Oceaneering International Inc (OII) 2013 Q1 法說會逐字稿

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2013 Q1 earnings conference call. All lines have been placed on mute to prevent any background noise. After your presenters' remarks, there will be a question-and-answer session.

(Operator Instructions)

I will now turn the call over to Mr. Jack Jurkoshek. Sir, please go ahead.

Good morning, everybody, and we'd like to thank you for joining us on our 2013 first quarter earnings conference call.

As usual, a webcast of this event is being made available to the Street Events 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 over to Kevin.

Good morning, and thanks for joining the call. I am happy to be here with you today.

Our record first quarter EPS of $0.69 was above our guidance range of $0.55 to $0.60, and was up 47% compared to the first quarter of 2012. Year-over-year, all of our operating business segments achieved higher income, led by Remotely Operated Vehicles and Subsea Products. We are well-positioned to participate in the growth of deepwater and subsea completion activity currently underway, and our outlook for 2013 remains very positive.

Given this outlook and our first quarter earnings performance, we are raising our annual 2013 EPS guidance. Our new guidance range is $3.10 to $3.30. 2013 is expected to be another record earnings year. We continue to anticipate global demand growth for our services and products to support deepwater drilling, field development, and inspection, maintenance and repair, or IMR, activities.

Based on our historical seasonal quarterly earnings distribution, you might think that given our exemplary first quarter performance, we should be raising our EPS guidance range even more. There are two reasons we are not. First, our above guidance first quarter performance was, to a large extent, attributable to an acceleration of the timing of forecasted work in our Asset Integrity and Advanced Technology business segments. And second, our earnings forecast, as is customary for this time of the year, includes a significant amount of unbooked, or speculative, work.

As always, our guidance range is consistent with our internal forecasts. We simply had no basis to be more aggressive, as our view of 2013 has not changed much since our last quarter. Of course, we will revisit our earnings guidance after our second quarter results have been recorded and the second half of 2013 is underway.

At the top of our guidance range, we are contemplating a growth in earnings of over 50% in just two years. And as you may recall, 2011 was also a record earnings year. Yesterday, we announced a 22% increase in our regular quarterly cash dividend, to $0.22 from $0.18 per share. This underscores our confidence in Oceaneering's financial strength and future business prospects.

I'd now like to review our first quarter oil field segment results. Year-over-year ROV operating income improved 16%, on the strength of higher demand to provide drill support and vessel-based services, particularly in the Gulf of Mexico and offshore Africa. Our ROV days on hire increased 13%, to approximately 21,700 days. We also benefited from a 5% increase in average revenue per day-on-hire, which was driven by an escalation in vessel-based work.

Sequentially, operating income improved on an increase in days on hire and an improvement in margin. The margin improvement was, as expected, due to unanticipated fourth quarter 2012 expenses related to a UK pension plan adjustment and vehicle umbilical repair and maintenance costs.

Our fleet utilization rate during the quarter was 83%, up from 79% both sequentially and year-over-year. We expect that our fleet utilization for 2013 will remain about the same as that of the first quarter, or 83%. Operating margin during the quarter was 29%, the same as a year ago and up from 27% last quarter. We continue to anticipate a 30% annual margin for ROVs in 2013.

During the quarter, we put six new ROVs into service and retired one. At the end of March, we had 294 systems available for operation, up from 270 a year ago. Three of the new ROVs went to work on board vessels and three went into drill support service. Our fleet mix during the quarter was 74% drill support and 26% on vessel-based work. This compares to a mix last quarter of 75%, 25%, and a 78%, 22% split in the first quarter of 2012. We are experiencing a trend of growing demand to perform vessel-based work. Year-over-year, over half of our increase in days on hire was attributable to this activity. We still anticipate adding 30 to 35 vehicles to our ROV fleet in 2013, 24 to 29 during the remaining three quarters.

Now turning to Subsea Products, year-over-year first quarter operating income improved 45% on a 24% increase in revenue, due to higher demand for all of our major product lines. Margin improved 3%, principally due to the fact that additional support costs we have incurred to grow the business were spread over a larger revenue base. As anticipated, sequential operating income declined, due to project timing. The 21% decrease on a 14% drop in revenue was due to reduced sales of tooling and subsea hardware and lower umbilical plant throughput. Margin, consequently, declined 2%.

