilization, you guys talking about slight improvement this year versus 2009. And just want to get a sense. Is that looking at slightly higher drill support with construction flat? Is that the thinking in total?

We think construction will be better, and that is the primary reason utilization has been down. And we do think construction will be a little bit better. And through the course of 2010, as I mentioned earlier, that's probably the biggest uncertainty is to how much better it gets to be. But we think it will be better. And we see more activity in the Gulf of Mexico particularly than we did last year.

The second one is just as it relates to your pricing comment earlier. If I understood correctly, that your revenue per day being flat year to year, some offsetting factors, some higher price new units coming in, offsetting some spot weakness in some regions. Is that a fair assessment of it? That's correct.

Exam obviously we do get moved around by currency issues as well. That's also a factor that's in there. I am not in the business of predicting currency. But there are a lot of moving parts in that figure.

Okay. That's great. That's all I had. Appreciate it.

Thank you. Your next question comes from the line of Joe Gibney. Your line is now open.

Thanks. Morning, guys.

Hey Joe.

Hitting the highlights. Marve, just a question for you. Were there any other incremental BOP control system cost creep in the quarter. And could you just update us on delivery expectations. I think in the last call, you indicated one system is expected to be up in the fourth quarter and the other in 1Q. Just curious what the status was there.

I think Joe, what we expect now is to deliver both of the systems later this year. And we believe we scrubbed our costs and have properly accrued all of the cost. And do not expect cost overruns in 2010.

Okay. That's helpful. And Jay just wanted to get your perspective on the projects business. I understand, it's quite a lot of work and visibility is as always fairly limited. Just curious in your perspective. Some of your diving competition in the Gulf of Mexico certainly alluded to the fact that weather has been more challenged here than it was in the fourth quarter continues to be in 1Q. Curious if you can comment on weather seasonally this year versus say last ? And as you stand here this quarter versus last quarter, admittedly with limited visibility. But are you seeing any up tick in bid activity (inaudible) for the back half of the year. Just curious what the pulse is from some of your customers in the Gulf of Mexico

I think it has been a tough year with regard to weather. I think that is certainly true.Bid wise, I think it's declining from last year sort of normal activity, nothing extraordinary. Pretty much what we were anticipating. I don't see any more change from what we were thinking. Marvin, do you have anything?

I don't know if the weather was really worse or not. But I know that when demand was higher because of the hurricane related work, the customer took a lot of that weather risk, and right now, the market doesn't allow that. So, some of the diving companies are using that as a reason, when maybe it's just a softer market.

Helpful guys. I appreciate it. I will turn it back now.

Your next question comes from John Donald. Your line is now open.

Good morning, guys.

Morning, John.

A quick question on the projects segment. Specifically, what is your visibility for the performer now in Angola. Presuming if that doesn't have any near term work, are there going to be some incremental dry dock in cost potentially for that here in the first half of the year?

That unit will be dry dock in the second half of the year. It is finishing up the contract in Angola right now, and next month will be on the way later. May even be on its way home. And we will plan on working it in the spot market in the Gulf of Mexico and dry dock it later in the second half of the year. And that is one of the dry dock cost that we referred to earlier. Have an increased dry dock cost in 2010.

And the former is a big swing going from a term contract through all of 2009. We continue the look for international work, but we haven't found any. So it will coming back to a tougher market, and it is an older boat.

Okay, thanks. That's helpful. And the product segment. Embedded in the current backlog, are there anymore of these similar serial number one projects like this GOP control systems that caused the cost to over runs in 2009 that may be looming out there in the near term?

No. Glad to announce that is not the case.

Okay. That's helpful. Thanks I will turn it back.

Your next question comes from Andrea Sharkey, Your line is now open.

Hi, good morning everyone.

Morning.

I had a question ton subsea products business. There was an umbilical order that was awarded I believe in February to one of your competitors, to Repsol. And I was just wondering if you were involved in bidding on that? If you had any thoughts on what that came down to it. Was that just price or what maybe that award was based on?

Could you tell us more about the Repsol order? It doesn't come to mind right off the top.

I think it went, it was announced in February and it went to Auker, I think it was 12 kilometers maybe of umbilical and it was for Repsol to be used in the Mediterranean.

Sorry, I just don't have any details information on that. We fight for orders. And I don't anything in particular about that one.

