Oceaneering International Inc (OII) 2012 Q3 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference operator today. At this time I would like to welcome everyone to Oceaneering International's third-quarter 2012 earnings conference call.

(Operator Instructions)

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

Good morning, everybody. I would like to thank you for joining us on our 2012 third-quarter earnings call. As usual, the 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'm now going to turn the call to Kevin.

Good morning. First I'd like to begin by saying that our thoughts and prayers go out to everyone affected by the severe storms named Sandy. We hope all of you and your families are safe and out of harm's way. Now, turning to Oceaneering's quarterly results, we are very pleased with our performance, which demonstrates the rising demand we are experiencing for our Subsea Services and Products.

Overall, our operations performed within expectations, and we remain on track to achieve record EPS for the year. Our third-quarter results were highlighted by an all-time high operating income from our ROV and Subsea Products segments. Given our performance so far this year, and our fourth-quarter outlook, we are narrowing our 2012 EPS guidance range to between $2.60 and $2.65, up slightly at the midpoint from our previous range of $2.55 to $2.65. We are well positioned to participate in the growth of deepwater and subsea completion activities that is currently underway, and we are initiating 2013 annual EPS guidance with a range of $3.00 to $3.25. This is up nearly 20% at the midpoint over our expectation for 2012.

For our services and products, we anticipate continued global demand growth to support deepwater drilling, field development, and inspection, maintenance, and repair activities. This market outlook is supported by industry observations and assessments that deepwater drilling is increasing, subsea equipment orders are escalating, and backlog to perform offshore construction projects is at a record high level. Specifically, in the US Gulf of Mexico, we are expecting 2013 demand for our service and product lines that support deepwater drilling to surpass the level we experienced before the Macondo incident in April 2010.

We are also projecting Gulf of Mexico demand for our non-drill support service and product lines to improve, but not to the pre-Macondo level. In our view, this level may not be reached for another few years due to the time lag between drilling and subsequent field development activity. Furthermore, we see this time lag lengthening, as major and national oil companies now comprise a larger share of the exploration and development activity in the Gulf. Compared to independent oil companies, the majors and NOCs tend to have larger projects that require more time to evaluate and plan from discovery to first production.

For 2012 and 2013, we anticipate generating at least $590 million and $670 million of EBITDA, respectively. Our balance sheet and projected cash flow provide us ample resources to invest in Oceaneering's growth, and we intend to continue to do so. I'll talk more about our 2013 guidance later, but first I would like to review our oilfield operations for the third quarter. Year-over-year and sequentially, ROV operating income increased on higher demand for both drilling and vessel-based support services. The 12% 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 4% increase in days-on-hire was spread throughout most of the geographic areas in which we operate.

Our fleet utilization rate and operating income margin during the quarter were 81% and 30%, respectively, about the same as a year ago. We continue to expect that our fleet utilization for the full year will be 80% or more, compared to 77% in 2011, and that operating margin will approximate the 30% we achieved in 2011. During the quarter, we put ten new ROVs into service and retired five. At the end of September, we had 285 systems in our fleet, up from 262 a year ago. Six of the new ROVs went into drill support service, and four went to work on board vessels.

Our fleet mix during the quarter was 73% in drill support and 27% on vessel-based work, compared to a 75%/25% mix both in the third quarter of 2011 and last quarter. We now anticipate adding at least 33 new vehicles to our ROV fleet in 2012, five or more during the fourth quarter. During the first three quarters of this year, we have retired ten vehicles and currently expect to retire four or five more during the fourth quarter. I'll address retirements again a little later on in the call.

Now, turning to Subsea Products, year-over-year, third-quarter operating income rose on the strength of increased demand for tooling and IWOC services. Sequentially, each of our major product categories achieved higher operating income, led by IWOC services and subsea hardware. Products' operating margin of 24% for the quarter was a record high, up from 19% in both the third quarter of 2011 and last quarter. The year-over-year margin improvement was attributable to a favorable mix change to more tooling sales and higher IWOC services. The sequential margin improvement was attributable to higher profitability on IWOC services and sales of subsea hardware and umbilicals. IWOC's margin improved on an increase in fleet utilization in the Gulf of Mexico. Subsea hardware margin benefited from higher pipeline repair system and clamp sales. Umbilical margin increased on a favorable mix change to more thermoplastic hose product at our plant in Scotland.