For the year 2013, we continue to forecast that Subsea Products margin will likely be lower than the 21% of 2012, due to an anticipated change in sales mix featuring a higher percentage of umbilical revenue. However, we still expect record segment operating income for the year. Our Subsea Products backlog at quarter-end was $776 million, compared to $402 million at the end of March, 2012 and $681 million at the end of December, 2012. Year-over-year and sequentially, the backlog increase was largely attributable to umbilical awards and the BOP Control System contracts we announced during the first quarter of 2013.

As for our remaining business operations for the first quarter, Subsea Projects' operating income was higher year-over-year, on a full quarter of work on a field support vessel services contract offshore Angola that commenced in February, 2012. Sequentially, as expected, operating income declined, due to seasonality in the US Gulf of Mexico. Near the end of March, our five-year vessel charter for use of the Ocean Alliance commenced upon completion of its shipyard modifications. We immediately put this vessel to work on an IMR job in the Gulf of Mexico.

Asset Integrity operating income improved year-over-year, on higher service demand in most of the geographic areas in which we operate. Furthermore, during the first quarter of 2012, this segment's results were adversely impacted by a low profit contribution from operations we acquired in December of 2011 and poor execution of a job in the US. Sequentially, operating income increased somewhat, due to better job execution and a favorable service mix. Additionally, Asset Integrity's results during the fourth quarter of 2012 included costs we incurred associated with closing an unprofitable operation in Sweden and a UK pension plan adjustment.

Compared to prior periods, Asset Integrity operating income margin improved, as we expected, to its normal double-digit range. Advanced Technologies achieved record operating income, on the timing of completion of Navy vessel and submarine repair and maintenance work, contract award fees, and improved execution.

In summary, our first quarter results were above our expectations and we look forward to realizing another year of record EPS performance in 2013. 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 service and products industry. We were pleased with our cash flow generation capability, as demonstrated by $160 million of EBITDA during the quarter. Capital expenditures for the quarter totaled about $94 million, of which $70 million was invested in ROVs and $14 million was spent on subsea products.

Now let's talk about our 2013 EPS outlook. As I stated earlier, we have raised our 2013 EPS guidance range to between $3.10 to $3.30. Compared to 2012, we expect all of our operating business segments will achieve higher income in 2013, notably ROVs on greater service demand to support drilling and vessel-based projects, Subsea Products on higher demand for all of our major product lines, led by Subsea Hardware, and Subsea Projects, on a full year of work offshore Angola. I believe we are well prepared for the opportunities we face in 2013 and have the assets in place to take advantage of growing demand for our services and products.

For 2013, we anticipate generating over $690 million of EBITDA. Our balance sheet and projected cash flow provide us ample resources to invest in Oceaneering's growth. Our CapEx estimate for this year, excluding acquisitions, is $300 million to $325 million. Of this amount, approximately $175 million is anticipated to be spent on vehicle upgrades and adding systems to our ROV fleet. About $100 million is for enhancing our Subsea Products capabilities. Our focus in 2013 will be on earnings growth and investment opportunities, both organically and through acquisitions.

Moving on to our second quarter outlook, we are projecting EPS in a range of $0.81 to $0.86. Sequentially, we anticipate quarterly operating income improvements from all of our oilfield business segments, ROVs, due to an increase in fleet days on hire and some margin improvement; Subsea Products on the strength of higher demand for tooling and subsea hardware; Subsea Projects on a seasonal demand rise in Gulf of Mexico activity; and Asset Integrity, due to the normal seasonal increase in activity, led by refinery maintenance and offshore production platform inspections in the North Sea.

We are, however, forecasting this segment's operating income in Q2 to decline year-over-year. This is attributable to the acceleration of work into the first quarter of 2013 and an anticipated reduction in the amount of production platform work we performed during the second quarter of 2012 offshore Norway, which was at an unusually high level.

Looking beyond 2013, we remain convinced that our strategy to focus on providing services and products that facilitate deepwater exploration and production remain 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 the demand for our deepwater services and products will continue to rise and believe our business prospects for the next several years remain promising.

At the end of March, 2013 there were a total of 94 new floating rigs on order. 65 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 65 rigs, 20 ROV contracts have been let and we have won 16, or 80% of them, leaving 45 contract opportunities left to be pursued outside of Petrobras in Brazil.

