Oceaneering International Inc (OII) 2012 Q2 法說會逐字稿

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the 2012 second-quarter 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)

I would now like to turn the call over to Mr. Jack Jurkoshek. You may begin your conference.

Good morning, everybody. We would like to thank you for joining us on our 2012 second-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 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. I am now going to turn the call over to Kevin.

Good morning and thanks for joining the call. I'm happy to be here with you today to review our Q2 results and second-half outlook.

Our record second-quarter EPS of $0.67 was up 43% over the first quarter of this year. And up 29% compared to the second quarter of 2011. As expected, operating income margin improved sequentially in each of our operating segments. We achieved best-ever quarterly ROV in asset integrity operating income. Year-over-year and sequentially, all of our business segments achieved higher operating income led by ROVs, Subsea Projects, and Asset Integrity. We are well-positioned to participate in the next growth stage of deepwater and subsea completion activity. And our outlook for 2012 remains very positive. We continue to believe we will achieve record results for the year. And are narrowing our 2012 EPS guidance range to $2.55 to $2.65. Our previous guidance was $2.45 to $2.65. So the new guidance is up slightly, at the midpoint.

Compared to the first half, we anticipate achieving higher operating income during the second half of 2012, principally due to the ROV and Subsea Products businesses. ROV profits are expected to be up on an increase in days on higher in most operating areas, notably in the Gulf of Mexico and off Africa. And a slightly higher operating margins as we benefit from the additional days work and a favorable change in geographic mix. For Subsea Products we are forecasting profit improvements for each of our major product lines during the second half of the year, led by higher demand for our Subsea Hardware. For the year, we continue to forecast higher operating income for all of our segments relative to 2011.

During the quarter, we purchased 400,000 shares of our common stock at a cost of about $19.4 million. And, as announced in April, we increased our regular quarterly cash dividend to $0.18 from $0.15 a share. These actions underscore our confidence in Oceaneering's financial strength and future business prospects. For 2012 we anticipate generating at least $565 million of EBITDA. Our balance sheet and projected cash flow provide us ample resources to invest in Oceaneering's growth, and we intend to do so.

We are raising our 2012 CapEx range estimate, excluding acquisitions, by $75 million. $50 million of which is for additional ROVs. Our total year estimate is now $275 million to $300 million. Of this amount, $175 million is anticipated to be spent on adding systems to our ROV fleet and vehicle upgrades. And $90 million is for enhancing our Subsea Products capabilities. Our focus in 2012 continues to be on earnings growth and investment opportunities, both organically and through acquisitions.

I would now like to review our second-quarter Oilfield segment results. Year-over-year and sequentially, ROV operating income increased on higher demand for both drilling and vessel-based support services. The 13% year-over-year improvement in ROV days-on-hire, was on the strength of higher demand in the Gulf of Mexico and off Africa. Sequentially, the 7% increase in days-on-hire was primarily due to increased demand in the Gulf of Mexico. Our fleet utilization rate during the quarter was 81%, up from 76% in the second quarter of 2011 and up from 79% in the first quarter of 2012. We continue to expect that our fleet utilization for the year will be 80% or more compared to 77% in 2011.

Operating margin during the quarter was 31%, the same as a year ago, and up from 29% last quarter. We continue to anticipate our ROV operating margin for this year will be slightly higher than the 30% we achieved in 2011. During the quarter we put 13 new ROVs into service and retired 3. At the end of June, we had 280 systems available for operation, up from 262 a year ago. Seven of the new ROVs went into drill support service and six went to work onboard vessels. Our fleet mix during the quarter was 75% in drill support and 25% on vessel-based work, the same as in the second quarter of 2011, compared to 78% and 22% last quarter. We now anticipate adding 25 to 30 vehicles to our ROV fleet in 2012, 7 to 12 during the remaining half of the year. During the first half of the year, we retired 5 vehicles and currently do not expect to retire any more during the rest of the year.

Now turning to Subsea Products. Year-over-year and sequentially, second-quarter operating income rose on the strength of increased revenue and profitability from tooling. Products operating margin of 19% for the quarter was the same as the second quarter of 2011, and up from 17% last quarter. For the year, 2012, we now anticipate that Subsea Products margin will be comparable to what we achieved in 2011. We continue to expect a record segment operating income for the year. Our Subsea Products backlog at quarter end was $621 million, up from $402 million at the end of March and $405 million a year ago. Sequentially and year-over-year the substantial backlog increase was attributable to two large Petrobras umbilical contracts we secured during the quarter that added over $190 billion to our Products backlog.