In light of the unprecedented products margin we achieved this quarter, we now anticipate the Subsea Products margin for 2012 will be slightly higher than what we achieved in 2011. We are not, however, expecting to replicate the quarterly margin performance of the third quarter any time in the foreseeable future. Products margin in the fourth quarter of this year is anticipated to be in the high teens, similar to that of the second quarter. We continue to expect a record segment operating income for the year. Our Subsea Products backlog at quarter end was $619 million, comparable to the $621 million at the end of June, and up from $403 million a year ago. Year-over-year, the substantial backlog increase was attributable to two large Petrobras umbilical contracts we secured during the second quarter of 2012, which added over $190 million to our products backlog. Product manufacturing for these two large Petrobras contracts is not expected to be completed until the third quarter of 2015.

As for our other oilfield business segments, Subsea Projects operating income in the third quarter of 2011 included an $18 million gain we realized on the sale of a mobile offshore production system. Excluding this asset-sale gain from the comparison, third quarter 2012 operating income improved substantially, primarily due to the field-support vessel services contract with BP offshore Angola. Sequentially, operating income was higher on increased demand for use of our Ocean Patriot to perform saturation diving services in the Gulf of Mexico and offshore Trinidad. Asset Integrity operating income improved year-over-year on higher service sales in Africa and in Norway, due to the acquisition we made in late 2011. Sequentially, operating income seasonally declined. The second quarter is usually the more profitable quarter during any given year for our Asset Integrity services, due to scheduling of refinery turnarounds and offshore production platform inspections.

In summary, our third-quarter results were very much in line with our expectations, 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 trend in the oil field services and products industry. We were pleased with our cash flow generation result of $169 million of EBITDA during the quarter. Capital expenditures for the quarter totaled $65 million, of which $45 million was invested in ROVs.

Now, let's talk about our outlook. For the fourth quarter of 2012, we are projecting EPS in a range of $0.68 to $0.73. We expect our fourth-quarter EPS to be up year-over-year on operating income improvements from all of our oilfield segments, led by ROVs and Subsea Products. Sequentially, we anticipate comparable quarterly operating income from ROVs and Subsea Products. The rest of our business segments are forecast to have operating income declines due to normal seasonality.

Looking forward to 2013, we are initiating EPS guidance with a range of $3.00 to $3.25, based on an average of approximately 108.5 million diluted shares and an estimated tax rate of 31.5%. We have not completed our detailed planning process, but the big-picture changes we envision for 2013 compared to 2012 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 to support drilling and vessel-based projects and continue to expand our fleet. We are expecting our fleet utilization rate will improve to 82% or more, and anticipate adding 30 to 35 new vehicles to our fleet in 2013. We intend to retire systems when they reach the end of their useful lives, with little or no adverse financial impact, and will now report these retirements only after they have occurred. Given our fleet size, its average age, and our strategy of operating a modern fleet, we expect to retire annually about 4% to 5% of our fleet. We expect to improve our average revenue per day-on-hire somewhat, at least to cover cost increases and maintain our operating margin. We remain committed to growing our fleet and securing as many new build floating rig and vessel opportunities as possible with customers that appreciate our value proposition.

Subsea Products operating income is forecast to improve on high subsea hardware and tooling sales, and increased throughput in our umbilical plants. We continue to foresee a very challenging Gulf of Mexico umbilical market for our Panama City plant, due to the after-effect of the drilling moratorium in 2010 and 2011. Subsea Projects operating profit is expected to be better on a full year of work on the field support services contract from BP offshore Angola. During 2013, we expect a modest demand improvement for diving and deepwater intervention services in the Gulf of Mexico. However, the operating profit from our gulf operation is expected to be about the same as in 2012, due to a reduction in our vessel availability and an increase in dry-dock expenses. Four of the eight vessels we will be operating in the Gulf are scheduled to undergo regulatory inspections, and another will be placed in a shipyard for modifications during the year. Our Asset Integrity segment profit contribution is forecast to be slightly higher on better execution and improved operational efficiency. Advanced Technologies performance is expected to increase somewhat, due to improved operating margin on US Navy submarine maintenance services, and increases in theme park entertainment work and manufacturing projects for the US Department of Defense.

