Oceaneering International Inc (OII) 2010 Q3 法說會逐字稿

Good morning my name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the Q3 2010 earnings conference call.

(Operator Instructions)

Thank you, Mr. Jurkoshek, you may begin your conference.

Good morning, everybody, we would like to thank you for joining us on our 2010 third-quarter earnings conference call. As usual, a webcast of this event is being made available through the StreetEvents network service by Thomson Reuters. Joining me today is 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 this call regarding our earnings guidance, 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 . And I'm now going to turn the call over to

Thank you, Jack. Good morning and thanks for joining the call. It's a pleasure to be here with you today. Our record quarterly EPS performance of $1.09 exceeded our guidance range and the First Call consensus estimate. This result is especially noteworthy in light of the low level of US Gulf of Mexico deepwater activity. Given our third-quarter results and an improved fourth-quarter outlook, we now expect that our annual 2010 EPS performance will likely be the best in Oceaneering's history and are raising our guidance range to $3.57 to $3.62 from the $3.20 to $3.40. All things being considered, that would be quite an accomplishment.

For the fourth quarter 2010 we are forecasting EPS of $0.80 to $0.85. Our improved fourth-quarter outlook since our last earnings call is based on our current forecast of additional product through-put at our umbilical plants. Additional IWOCS completion and work-over service activity. And additional installation, inspection, repair and maintenance work for our deepwater vessels. The increased demand for deepwater vessel services is primarily attributable to work that was postponed while the BP Macondo project was underway. We are initiating 2011 annual EPS guidance with a range of $3.45 to $3.75 with the possibility of another record year. Our assessment of international demand is that deepwater drilling and construction activity will increase particularly West Africa and Brazil.

For our services and products we anticipate that this demand growth may more than offset lower demand in the Gulf of Mexico. The major uncertainties we face heading into 2011 are when, at what pace, and to what level permits for the Gulf of Mexico deepwater drilling project will rebound. We are anticipating a slow start and a strong finish. Compared to 2010 and 2011, we are forecasting a lower profit contribution from our ROV services in the Gulf. In the event Gulf of Mexico permitting is significantly lower than we expect, we believe more floating rigs will be mobilized to other geographic areas. And that our ROV systems will stay on board and work at their new drilling locations. I'll talk more about or 2011 guidance later.

Now I'll review our operations for the third quarter. As we had anticipated, our ROV days on hire, fleet utilization rate, and operating margin declined during the quarter due to the drilling moratorium in the Gulf of Mexico. Segment operating income declined sequentially and year-over-year. During the quarter we added four systems to our fleet and retired one. At the end of September we had 252 systems available for operation, up 9 from September a year ago. We continue to anticipate adding 18 new systems to our fleet this year 6 in the fourth quarter. Our fleet mix utilization during September was 73% in drill support, and 27% in construction and field maintenance. The situation in the Gulf of Mexico deepwater remains dynamic. At the end of September, we had ROVs on board 23 Gulf of Mexico floating drilling rigs, and we were receiving full day rates for ROVs on seven rigs. Partial rates on six rigs and zero day-rate on 10.

As of yesterday there have been no changes in our Gulf ROV drill support contract status on rigs from the end of September. Of the seven rigs with customers paying us full day rate, two are on standby awaiting disbursement decontamination work following work at the Macondo well site, four are working in the Gulf doing abandonments and completion, and one is warm stack. Since our last call, drilling contractors have announced that three more Gulf of Mexico floating rigs are being relocated to other market areas Nigeria, Egypt, and Greenland. We have ROVs on board all of these rigs and have contracts to keep our vehicles working at the new locations.

During the third quarter we achieved record Subsea Products operating income. Operating margin remained at a very high level. Year-over-year, the increase in operating income was primarily attributable to higher demand for IWOCS services, and field development hardware, and our successful efforts to lower manufacturing costs. Sequentially, operating income improved on the strength of higher demand for IWOCS services and field development hardware.

At the end of the quarter our products backlog was $308 million compared with $347 million at the end of June and $328 million a year ago. In mid-October we secured a significant umbilical contract and anticipate our year-end 2010 products backlog will be higher than at the end of 2009. During the quarter, we acquired the operating assets of SMX international Canada. A manufacturer of metal-to-metal steel clamp connectors, check-valves, and universal ball-joints. This acquisition complements our Grayloc products business which we acquired in 2005 and has proven to be a very successful investment. As anticipated our Subsea Products business had a third-quarter operating income performance that was sequentially higher, largely due to additional demand for deepwater vessel services by BP at the Macondo well-site. We also benefited from a seasonal pickup in demand for diving services.

Year-over-year, Subsea Projects operating income was lower due to a decline in profit contribution from the Ocean Legend, our remaining MOPS unit. And the lack of profit contribution from the Ocean Producer, a MOPS unit that we sold during the fourth-quarter of 2009. During the quarter we completed the shipyard repairs required on the Ocean Intervention Two. And this vessel returned to work in the middle of September. We also sold a Performer for approximately its reduced carrying value. During the quarter we secured an 18-month contract commencing in January 2011, for use of our Nautilus Sat system for work on the Helix Intrepid a deepwater subsea construction vessel. The Nautilus is currently working on board the Intrepid Offshore Trinidad, and is expected to remain there through the end of this year. Consequently, we decided to acquire a new 12-man saturation diving system to install on the Ocean Patriot. We are naming this new sat system Neptune. We anticipate that the Ocean Patriot will be available for SAT-diving service sometime in the first quarter of next year.