Subsea Projects operating income was higher year-over-year and sequentially due to the field support vessel service contract with BP offshore Angola. Asset Integrity operating income improved year-over-year and sequentially on higher service sales in all of our major geographic areas we serve. Most notably in Norway due to the acquisition we made in late 2011. As anticipated, this segment's margin returned to its historical double-digit range. And we expect it to remain there in the remaining quarters of this year.

In summary, our second-quarter results were up significantly, both sequentially and year-over-year. And we look forward to realizing another year of record EPS performance in 2012. Our focus on providing products and services for deepwater and subsea completions positions us to participate in a major secular growth in the oilfield services and products industry. We were pleased with our cash flow generation results of $149 million of EBITDA during the quarter. Capital expenditures for the quarter totaled $68 million, of which $43 million was invested in ROVs.

Looking to the third quarter, we are projecting EPS in a range of $0.75 to $0.80. We expect our third-quarter EPS to be up year-over-year on operating income improvements from ROVs, Subsea Products and Asset Integrity. I would like to remind everyone that last year's third-quarter results benefited from an $18.3 million pretax gain on the sale of a mobile offshore production system reported in Subsea Projects. And the recognition of $4.9 million of tax benefits principally related to prior years.

Sequentially, we anticipate quarterly operating income improvements from our ROV and Subsea Products segments. ROVs, due to an increase in days-on-hire in most operating areas, notably in the Gulf of Mexico and off Africa, and a slightly higher operating margin, as we benefit from the additional days worked due to a larger fleet size and favorable change in geographic mix. And for Subsea Products on higher profit contribution from each of our major product categories, led by Subsea Hardware and Tooling.

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 at relatively low finding and development costs. A late 2011 industry report forecasts total annual worldwide exploration and development spending to grow nearly 50% by 2015. While capital expenditures on deepwater projects are projected to more than double. Therefore, we anticipate 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 the quarter, there were a total of 92 new floating rigs on order. 57 of these rigs are not contracted to work for Petrobras in Brazil. And we expect all of them to go to work for other operators. On these 57 weeks, 11 ROV contracts have been let and we have won 10 of them, leaving 46 ROV contracting opportunities left to be pursued outside of Petrobras and Brazil.

At the end of June, 94 of the 136 existing high-spec drilling rigs, consisting of dynamically positioned fifth and sixth generation semis and drill ships, were not contracted to Petrobras in Brazil. We had ROV contracts on 69 of these for a market share of 73%. If all 57 of the non-Petrobras rigs I mentioned are placed in service, this fleet of 94 will grow 61% to 151 rigs. So, the visibility of the secular growth outlook for this market remains very promising. And 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. There is no industry source of information to track vessel-based ROV demand. However, there has been a measurable trend regarding the total size of the ROV fleet with respect to the size of the floating rig fleet. At the end of 2000, the total ROV fleet size as a ratio to floating rigs was 2 to 1. Since then, the estimated size of the world-wide ROV fleet has doubled, while the size of the floating rig fleet has grown only 50%.

Consequently the ROV fleet size relative to floating rigs has risen to a ratio of about 3 to 1. Given that the number of ROVs to support drilling has remained fairly stable at slightly over 1 per rig, the faster rate of ROV supply growth is, by default, attributable to increased use of vehicles on vessels. If the recent trend ratio of 3 to 1 persists, and all 90-plus new floating rigs on order are delivered, future vessel demand for ROVs may grow by more than 180 vehicles. We estimate Oceaneering's market share of the global vessel-based ROV fleet at about 20%. And see no reason why we would not at least maintain this share in the future.

Quest Offshore's latest Subsea Hardware forecast for the period 2012 to 2016 includes an 80% increase in Tree orders over the previous five years. In 2012, Subsea Tree orders are projected to be about 550, an all-time high, eclipsing the previous record of 462 Trees in 2006 by about 20%. While we don't make Trees, orders for Subsea Trees drive demand for a substantial amount of ancillary Subsea Production Hardware that we manufacture. For example, Quest is forecasting nearly a 60% increase in umbilical orders for the five-year period 2012 to 2016 compared to the previous five years.

