Oceaneering International Inc (OII) 2011 Q4 法說會逐字稿

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2011 fourth-quarter and 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) Jack Jurkoshek, you may begin your conference.

Thank you, Jessica. Good morning, everybody. Thanks for joining us on our 2011 fourth quarter and year-end earnings call. As usual, a webcast of this event is being made available to the StreetEvents network service by Thomson Reuters. Joining me today are Kevin McEvoy, our President and Chief Executive Officer, who will be leading the call; Marvin Migura, our Executive Vice President; and Cardon Gerner, our Senior Vice President and Chief Financial Officer. Just as a reminder, remarks we make during the course of the 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 am now going to turn the call over to Kevin.

Good morning, and thanks for joining the call. It is a pleasure to be here today, but, before I get into my customary opening remarks, I would like to summarize three key points addressed in our earnings release. First, 2011 was a record earnings year for Oceaneering. Second, we are expecting an even better 2012 and are not changing our previously announced EPS guidance range for the year of $2.45 to $2.65. And third, we are initiating first quarter 2012 EPS guidance of $0.44 to $0.46. We recognize that may appear a little light to some of you. At this time of the year, we always seem to remind the investment community of the seasonality of our business, especially in the Gulf of Mexico and the North Sea. We usually earn about 19% of our net income in the first quarter and 45% in the first half of the year. Our first quarter guidance is consistent with our historical quarterly earnings distribution. Now, for my opening remarks.

Our 2011 earnings of over $235 million and EPS of $2.16 were the highest in Oceaneering's history. These were notable accomplishments, particularly in light of regulatory constraint activity in the US Gulf of Mexico. This performance was largely attributable to our global focus on Deepwater and Subsea completion activity. Our results were highlighted by best ever operating income from our ROV and Subsea product segments. At $484 million, our 2011 EBITDA was also a record high. In May we initiated a regular quarterly dividend of $0.15 per common share to return a portion of our earnings to our shareholders which underscores our confidence in Oceaneering's financial strength and future business prospects. We believe this will not compromise our ability to pursue organic growth and acquisition opportunities to expand Oceaneering's asset base and earnings capability. In fact, during the year, we continued to fund these opportunities at a record-setting pace. Our 2011 capital expenditures of about $525 million were nearly 2.5 times what we invested on average during each of the previous five years.

Our investment in acquisitions of around $290 million was three times what we spent in total on acquisitions during the 2006 through 2010 period. In addition to our capital expenditures, during 2011, we repurchased 500,000 shares of our common stock for $17.5 million, and paid $48.7 million of common stock dividends. Our balance sheet remains conservatively capitalized. At year end we had over $100 million of cash, $120 million of debt, $180 million available under our revolving credit facility and $1.6 billion of equity. We are forecasting our 2012 EPS to be in the range of $2.45 to $2.65, up 18% at the midpoint over 2011, as we expect another record earnings year. For our services and products we anticipate continued international demand growth and a moderate rebound in overall activity in the Gulf of Mexico. The price of Oceaneering stock rose by 25% during 2011. We believe this was in recognition of our record financial performance, actions we took to enhance shareholder value, and our future business prospects.

Our share price percentage increase was larger than any of the other companies in the OSX which by comparison declined 12%. Our annual year end share price change has outperformed the OSX in 8 of the past 10 years. Over this decade our stock price has increased on average 32% per year, twice that of the OSX. During 2011, our market capitalization reached $5 billion. This was a great way to start my tenure as President and CEO and I recognize and thank our employees who made this possible. Their commitment to safely provide high-quality solutions to our customers' needs is the foundation for our continued success. I would now like to review our operations for the fourth quarter. Our overall fourth quarter EPS result was slightly above our guidance range on the strength of higher than forecasted demand for our diving and deepwater services in the Gulf of Mexico. EPS of $0.54 for the fourth quarter of 2011 was 23% above that of the fourth quarter of 2010, largely due to improvements in ROV and Subsea Products operating income.

Year-over-year, fourth-quarter ROV operating income rose by over $10 million, or 21% on a 12% increase in days on hire and an 8% increase in operating income per days on hire. The increase in operating income per day on hire was attributable to a favorable change in geographic mix. About 75% of the growth in days on hire occurred in the Gulf of Mexico and West Africa, both of which are high rate and margin areas of operation. Our fleet utilization overall improved from 73% to 79%. We achieved operating income growth in all of the major market areas in which we operate, led by an improvement in the Gulf of Mexico. During the quarter, we put five vehicles into service. Our fleet mix usage during the fourth quarter was 79% in drill support and 21% on vessel-based work. At the time of our last earnings call, in the US Gulf of Mexico, we were receiving full rates for 25 ROVs on 22 rigs, all of which were working, and zero rate on one ROV on one rig which was not contracted. As of yesterday we were on full rate for 29 ROVs on 25 rigs, all of which were working. There are presently 26 floating rigs available for use in the Gulf and we have ROVs on all but one of them.