Unallocated expenses are estimated to increase in line with revenue growth. At the midpoint of our guidance range, we expect our overall operating margin in 2013 to remain approximately the same as anticipated for 2012. Based on our preliminary numbers, we are not anticipating any meaningful changes in our segment operating margins in 2013. During 2013, we anticipate generating at least $670 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 $275 million to $300 million. Of this amount, approximately $175 million is anticipated to be spent on adding systems to our ROV fleet and vehicle upgrades. Our focus in 2013, as it was this year, will be on earnings growth and investment opportunities, both organically and through acquisitions.

At this time, we are not providing quarterly earnings guidance for 2013. For those of you who 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 typically below that of the fourth quarter of the previous year. Furthermore, we tend to have higher earnings in the second half of the year, compared to the first.

Looking forward to 2013 and beyond, 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. 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 95 new floating rigs on order. 62 of these rigs are not contracted to work for Petrobras in Brazil, and we expect all of them will go to work for other operators. On these 62 rigs, 11 ROV contracts have been let, and we have won 10 of them, leaving 51 ROV contracting opportunities left to be pursued, outside of Petrobras in Brazil. At the end of September, 96 of the 140 existing high-spec drilling rigs consisting of dynamically-positioned fifth- and sixth-generation semis and drillships, were not contracted to Petrobras in Brazil. We had ROV contracts on 72 of these, for a market share of 75%. If all 62 of the non-Petrobras rigs I mentioned are placed into service, this fleet of 96 will grow 65% to 158 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 should follow.

There is no industry source of information to track vessel-based ROV demand. However, there has been a measurable trend over the last decade regarding the total size of the ROV fleet with respect to the size of the floating rig fleet. Currently, this trend ratio is 3 to 1, with the number of ROVs to support drilling at slightly over one per rig. The existence of the other ROVs is, by default, attributable to market demand for vehicles to support vessel-based work. If this 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 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 increase in tree orders of more than 75% over the previous five years. In 2012, subsea tree orders are projected to be about 570, an all-time high, eclipsing the previous record of 462 trees in 2006 by over 20%. In 2013, tree orders are projected to rise to 640. While we don't make trees, orders for subsea trees drive demand for a substantial amount of the ancillary subsea production hardware that we manufacture. For example, Quest is forecasting a nearly 50% 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 position in the off-field services market, and we are leveraged to the growth of deepwater and subsea completion activity that is currently underway. The longer-term market outlook for our deepwater and Subsea Service and Product offerings remains promising. 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 and that 2013 will be even better. We think this distinguishes Oceaneering from many other oilfield service companies. We appreciate everyone's interest in Oceaneering, and I will now be happy to take any questions you may have.

(Operator Instructions)

Justin Sander, RBC Capital Markets.

Hi. Good morning.

Good morning.

Just a few questions here on the utilization front and the outlook for 2013. So it continues to be real solid at 81%, though below the mid-80%s achieved in the 2006 to 2008 period. Can you just talk about some of the critical factors that we should keep an eye on to drive utilization higher and toward that 80% average in the coming quarters? And then also, maybe some of the gating factors, whether it's labor or anything else, that may keep you from getting back to the mid-80% range beyond 2013?

I think the primary driver to that utilization really is the vessel-based activity. And so, as you see a strengthening in that market, bigger backlogs on the construction, installation companies, is probably a good proxy for what will follow thereafter, and so that really is the primary driver. And we see that strengthening next year, as it did this year, compared to last.

And we don't see labor supply as being a gating issue. We're spending a considerable amount of money on training new crews and recruiting new technicians, so -- I mean, it is a continuing challenge, but we do not see that as a gating factor to limit our utilization or growth.

Okay. So then if you kind of break it out for the 82% number in 2013, you were probably talking about drilling support, utilization, fairly static, and then improving on the vessel side to drive the progression going forward?

Correct.

Correct.