Furthermore, renewed industry and regulatory emphasis on safe and reliable operations is providing additional opportunities for us 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 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 conclusion, our results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well over both the short and long term. We like our competitive position in the 2012 oilfield services market and are levers to a resumption in the growth of deepwater and subsea completion activity that is currently underway. The longer term outlook for our deepwater and Subsea Service and Product offerings remains favorable. Renewed industry and regulatory emphasis on reliable deepwater equipment, with redundant safety features, 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 services companies. We appreciate everyone's interest in Oceaneering. I will now be happy to take any questions you may have.

(Operator Instructions)

Jon Donnell from Howard Weil.

I had a question regarding the increase in the ROVs you're scheduled to be delivering this year. Is that driven by the fact that you had the six that were delivered for vessel use during the second quarter? Or is there additional vessel opportunities here in the second half of the year?

I think it reflects the fact that additional opportunities are coming available that we did not foresee earlier. And it would be primarily on the vessel base side, although there are some existing rigs that we are having some success on, as well.

Okay. And when these new vehicles are delivered to the vessels, do those come under any term contracts? Or are those still essentially just the callout market based on when the vessels are going to be working?

It's a combination. It's all over the map, depending on where it is and who it's for. I really couldn't give a definitive answer on that. It's a combination.

Okay. Regarding the Product segment, obviously a huge order rate this. But even excluding the Brazil umbilicals, it looked like you are still pretty close to record levels in bookings. I was wondering if there had been any mix shift there in terms of maybe some higher demand for the Tooling or IWOCS Products and Services. Or if this is still just consistent with what we have been seeing for the last few quarters?

I think it is the latter, Jon. I think this is consistent. And I think most of it, in umbilicals, I do not foresee right now a different mix than what we saw and what we talked about last quarter.

Okay. And then just the addition of the umbilicals, obviously. The large orders just will obviously flow through as we go through '13 and impact margins that way. Okay. That does it for me. Thanks for taking my questions, guys.

Brian Uhlmer, Global Hunter.

I just had a couple of quick questions. Number one, on the Products order, obviously a great quarter. If I back out the umbilicals, is getting $200 million just a standard run rate outside of the large awards? Is that something we can project moving forward? And number two, with the big awards, how should we look at modeling our backlog revenues out of backlog for the Product segment?

If you look at, if we can stay flat, we have this quarter we had $190 million to, call it, $200 million of revenue. If we didn't have that $190 million, we would have stayed pretty flat at around $400 million. So I would think $200 million of order intake is getting to be pretty good and pretty recurring. And I think on your second question, we really expect the work on the two big orders to start in the second half but predominately in the fourth quarter.

Okay, perfect. As we look out into '13, obviously for your guidance you're roughly flat in Q3, and seasonally down Q4. Could we think that 2013 would be up versus 2012? Is it too early to tell on the Products. I hope I didn't miss that in your guidance.

No, we are not going to '13 yet. We will do that next quarter. We are not going to do it a quarter early.

I will call that a semi-question so I will ask the second-and-a-half one here. (laughter) On the BP project, what percent was that ramped up in the quarter. Did you work 100% for the last two, three weeks of the quarter? And how much did it contribute in Q2? And then we are fully ramped up for Q3 and we are not expecting any type of additional vessels or any indications for another option in the third quarter. Is that correct?

You asked two questions there. I think, first of all, we are seeing the run rate now for that contract. And secondly, we see, at this point in time, no suggestion of any additions there.

Brian, the job ramped up earlier than what we thought. So no, it is not the last two or three weeks of the quarter that we hit our run rate. I would say the quarterly run rate is indicative of what we expect. And now the variability in projects is going to come and depend on how the Gulf of Mexico is doing. You didn't ask, but that's still a pretty soft market. It's stronger than it was a year ago for deepwater vessels. But it is still soft to very soft for the diving market.

Okay. Since I asked about four questions I will turn it back. (laughter)

Kurt Hallead, RBC.