There are eight known additional rigs currently scheduled to come into the Gulf by the middle of this year and we have the ROV contracts for six of the eight. Two are existing rigs and six are new builds. So by mid-2012, we anticipate there will be 34 rigs available for use in the Gulf of Mexico and we expect to have ROVs on 31 of them. By comparison, we had ROVs on 31 of the 36 rigs in the Gulf pre-Macondo. There have been announcements of another two new build Deepwater rigs being contracted to work in this area commencing in the fourth quarter of 2012. We have secured the ROV drill support contract for one of these rigs and are pursuing the other. Now, turning to Subsea Products, year-over-year, fourth quarter operating income increased by $5 million, or 16% on better umbilical plant throughput, higher installation and work over control systems services, and growth in demand for our Subsea Hardware and tooling. As for the remaining business operations for the fourth quarter, year-over-year asset integrity operating income improved on higher international demand for our services.

Advanced Technologies operating income rose on higher demand to perform engineering services for the US Navy and an increase in Department of Defense manufacturing projects. Subsea projects operating income declined due to lower demand for our services in the Gulf of Mexico. In late December we acquired for $220 million AGR Field Operations Holdings, a provider of asset integrity, maintenance, subsea engineering and field operations services primarily to the oil and gas industry. AGRFO will significantly increase our asset integrity business, particularly in Norway, and provides us subsea inspection tooling we can offer in other geographic markets. As a result of this acquisition, we increased our 2012 EPS guidance range by $0.10 per share. Also in December, we secured a three-year field support vessel services contract from BP for work offshore Angola which commenced on the 1st of February 2012. Under the contract, project management, engineering and two chartered vessels, each equipped with two Oceaneering work class ROVs and associated tooling will be supplied.

This contract represents a significant graphic expansion with considerable backlog for our Subsea Projects business. The expected impact of the work we will be performing under this contract was included in our 2012 EPS guidance at the time of our last earnings call. While the contract started at the beginning of this month, the scope of work performed will expand gradually during the first half of the year. I would now like to review our operations for the year. Our 2011 annual EPS increase was highlighted by record operating income performances from our ROV and Subsea Products businesses. Year-over-year our ROV operating income rose for the eighth consecutive year to nearly $225 million, up $13 million despite lower demand in the Gulf of Mexico for vessel-based services. This was accomplished by increasing our days on hire to nearly 73,000. We are quite proud of this accomplishment.

During the year we grew our fleet to 267 vehicles, up from 260 at the beginning of the year. We added 24 vehicles, retired 16 older systems, and transferred the use of one to our Advanced Technologies business unit for non-oil field use. In 2011, 29 new floating drilling rigs were placed in service, and we had ROVs on 12 of them with two on two rigs for a total of 14 vehicles. At year end we estimate that we continue to be the largest ROV owner with 35% of the industries' work class vehicles, two thirds more than the size of the next largest ROV fleet. We remain the primary provider of ROV drill support service with an estimated market share of 60%, three times that of the second-largest supplier. Operating margin declined to 30% from 32% in 2010, due to a reduction in work in the Gulf of Mexico. Our Subsea Products operating income increased by nearly $34 million or 37%, to a record $142 million. This was accomplished on better umbilical plant throughput, higher installation and work over control systems services, and growth in demand for our Subsea Hardware and tooling.

Operating margin declined to 18% from 20% in 2010 due to a change in product mix. Umbilical revenue as a percent of our total products revenue in 2011 was 35%, compared to around 30% in 2010. Our year end Subsea Products backlog of $382 million was nearly the same as at the end of 2010. The product line mix of the backlog did change as it now notably includes more tooling and less umbilicals. While our umbilical backlog declined year-over-year, we are confident that we should secure the necessary contracts which are awarded intermittently to meet our 2012 plan for this product line. Asset Integrity operating income improved in 2011 on the strength of higher service demand in Europe and Central Asia. ADTECH results were similar to those of 2010 and Subsea Projects profit decreased due to lower demand for our services in the Gulf of Mexico. In summary, we believe our annual 2011 earnings performance and cash generation were excellent, particularly in light of the weak market conditions for our non-drill support offerings in the Gulf of Mexico.