Sure, thank. And then, I don't know if I am correct on this or not but I think I have in my notes that the Ocean Intervention III is chartered until May of this year. And if that's correct, I was wondering if that's something that maybe you are going to let that charter lapse and if that would have any impact on your projects?

No, we have some options for continuing to use that vessel on a series of a one year options and anticipate we will. We are in discussions about extending that for another year.

Okay, just one last question. What maybe your priorities are for using your cash aside from the new ROV bills? If you could comment on that?

We will certainly fund any of the ROV business that needs funding, that will not consume all of our cash. We are looking around for other places. We don't need it in our products business right now. We are in plenty of capacity, and that business in general.

So we are look around for acquisitions and other investment opportunities. Historically,we have bought stock back and we have no authorization present at the moment. But our Board had authorization in place to buy back stock. So that certainly is a longer term possibility. But, we are very focus on trying to find a way to invest this money. We like to stay stull fully infested. And very focused on trying to grow the Company.

Okay. Great, thank you so much.

Your next question comes from the line of Michael Marino. Your line is now open.

Morning, Jay.

Hey, Michael.

Question on kind of bigger picture. You guy have been pretty consistent talking about your customers showing no real sense of urgency to get going again in the deepwater on the construction side of things. Have you seen anything that makes you more optimistic over the last three months or maybe even as the kind of the calendar rolled to 2010, that your customers kind of getting a little more active in at least the planning stages? Maybe give you a little more confidence in the back half of 2010 at least?

We are getting reports of more bidding activity, in the Gulf of Mexico related from various parts of the business. Some construction projects umbilicals, Gulf of Mexico related. So, we get a sense the projects are starting to come back up on the table and people are starting to get quotes out. So it is a little bit encouraging. But I wouldn't overdo that.

You have heard this before.

I think the OEMs, and construction companies are starting to sound more optimistic about the second half activity. But it has not translated down to our segments yet.

We are still very hopeful.

And that's really the variance in the guidance. If you see it middle of the year, you are on the high end of the range. If you see it late in the year you are on the low end of the range. Is that the way to think about it?

And it depends upon the pace at which it picks up.

Okay. And one other question, too. In the ROV space, you all will add fewer units in 2010 than you added in 2009. Yet you talk about the incremental rigs coming in the market. It is a bigger number. Are you more focused on pushing pricing as opposed on adding units In 2010?

No. We are trying to win every job. As you saw utilization of our fleet was down a little bit in the 2009. So we think we can make a little more use of our existing fleet. As you notice, of those 17 systems three or four were being used by our existing ROVs. So, we going to really take a hard look at our existing fleet. We are looking and doing upgrades and think we can serve some of these jobs with our systems with a little, some up grades done to them. So, hopefully we can increase our utilization of our existing fleet a little bit, but we are trying to win at good pricing.

So is it fair to say that your mix between construction support and drill support maybe, it's not the 2/3, 1/3 like it used to be and it is more 70%, 30% or 75%, 25%.

I think we were at 71% Yes We were at.

Historically you have been 2/3, 1/3; right?

That's right. That's a very good indicator Michael of how the construction market has just kind of really come to a stall. So we have always said we could come back to a 2/3, 1/3 mix because we grow each of them at the same time. And we have said the primary, the number of utilization drop off from 8% to 9% was construction activity.

We'd very much would like to see it come down a little bit more toward the side of the construction.

And regarding your 35, 30 to 35 rigs being more than last year, remember the 7 to 12 of those rigs depending of what is 30 to 35, do not have contracts yet. Do not have ROV contract yet.

So, it's foreseeable that you actually add more than 15 to 20.

I think it's 15 to 20 plus we are trying to meet some of the demand with the upgraded existing system is our expectation for the year.

And keep in mind also we are pushing very hard on the vessel side and we see increasing demand on the vessel side of the market. But that's really the construction side of the market. So, depending on how that comes back, it could make a difference of how many systems we put to work and how many we need.

It sounds like utilization could go higher. So focus more on utilization opposed to just ?

We will be disappointed if we don't get an increase in utilization in 2010. Right. Okay. Thank you.

Your next question comes from Daniel Burke,. Your line is now open.