And we have taken into consideration the new rig deliveries that are forecasted for the rigs that are expected to go to work. We have not forecasted a significant change in the utilization rate of the existing fleet.

Got it. Okay. Thank you. And then, just a clarification on the ROV operating margins here. So, if I understood the guidance correctly, it sounds like operating income in the fourth quarter is looking like the third-quarter level, so we should see operating margins down tick a little bit as a result from the 29.7% of the third quarter. And then I assume, going throughout the course of 2013, we kind of see that pick up, as the utilization picks up. Is that a fair way to think about it?

Justin, I'm trying to understand why, if we're expecting margins to be about 30% for the year, why you would be saying that we would be having a down tick of the 29.7% from Q3. We're looking -- I think the comment was that we're going to have a Q4 for ROVs that is comparable to Q3. So --

Okay.

And that we're going to stay at or about the same as 2011 or 2012 on a year-over-year margin basis.

Got it. I wasn't clear if that guidance was related to the margin or the actual operating income. Okay.

Could be both.

Thanks for clearing that up.

Mike Urban with Deutsche Bank.

Thanks. Good morning, guys.

Good morning.

As you see the shift in mix on the ROV side from drill support to a little more activity on the vessel side and presumably construction-based activity as well -- and, of course, you have the new builds coming in as well -- that would seem to create a tightening of the market, i.e., we haven't traditionally thought of the ROV business as one that gets a lot of pricing power, but as you've often said, most of your competitors are in the construction side. Do you see an opportunity to potentially change that dynamic a bit? It just seems like there's an awful lot of activity out there.

Well, there is, but I really wouldn't see that as a driver to increase prices in that sector. Generally, in the past when that's occurred, there has not been -- it's not been in a growth part of the business, and so there weren't a lot of new ROVs being produced and entering into the market as there are now. And so I think that sort of mitigates against raising prices from that perspective.

Okay. So we should continue to think of it as more of a volume-based growth story?

Yes.

Okay. And then, kind of on an unrelated shifting over to the product side, you've cited the Panama City facility as being a bit challenged, as it has been for awhile. Do you get to a point where you have to make a decision there on whether to continue with that facility, or at some point, just given all the activity that is prospectively out there in the Gulf of Mexico, do you just kind of hang on and minimize your costs there, and hopefully the volumes pick up as the Gulf of Mexico shifts more from exploration to well-construction development mode?

Good question. We are committed to keeping that facility. We are keeping it busy enough to take over, if you will, and there certainly is visibility to some Gulf of Mexico ordering in the next two years or so, depending on what the schedule is for major operators and discoveries that have already been made, how that will go. And we are continuing to focus on foreign projects in order to put through that plant to keep it going. But we think it is going to be a good thing to keep, and we're planning to do so.

Absolutely, Mike. I think what we've got is a challenge, but definitely a contributor. We have done -- the guys have done a great job in reducing our costs and chasing international work, and winning international work.

Okay. Great. Thank you.

Stephen Gengaro, Sterne, Agee & Leach.

Thank you. Good morning. Two questions. One pretty simply -- did you say you ended the quarter with 285 ROVs? I just wanted to make sure I had that number right.

Correct.

Okay. And then, second, when I look at your balance sheet, and obviously you're in a great position from both a balance sheet, but also a prospective cash flow position over the next several years -- how do you prioritize use of the cash, and how aggressively will you look at giving cash back to shareholders maybe even more aggressively than you already are, versus growth opportunities? How do you look at that and actually think about that?

Well, our number-one objective is to grow, as it has been, and the priority has been internal organic growth investment, represented primarily by ROVs, and then in tooling, and secondly, looking at acquisitions, which unfortunately are few and far between in the space that we're really interested in. Thirdly, dividends, as you pointed out. We just increased that last time, at the year anniversary. So we think that's already kind of, a little bit aggressive anyway. And lastly would be share repurchases, which we have no schedule fixed for doing so, but we do have an authorization out there, which we could exercise if we think the market is right.

And we did buy 400,000 shares in the second quarter. And I think directly -- to dividends, we have no specific plan to increase, but as Kevin said, it's been, you know, just since May when we increased the quarterly dividend by 20%. So I think we're going to keep the focus that Kevin said, and right now there's no plans to be more aggressive. But we'll revisit that sort of when it's more prudent to do that, and we think it's more prudent to do it on an annual basis.