During the year, we continued to invest for the Company's future earnings capability. Our capital expenditures totaled about $525 million, of which around $290 million was for acquisitions including $220 million in December for AGRFO and $50 million in March for Norse Cutting and Abandonment. Our organic growth investments totaled approximately $235 million which included upgrading and expanding our ROV fleet and completing the conversion of the Ocean Patriot to a dynamically positioned saturation diving vessel. We also made investments in ROV tooling, installation and work over control systems equipment and modifications to increase throughput at our Brazil umbilical manufacturing facility. Now let's talk about our 2012 EPS outlook.

Looking forward, we are reaffirming our 2012 EPS guidance with a range of $2.45 to $2.65 based on an average of 109 million diluted shares and an estimated tax rate of 31.5%. The big picture of the annual 2012 versus 2011 changes we envision occurring can be summarized as follows. ROV operating income is projected to grow on the strength of an increase in days on hire as we benefit from an increase in demand off West Africa and in the Gulf of Mexico and continue to expand our fleet. We anticipate adding 20 to 25 vehicles to our fleet in 2012 and retiring from 4 to 6. For West Africa we are anticipating an increase in ROV demand for both drill support and vessel-based services in 2012 compared to 2011. For the Gulf of Mexico, we are projecting an increase in ROV demand for drill support services as more rigs go to work in this area. We are projecting that for 2012 our days on hire will increase and that our fleet utilization rate will improve to 80% or more. Subsea Products operating income is forecast to be higher on the strength of higher tooling sales and increased throughput at our umbilical plants. We do foresee a challenging Gulf of Mexico umbilical market for our Panama City plant due to the after effects of the drilling moratorium in 2010 and 2011.

Subsea Projects profit is expected to improve on an international expansion of our deepwater vessel project capabilities to work for BP offshore in Angola and a gradual recovery in the Gulf of Mexico. Our Asset Integrity segment profit contribution is forecast to be significantly higher due to the contribution of the newly acquired operations and increased use of associated subsea technology and tools. Advanced Technologies performance is expected to increase mainly due to an increase in entertainment projects and improved execution on US Navy vessel service work. Unallocated expenses are estimated to be slightly higher. At the midpoint of our guidance range we would expect our overall operating margin in 2012 to be about 15%, the same as it was in 2011. We are expecting Subsea Projects margin will substantially decline in 2012 as 2011's results included the $18 million plus gain on the sale of the Ocean Legend. Excluding this gain, we are anticipating Subsea Projects margin in 2012 will improve over that of 2011. We are not anticipating any big changes in the rest of our segment operating margins in 2012 compared to 2011. It does seem likely, however, that ROV margin may improve somewhat as a result of more activity in the Gulf of Mexico and higher fleet utilization overall.

Subsea Products margin may be slightly lower due to expected change in product mix. For 2012, we anticipate generating over $550 million of EBITDA. Our balance sheet and projected cash flow provide us with ample resources to invest in Oceaneering's growth. Our preliminary CapEx estimate for next year, excluding acquisitions, is $200 million to $225 million. Of this amount, approximate $125 million is anticipated to be spent on vehicle upgrades and adding systems to our fleet. About $75 million is for enhancing our Subsea Products capabilities. Our focus on 2012 will be on earnings growth and investment opportunities both organically and through acquisitions. Moving on to our first quarter outlook, our EPS guidance range is $0.44 to $0.46. This is consistent with the fact that our first-quarter earnings our customer early lower than the fourth quarter than the previous year. At the midpoint this would equate to 18% of the $2.55 midpoint of our annual guidance range. This is within our historical first quarter percentage range. Over the last 10 years we have averaged 19% of our earnings in the first quarter with a typical band of 17% to 21% for any particular year.

Our first quarter 2012 guidance at the midpoint is up 15% compared to the first quarter of 2011. We expect all of our business segments to achieve higher operating income led by a strong first-quarter profit contribution from ROVs. Compared to the fourth quarter of 2011, our first quarter guidance is lower based on anticipated reductions in operating income from Subsea Products, Subsea Projects and ADTECH. Looking beyond 2012, we remain convinced that our strategy to focus on providing services and products to facilitate deepwater exploration and production remains sound. We believe the oil and gas industry will continue to invest in Deepwater as it remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates and relatively low finding and development costs. A recent industry report forecast total annual worldwide exploration and development spending to grow nearly 50% by 2015, while capital competitors on Deepwater projects are projected to more than double. Therefore, we anticipate the demand for our Deepwater services and products will continue to rise and believe our business prospects for the next several years are promising.