At the end of March, 99 of the 142 existing high spec drillships and fifth and sixth generation semis were contracted to operators other than Petrobras in Brazil. We had ROV contracts on 75 of these, for a market share of 76%. If all 65 of the non-Petrobras rigs I mentioned are placed into service, this fleet of 99 will grow 65%, to 164 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. If the trend of three vehicles in the global ROV fleet per every floating rig continues, we estimate that future demand growth for ROVs to support vessel work may exceed 180 vehicles at some point following the new rig in-service dates. We estimate Oceaneering's market share of the vessel-based ROV fleet at about 20% and see no reason we will not at least maintain this share in the future.

To meet visible growing rig and vessel service requirements, we are forecasting future demand growth for ROVs will be approximately 275 vehicles. So, we anticipate the fleet will grow about 35% over the next several years. We expect to capture roughly 30% of this market demand growth, or about 80 incremental vehicles. 45 to 50 of these will likely be in support of drilling operations, all of which we anticipate will be in service by 2016. The in-service timing of the remaining vehicles for vessel-based work is indeterminate, but will likely lag those required to support drilling.

Quest Offshore's latest subsea hardware forecast for the period 2013 to 2017 includes an increase in tree orders of about 55% over the previous five years. In 2013, tree orders are projected to rise over 2012 by more than 25%, to 523, an all-time high, eclipsing the previous record of 426 trees in 2006. 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 nearly a 40% increase in umbilical orders for the five-year period 2013 to 2017, compared to the previous five years. Umbilical orders in 2013 are forecast to rise to about 1,800 kilometers, up over 60% from the 1,115 kilometer level in 2012.

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 safely support the 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 oil field services market and our leverage 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 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 offerings, and reinforces the benefit of our value sell.

For 2013, we are anticipating that we will achieve another record year of EPS performance. We believe this distinguishes Oceaneering from many other oilfield service companies. We appreciate everyone's interest in Oceaneering, and I'll now be happy to take any questions that you may have.

(Operator Instructions)

Your first question comes from the line of Ryan Fitzgibbon. Your line is open.

Thanks, guys. First question, on the ROV side of the business. Kevin, I believe you mentioned day rates were increased about 5% sequentially. What was the reason for that? Is that just cost escalation or are you seeing some improvement in pricing?

It's mainly vessel-based increase in activity where, on vessel-based, it usually requires a larger crew than it does in drill support. And so day rates are consequently higher, because of the additional crew for vessel activity.

And safe to assume that's higher margin work, or is that similar margin work?

It's similar. It's just really the addition of the extra personnel required to operate a system on a 24-hour a day basis. I think you get higher margin when the vessel works, but you have more gaps in utilization than you do on drill support. So overall, we're pretty indifferent, over the longer haul, as to whether or not it works in vessel service mode or drill support.

Got it. That's helpful. And then maybe, Kevin, a bigger picture question. You've walked us through the ROV growth story and the Subsea Products growth story on the umbilical side. You've grown your business 20% to 30% over the last two years. Is this kind of growth rate sustainable when you look out to '14 and '15, or are there M&A opportunities you're looking at now? And if so, are there specific product lines we should be focused on?

Well, we certainly can't comment on M&A activity, as you can look historically or backwards for the last couple of years. It's been somewhat sparse, apart from the larger acquisition we did at the end of 2011. Opportunities are kind of few and far between in our space, and what ones we do come across are usually very highly valued. But in terms of the demand growth that we see, certainly if you look at the rig building that is going on through 2016, which is similar pattern to the last couple of years, we would anticipate the ability for similar growth, at least in those couple of years going forward.

Okay. Maybe if I phrase it a different way. When you look at capital allocation strategy, how would you rank either M&A, dividends or buybacks, at your current share price?

I think we'd first rank organic CapEx as our number one focus and priority. And I think we have plenty of opportunities, as Kevin mentioned, to not only participate in the growth that's going on. And as Kevin mentioned, the drilling rigs is the start of the exploration cycle. Then we hope to follow-up with just the increased number of rigs drilling to have increased number of completion and development activities that really has pulled through for our ROV vessel-based service, and particularly our Subsea Products. And then later, as the infrastructure is being assembled and being maintained, it also improves our asset integrity outlook and vessel-based project business. So we see segment growth going on in the offshore deepwater and in almost every area, and we hope to be able to expand our coverage into new areas, such as now we don't talk only about West Africa, we also talk about -- or we just talk about all of Africa.