Very good. Thank you. As one follow up to that. When you -- is there anything product line-wise, and you may not want to get into too much of that, that you don't own that is sort of directly complimentary to what you're doing, or is it sort of more smaller niche acquisitions that you'd be looking at?

I guess the way to answer that is, while we are always looking for things that are complementary, we don't see anything that is so strategic that we feel like we're missing something or have to go after something really aggressively. So we are looking for things that are complementary, ideally a product with a service component to it. More than likely that would be something outside the US, but not necessarily so. So that's really what we're looking for.

Stephen, I think our focus is, as it has been, is to grow geographically with some of our product lines and expand existing product lines geographically to grow the business, as opposed to necessarily adding a complementary product through acquisition. But we keep looking --

Okay. You've done that well over the last couple of years. That does make sense. Thank you.

You're welcome.

Jon Donnel, Howard Weil.

Good morning, guys.

Good morning.

Had a question regarding the products operating margins and whether there was any contribution from those large Petrobras awards on the top line to 3Q; if that was any of the help on the margin uptick that we saw during the quarter.

No. I mean, that project -- both of those projects are kind of long-term, as we've tried to indicate, and really haven't even started to get into the financials yet.

Do you expect that there will be some top-line hitting in 4Q? And did I hear correctly that you expect the op margins to be relatively flat sequentially here, and is that perhaps a contributor to that?

No.

No, John. We do expect production in Q4 to have some top-line growth, but we did not say that margins sequentially would be flat. We said margins would get back to the mid teens -- I mean high teens.

All right. I'm sorry. I may have said margins. I meant op income being flat. Okay. That makes sense, then.

Op inc is correct. Yes, sir.

Okay. Great. Regarding the CapEx outlook for next year, it looks like there may be a little bit more going to the non-ROV businesses than what we've seen in the past. Can you maybe give us a breakdown a little bit of where you expect that CapEx spend to be coming from, and is any of that specifically related to the Ocean Alliance upgrade that you all had mentioned earlier during the quarter?

Jon, I'm sure there's a little bit in for the Ocean Alliance. But we're not going to go ahead and go much beyond -- we don't have a detailed CapEx plan. What we did is, as you can see from the numbers, exactly the same amount of CapEx as we expect to spend in 2012, and with the ROV adds, what we're saying is, we're going to roll another one out very similar to 2012. We don't have any more detail of that. We just expect it to be spread among the other segments.

Yes.

A little bit. I mean, it's not a big modification that's going in for the Ocean Alliance when you look at the magnitude of our CapEx. It's not a needle-moving event.

Okay. Great. And then finally for me, regarding the AGR acquisition, you all had mentioned at the time of that announcement that you had expected it to add $10 million of op income during 2012. I was just wondering if we could kind of get an update of how that's progressing from that standpoint, and is there anything specifically that you've seen, either to the good or bad, of that acquisition, and how we should maybe think about that going forward, relative to the prior expectations that you all laid out there?

I think everything is going pretty much as expected. And I'm kind of thinking of what we talked about when we did the press release in December. You know, we're seeing the growth through asset integrity and a little bit of activity in projects. Projects, as you know, is being overwhelmed in 2012 in a good way by the BP Angola project. But I don't see any significant change year-over-year coming up because of any changes in AGR.

Okay. Great. I appreciate the color, guys. Thanks a lot.

Ian Macpherson with Simmons.

Hi. Thanks. I had a question on the ROV unit growth outlook. Is there anything to pull through from the second BOPs that are becoming more common on new build orders for floaters that would relate to more than one joint-support ROV on those rigs?

No, we don't see that. There could be a onesie, twosie kind of thing where somebody decides for other reasons that they want to have a second ROV. But we don't see that as a trend developing at all.

Okay. Good. You mentioned for growth, geographic growth in existing product lines, one geography that stands out -- it's not one, I guess it's many that are similar in terms of the North Atlantic and the North Sea, Norway, the harsh-environment domain generally. Is that specifically an area that you would like to have more exposure, and can you do that organically or is that something that would be more inorganic if you wanted to do it?