At the end of December, there were 68 new floating rigs on order. 45 of these are planned to be available by the end of 2013. 28 have been contracted long term for an average of 7 years. Of the 28 contracted floating rigs, operators have let ROV contracts on 14, and we have won 7. So that leaves 54 ROV contracting opportunities for new rigs left to be pursued, of which 14 have operator contracts and 40 do not. If all the rigs on order are placed into service, the global floating rig fleet size will grow 24% to 352 rigs. The high-spec Fleet consisting of fifth and sixth generation semis and dynamically positioned drillships, which currently totals 113 rigs, will grow 60%. We historically have had a high market share on the high-spec rigs and are currently on 72% of them. Looking forward, we see no reason why we will not continue to be the dominant provider of ROV services on these rigs. Each additional floating rig represents an opportunity for us to put another ROV to work in drill support service. As the use of floating rigs grows we believe it is inevitable that discoveries will eventually drive orders for Subsea Hardware to levels not previously experienced, and demand for ROVs to support vessel-based activities will follow.

Quest Offshore's latest Subsea Hardware forecast for the period 2011 to 2015 includes a 58% increase in tree orders over the previous five years. In 2012 Subsea tree orders are projected to be 618, an all-time high, eclipsing the previous record of 462 trees in 2006. While we don't make trees, orders for subsea trees do drive demand for a substantial amount of the ancillary subsea production hardware that we manufacture. For example, Quest is forecasting a 57% increase in umbilical orders for the 2011 to 2015 period. Furthermore, renewed industry and regulatory emphasis on safe and reliable operations is generating even more interest in our value sell. With our existing assets we are well-positioned to supply a wide range of the services and products required to support the safe deepwater 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 and cash flow enable 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, both the long-term and the short-term. We like our competitive position in the 2012 oilfield services market and our leverage to what we believe will be the resumption in growth of deepwater and subsea completion activity commencing this year. The longer-term market outlook for our Deepwater and Subsea service and product offerings remains favorable. Renewed industry and regulatory emphasis on reliable equipment and redundant safety features of deepwater operations has caused our customers to be even more focused on risk reduction. This elevates the importance of the utility and reliability of our ROV services and related product line offerings and reinforces the benefit of our value sell. For 2012, we are anticipating that we will achieve another record year of EPS performance. We think this distinguishes Oceaneering from many other oilfield service companies. In closing, we appreciate everyone's interest in Oceaneering, and I will now be happy to take any questions you may have.

(Operator Instructions) Jim Crandell, Dahlman Rose.

Kevin, if you look at this rig ordering cycle as a whole which began about maybe 18 months ago, has there been any changes in market share by region with the exception of Brazil, or have you found that, compared with prior cycles, that, if you just eliminate Brazil, that your market share is as strong as ever around the world?

I think if you eliminate Brazil and also Mexico, we believe it is true that our market share is as strong as it has been historically.

Okay, good How about the non-rig side, Kevin? Any stab or any attempt for manned ROV market share in the vessel-oriented ROV market?

The vessel-based part of the market has always been roughly 25%, give or take, of our overall utilization. There is, over time, we believe going to be increasing demand for vessel-based ROV services on fuel support-type contracts, and we are, as we always have been, focused on trying to get ROVs on vessels. I think that is a developing and longer-term event that we are very focused on, for sure.

Can you at all quantify, Kevin, about the opportunities out there? Or how many opportunities were there for manned ROV work in the vessel oriented ROV business in 2011, and what percentage you won of the percentage you went after?

I really can't give any details on that. Unfortunately, the vessel part of the market, as opposed to the rig part is not as clear or as visible all the time, and is pretty opportunistic. And in addition to that, a lot of these are seasonal or project oriented, so ROVs are going on and coming off continuously. So, it is pretty difficult to characterize that beyond that.

Is there any trend in the vessel-based business of either more jobs are unmanned and that companies are just selling equipment into that market, and that is the majority of the market, or no?

I'm not sure what you mean by unmanned. Typically we have ROVs on vessels, and they are manned. It may be a call-out type situation where you go from job to job, and there could be gaps between jobs, but we would never, and I don't think the industry in general, just has ROVs out there with no people on them.

Okay, well I know you always sell your equipment with your trained personnel. I was just wondering about some of your competition, FMC or others, who would have more of a sale operation, if that was making inroads into the market.

No, FMC with Schilling is definitely not a competitor in our view. They manufacture and sell ROVs to other service providers, and so we don't view them as a competitor. Schilling will sell ROVs to a service competitor of ours who will put those two work, but we have already talked about our statistics and whatnot, so I think that reflects what is going on.

Okay, and last question I had, Kevin I know you indicated in your comments that the Panama City plant was still tough. What is your sense about improvement in that Business over the course of 2012?

Well, I think 2012 is going to be a very challenging year, particularly since there hasn't been a lot of discovery activity in the Gulf that would generate any meaningful business in 2012. I do think in the longer-term, say the next three to five years, there should be an increase in opportunities here as some majors and some larger independents are making discoveries that will eventually end up with development projects. In the meantime we continue to focus on trying to obtain foreign work for the Panama City plant, such as we have done on occasion with West Africa and Brazil.