So number one is organic growth. Number two is acquisitions. We don't have a product line hole that we are trying to fill, but we do look for something that is very consistent with our existing products and services, and particularly we'd like to find a product that has a service component. And so growth is the number one priority, and then we've got an ongoing dividend program that we just announced. We increased it by 22%. So that takes -- on an annual run rate, would be about $95 million a year. And then, we would like to buy enough shares back to at least maintain our EPS denominator over time. And we have a lot approved by the Board to do that, but we have no current ongoing plan that we execute quarterly.

Okay. Appreciate that. Thanks, Marvin.

Thanks.

Your next question comes from the line of Ole Slorer. Your line is open.

Hello. This is actually Igor filling in for Ole. Great quarter, guys.

Thank you.

So it looks like your ROV utilization picked up sequentially, and this is despite the first quarter typically being seasonally impacted by lower vessel activity in the Gulf. I think this is actually the first time in six years we've seen the first quarter utilization for ROVs up sequentially. So is vessel activity that strong that it's more than offsetting the seasonality? I was just hoping you could address that.

Yes, I think certainly for this quarter, that is the case.

Wow. So what is the read through here then for the vessels in your Projects segment in the Gulf of Mexico and demand there?

Ask that again.

So with increased vessel utilization on the ROV side and those vessels working more, what are the prospects for the vessels in your Projects segment in the Gulf of Mexico?

The Gulf of Mexico has been pretty weak. Not pretty weak, it's been weak in Q1. The vessel-based work was outside of the Gulf of Mexico.

Okay. So that was mainly -- all of that was -- which markets would you say that mainly came from?

I would say, it was increased -- Norway had a little uptick, earlier than normal. And then West Africa and Southeast Asia.

Okay. And then my last question is, when should we expect those large umbilical projects in the Subsea Product backlog to start coming out, where that will have some impact on margins? Is that most of that in 2014, or what is the rough timeline of that?

For the year, we've said that we expect our margin to be lower than last year. And the reason is a higher percentage of umbilical revenue in '13. It just didn't kick in

It starts later this year, but it definitely impacts this year.

Right.

Okay. And then in '14, as well?

Yes. Right. The big Petrobras order is a three-year project.

Okay. Perfect. Thank you very much. I'll turn it over.

Your next question comes from the line of Stephen Gengaro. Your line is open.

Thanks. Good morning, gentlemen. Two questions. The first one is a follow-up on the prior question. When he mentioned 2014 and the margins with a bigger mix of umbilicals within Subsea Products, would that be a similar type mix to '13 or does it getting incrementally worse in '14?

Stephen, we're really not going to go there. We don't have a '14 outlook that we're going to talk about. I would hazard to guess about what all is going to happen between now and the beginning of '14 that will influence our product margin mix.

It depends on the non-umbilical part of the business, which we really don't have an outlook on for '14 at this moment in time.

Got you. That make sense. I just figured I'd ask as a follow-up, since you left it hanging there. The other part of the question, on the umbilical side, you've obviously seen orders. You've seen better volume flowing through. Has there been any inklings of price momentum anywhere yet, or is it still sort of a wait and see on that?

I don't think there's been any change in pricing momentum. I think people are starting to see that big oil is still looking for low prices in their development projects, and there's still excess capacity in the umbilical side, so --

A lot of excess capacity.

And so we don't see pricing leverage.

Okay. That's good color. Thank you.

Your next question comes from the line of Ian Macpherson. Your line is open.

Hello. Thanks. Kind of flogging a dead horse here, on the margins question for ROVs, and I apologize. But when you look at your results this quarter, your utilization was up and your rates were up nicely versus the first quarter of last year. Your margins were down just a whisker versus the same period, and I think that you've basically said that the margins are ambivalent between drill support and vessel support, with the caveat that utilization is more variable for vessel support. And I get that. But are we still basically, independent of the mix shift, expecting the run rate margins for ROVs to be in that 30%, low 30% range throughout the rest of this year, and should that be our framework for '14, even as your mix evolves?

I think that's a good point. Maintaining the margin at a 30% rate would be a good thing. Kind of a lofty goal, but that's what we're trying to do.

Okay. And then you provided, I think, very helpful indicators with regards to the seasonality, or the Q2 book and expectations for Asset Integrity. And then when we think about Advanced Technologies, which also had a nice step up in Q1, is there anything that we should think about with regards to the sequential progression of profits through the rest of this year? Should it be fairly linear?

With Advanced --

With Advanced Technologies.