For products in the North Sea?

Be it for ROV expansion or products.

Well, ROV -- I mean, ROV expansion pretty much follows wherever the drill rigs are going, and so that is really not focused on a geography as much as it is on the rig and the operator. As far as products are concerned, we're pretty well represented in the North Sea already. We're looking to push products more out into Australia, for example, West Africa, East Africa, those sorts of areas that there's not as much of a concentration now.

Very good. And then just last, quickly, with respect to your guidance for next year in general, are there any aspects that we should look at as being more sensitive to the high end or the low end of your earnings range, and are there other areas that more set in stone at this point?

I wouldn't say so. No. We've got a narrow range where if you pick a midpoint we're plus or minus 4%. A lot of things can happen that move the needle that much. So there's not any contingent situation that causes us to be on the high end or the low end. I think it's just a good mix.

All right. Very good. Thank you.

Darren Gacicia with Guggenheim.

Hey. Good morning. Thank you for taking my questions. Just wanted to flesh out a little bit. You were talking about kind of business mix next year on the products side -- when you look at company, IOC customers versus NOCs and majors. When you think about sort of an added planning time, what is that telling you? Is that saying that you probably have more activity in 2014? How does that delay work, and what's the difference? Can you just expand on that?

Well, first of all, just to remind everybody, that comment was really directed at the Gulf of Mexico. And I think, before Macondo there was a fair amount of, let's say, smaller independents that were operating in the Gulf of Mexico, and they would typically have relatively fast turnaround single- or double-well projects where they would get -- from discovery to production might be two years or something on that order, whereas today, we see very little of that activity, and it's much more predominantly the majors who are operating in ultra-deep water where you have got multiple wells and a complex production scenario to work through and develop, and that planning process and the procurement for floating production equipment and all the rest of it has a much longer timeline.

So that's typically a five-year idea from discovery to development. It could be as long as seven. But I think for the Gulf, it would probably be more closer to the five-year range. So that is really what we're talking about. And given that people have just started drilling, let's say, a year ago and finding these prospects, it could be four more years before it really starts happening.

We just recently bought an updated market forecast for the Gulf of Mexico only by Quest. And according to what they gave us, they said subsea tree installations in the Gulf are not expected to reach the prior peak level of 2008 until 2016.

Got you. So you're sort of still on a slight lull, but what seems to tell me is that if you're going to employ more [autologs] than the rest, that your margins should expand over the next couple of years as those start to come through. Which is the positive part of mix, anyway.

Absolutely.

We do see good growth opportunity in the Gulf of Mexico once those projects start taking hold, yes.

Right. And what we're trying to differentiate is we see it in the drill support activities right now.

Now.

Right now. And we're just trying to say that it's only in the drill support activities now, but we believe it will have a great follow-through in later years when we get to that development stage. That's the point of differentiating between drill support and non-drill support.

Got you. And kind of next question, just to make sure I heard you correctly, so you said you are going to be net up 30 to 35 vehicles next year?

No, no. No, we said we would be adding 30 to 35 vehicles, and we will announce retirements as and when they occur.

And the 4% to 5% would be normal per year.

Got you. And does that -- now, is that a function of what's already won, or is there some kind of -- are some of those being built in expectations of wins?

We only have 13 contracts in hand for the 30 to 35 at this moment in time.

And every year, when we go into this, we include, throughout all of our segments, an incredible amount of speculative work that we feel we're going to win, where the projects are not yet identified. So, no, it is not on a won basis. It is on a projected outlook.

Well, given dominant market share, I can understand how you can plan ahead. My last question, if you don't mind is, it strikes me that you're going be kind of in a net cash position as you go into next year, and I know somebody has asked about capital budgeting and returning capital to shareholders, but the one aspect -- you said that was an annual planning process. Does that mean there's a kind of a meeting of the Board in the beginning of next year where that kind of get decided? And is there a thought process to an optimal capitalization level, kind of net debt-to-capital level that we should be thinking about as we build in our models?