You would think given the ramp-up in drilling, wouldn't you, that the Gulf of Mexico market alone, at some point in the future would provide a healthy enough activity so that utilization of the Panama City plant could be high, or is it always going to be dependant on international work to make a good profit?

I think in the future there could be enough work generated here. The problem is that, at the moment, the major operators and the very large independents are the ones that are pursuing the Gulf of Mexico in terms of expiration drilling that will produce some projects. And these are ultra deep water, larger projects that take three to five years from making a discovery to getting into hardware and installations and whatnot. So, I think that's the timeline that we are looking at now.

Okay. Good quarter. Thank you, Kevin.

Brad Handler, Credit Suisse.

Maybe a line of questioning with respect to the Subsea Projects division. How much of your revenue in 2012 do you expect to be internationally driven now? What fraction, if you would?

Brad, we are not disclosing how much -- since we have a one job international, we are not disclosing revenues, specifics about the BP Angola work. And it is going to be dependent upon, we are talking about -- we won't know the run rate of projects until the third quarter, because it because it is going to ramp up in the first half, and so we will be able to see the change, and it's going to be a mix of some of the Australia contributions that will be in there from our AGR acquisition and the BP Angola job and plus a ramp-up as we expect a gradual recovery in vessel-based that activity in the Gulf.

But we are not, at this point, willing to take a flyer on how much is going to be Gulf and how much is going to be international. I know I said only one job. We do have the Australian work, but we are not at all comfortable with making forecasts for that Company's operation that we've only owned for a couple of months.

Okay. Understood. Maybe you can still give -- I'm trying to understand as you push more internationally, and maybe this is a longer-term question, how might the nature of the business change? How might the predictability of it, perhaps a lot less call-out work, a lot more kind of -- here's a certain commitment that's being made for work that will be executed over an amount of time. Is that a relevant thought as we think about projects going forward?

I think, yes, when you talk about outside the Gulf of Mexico, I think that is relevant. I think it is a longer-term view though. In order to have some predictability, in order to reduce the risk, this type of work outside the Gulf we are looking for longer-term contracts.

That is a developing aspect of the market as more subsea infrastructure is installed and requires constant maintaining, then operators are going to go for year plus or multiple year contracts in order to support that similar to the BP contract in Angola. But that is an emerging market trend right now, and pretty hard to predict. But, obviously, if the international work that we are trying to get is longer-term, then you would have a lot more visibility of that segment of our projects business.

And one of the things, Brad, if we continue to be successful in growing the international piece, I would expect the lower margins because of the pass through of the vessel cost.

Got you. If I may, still within this topic, I guess I recognize the sensitivity, because we are largely talking about one project, but to what degree is there -- how large is the range of possible revenue recognition, or revenues earned in 2012? I assume there is some minimum level within your contract. How much bigger could it be off of that minimum?

I think what we have contracted for is pretty clear. There could be some upside, but I would say at this point it would not be material. The big picture issue here is that it is going to be a relatively slow ramp up between February 1, when we actually started the contract, and probably getting to the end of the second quarter, we'll be at full speed for what we are being contracted to do. And at the moment I don't really see any huge upside variability to that. There always could be, but right now it is just too early to make any predictions about that.

Okay, I appreciate the answers guys. I will turn it back to you. Thanks.

Andrea Sharkey, Gabelli & Co.

I was looking at the Subsea Projects margins, and if you back out from the third quarter the $18 million gain that you guys had on the sale of the Ocean Legend, it looks like there was a pretty big sequential jump in the margin. And I was just curious if there was anything one off going on there, or is that sort of the more sustainable level as we go forward. Was that partially from the startup of Angola? I guess, what was driving that?

I don't think there was anyone one off thing that is of substance, and I just do caution that Subsea Projects is a very evolving segment right now with the acquisition of the operation in Australia and the startup of the operation for BP in Angola. We are adopting a wait-and-see kind of attitude as to what our margin run rate is. I would not take the fourth quarter and extrapolate it.

I think it's really going to be until we get to the second half of the year to truly appreciate what that segment is going to do. I know that makes a modeling difficult, and we respect that, but we are facing the same issues in trying to do our forecast.

Sure, that's understandable. And looking at the range of your EPS guidance, what's the sort of the swing factor that takes you from the low end to the top end? Is it just how fast does Gulf of Mexico comes back, or are there other things that are in there?

I think there are certainly securing the BP Angola contract removes a lot of speculative risk out of our forecast, but there still is substantial speculative work in the overall Company plan. So, it would be very premature to make too much out of that at this point in time.