Advanced Technology is going to be lower, because they brought work forward that was forecasted not to occur until second quarter. So it's not like there was more business, it just came earlier than we thought.

And I think the government funding is really going to start to have some impact on that. So we are expecting no change in our outlook. We are hoping to hold forecast, but there's more downward force pressure on our outlook in the government-related work. It was just a timing issue that the Navy brought somewhere forward that we had in subsequent quarters. So do not -- definitely do not project that as a run rate.

Got it. Thanks very much and congrats on the quarter. Thank you.

Thank you.

Your next question comes from the line of Jon Donnell. Your line is open

Good morning, guys.

Hello, Jon.

I had a question regarding the ROVs, in terms of the remainder that are scheduled to be delivered here for the rest of the year. How many of those are specifically earmarked now for vessels, as opposed to the drill support? It sounds like this is part of the business really picking up a lot here, and I'm just wondering if we can get a little more information on that.

The answer to that is based on what we know right now is only a handful. The majority of them are scheduled to go into drilling.

Okay. And for these new ROVs that end up on the vessels, do they come with an initial contract that helps out that utilization right out of the gates? Is that some of what we saw in first quarter for that, or is it still more of just the shorter-term, more or less, call out work that will be associated with those vehicles?

They do come with contracts in place.

It's a combination of both, Jon. Some of them come with field maintenance contracts in place, and others, in areas such as Norway, where they get a new boat and a new call out work, it will come with more of a call out basis. So we try to manage that and we look for the field maintenance contracts, but we are willing to put a new ROV on a boat if the outlook is good for its call out business.

Okay.

The mix is still far more on the call out part of the market than it is on the long-term part of the market.

Okay. And then just regarding the seasonality and the Asset Integrity business. As we look over the last, say, four quarters, especially on the top line, it looks like basically the results are very flat. You don't see a lot of seasonality there. I know there have been a lot of moving pieces. But can you help us understand, as we look forward here, what a more typical run rate in that segment ought to look like, at least from a top line perspective?

Hang on a second. Let me see if we're going to have a comment on that or not. You know, I think you really hit the nail on the head that there are so many moving pieces that -- we talked about the outlook for the second quarter and the amount of work we pulled forward, plus Norway was unusually high last year. But I think there's not much variation in our outlook for the remaining three quarters. It does go up and down. The third quarter should be the peak. But I think we'll just have to see how that unfolds, as well as you do.

Okay. Great. That's helpful. Thanks, guys.

Your next question comes from the line of Justin Sander. Your line is open.

Hello. Good morning. Had a follow-up question on the ROV utilization outlook. So 83%, very strong for the first quarter. And it sounds like your outlook for the full year of 2013 implies utilization generally in that range for the rest of the year, even though we usually see a bit of a pickup in the mid-part of the year. I'm just wondering if you could help maybe provide a little bit more color on what's behind the progression here that drives you to think of an 83% number for the full year 2013?

Well, I think the first quarter was unseasonably high for us. And you know, from what we can see, with a lot of -- particularly the vessel-based part of the business still being largely call out, it's pretty hard to call anything higher than that at the moment. So that's what we're anticipating for the rest of the year. We just had a better than normal first quarter, in that regard.

Okay. So you're expecting that to normalize throughout the rest of the year then, in keeping utilization at that level. Okay. And so my follow-up on that is, I think in the past, if you go back to 2007, 2008 we saw vessel mix as a percentage of the ROV fleet somewhere in the mid-30% range. Just curious to get your thoughts on how we can think about the vessel work progressing here over the next few quarters and if we can see something return towards that type of a mix here in the near-term?

I don't think so. I think that time period that you referenced really was the height of the hurricane damage repair activity in the Gulf of Mexico, and there was an unusually large number of ROVs dedicated to cleaning up that mess over a several year period there. So that was a spike in demand that we don't see reoccurring.

So much of that, Justin, was in shallow water, as they were just assisting in the down platform removal and some repair. So I think with the growth in the drilling rig fleet, I mean, it's going to take some time for us to slowly move that needle if the vessel-based activities come up to -- like we did in Q1 was a little bit better than Q4 and a year ago. But I don't see a major shift like what we had back then.