I think we all understand that you got a very strong or very long runway out in front of you with respect to what's going on in the offshore market, and deepwater in particular. I am just curious here, guys. You've always taken a measured approach to your pricing dynamics, especially in the ROV. Just curious as to, given this long run way in front of us, whether or not you feel a little bit more confident that you would be able to push pricing a little bit more than you have maybe in prior-cycle periods. Why don't we start there.

I would say that we get asked this question a lot. ROV pricing is pretty sensitive. And we, I think, have done a pretty good job of increasing price in order to maintain margin in the face of cost increases that we get around the world in labor and higher-spec equipment -- higher CapEx costs. But we do not see any big opportunity to really push pricing to get much higher margins here. There is some ability to do that on the vessel side of the business, on the callout part, when the market gets tight. And it is improving in that regard, as we have been saying the last couple quarters here. So that is a place where there's some opportunity. And that is about it, I think.

Kurt, I don't think there's an inflection point on the horizon.

You couldn't be any more clear than that. I appreciate that.

Nicely said.

The other comment you made about the 3 to 1 ratio, I think is pretty interesting. You said it's a little bit more than 1 to 1 on the breakfront and obviously increasing on the vessels. So, in that context, I'm just trying to gauge here. We had good visibility on the number of rigs that are coming. How do we get a handle on the number of vessels that are coming, number one. And, number two, I think you gave somewhat of a mixed read here. You said good for deepwater vessels but not so good for diving. And how does that play into this 3 to 1 ratio? Deepwater vessel versus diving.

The diving comment was strictly a Gulf of Mexico comment. So I will try to address the 3 to 1 issue first. The vessel market -- there really is no place like a Quest or Petrodata that you can go to, to track this stuff. So it's pretty difficult for us to predict that. The only thing that we have tracked over time is, obviously, the number of work class ROVs in the worldwide fleet. And we know how many rigs there are. And we know that historically, and as we see it currently and moving forward, the average number of ROVs on a rig is one and a very small fraction. Because there's only a few rigs that would have more than one. So basically one for one.

So that at least starts to give us some idea about how the vessel market is growing. That's why we have tried to put that out there. It's the best that we have. I can assure you that, that is an important part of the market for us. And we track every opportunity we become aware of. They typically tend to be very short turnaround projects or contracts. So you don't have a long visibility, like you do with a drilling rig that is under construction. So that is an attempt to try and get a little more clarity around it. Unfortunately, there is no really good way to track that in order to predict how it's coming. However, I think notionally, if the 3 to 1 ratio stands, that suggests that there should be some pretty good opportunity growth out there in the marketplace.

Going to the diving comment, there's a lot of confusion, depending on what you are following about the Gulf of Mexico. Obviously, it has strengthened dramatically on the drilling rig side. And is, by all accounts, set to exceed pre-Macondo levels by a fair margin, if everything comes to pass. So that is fine, everything is happening well there. But as far as the non drilling rig activity in the Gulf it is still a bit slow. It is better on the ROV vessel support side of that business, as Marvin said, but on the diving side it is still very weak. And just generally speaking, utilization is still a little on the weak side generally. So, pricing is not where we would like to see it. But it is improving.

Okay that's great, I appreciate it. That's all for me.

Ed Muztafago from Societe Generale.

I just wanted to touch basis again on the BP contract. Quest is saying that the second phase of that is likely to be awarded in the second half of this year. Just really wondering, does the current scope of your Block 18 and 31 project include the phase two? Or does that represent some incremental work opportunity for you all?

I think that really relates to Hardware orders and the contract that we have is supporting both fields with the two vessels that are currently operating. There is the option, as we said, for BP to ask for a third vessel at some time. But at the moment, that is not being considered. We have not had any discussions about that. I think what they are waiting to see is, are two vessels enough to be able to service the requirements that they have there going forward. Or will they need a third one. So there is no second phase, if you will, for us. That really is a Hardware issue.

Okay, that's very helpful. You also noted the incremental $90 million of CapEx that's going towards the Products business. Can you talk to us a little bit about, is that directed in any specific area per se. I assume it's not umbilicals but maybe you could give us a little bit more granularity on where that CapEx is going to be directed.