And I think one of the things that -- we think projects -- the recovery in the Gulf of Mexico, the rate that the BP Angola work ramps up, how much of the speculative work that we have for umbilicals and the timing of those awards, and how soon and they can be prosecuted and be recognized as revenue.

But the main thing I would like to point out is, if you take the midpoint of our guidance range, we are saying we've got a 4% upside and a 4% downside. And 10 months out from the end of the year, I don't think 4% is too wide a range. So there's a lot of moving pieces within our segment and a lot of speculative work that we expect, so while we are absolutely positive that being awarded the BP work did de-risk projects, there is still a lot of other assumptions that are not in backlog.

Okay, great. Thanks a lot.

Jon Donnel, Howard Weil.

I was wondering if you could give us some more details on the AGR acquisition and specifically some of the incremental offerings that this brings to your inspection, I guess asset integrity division. Now I know you talked previously about the subsurface inspection tool. How does that fit in with what you have now? How does it provide new opportunities for markets you currently work in, like it the Gulf of Mexico, and how might that create some pull through for your other business segments, if any?

I would start by saying that we have had the business for like seven or eight weeks or something, so we are still -- pretty much gone through the organizational integration aspects of this thing. I think I mentioned previously that both companies have started down the path of the developing some subsea inspection tooling technology, and that is the focus that we are going to have.

Trying to further develop that and then deploy that is it just way premature to make a prediction about what that means in money terms, I think. I think the other thing I would say is that AGR was a lot more leveraged to the asset integrity part of the business as opposed to the NDT part of the business. The asset integrity being higher value, higher-margin, and so we are certainly going to be trying to leverage off of that to increase that portion of our Business.

Okay. And then kind of along those lines too, with -- given their current bases and their operations in Australia, how do you think about that in terms of going forward? That's been a pretty small focus for you guys in the past. Does this give you the opportunity to be bringing in more of your service offerings into that market here, or is that something longer-term that is going to be less of a focus for the AGR side of the business?

Well I think we are going to be very focused on what we can leverage out of AGR's Australia footprint. I think that our current presence in Australia is also relatively new on the non-AGR side. We recognize that this is a quickly developing market.

And, while we have operated in Australia off and on for probably 40 years, we have recently really tried to ramp up. And we are starting to win contracts, and we have a very high expectations for the added growth that Australia as a region can provide to us. And we view the AGR piece as just another aspect of that that we will be trying to combine and leverage.

And our existing operations, Jon, were basically based out of Perth and we feel like their Darwin logistics base is a good opportunity for us to provide a home for some assets and use as a platform perhaps for callout work for tooling, and even maybe vessel-based ROV's.

Okay, great. That's really helpful. Thanks a lot for taking my questions guys.

Tom Curran, Wells Fargo.

Starting with ROVs, a two-parter. First, of the incremental ROVs you expect to deploy, so the new builds net of retirements that you expect to actually go to work, what percent do you expect to be deployed for drill support? And then the second part of the question is, as you look out over the next several years, given the disproportionate portion of the high-spec new builds that will be heading into Brazil, what gives you such a high level of confidence that you will be able to defend your 70% plus historical market share given some of the uglier pricing-based competition we have seen their recently?

Okay, the first -- answering the first question -- we currently have firm contracts for 17 new ROVs that we expect to place into service during 2012. Ten are for rigs, four are for vessels, and one each are for Spar, a Tension Leg Platform and a drill barge. And, obviously, some of these expected start dates could slip into 2013, but that is as well as we can see it at the moment. We are obviously pursuing opportunities on additional rigs and vessels and believe we may secure more work commitments for additional ROVs to place into service during the year. Your question about Brazil was -- can you just restate that for me?

Sure. Kevin, in your opening remarks, you had expressed a high level of confidence in being able to defend your current share of 72% on the global high-spec rig fleet. And as we look out over the next few years, of the new builds in the construction queue, the majority are going to be heading into Brazil, where, at least recently, you have suffered a share loss because you haven't felt the pricing required to win reflects the value that you provide. So I'm wondering where the confidence comes from that as we see the high spec -- the global high-spec fleet, as it expands -- as it shifts ever more heavily towards Brazil, how are you going to defend your share?

I think what we stated was our current percentage of that market and our belief that we see no reason that we shouldn't maintain a dominant share in that segment. I don't think we said that we were going to keep the 70%, but, specifically with respect to Brazil, it is true that that area is pretty challenging commercially.

There no doubt will be another award for a large number of systems there, and, depending on who wins that, that will be a further indication of what's in store for us there. But we do not believe that it is worthwhile for us to pursue low-margin work in Brazil for Petrobras. It is a very difficult operating environment. I think the news is full of folks that have stumbled on increased costs and other kinds of logistical issues. I think we have a good Business there.