In summary, we were extremely pleased with our record quarterly EPS results of $1.09 and our cash flow generation of $130 million of EBITDA for the third quarter. We are looking forward to achieving our best EPS year ever in 2010. This would be quite an accomplishment given the moratorium on deepwater drilling activity in the Gulf of Mexico arising out of the Macondo well incident and the lack of global demand growth for deepwater construction projects. During the quarter, we paid $20 million to retire our senior notes, purchased 100,000 shares of our common stock, at a cost of approximately $5 million. And invested $69 million in capital expenditures. We also reduced our tax provision based on our 2010 estimated tax rate of 34.3%. $34 million of our CapEx was for ROV and $25 million was invested in Subsea Products. Which included our acquisition of SMX. ROV investments have accounted for $93 million or 57% of our $164 million year-to-date capital expenditures. We are currently estimating our CapEx, for the year, to be about $200 million. At the end of September, we had $148 million of cash, no debt, $300 million available under our revolving credit facility, and $1.3 billion of equity.

For the fourth quarter of 2010 we're projecting EPS at a range of $0.80 to $0.85, about the same as the fourth-quarter of 2009. Year-over-year we're expecting an operating income improvement from Subsea Products and lower profit contributions from ROV and Subsea Projects. Inspection to ADTECH operating incomes are anticipated to be about the same. As I stated earlier, we now believe that our 2010 EPS performance will likely be the best in Oceaneering's history, in the range of $3.57 to $3.62.

Looking forward, we are initiating 2011 EPS guidance with a range of $3.45 to $3.75 based on an average of 54.6 million diluted shares and an estimated effective tax rate of 34.5%. We have not yet completed our planning process but the big picture of the annual 2011 versus 2010 changes we envision occurring can be summarized as follows. ROV operating income is projected to grow on an increasing days on hire as we benefit from an increase in international demand for drill support services and continue to expand our fleet.

We anticipate adding about 15 vehicles to our fleet in 2011 and retiring 4. For the Gulf of Mexico we are projecting fewer drill support days on hire in 2011 compared to 2010. Regarding the pace at which Gulf deepwater drilling recovers, we do not claim to have any more visibility than others for the purpose of developing our guidance we considered a wide range of scenarios. At the mid-point we assumed a slow start with a modest acceleration of work. And expect 20 to 25 rigs working in the Gulf of Mexico at year-end. Subsea Products operating income is anticipated to be approximately the same, as increased throughput at our umbilical plant is offset by lower sales of IWOCS services in the Gulf of Mexico. ROV tooling orders for higher flow rate hot stabs, hot stab receptacles and valves, and ROV accumulator reservoir skids picked up significantly since our last call in response to escalating safety concerns by operators throughout the world in the wake of the Macondo incident. This hardware will enable the ROV to close the BOP ramps faster than is presently the case. We are renting the reservoir skids which we believe will provide a steady source of additional income in the future. We received a few orders for backup accumulator bottle skids which we are selling and renting. These provide a freestanding, pressurized, hydraulic fluid-source close to the BOP ramps independent of what is available on the BOP stack, and allows closing times to meet or exceed API minimum requirements.

From an ROV tooling deepwater technical solutions perspective, we believe by year-end we should have enough 2011 new orders for specialty equipment to replace the Macondo well site earnings of 2010. Subsea Project operating profit is expected to decline due to the completion in 2010 of BP Macondo project work. Our inspection segment profit contribution is forecast to be slightly higher on increased service sales in Africa, the Middle East, Asia, and the United States. ADTECH performance is expected to be flat. Unallocated expenses are expected to be slightly higher. We currently are forecasting our overall operating margin in 2011 to be about 16%. The same as what we are expecting for 2010, and what it has been for the past two years. Based on our preliminary numbers we are not anticipating any big changes in our segment operating margin in 2011 compared to 2010. We should have a better assessment and more to say about this at our next earnings call in late February.

During 2011 we anticipate generating at least $325 million of cash flow, simply defined as net income plus depreciation and amortization. Our balance sheet and projected cash flow provide us with ample resources to invest in Oceaneering's growth. A preliminary CapEx estimate for next year is $150 million to $175 million. Of which approximately $100 million is anticipated to be spent on upgrading and adding vehicles to our ROV fleet. About $20 million is for Subsea Projects, which includes the completion of the Ocean Patriot renovation and adding the Neptune SAT-system. We're not going to give out any more detailed information for 2011 at this time. Our focus next year will be on earnings growth and investment opportunities. For those of you intend to publish quarterly estimates, I would like to remind you that historically our first quarter is the lowest of the year due to seasonality. And that we tend to have higher earnings in the second half of the year as compared to the first half. This will likely be exacerbated by the expected ramp-up in 2011 with the Gulf of Mexico drilling activity. We are not providing quarterly earnings guidance for next year at this time.