I wanted to stay on the topic of upgrading some of your older ROVs. Can you address that opportunity a little more specifically just in terms of maybe the number of ROVs you are targeting. And what type of CapExp committment that represents, if it is more than nominal?

I had rather stay away from that. I think that's competitive information really. But some of these ROVs we started building in 1995, these systems are now 13 years old. The horsepower requirements have increased. But, their component, part of this the A frame, the wedge are still great pieces of hardware and maybe some technology has moved ahead. Maybe we need a better camera and different manipulator arms. But the CapEx to bring that up to really current standards is relatively small compared to a new ROV. So we can have the opportunity to increase the effectiveness of that ROV by upgrading it and perhaps using it on some of these new jobs.

Great.

And we have done that historically throughout our last decade, last 15, 20 years. But we are just saying that right now our focus is we think we can get better utilization if we upgraded the market availability of some of these systems. As Jay said, we are really primarily talking about upgrading the underwater fish piece as opposed to, and the cost is significantly less than the cost of the new ROV.

That's helpful Marvin. And then, the last question again going towards building out the CapExp profile for 2010 and onwards, you made the decision to invest in the shallow water dive support vessel. But I presume you are not interested or considering any other incremental investments in the vessel market this year..

Well, on the diving side, we are basically just replacing an existing dive support vessel that was really 30-year-old vessel. So we really are just continuing to focus on that same market, on the diving business. On the deepwater side, we are always looking around to see what's in the market.

The last couple of times we wanted to add a boat, we ran our lease by economics, and we decided to lease. And that's how we got the Ocean Intervention III, and the Olympic Intervention IV. If the lease buy economics because of the additional vessel availability switch,, then our economics will switch. So, we are not going go ahead and say we have no intention or we have any intention of acquiring vessels. It truly depends upon the opportunities that become available and the economics and our views of the market at that time.

Okay, great Marvin. thanks.

Your next question comes from Steve Helms. Your line is now open.

Thank you. The umbilical business just really never got on fire in the last cycle. One of these days it is going to have to, I guess the customers out there are going to have to order the umbilical. Are you seeing any sign that they are ready to do that? Or any idea on when the dam might break on that?

I wish I did. Unfortunately I think it has been pretty much status quo except for the comments I made earlier about some smaller bids that we are seeing in the Gulf of Mexico right now. So, while it is a little encouraging in the Gulf of Mexico, I think the big picture remains pretty steady, and the industry needs a lot more work.

What kind of capacity utilization are you running at now in the umbilical business?

I think the industry is a realitively low capacity. Brazil probably being the exception where this is an adequate business in Brazil. Petrobrost has lots of needs. So I think the plants there are probably operating at reasonable capacities. But outside of Brazil, my views are that we are certainly at a low capacity. And I think that others have been as well.

I think what we said is with we captured the same amount of market share in 2009 as we did in 2008 but it seems like every time a new bid comes to order either us or a competitor has an empty factory. And you have no pricing leverage with the industry conditions are that way. So, we don't need the dam to break. We just need to see it trickle a lot more.

What's the normal time frame between say one of these big discoveries on the west coast of Africa and ordering umbilicals, six seven, five years?

Maybe not six or seven but certainly five years is probably not unreasonable. Three to five years some time. what are the -- go ahead.

What I was just going to say is with the number of increased drilling rigs, that have occurred over the last five years there's a lot more discoveries being made. And our position is nobody gets paid, oil companies don't get paid for finding. So they have to go through as you mentioned earlier, they've got to go through that construction phase. And until there's a sense of urgency, it can be just a long time. But, when somebody starts talking about getting production through the market and replacing depletion and growing reserves or proven producing reserves then we will see a construction activity pick up. But there's just no period of time that we can point to as kind of quote average or normal. Just that we are not now in average or normal times.

I would say with regard to discovery, I mean we look at quest information and there are quite a few discovery that have been made that are not being developed at this point in time. And projections looking ahead to 2011 and 2012 are that the world need a lot more umbilicals than we are producing today. So we hope that turns out to be the case.

What's the cost on building a new ROV today?

$3.5 million to $4 million.

Thank you so much.

Your next question comes from Stephen Gergano. Your line is now open.

Thank you. Two questions we haven't talk about them. About advance technology, anything we should think about? Sort of flatish 2010 versus 2009, is that reasonable?