We still have in the 40 percentile region of market share in Brazil. We do continue to win some jobs there at prices that are attractive to us. So, we are going to maintain that strategy. So, I guess to recap, I think if you discount Brazil or don't talk about Brazil, we certainly believe that we will maintain the dominant market share that we have enjoyed in the ultra-Deepwater fleet, and Brazil is an evolving deal.

They are making big orders for lots of things. And my personal observation is that for a place that is really just trying to start up, a lot of industry for local content and developing their own economy, they are ordering a lot of stuff expecting it in a timeframe that I would be very surprised if they are able to achieve it.

Okay, thanks for that thoughtful answer. Turning to Subsea Products, could you quantify for us how much you have improved Multiflex's run rate margin at this point?

No. We really don't break that out. There are too many pieces within the full Subsea Products basket of companies and things that we do. It would just be a nightmare.

Okay. Then turning to IWOCS, maybe an update there on the current total fleet size and where those assets are deployed by market?

We have never really given that out. It is predominantly Gulf of Mexico. We do have some reasonable international exposure, and we are continuing to try and grow that part of it. I think the IWOCS business was very strong in 2010 and in 2011. And we do expect that to decline in 2012 because, initially in the Gulf of Mexico, when it was a difficult to drill an exploration well, it was pretty easy to get a permit to do other things that required the IWOCS business. I think there was a level of business there that is not sustainable.

Okay. Our those assets readily re-deployable?

Some are. It really depends on the region of the world where they go. Some of them are kind of Gulf of Mexico specific in terms of our water depth and certifications and whatnot, but I don't see that -- I don't see the inability to provide a system to some international location as being an impediment to our growing that business.

Okay. Thanks. And last one for me, Marvin, how about an update on the M&A pipeline and in particular the prospects out there internationally?

We don't have a pipeline that, like others, we can quantify how many hundreds of millions we are going to spend in any given quarter. Right now we are continuing to look. You stated it, our focus is international, and what we are really looking for is something in a Subsea Products segment that has a service component so we don't have to deal with just a manufacturing margin and higher risk of execution as we've read about recently.

So, we are focused on continuing doing what we are doing it. We had almost $300 million -- $290 million of acquisitions in 2011. We will just see how well we can keep that rate up. That was an extraordinary feat, but we are still out there with growth in our operations being our number one objective and focus primarily on organic being augmented with acquisitions.

Thanks Marvin. I will turn it back. I appreciate all the color guys.

Edward C. Muztafago, Societe Generale--

I got on the call a little late, so pardon me if you have already talked about this a little bit. We have heard over the course of 2011 some of the Subsea manufactures announce delays in shipments and project delays. I was wondering if you could just talk a little bit higher level as to how the risk of further slippage or equipment delivery delays plays into your 2012 outlook and guidance, and both specifically with respect to the ROVs and Subsea Products. Because as you indicated, the tree sales are a driver of demand, and so they are longer lead time than some of your products. Maybe you could just walk us through your thought process there?

Okay. There's a couple of pieces there, I think with respect to the ROV business, I don't think there really is too much there. It really is the rig deliveries and their construction schedules, and I think there's pretty good visibility of that. Obviously if they slip then a start date for a contract that we may already have is going to slip along with it. So, far that has not been a driving factor in our ability to put ROVs to work, because the vessel side of that takes up the slack.

With respect to products, it is true that the trees are generally longer lead time items, but they're -- I think the difficulties and the issues that some folks have been having are not really reflective of A -- our business or B --even if we are providing some connection hardware or something to the same project, because it usually these difficulties end up appearing pretty near the end of the project. Orders are already in, deliveries are made, and so far we have been fortunate not to have any significant impacts of our own in terms of an ability to deliver.

Okay. That's helpful. And then maybe just as a second question if we can flip back to Brazil a little bit. There is obviously a fair amount of chatter about subsalt development going horizontal there. And clearly one of the implications is that they will ultimately need less rigs to develop the subsalt reserves. Can you just talk generally speaking as to how that type of a Genesis might play out for you? And maybe even potentially if rigs go to work elsewhere is that more beneficial than if they were to physically be working in Brazil?

Well, if they went to work somewhere else outside of Brazil, I think that is favorable in our view. Whether there is any opportunity for Petrobras to reduce the number of drilling rigs they currently think they need to do their development programs or not, I really couldn't comment on that. I don't know. But, obviously, if they can reduce that, that's less ROVs. But presumably we would be looking to see whether those rigs can be utilized elsewhere in the world.