While the longer-term impact of the Macondo well incident is uncertain, we are convinced that our strategy to focus on providing services and products to facilitate deepwater exploration and production remains sound. There will undoubtedly be a greater regulatory scrutiny and higher costs associated with finding and developing hydrocarbon reserves in deepwater, particularly the Gulf of Mexico and perhaps elsewhere. However, we believe the oil and gas industry will continue to invest in deepwater, as the deepwater play remains one of the best frontiers for adding large hydrocarbon reserves with higher production flow rates. The renewed industry and regulatory emphasis on safe and reliable operations should provide us with additional opportunities to demonstrate our capabilities. With our existing assets we are well-positioned to supply a wide 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 long-term remain promising. Our commanding competitive position, technology leadership, and strong balance sheet position us to continue to grow the Company and we intend to do so.

In summary, our results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well for both the long-term and short-term. We like our competitive position in the 2010 and 2011 oil field services market. Our technology gives us the ability to prosper in challenging times. We are leveraged to what we believe will be an inevitable resumption in the growth of deepwater and subsea completion activity. The longer-term market outlook for our deepwater and subsea service and product offerings remains favorable.

The renewed industry and regulatory emphasis on reliable equipment and redundant safety features of deepwater operations may cause our customers to be even more focused on risk reduction. This would elevate the importance of the utility and reliability of our ROV services and related product offerings, and reinforce the benefit of our value-sell. We now believe that our annual 2010 EPS performance will likely be the best in Oceaneering's history. In 2011 we are anticipating our EPS performance will be comparable to 2010 with the possibility of another record year. We think this distinguishes Oceaneering from any other well-field service companies. We appreciate your interest in Oceaneering, and now we'll be happy to take your questions.

(Operator Instructions) Your first question comes from Jim Crandell your line is open.

Good morning guys, and Jay great job.

Thank you, Jim, good morning.

Jay, my first question is about your umbilical business. My recollection is about a year ago that -- we were looking at low capacity utilization at least in some regions, pricing pressure, and although you had won big contracts, you cautioned about that those might have been won at big price -- or low prices. And not to really be too optimistic about margins. Now, you have improved profitability, you're announcing another contract win here, but none of those cautionary statements. Can you talk about what's really driven the improvement of the business? Is it utilization, is it just your internal cost-cutting, or some combination?

First of all, Jim, we did right-size the business to the level that we could achieve presently, and I think that certainly has helped. I think other fundamentals that you talked about are still problematic. There still is excess capacity in the industry, there still is relatively low pricing. Our business has been running very well, I think we have predictably produced high-on-time delivery rates. But, I would say this business, while it is recovering there is no -- the flood-gates have not opened and the real improvement in our product business. Multiplex has certainly improved, but we've also had excellent performance from DTS and IWOCS. So, I would say, Multiflex is just one of the components of the improving story. But the flood-gates have not at all opened up, we are very pleased with this one award that we've received for a large project. Again, longer-term we are still looking for margins in the 15% to 18% range. We did benefit from this special Macondo situation. So I would say we are looking for gradual improvement but it's not a total game changer yet.

Jay, your subsea equipment business can you give at least a ball-park estimate as to the relative percentage that Subsea Umbilicals or Multiplex accounts for?

We'll do that at year-end, Jim.

Okay. Second question, Jay, is on your ROVs in the Gulf of Mexico, 7 getting paid the full day rate, 6 partial, and 10-zero I guess. First of all, are you involved in any disputes on what you should be getting from your customers at the present time? And secondly, does the different status of your fleet -- differentiated status really have to do more with the contracts or the customers or why is that -- why is it what it is?

First all, Jim, we have no disputes with our clients on a those matters. I think some oil companies are -- I think the ROVs are a critical piece of the operation, the crew is a critical part to that service. So, I think there are particularly some large -- some majors that are expecting to be able to go back to work in the near future and they want that same crew, they want that ROV on board. I think now the ROV is going to be essential to testing the BOP either on the surface, and maybe when it first landed on the ocean floor. So, I think they're considered to be an essential part of the crew and these companies want to maintain that capability. So, I think that is the -- that is the decision or their decision based on readiness and maintaining crew.

Okay. Good, okay. That's it for me. Thank you, Jay.

You bet.

Next question comes from Jason Wangler your line is open.

Good morning guys, nice quarter.

Good morning, thank you, Jason.

Just curious as far as with the guidance and what it sounds like you guys keep seeing better and better international work. Do you think the split from essentially 50-50 what you saw last year in terms of work will move higher on the international side maybe going to something like 60-40?

I wouldn't -- at the end of the year I wouldn't think it would be that much difference, obviously a little bit of impaired Gulf of Mexico -- move the number a little bit. But I think that'll just be a temporary situation, I think.

Okay, and maybe one for Marvin on buybacks, it sound like you quite bought but quite a few shares back. Do you expect to continue doing that the rest of this year and into next year?

Jason, we don't go ahead and we will not predict when we will buy back, we bought back 100,000 shares this quarter. And we do have a significant amount of cash. It is our second best use of cash, in our minds, after growth. Our first focus is going to be growth, and we will report quarterly on any shares repurchased.

Great thanks, guys.

Your next question comes from Brad Handler your line is open.