No. I think when you look at Oceaneering's history, we've been in a net positive, net cash position for a lot of it. We would like to grow, and growth is our number-one priority, as Kevin said, and returning cash to shareholders is a secondary one, and, yes, we will look at it. We did, after four quarterly payments, the board chose to increase our dividend by about 20% to $0.18 a share per quarter. And I'm sure that is going to be on the agenda and it gets discussed a lot. We just think it is more prudent to have a have a consistent dividend policy, as opposed to doing a special, for example. Any of that could change. It's always up to the Board. But right now I see us staying in a net-cash position unless we can find a substantial acquisition. And we're looking, and we continue to look. But it has to be sort of within our space, so we don't do a wild step-out. But there is no optimal capital structure, Darren, that we are striving for. It really is -- we try to make the best of what's available and continue to grow.

Great. Thanks a lot.

Brian Uhlmer, whose company name was not gathered. Your line is open.

We know he is with GHS.

Thank you. Most of my questions have been answered. I just want to ask more a philosophical question. As you're quoting some of the Quest forecasts, and you guys normally have a more temperate approach to your outlooks and how you discuss the timing of projects getting pushed out to the right on the decision tree. How do you look at -- when we look out at 2013 and 2014, kind of handicapping what those forecasts are versus what your expectations are?

Dang. How do we answer that? We already told you the outlook for the Gulf for our non-drill support next year. While we expect some improvement, it's not going to get back to pre-Macondo level.

Yes, but I think our belief --

I'm thinking more worldwide here. I mean, you're talking --

But Brian --

You're talking about that 50 number that never happens, right?

No, no, no. I know. We think Quest is directionally -- we think they're directionally correct. We never try to pick what 12-month period they're going to be right or wrong in. But let's go back to the number of new drilling rigs that are being added to the fleet, the number of holes that are being poked into the ground. And if you just assume the exact same success rate, you're going to have more development activity over time. So we subscribe to the Quest growth trajectory for the five-year-over-five-year period. And I think it really is a strong story. And we talk about -- first it comes in the exploration side with drill-support activities, and then it comes in the development side, and then it's in the infrastructure, Asset Integrity side. So we really like that aspect, and we really believe that a lot of stars are aligning now for a continued growth of subsea and deep water. So is it going to be $640 million in 2013? We don't really take a position on that, we just sort of report it. And we believe directionally -- our beliefs and philosophies are very consistent with Quest's outlook.

Kind of unfolding as they predicted.

And 2012 is kind of pretty close to what they thought.

Okay. Fair enough. That's it for me. That's all I wanted to get answered; everything else was answered.

All right, Brian. Thanks.

Joe Gibney, Capital One.

Thanks. Good morning, guys. I have just one quick modeling on the project side. The reference to the four of eight vessels in regulatory inspection. I was curious if that was going to be front-half weighted in the seasonally slower period, in 1Q, 2Q -- just appreciate some timing color associated with that.

I don't know. Jack. Do you?

I've got it. Joe, if you'll call me later, I can get you --

No, no. I think -- the answer is yes. But what we've got to do is, we have to do them on the anniversary dates.

Right.

And we always try to do more in the slower seasonal period than not, but I can't recall the details. I would say that directionally, we are -- as Kevin said, the message here is we continue to see strengthening of Gulf of Mexico shallow and deepwater. However, due to our dry dockings, it's going to reduce the available days, and it's going to increase the operating expenses. So when you model it quarterly, we haven't done that. So we've looked at the full year. We haven't done quarter by quarter, but I know we know what days those are scheduled in a quarter basis. So I would really hate to get into that right now. So I'm just saying -- you've got to do the modeling on a quarter-by-quarter basis, and we haven't done it yet. That will be part of our next detailed planning process.

Alright, fair enough, guys. I'll turn it back.

(Operator Instructions)

Joe Hill, Tudor, Pickering.

Tudor, Pickering. Good morning, guys.

We know, Joe. How are you doing?

Just had a couple of questions. Just wanted to understand the business a little bit better. So when you guys use an ROV to do a subsea install, whether you're hooking up flying leads or jumpers or whatever, is that revenue dollar flowing through the non-drill support ROV segment or is it flowing through projects?

ROVs.

ROVs. Okay.