That's what we should advise. That business, we really have great little businesses in there but they're relatively small compared to Oceaneering as a whole. The most topical is our group in NASA, our group in Clear Lake that works for NASA Oceaneering has the lead in the constellation space suit. And the Obama plan right now is to terminate the constellation program. We have heard from the NASA administrator that they're going to look at every piece of that constellation program, and decide what pieces to try to go forward and what pieces to stop. And that then we should continue doing what we are doing, and give them several months to figure out what is going to be needed in the future. Seems to us, they are going to need space no matter what they do, even to go to orbit and to the space station. But anyway from a financial point of view it is a very small piece but interesting piece. It is topical in the market to.

Is there any changes or long term attitude toward that business? I know you don't need cash but I am just sort of thinking about the structure of the organization, if there's any changes possible there?

We like that business. It has interesting technology and occasionally there are interesting technologies transfers back and forth. People can help each other out. They've got some fantastic engineers. And sometimes we call up on them to help with an (inaudible) field. Okay. Great

Thank you.

(Operator Instructions). Your next question comes from Eric Gordon. Your line is now open.

Good morning guys. I wanted to drill a little deeper into use of cash. You have $160 million in cash on the balance sheet today. If I am doing the math right the $300 million in cash flows from operations, and CapEx just based on the ROVs of roughly $100 million or less. That's a tremendous amount of cash flow that can be generated and could be on your balance sheet by year end 2010. I wanted to gauge your thoughts on M&A discipline in term of what you are looking for specifically, in the transaction versus buying back stock or buying a dividend with that cash flow today? Thank you.

Well, we would certainly much prefer to find a good acquisition opportunity. I think we want something that fits with our subsea world. If you look at our previous acquisitions, you have seen that we have been focused on, we found those in the product area:. I think we were continuing to look in that part of our business. And things that are closely related and really will have some impact on our future in the subsea world. I think that will be our focus. Continuing to look for things that fit in the subsea, and that some technology that will be or can be used in to fit with our other products. We are not in a hurry. We hope we will be patient. I think we will be. I think we're very disciplined in looking at acquisitions. We're, very focused on the long term cash flow. And while we are hopeful in expecting that we will find some good investments, money is not going to burn a whole in our pocket.

Right. We are not going to change our economic outlook because we have cash on the balance sheet versus credit availability. So, and as Jay mentioned we always have historically gone to the next best alternative. When we can't buy investments, we buy back Oceaneering stock. And it is a topic for our Board's consideration, and it will be discussed.

Thank you. I think the next follow up is how much cash would you be comfortable holding? I believe you have more cash today than you ever had on your balance sheet. And with the free cash flow that can be generated this year based on your capital program for ROV spending at least. Is there a point at which a decision would need to be made on use of cash rather than focusing on M&A opportunity?

Eric, that gets a lot of discussion right now. I think you're under estimating our CapEx at $100 million Remember, we're building. I mean last year we spent $175 million, the year before that $250 million. So, I mean, we think we will be more successful in investing our cash than the $100 million number you threw out and we said maintenance CapEx including that vessel would be $30 million to $45 million. But I mean your point is extremely well taken, and noted. And we look at, we are talk about that often, early and often about our cash flows. We had a phenomenal year in 2009, where we did not expect given the market that we would be within 1% of our record high cash flow. It just shows how much cash our operations can generate. And we do expect to put that cash to good use.

Thank you. It's a great problem to have.

Thank you.

Your last question comes from Phillip Dodge. Your line is now open.

Good morning. Thanks. Two questions on Brazil. First I heard you say that there were some ROV orders cancelled. Were those cancelled cancelled or could they come around again, that you might have a shot at?

That was just a specific contract that Petrorost had awarded and never got formalized and they canceled that. Those are still out there, and still potentially available, I guess.

The other one, more general would you expect more orders from Petrobros and Brazil in 2010, then you had in 2009?

I doubt it. We won nine jobs in a row in 2009 time frame. And so I would doubt that we would, we have seven new systems coming to work in Brazil, and the rest of this year. Our business is already going up about 40% in 2010, from 2009 to 2010. So it would be hard to imagine we will see many more orders from the short to the near term. And more orders in the near term.

A victim of your own success. Okay. Thank you.

There are no further questions at this time.

Thank you very much.

Take care, guys.

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