Thanks. Good morning. Could you speak to maybe a couple of different questions and I'll take them one at a time but they are sort a related to Macondo or knock-on effects. First, very interesting opportunities you're talking about in terms of these accumulator skids and the like, but is there a way for you to help us think about the opportunity set that results from this increased safety-mindedness? Maybe on a given rig relative to what you have in the past?

I think it's -- Oceaneering as a whole this is not a needle moving event, but as I was saying we have been able to replace the Macondo tooling business that we had which was excellent with this -- with these new orders. So I think on an individual rig this is not a huge investment, and for Oceaneering as a whole it doesn't really move the needle. But it is just incrementally very good business and something that we are well-suited to do. So the skid, for example, that we are talking about is something that we'll rent to the oil company as part of our ROV tooling equipment. This will allow the ROV to function to BOP Subsea. So, it's just an additional piece of equipment, but we are not only running this in the Gulf of Mexico but operators all over the world are seeing that this is a better way to operate the BOP. So, it's not just the Gulf of Mexico market, so that's a nice these of it. It's not just in response to US regulations, it's the industry deciding that this would be a better way to operate.

It makes sense, but -- you are renting it is more of a temporary need?

I think it's a permanent need. This will be the way that BOP -- the ROVs interface with the BOP for the future.

Right, right that makes more sense. What you're trying to say is it's not a big number?

We are not talking about hundreds of millions of dollars here. I mean we're not inventing a totally new business here, there's just an incremental improvement in the business that we already are doing.

Right, I understand. Okay and then maybe a separate line of questioning. Can you calibrate in the third-quarter perhaps -- how much EPS came in effect from Macondo relief efforts and other things specifically related to Macondo?

I will tell you that, that is 12% of our revenue. And truly we decided not to go back and even try to figure out the Macondo EPS effect. You can imagine that one, it unveils all kinds of allocations and indirect cost. Secondly, what would we have been doing anyway if we hadn't had Macondo? I think now in retrospect if we look back on it and see where the Gulf was, where the international market has moved to, my view is that if Macondo had never happened, we would still be having essentially the same earnings results for the year.

I think we would've -- right about where we would be right now if Macondo had never happened, so I think it makes the incremental portion of that problematic to even figure out and I think less meaningful.

And to put Macondo in perspective, we think at the end of the year it will have accounted for approximately 5% of our estimated total revenue for 2010.

About $100 million.

Interesting, very interesting. Okay, thanks guys. I'll turn it back to you.

Next question comes from Michael Marino, your line is open.

Good morning, guys. Question on 2011 guidance. Obviously the Gulf of Mexico is going to be weaker which would imply record Oceaneering results from the international markets. Is that a function of what you all have kind of laid out at the contract level in visibility on, or is that a function of your outlook on international construction activity for 2011?

I think not so much international construction activity just the ROV business as a whole. For example, keep in mind the Macondo was a negative to our ROV business, as it decreased the Gulf of Mexico. Next year we think we will have increased numbers of -- increased days of service overall as a Company, but we will have declining days of service in the Gulf of Mexico. So, we see increased drilling activity, perhaps more rigs, and perhaps better utilization internationally. We are seeing increased demand from vessels that have -- where people need additional vessels working in the deepwater areas. So, those -- combination of those things together all over the world we believe will have more -- more days of service increase there then we will be losing in the Gulf of Mexico.

I guess my question is more specific to the construction side. I guess I'm trying to get a feel for what your basic outlook of the global construction market is for 2011, or is maybe your implication that this is -- you all have some stuff maybe booked like in West Africa, for instance you talked about, that is more Oceaneering specific and you're not kind of banking on a real recovery in the global construction market with your guidance.

Michael, on the global construction market recovery, when Jay talks about additional vessels whether they be for field maintenance or -- actual construction activity that's how we mainly participate. So, we are not necessarily forecasting a construction activity increase, when we mentioned it in the press release we're talking about our call notes -- we're talking about non-drill support activity and we see that growing internationally.

Okay. And that's more Oceaneering-specific, I guess?

That's correct.

We're not really saying that the whole construction market is somehow booming back.

Okay That's what I wanted to just make sure I--?

That upside is still out the for 2012, or who knows when.

Yes, that's exactly where is getting. And then to clarify on the tooling benefits in 2011 offsetting the Macondo work -- that tooling benefit is that one-time or that is a recurring revenue stream because it's a rental product?

Well, on the rental product it will be a recurring revenue. We mention the accumulator banks themselves that we've I think taken a couple orders maybe one was a rental and one's a stay-all. But our basic tooling thing that we are talking about is it will be recurring and it will be part of the new equipment that we will be renting on a daily basis all over the world.

Okay, but there's nothing significant in 2011 guidance that we should consider one-time in nature, like one-time deals or anything?

Nope.

Okay, great that's all I wanted say, thanks.

Next question comes from Tom Curran your line is open.

Good morning, guys.

Good morning, Tom.

Too bad you didn't buy back more of your stock?

Monday morning quarterback is easy isn't it? Wish we had.

A few follow-up questions on the Gulf of Mexico ROV outlook. Did I hear correctly you expect flow-to-rig count to end 2011 at 25?

Between 20 and 25 that's our base case.