It is. There is some in umbilicals. And, in fact, if I could find my note, about 40% of that incremental investment is being made to increase the capability of our umbilical plants, particularly in Brazil and Scotland. In Brazil, this is to produce and test umbilicals. So there's test equipment being involved. To incorporate higher-pressure hoses to serve the pre-salt field developments. And in Scotland, there's an evolving customer need for longer and heavier umbilicals with more elements, so we need some additional storage capacities. So we are talking about capabilities to improve the type of umbilicals that we are building. And then another 35% of that incremental amount, or of this year's amount, is to support our rental tool operations.

Okay. What I am wondering there, on the umbilical side then, since there is a fair amount of that CapEx directed towards it, are you starting to see a little bit more optimism in the umbilicals business that maybe things may tighten up in that business maybe going into 2013?

I think it really is a capability issue, not a capacity issue. In Brazil, for example, the pre-salt umbilicals are much larger diameter, a lot heavier. So, we just needed to increase our capability of pulling that stuff through our plant, so to speak. So, it really is to match up with the new cross-sections that are being ordered by Petrobras there.

This is not a capacity increase CapEx.

Yes, that was clear and that is why I just wanted to vet out what your thoughts were there in terms of were things tightening quicker than maybe you had originally thought. And it clearly sounds like this is more directed at very specific usage or type.

Correct.

That's very helpful. Thanks a lot. I will turn it back.

Jim Crandall from Dahlman Rose.

Just in clarification because I either forgot it or I missed it. But in the Projects business, how long does the work for BP go offshore Angola?

That, Jim, was a three-year contract and it does have options for two one-year extensions.

Okay. And the visibility on the work for the Ocean Patriot in the Gulf of Mexico at this point, how far does its work go? And what is the visibility of that vessel?

As we said earlier, the demand in the Gulf for the diving side, the shallow water assets, is pretty weak. It is working, most of our vessels are working. We have reasonable utilization. But pricing is not what we would like it to be, that's for sure. But the vessel is working. It has been operating pretty consistently since we put it in the field.

And it's not term work, it is callout work. So there's not much visibility to any of our Gulf of Mexico vessel utilization.

Okay. And my second question, you are your two big umbilical orders that you said, are either of those going to be serviced out of your facility on the Gulf coast?

No, those are both out of the Niteroi plant in Brazil.

Okay. Am I right to think about that business as doing well in all regions except for the Gulf of Mexico where you are suffering from low utilization there?

That would be correct.

How do you see, do you see that -- are there any indication that, that can be changing over the next six months?

Over the next six months I would not say so. But I think we certainly can see a lot more increased opportunity with these deepwater developments that are happening in the Gulf of Mexico now. So I think that's a very good sign. There's been a pretty good lack of that up until now. So the outlook looks good, but I think it's a late '13, '14 idea. It would appear that there are enough projects in line there that, that could be somewhat of a game changer for our plant in the Gulf here.

Okay, good. Thank you.

Tom Curran from Wells Fargo.

Subsea Projects in the Gulf of Mexico, which historical quarter did Q2 come closest to resembling?

Two. (laughter) We always say -- it came pretty close to resembling --.

Or you could just tell me --.

To what?

How about prior to 2012. Or if you could just tell me what the year-over-year changes for revenues and EBIT margin for the Gulf of Mexico for Subsea Projects.

I would have to say that year-over-year Q2 GOM -- Gulf of Mexico Projects was pretty flat.

Okay. At both the top line and for EBIT margin?

I won't go there, I will just talk about the bottom. I will talk about the operating result. (multiple speakers)

Okay. Great. And then turning to Subsea Products, given the surge we've had here in Multiflex's backlog, as well as the run rate you're expecting going forward. How has margin come in thus far relative to what you were expecting? And then the second part for Subsea Products would be, if orders were to positively surprise over the second half of 2012 for any of the other businesses, which seems the most likely, and why?

On the umbilical side there, margins are as expected. Capacity is still pretty huge out there and so margins aren't really changing much in the regards. So really it is a volume throughput business at the moment. Obviously with these orders and with the backlog that we've been tracking there it has been better. In terms of increases, Tooling is really where we see the opportunities for the second half of the year.

If there were orders to surprise.

Yes. If they were to surprise.

And would that most likely be BOP related? A continuation of the secular uptrend in safety and redundancy-related spending we've seen post-Macondo? Or somewhere else?

It's pretty broad-based.

And I'm just going to cheat and squeeze one more in here. For Asset Integrity, what's the expectation going forward in terms of the EBIT margin run rate? And should we still see seasonality there?