Okay. Thanks a lot. That's very helpful.

Daniel Burke, Johnson Rice

I have a question on Subsea Products. If we look at Subsea Products and the revenue growth rate you enjoy, excluding umbilicals in 2011, you mentioned IWOCS, but what reasons are there to believe that revenue growth rate would overall decelerate here in 2012 given the capital investments you are making in that sector?

I don't think there is a reason to believe that the growth rate or the sustainability, I think Kevin mentioned about IWOCS not being -- having a very good year in '10 and a very good year '11. And we believe there is an after effect that when rigs go back to drilling exploration wells, that they are not going to be using the IWOCS units as frequently as they had been. Other than that, I think your premise is pretty sound with the investments we've been making. We think that tooling and Grayloc and rotator valves and all of those specialty items that we provide will continue to grow.

Okay, thanks. And switching to Products on the margin side, I guess my presumption, I know you've made substantial improvements at Multiflex, but I guess I assumed in '12 that Multiflex was probably-- or excuse me '11 that Multiflex was probably towards the lower end of the margin range within Products. I guess, what are the dynamics that could allow Products margin to decline in '12, given the healthy growth rate in revenue from the non-umbilical side?

It really is a function of mix and the predominance of umbilicals of versus the rest of the Subsea Products offerings in that. And there still is roughly 50% worldwide umbilical plant capacity that is not being used at the moment, and so that is keeping margins pretty tight.

So until or unless that significantly changes, the margins on the umbilical side are not going to see any dramatic improvement. I think it maybe our ability to win more work will help us on the volume side, and the amount of contributions of that umbilical solutions does provide to that segment.

And Daniel, while the nonumbilical side is growing, we are expecting the product mix in '12 to continue to shift to higher throughput on umbilicals. So, while Panama City plant has been discussed and is facing a challenging market, we are expecting more throughput from our UK facility and our Brazil facility. So, we look at the mix continuing to change, being driven by higher throughput, and Kevin mentioned that, while we are not forecasting any significant change in our margins, we could see products a little bit lower as the mix of umbilicals continues to strengthen.

Okay, great. Thank you. Thanks for staying with me through those detailed questions.

John Lawrence, Tudor, Pickering, Holt.

Good morning guys. Just on the 20 to 25 new builds for 2012, could you remind us of your capacity for additions? And I think you raised it -- you had 15 to 20 last quarter, and I think you raise that? Is that correct? And finally, would you consider raising it again if the market is strong enough?

We will build as many as the market will take, that's for starters. I think we have not so far experienced any situation where we have not been able to deliver or provide in ROV even for emerging opportunities that we didn't see from a distance in order to satisfy a contract deployment.

In fact, quite the opposite. We have won contracts because of our ability to quickly provide a system that probably most others would not be in a position to do. Because we have such a strong supply-chain, and we are just able to ramp it up or ramp it down. So, while I don't think we give any particular number as to what our capacity is, it is certainly a lot more than 20 to 25. And unless there was just some dramatic demand coming from someplace that I can't even fantasize, I would not see that as a problem for us.

We have said before that we could build three a month if we needed to, and, as Kevin said, capacity is not a -- when we add another shift and push more ROVs through. And these are ROVs being placed in service so most of the time we are talking about a delivery that occurred or is going to occur early so that we can get it on the -- if it's going to a new build rig.

And since we said, we had 17 contracts, we thought there was more upside than to adding 15 to 20. And we did change it to 20 to 25. But, I have been asked, why did you change the guidance? Because there is a lot of speculation as to the exact date some of these rigs and vessels go to work. So, we still have -- and we have a lot of spec work in our ROV forecast. So, we did go from 15 to 20 last quarter to 20 to 25 been added during '12.

Okay, that's helpful. Thank you. And then just switching gears to the AGR business. Is that going to see typical North Sea seasonality?

I think that -- there certainly is North Sea seasonality. Whether it is as dramatic as it has been historically, I am not sure because, right now, I think there is an increased emphasis on collecting data and doing asset integrity. We've seen an increase, that's part of why our 2011 was better than 2010. And so, when demand is coming up like that, it tends to override some of what used to be seasonality. So, it is kind of difficult to really peg that too closely there.

Directionally, the answer in our forecast is yes. We will see that kind of a seasonality. Remember in the first quarter, most of the inspection first of all is in Norway, and they are weather challenged in Q1. And most of the activity occurs in the second and third quarter, tailing off again in the fourth. The other thing I might say is that we would expect lower margins in Q1 because we are still going to be incurring some integration costs in Q1 as we sort out how we best run our combined businesses.

Great. Thanks for the answers guys.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you very much. We appreciate your interest in Oceaneering.

Take care guys.

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