Okay, and in terms of what that means for ROVs working, should I assume that the construction count remains flat, and then what multiplier should I use for drill support on that floater-count?

We have generally had about 85% to 90% of the Gulf of Mexico market so if 20 to 25 rigs are working we would be expecting to serve 85%, 90% of that fleet with ROVs. Generally one per-rig. And I think that -- so that -- probably that answers that question?

Okay. And among the additional, new regulations that I understand are being considered based on comments Salazar and Abramowitz have made. Is it true that they're considering either making it mandatory, or highly advantageous to move to two ROVs on average per-floater, so you'll have a standby back up one from one?

We do not anticipate that being the case, nothing like that is built into our forecast. I don't expect that to happen.

Okay. Are you seeing any -- because of this increase in risk consciousness and hypersensitivity to it, are you seeing any customers move to do that voluntarily?

I have not seen that so far. Keep in mind that our Oceaneering goal in the Gulf of Mexico is 99% up-time. And oil companies often have ROVs on vessels that they can access pretty quickly. So, I would think that could well be covered by the combination of one we have very high up-time and two, they have access to ROVs on vessels that are probably serving their field or supplying services to the boat -- I mean to the rig. So, we are not anticipating any structural change like that

We wouldn't oppose it, if such a change would occur. But we don't think it's necessary.

My last question on this topic then, maybe where I should have started, but is there anything on the ROV services side and the kind of benefits or increased revenue potential per floater in the Gulf, that you expect to see as a result of the changing rulebook?

No, not in the ROV segment. No. That would show up in our tooling sector that we talked about already

That's in products.

Yes, that's in products.

Okay. Thanks guys, I'll turn it back.

Next question comes from the line of Chris Glysteen your line is open

Thanks. Good morning, guys. First question, quickly, can you expand a little on your '11 guidance range in terms of what your assumptions are for the low-end? And also, with regards to the base case what your thoughts are in terms of how we progress throughout the year given the anemic permitting that's going on right now?

I would just tell you that we are going to stick with our teacher that we presented, which is you go from where you are now gradually increasing toward that 2025 at the end of the year. And let that be about as granular as we get right now. Keep in mind we haven't completed even our budgeting process thoroughly. So, I think we are not going to give any more detail on that really I think that's about as far as are going to go on that. Was there another half of that question?

How do we get to the bottom end. Chris, we are not going to go -- we said we ran a range of scenarios and there is a lot of variability looking out 15 months to what is going to happen in the world. So I would say lower utilization, lower margins and less international expansion would get you to the lower end.

Okay. And with the latest departures out of the Gulf of Mexico on the drill support side, how many total ROVs do you have working in the Gulf now? 66, would that be a fair number?

You mean, vehicles that are located in the Gulf?

Located in the Gulf currently, yes.

It would be close. That's about right.

Okay. And any way you could provide us the break-out in terms of utilization outside the Gulf?

No. We don't go regional on ROV utilization we talked about it being -- we think that since the fleet is mobile, that a global perspective is a better one to look at over time.

Okay. Just one last one if I could, could you guys update us quickly as to contracts anything that you might have won in the quarter, and things that you see on the near-term?

There were five ROV jobs awarded on new floating rigs during the quarter and we won four.

Okay.

The total number in the Gulf was 32 plus 26 plus 11. 69.

So our count is 69 ROVS in the Gulf of Mexico.

Exact date of September 30. Right.

Okay, thanks very much.

You bet.

Next question comes from Jeff Spittel your line is open.

Good morning, guys.

Morning, Jeff.

First starting off, can you help us for any opportunities you look forward to with the remaining new build rigs that are out there under construction set to come out for the ROV business?

Sure. There are 64 floating rigs on order. 41 of these, by our count, have been contracted for an average term of seven years. 27 have signed an ROV contract. So, that leaves 37 that are still up for grabs. Of the 27 contracts that are -- that have been awarded we won 10 of those. Difference being (inaudible) or order that we missed. So 37 opportunities still up for grabs.

Okay. Is there concentration of those opportunities either with Pemex or with Petrobras out of the remaining 37 that's noteworthy or are they pretty evenly spread from a geographic and client standpoint?

Yes, they're spread They're pretty well spread all over the world.

Sure. And then I guess secondly, touching on the spill response team that some of the majors have put into place I wouldn't assume there has been a lot of traction or movement on that front yet. Any update there as to what you are hearing?

No, we are in discussion with that team, and I think they are working hard and as urgently as they can to put their plan together and we're talking with them pretty frequently.

But you are absolutely right. There is no traction as to orders that have been placed.

Fair enough, great quarter, thanks, guys.

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

Hey, John

Good morning. Most of my questions have been answered already. But one more I had on -- concerning the ROVs was think by ODS's count there are about 30 floaters internationally right now that are under contract but that are going to be rolling off by the first half of 2011. I was wondering what your exposure might be to those on the ROV side and what your assumptions are for 2011 in terms of whether those rigs will continue to work, and presumably if your ROVs will continue to work on those rigs as well?