We do expect that there will always be seasonality there. We expect the run rates, in terms of margin percentages, to be more consistent with out historical results.

Historically, Q2 and Q3 are close. Then Q4 drops off and Q1 is the weak quarter, as a seasonal weakness. I would expect, within 100 basis points, that to be the case.

Similar pattern going forward, then, 100 basis points.

Yes.

Very helpful. Thanks, guys.

Stephen Gengaro, Sterne Agee.

Just as a follow-up. On the Subsea Projects side, given the vessel utilization for BP, how should we think about those margins? Should they remain pretty healthy around these levels, given the high level of utilization? Because there's obviously a big step change here. But how should we think about that going forward?

For Projects, right?

Exactly right, Projects.

I think we're going to see the same seasonality that we always have seen in Project margins. I think the Project margins for Q2 were a little better than what we expected. And it's just going to depend upon the level of activity in the Gulf of Mexico to see if that is sustainable. I think the run rate for BP Angola will be steady. But, as we talked a lot, there's not much visibility in the Gulf of Mexico. So I expect there to be a considerable amount of variability to our margins, depending upon vessel utilization.

And right now we said diving is weak, and ROVs vessel-based activity in the GOM -- in the Gulf is okay. But nothing to write home about. I hope that helps. I can't get more specific than that. Because, as everybody knows, this is our first year with Angola. So we are learning as we go.

Okay. As you thought about the big sequential rise first quarter, second quarter, is that -- that's BP Angola, but that is some just seasonality in the Gulf, as well, there?

Absolutely, Stephen. Yes. And, again, the activity came early in Angola.

That's very helpful. Thank you for the color.

Darren Gacicia from Guggenheim.

Good quarter. I wanted to ask you first, when I am looking at Subsea Products, obviously umbilicals are flowing through. Is there any way you can give some color on how umbilical margins play through versus other Products? And what the mix of other Products is within the other element of that? And what the mix in the overall is, with other Products and umbilicals? Just to get sense of what how that may progress as those large projects start to flow through.

We really don't give that granularity. We have said that umbilicals have a lower margin than the other product businesses in general. So that mix really does determine what the margin is. But beyond that, we don't really get into that detail.

Sure. Is there any way to get a sense of how the new umbilical orders will actually flow through numbers over the next -- how should we look at them flowing through over the next handful of quarters?

Not much is going to flow through in this year. Very little amount which will probably be indiscernible from the external world. So those are primarily played out over the next, through '13, '14 and some into '15.

I think we do expect more umbilicals, particularly out of Brazil, in Q4. What we will do is annually we will disclose -- continue to disclose what percent umbilicals were of the prior year. And then, as Kevin said, umbilicals, because of the high input costs of the steel tubes that we can incorporate into our umbilicals, had the lowest margins. And then the other ones you would go with IWOCS as being probably the most profitable, followed by Tooling and then Subsea Hardware. And the mix does not vary that much.

With the increased throughput of umbilicals, which is the lowest margin percentage, then you have some -- that is why we are always saying that we expected, with increased throughput, umbilicals to drive down our margin year-over-year for 2012 over '11. This quarter, we said it is going to be comparable. So we did increase our expectation for profitability of Products. Marginally.

So, as I think about the mix and I think about IWOCS, for instance, if you have an increase in drilling activity, especially in the Gulf of Mexico, on what kind of timing lag should that increase the IWOCS portion of the mix?

It is extremely difficult to gauge because it really depends upon when they start completing, how they are completing. Right now the deepwater is totally driven by majors and they have a different outlook on how they do that compared to independents. So that is the lead lag factor of Products versus drilling, is very difficult to forecast or imagine.

With hands on the rail, what would you say -- it's probably an uptick or a net flat for '13?

Flat for our outlook, with no comment on '13. But just flat for the last half of the year.

Thanks, I appreciate the help.

John Lawrence from Tudor, Pickering, Holt.

Kevin, in the past you've had some positive comments on Australia. Will this be a meaningful market for you over time or is it just too early to tell down there?

We believe it is going to be a meaningful market over time. It is evolving, obviously, and there's a lot of big project work right now. It takes a long time for that to get executed. The real opportunities for us are on the Hardware side. And hopefully on the intervention side, once all this stuff is installed and has been operating. So we are still very positive on Australia. But, you're right, it is going to be an over time development.