And if we're using one of our boats, that's flowing through projects. We take the ROV aspect and run it through ROVs, regardless of what type of service it's doing, whether a vessel -- our vessel -- is involved or not.

Okay. That's helpful. And then, just the other point I was trying to understand, are IWOC sales coincident with an installation, or do they lead a tree installation by a fair amount?

They do not lead the tree installation. They're part of the tree installation.

Coincident is the answer. Coincident.

And they're also involved in a lot of work overs as well.

Okay. So getting back to maybe a point you guys were emphasizing earlier, the customer mix in the Gulf of Mexico has changed. We've got some delays in the non-drill support ROV work, it sounds like, as a function of that mix change. But IWOCs is picking up, it sounds like. So I'm just trying to get a sense as to when we actually get the handoff from the installation business into the IRM construction, et cetera, down the road. It sounds like it's at least a couple of years, which surprised me a bit.

Joe. IWOCs is picking up. It really picked up in Q3. But the other thing we have going on is a shift from a predominantly Gulf of Mexico business to having a substantial element of international work in our IWOCs business. So it's not as Gulf of Mexico-dependent as it once was, and that's what we talk about when we got geographic expansion opportunities, IWOCs and subsea field development and tooling, those things are very relevant.

But just to repeat what Kevin said, though, our op inc outlook for 2013 on products is not predicated on an increase in profit contributions from IWOCs.

Right.

It's not.

It's from tooling, subsea hardware.

And umbilicals --

But not IWOC.

Got you. Okay. That's very helpful. Thanks, guys.

Ole Slorer with Morgan Stanley.

Thanks a lot. Kevin, I could have used to be on one of your ROVs yesterday. (laughter)

You probably could have had a better use for one of our small boats.

I probably could have used that one, too. It would have been interesting. But as we look at your ROV business, we have a very high market share but clearly some favorable trends with more units potentially added per rig and, you know, tight maybe growth in the rig count plus a little bit, and you compare that to the Subsea Products. Over the next two years, which of these two divisions do you think will show the strongest growth? Not for 2013 per se, but if you look a little bit longer term, the sort of favorable trend of more step-outs and further distances on the umbilical side, is that a big driver? Or is the competition there still pretty cutthroat? So how do you see that opportunity on the two-year view relative to the ROV business, which I would imagine would be a lot more steady?

I think your observation is correct. ROV business is more steady. There's more volume opportunity on the product side, maybe two years and out, I would say. Of course, that is top-line growth with the historical margins that we have been able to achieve in that segment. So I think it will be more growth on the product side than on the ROV side over time.

And how much of that is organic versus -- I would imagine you're sitting now with quite a lot of cash, you could add products to your infrastructure. But if also if you consider the competition from the Akers, the Technips of this world.

Well, I mean, we invest in organic products in areas that we have a market niche. You know, you think of hydrate remediation activity, acid injection and things like that, that we are moving into, as well as our traditional stuff that we've been doing, and when we see the opportunity, we do it. We don't just build a bunch of stuff and then send it around the world and hope for a job. There's usually some indications of demand out there for a customer, and then we invest the money and produce another unit and send it where it needs to go.

And I think our focus continues to be products, as Kevin just alluded to -- is products with the service component.

Right.

And I think in that way, we really don't compete with some of the other players that you mentioned. We do own an umbilical with Aker. But we're not getting into the tree-manufacturing business. And I think there's enough ancillary equipment around the tree for us to keep our focus and try to broaden our scope that way, particularly if it has a service component.

Okay. So you're not terribly troubled by the competitive backdrop. You see the opportunity as outweighing the behavior of competitors.

So far, yes.

Yes. I think we all -- we all know there's way more umbilical capacity in the world than we need, and we know that Aker is adding a plan that should come into production by the end of 2013. But we've got to pick and choose wisely, and we think we have capability of doing that, and improving our throughput and margins over time.

Okay. Sounds good. So you're going to give me that deal on the ROV, or no? (laughter)

I see an opportunity to increase rates right now.

Okay. I'm hostage. Fine.

Take care.

(Operator Instructions)

All right. Thank you, guys, very much. I think we're going to end the call, and you all have a good day.

Thank you.

Bye, bye.

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