Sure. During the third-quarter, we run two rigs that came off contract. We've left our ROVs on there, and we think they'll have a reasonable chance to go back to work. We're watching those. For the rest of 2010 we are on four rigs that have contract expirations, three of these are third-generation semis and one is a fifth generation semi. So, we are certainly watching those closely. If we look at all of 2011 there are 62 rigs that have contract expirations and we are on 30 of those.

Okay.

Hope that helps you.

Yes, that's helpful. Then in terms of the balance sheet, with you guys being debt-free now, and obviously have a lot of cash and operating income going forward here. Do you have any target debt-to-cap ratio that you would look at it either in terms of making a large acquisition or other ways of expanding the business that you would be comfortable with now, or are you trying to keep that debt-level down at zero still going forward?

We are definitely not trying to keep the debt level down at zero. We feel very comfortable with -- if we could make a large acquisition and use cash, we would do so. We do not have a specific leverage ratio in mind.

We ran for years at something on the 20% level. The truth is, our cash flow is very secure our ROV businesses are very strong cash flow generators. So, if we needed to leverage up a little bit more for a significant acquisition of great cash flow we would certainly consider it.

Going back much further we could get to a debt to cap ratio of 41% in one year and then because of project cash flow when we were building assets for contracted needs we would bring it back down to 25% within a couple of years. So, we see that position with our cash flow generation has only been enhanced, but no, we have no specific debt-to-cap targets in mind. Anything other than above zero.

Are there any specific assets or services or geographic focuses that you all would be looking at in terms of acquisitions at this point, or is it just more opportunistic as individual projects come up?

We're looking everywhere in the world, but I think certainly the moratorium did cause us to think seriously and look at our worldwide distribution. And I think we would love to find some more international acquisitions if we can.

Okay.

Tell your bankers to bring some to us.

Will do. Thanks, guys.

There are five questions left in the queue. The next question comes from Stephen Gengaro your line is open.

Thanks, good morning, gentlemen. I guess two things I wanted to hit on. The first in the quarter sort of the implied day rate on the ROVs was up. Is that a function of rig support versus construction mix mainly?

I think what happened during the quarter we seemed to -- we generally have a three-man crew and then often a fourth man is called out. And so on a worldwide basis we had more people working on the -- our average crew per-day, or man per day -- number of men per-day was up. And I think that probably was the biggest single factor around the world that just kind of comes and goes, and is sort of a random factor in this was a quarter where it was one of the higher numbers.

But that's not a trend, that's just the noise?

I think that's correct.

And then, you mentioned crews that actually ties into my next question what do you do with the -- are you moving personnel internationally with the ROVs, or how does that work? Because I know, your expertise on teh ROV pilot side is critical, what are you doing with the Gulf folks? Are they moving internationally or are they going to other assets?

We are doing all of those things, everything that we can. We have moved quite a few people certainly more than 100 people internationally. We have also looked at our other business units that needed expertise and needed some help in the short-term and we have moved people into those business units. We did trim some people off the bottom of our ROV ranks. So we are doing all of those things, and I think we have done a good job of protecting our key people and maintaining the expertise that we developed over time. Because you're exactly right, our 99% up-time is a function of a well-trained crew and so we are not giving up these people easily.

And we continue to train non-US personnel who are, if you look in West Africa the level of expertise in non-US personnel is as high as it is in the Gulf of Mexico. We are doing that to protect these positions and these jobs so we don't lose that expertise during this level of inactivity.

Okay. That's helpful. And then just as a final follow-up. When I thought about the outlook one of the things that I think about is that rigs in the Gulf generally are more of a positive to Oceaneering than rigs outside the Gulf. And as we go forward here, and I think we've had that discussion but as we go forward here, is this evolving where that is less the case going forward? And if so why, and if not are you thinking about trying to change that?

I think we really don't care for sure where the rig works. We probably do just about as well. I mean, there are differences between areas but one location versus the other is not a big deal to us on the ROV side. I think the bigger difference is our other Gulf of Mexico businesses. So we would rather have 35 or 40 rigs working as a fees project, where it feeds our project business it feeds our Gulf of Mexico IWOCS business, it feeds more of the call out tooling business in the Gulf of Mexico. These are the things that benefit more from a 30 to 40 rigs floater fleet in the Gulf of Mexico. I think that's where you make the most difference I think on the rig side on the ROV side itself pretty much have a wash depending on where it goes in the world.

I think historically, Stephen, if you look at the composition of the Gulf fleet, has had more high end, deeper water assets and therefore it's probably a little bit more profitable than the general mix of the rest of the world. But when you compare like-for-like equipment, you really see very little difference between -- ROV on drill support, ours in the Gulf of Mexico versus West Africa. You have pockets in Southeast Asia with less deepwater focused equipment, were to learn less and Brazil is a very competitive place, and Norway is rather high cost. But I think we are indifferent as Jay said when you compare like-for-like.

I think the question was really beyond the ROV the other Oceaneering services benefit more from Gulf activity and I was just thinking in terms of are you thinking about ways to change that going-forward?

Well, I think some of it is even more transportable than others but we certainly -- our IWOCS business has already over the last several years expanded to West Africa. This year we expanded into the UK -- we will be -- we have been getting some contracts but have not won an independent contract yet in Brazil. We're looking to expand that business as we can to get opportunities around the world. Our project -- our vessel-based project business is particularly designed for the Gulf of Mexico call-out, although we did put that one vessel in Angola for a year. So, we are looking for opportunities that might fit our skillset. But duplicating our call out business. In some of the places it just doesn't fit quite as well. So, we would rather have a stronger Gulf than a not that's just a bottom line.