Okay. Are there more acquisition targets down there or is it just organic growth going forward?

We are not going to comment on acquisitions in any specific area, likely or not. What we will say is that our focus is on organic growth and geographical expansion.

And historically that is where the bulk of our growth has come. Last year, if anything, was a bit of an anomaly in that regard. But historically virtually all of our growth has come from just organic growth.

Thanks a lot, guys.

Joshua Jayne from Simmons & Company.

Just one quick one on the ROV side for drill support. Could you update us on your Gulf of Mexico outlook, how many ROVs you had on the rigs working today? And then on the rigs to be delivered in the balance of the year?

Sure.

We didn't think anybody was going to ask that today. (laughter) We were wondering. At the time of our last earnings call, we were on 31 of 32 rigs under contract in the Gulf of Mexico. As of yesterday, there were 34 rigs under contract in the Gulf. And we had ROV contracts on 31 of them. Just by comparison, we had ROVs on 31 of the 36 rigs that were under contract in the Gulf, pre-Macondo.

So three more rigs came in and we did not have ROVs on those three.

A little more there. There's five known additional rigs currently scheduled to come into the Gulf by the year end. Two are new rigs and three are existing. And we have ROV contracts on four of them. So by the year end, if all happens as scheduled, we anticipate that there's going to be 39 rigs working in the Gulf. And we expect to have ROVs on 35 of them.

Thanks, that's all I had.

Alan Laws, BMO Capital Markets.

I've got just a couple of follow-ups here. You just mentioned that last year was an anomaly for you in the acquisition front, in that you were able to close on a few. Can you maybe talk a little bit about what your pipeline or opportunity set looks like for additional M&A? You've always been pretty good at adding earnings power through this, even if it's a small number.

Nothing's really changed in the pipeline. I think what makes it -- why it was an anomaly is because we were able to find one that we thought fit our niche market strategy. And we invested $230 million in one deal. It's the still case that we keep looking for companies that meet our niche strategy and fall under our umbrella. Right now, if anybody has anything that as the word subsea in it, or can imagine it being subsea, they're pretty much hoarding it. So the opportunity set isn't anything that we can say we've got X number. Or we don't have a hole in our arsenal that says we would really like to have this product, and we're going to go out and get it for strategic reasons. So we're continuing to be opportunistic and we're looking. But we're not going to comment any further. It's just not a lot of acquisitions that we're interested in that meet those criteria and are accretive.

All right, great. Another follow-up here on the margins in Products. You seemed like in a good mood today, maybe you'll answer this. (laughter) What would be the magnitude of the difference in margins between umbilicals and Tooling? Since you wont' give us the exact one, I'm sure. Is it 50% more? 20% more?

We're not in that good of a mood. We really don't want to go sub segment. It truly is, all these things end up fitting together in the greater scheme of things. And it really is better to look at Products as a segment as opposed to trying to dissect it into each product line.

All right. At least I had to try. Thanks, guys.

(Operator Instructions)

Ed Muztafago, Societe Generale.

Just had a couple quick follow-up questions, if you don't mind. To maybe help us understand a little bit better how the umbilical, or big umbilical awards hit the P&L. Can you tell us, did those ship on a completed contract? Or is that more of a unit completion type basis that you ship the umbilicals on?

It's a percentage of completion accounting. It depends upon the cost and the physical flow. It's not on a shipment basis.

Okay. So, presumably, these don't cause a lot of margin volatility from one quarter to the next. It's somewhat smoothed out over a longer period.

Presumably, yes. (laughter) Unless something doesn't go the way we expect. But, yes, that's absolutely correct.

That's fair. And then, when you look back over the history of your business for vessel-based work, does the strength or weaknesses of the lease sales -- in particular the shallow water, tend to be a good proxy as to where that business may be, let's call it, 12, 24 months down the road?

Not really. I think much longer term, obviously, healthy lease sales are good for the industry, and eventually something's going to come of it. But typically, by the time somebody goes and drills a prospect, and then has a discovery and then does something about it, several years are going by there.

Very long lead time. That's very helpful, Thank you very much for getting me back in.

There are no further questions in queue.

All right. Thank you very much.

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