But we are trying all those things that you mentioned or asked about to moderate the effect, but definitely benefit from a strong Gulf.

Great, that's really helpful thank you.

Next question comes from Joe Gibney your line is open.

Good morning, guys. Just a quick question. Just wanted to drill down a little bit more sequentially about what changed in your fourth quarter guidance versus where we were coming out of 2Q.

I know directionally, Jay, you have answered this for the most part, but we were sort of heading for between $0.60 to kind of $0.65 guidance for the fourth-quarter. If I look at the mid-point of where we were. What is the single biggest factor that changed coming out of 2Q. Can we point to ROV tooling and the escalating safety concerns that you alluded to as being the single largest factor. I certainly know you've got the reduced manufacturing calls you've right sized and you're obviously pulling for some of this deepwater install work that was postponed. But is that the single biggest factor that we can point to that has changed substantively from where we were coming out of 2Q?

I'm just thinking about all of our businesses, and it seems like all of our businesses just had a little bit better outlook. I think you mentioned are certainly true, but even our project business I guess we were uncertain as to the project activity that we would see. And that seems to have held up as some of the work that would delay from Macondo was still there. Our IWOCS business has continued to be strong. As completions are one of the things that's allowed and so people are doing these completions and that wasn't as visible to us a quarter ago. And our other businesses, I think all of them are just doing a little better than we thought. Marvin, do you have a comment on that?

No, I think it was broad based and I don't have a specific segment to point out.

Okay. Fair enough. I appreciate that. Just one last one for you on your projects outlook next year, just curious. Thoughts on any incremental dive support demand or vessel utilization associated with plug and abandonment or rec-removal work -- or do you share a certain degree of skepticism as we all do about the BOEM on progressing that outlook?

We certainly -- we don't think it's a game changer for us, but we do think that it's a plus for the Gulf of Mexico market. It will maintain a pretty high level of decommissioning activity over the next three years.

But if we look at the facts 3,400 wells to be abandoned and 650 structures by our count, the industry does 1,600 abandonments this last year and 200 structures. So that will happen -- if you stay that level that will happen over the next three years. We participated in this primarily as a subcontractor, with SAT-diving with ROVs, vessel services, ROV tooling, so we will continue to do that. I guess the one new thing is we are bringing a new vessel the Ocean Patriot with the new SAT system the Neptune, that will be a perfect fit for this market. So we think that will be another asset that will play right in this area. So, I guess it's a plus for us but not a game changer. We are certainly talking to our customers and trying to understand what we can do for them. And particularly focused on these 115 structures that are in water depths greater than 500 feet where we may need a little more deepwater services. So I guess it's an incremental small plus, not a game changer.

Fair enough that's helpful I appreciate it. I'll turn it back.

We now have four questions left in the queue. Your next question comes from Daniel Burke, your line is open.

Good morning, guys. I had a question actually following up just on that one on the project side, looking into next year. Jay, you had referenced the Patriot coming into the market. You also have a new shallow water vessel and Ocean -- I guess the OI2 back for most the year. So it seems like you have a lot more capital deployed in that business. So, year-over-year -- was wondering how to think about what kind of year-over-year decrements to expect in terms of op inc on the project side '11 versus '10?

We're not going to quantify that.

We're working on that on our own budgeting process at the moment. And you're right, we have more capital employed in the market, but we do think it's going to be a down year. So at least that's our view at the moment. But we're going to be looking to see more detail into that, but I doubt that we will predict it for you other than give you directional information.

And one of the things we see the absence of third party vessels that we were able to charter in and use in 2010 in support of Macondo. So we see a softer vessel market internationally, there is a lot of tonnage being added into the fleet. Some of that is going to migrate to the Gulf of Mexico. So we think it's going to be we have got a better suite of assets as you said going into 2011 than we had in 2010 but directionally it will be down.

I think in the big picture we have more capacity so if there's opportunity there I think we will be able to take advantage of it, perhaps even better than we have in the past. We just have to wait and see what happens on that, see what evolves.

Okay, and then believe it or not I did have a clarifying questions on ROV tooling. You said that the ROV tooling revenue stream associated with some of these post response accumulator type items -- just to clarify does that replace the ROV tooling specific revenue you generated at Macondo? Or is it sufficient to replace the incremental Macondo stream that was fully included in Subsea Products?

No, no, just the tooling revenue -- the tooling component of that. This business unit deepwater technical systems, that business provides all the tooling and that business unit is being able to replace its earnings in -- that it made from Macondo with these new orders in 2011. Good clarification question. Thanks.

And then one last questions, just philosophically. The guidance range for next year is $0.30 in terms of spread, last year you had a similar $0.30 spread -- difference being this year I guess, the Gulf of Mexico injects a pretty big variable into the outlook for next year. And I guess I was just wondering if that implies that you actually have a higher underlying level of conviction and what are your growth opportunities internationally looking into next year?

I don't know.

Well, we do feel good about the international arena. I wouldn't draw to much into it though. I think we just that -- somehow we felt like one way or the other that was a good range.

That range kept coming up in a variety of scenarios.

I appreciate it. Thanks, guys.

Next question comes from Waqar Syed, your line is open.

Good morning, Jay, and congratulations on a great quarter. My question is on the BOP control systems. In the past, you had been one of the best systems in the marketplace and all the (inaudible) in the past, but now there are changes in the number of sheer RAMs on the BOPs. Do you see any hope for some incremental sales in the coming years?

We are going to be pushing. I would say if we can get a significant order next year for a new BOP control system it wouldn't be delivered next year. So, it really wouldn't have a big effect on our earnings in 2011. But, we are going to be out selling upgrades, incremental improvements, if you need more functions we can certainly help you with that. If you need a completely new system we are happy to do that. We do think that we have got an extraordinarily good system that's modern and capable of handling all of the new requirements. So we're going to be out selling it and again it's not a really big mover for 2011 but we like this business longer-term.

And one of the things, Waqar, you know that we bring to the table that few others do, is working expertise in ROVs, a significant amount of ROV tooling or deepwater technical solutions group, and BOP control. So the interface of that is we think going to be very important in our value sale, but as Jay said any BOP controls would be a 2012 revenue earnings event.

I would make the comment that the combination of those three business units working diligently with our customers and with OEM equipment providers since Macondo happened. And trying to figure out what we are going to need and what -- anticipate what the industry would want. And then getting that to market and being able to -- I think that was a unique combination of skills that allowed us to figure this out, work with our customers, and be able to be delivering product now. So I think that was a good combination of skills and I think it adds a lot of value to our customers.

And that's what allowed us to get the orders on the ROV tooling side.

Which we are delivering right now.

Sure. Now on this BOP control systems the individual orders can be fairly sizeable in terms of revenues. Is $20 million to $25 million something to think about even if you sell a single unit?

I think that's too high.

$25 million is too big number.

$20 million probably is in line -- I think last time, it was around $15 million but you didn't make much money so that's why I thought it would be a little higher than that.

$25 million is a little too big. $25 million is a little too high.

Okay.

We have our goal so I can't really say what the clearing price is going to be.

Okay, sounds good. Thank you, sir.

You bet.

Next question comes from Victor Marchon your line is open.

Thank you, good morning, guys. Just two quick ones. First, for the Gulf of Mexico the non-drill support work that you guys see for 2011, is it fair to assume that you see a similar path of activity as you are seeing on the drill support side?

That was a mixed bag. It really is -- if there is one with less visibility than drill support, because we know when those rings are going to go back to work. But there is a significant amount of project work that is on the books for 2011, and it really is not as clear as -- not as granular as we might think. So, one of the things we are constantly looking at is what vessels are we on, and how many more are going to work and what -- how can we improve our non-drill support, construction support activity in the Gulf.

I think it is a lot lumpier, and what projects that are out there that are ready to go, maybe they are ready to go now, maybe they need one more well drilled. So, I think it's not quite as steady growth type deal. I think it's much more lumpy and depends much more on the past work that has been done in '09 and '10.

Thank you for that. And the second, was just clarification and make sure I got the numbers right, the ROV breakdown that you gave at the beginning of 23-ROVs was that as of the end of the quarter or was that more of a current number?

We said it was the number at the end of the quarter buit there have been no changes up until today. So we will reaffirm the number.

Okay great thanks guys, appreciate it.

Your final question comes from Tom Karen your line is open.

Just jumping back into the queue here guys with one follow-up. Do I understand correctly that if you are going to meaningfully expand some of the Subsea Products related work you do in the Gulf, I'm thinking here more call-out and services type work. How much can you grow that purely on an organic basis? And then how much would -- beyond that would it require acquisitions? I'm trying to get an understanding of how key acquisitions are going to be, to meaningfully expanding your Subsea Products offerings internationally?

Well, we've had great experience both ways. Most of our growth really has been organic I guess in the last few years. But before that we did significant acquisition activity. I think it will be both. Keep in mind if we end up with 300-plus floating rigs working in the world, that will generate significant more product opportunities than, say the 150, 175 rigs we had the past decade. So, I think organic growth will have significant growth opportunities but I don't think we will consume all the cash we are going to generate.

So we will be -- that's why we are looking for acquisitions as well.

I think the ones we have been talking about today in the ROV tooling side are all related to organic growth. But however, I will remind you that we have grown ROV tooling's with acquisition of technology and augmenting our offerings by making acquisitions particularly in Norway. We bought a couple of ROV tooling companies and we look to add to that but in our 2011 guidance we are talking about organic growth.

I think a significant growth possibility if you look at 2011 and 2012 it doesn't depend on acquisitions so I think acquisitions are longer-term view. But I think there are -- a lot of spring loaded upside in the offshore drilling world as is obvious to everyone at the moment.

I would agree. Thanks for the color, guys, that's helpful.

You bet.

I have no further questions at this time. Mr. Jurkoshek, I turn the call back over to you.

Okay. We would like to thank everybody for joining us this morning number and we look forward to talking to you again toward the end of February. Have a great day.

Thanks a lot.

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