Okay. I see. Thank you. And just one other follow-up, if I can. I think, Marvin, you were going through a priority of capital allocation earlier, and it sounded like it had a heavy weighting on organic CapEx. Obviously, a lot of room to work with the balance sheet. I just want to clarify, does it -- is a more of building out the same type of product offering in different geographic markets? That's what it sounded like was the case to me. I just want to confirm if that's the biggest driver you think of, as far as organic growth.

I think it's both. I think it is increasing capacity in existing markets and building out new markets, as they grow.

Got it. Okay. Thanks a lot. Appreciate it.

Thanks.

You next question comes from the line of Tom Curran. Your line is open.

Good morning, guys.

Hello, Tom.

Returning to ROVs. On the drill support side, have you seen any indications, however slight, of specific large customers or markets beginning to move in the same direction as Petrobras in Brazil, in starting to emphasize price more over value, or conversely, beginning to stress value even more, either scenario? Any examples of that? And then could you please just refresh us, in general what percentage of your existing fleet on contract tends to renew each year?

Okay. I'll answer the first part. Really, there is no big change that we see happening there in terms of the market. Petrobras remains the only major customer that does not seem to take into account the value proposition of up time and that sort of thing. And so we don't see any change in that, with regard to other operators. I think that our market position demonstrates that the rest of the world does value that and we have the market share we do, as a result.

And I think, regards to the other side, the value sale, being more readily accepted, it's a dog fight for every ROV contract that comes up. Our competitors are trying to cut the price enough to negate the value sale. So I wouldn't say that the pendulum is swinging the other way, as well.

And on your question about what percent of our ROVs roll over, we don't know. We do not track that. We track what percent of the rigs that we are on have contracts that are rolling over. And I think that's a very broadly known -- and I don't have the statistics. But what we look for is what's the opportunity for a rig that is coming up? What's the mid-water depth rigs going to do? That's what seems to be the attention is getting. We haven't seen any change in our outlook, as the -- right now, new rigs seem to be incremental demand, as opposed to replacement. So we don't follow that, because a lot of our contracts have 60-,90-, 30-day cancellations for convenience clause. So looking at the rollover rate contract date doesn't matter much. If the rig is working, our ROV is going to be working, if we're on it.

Okay. So it doesn't sound like there's been any changes there in the nature of how you deploy the ROVs on contract on the drill support side.

No.

Great. Then on the -- turning to Subsea Products, the subsea anti-surge control package you've developed with Mockveld, in which Oceaneering provides the actuator and Mockveld, the rest of the system. That package just won an award for Asgard and has also been bid on the Orman Langa commercial phase, correct?

I believe that's correct.

Any sense on the timing for the Orman Loungo award? I know you guys also won the pilot phase of that project for this system.

Right, we did. And I really don't have that information off the top of my head. But I think these contracts, while they're interesting because of the new technology involved, they're certainly not needle movers for our business. And I guess over time, that electric market in general and actuators to go with that, will steadily increase. But I think it's more associated with these subsea processing type activities, which are going to be slow to come on. But I think they're definitely coming on.

They're much talked about, but we don't see a ramp-up that is meaningful in the short-term.

I completely understand how de minimus it remains on the financial side, but I do think you guys have proven to be a stealth cutting-edge technology player. And so I'm definitely trying to stay on top of what all you're involved in out there, whether it's the marine well containment company or subsea wet gas compression. I have noticed that recently in industry media trade magazines and other periodicals, you have been highlighting your leadership in subsea electrification. More broadly, when it comes to subsea electrification, are there any other projects or opportunities out there that you are focusing on this year as a potential catalyst or milestone that Oceaneering is or could become involved with?

You mean outside of the electrical stuff you were mentioning?

Yes. Outside of the subsea anti-surge control package with Mockveld, any other projects or offerings?

On the -- as far as electric actuators, no. As far as other things that we're trying to do subsea, yes, there are some things that we are working on. And if we talked about them too much, they wouldn't be stealth anymore. But we are providing flow line remediation services, have been for quite some time. These are basically hydrate remediations, and we have some pretty good equipment for doing that. We're also doing some subsea chemical injection work, which we have developed some operating systems for. It's a low-end of that sort of business, from a volume point of view, but there are some applications that that is effective.

And we are always looking for these kinds of niche areas, technology areas. There's also the subsea inspection area that we've mentioned a few times in the past, that the company that we bought in Norway at the end of 2011 had some technology in that area, mainly ultrasonics, in phase array. And we have on our own, in conjunction with two other companies, been developing some subsea direct radiography capabilities. So we're always looking at those sorts of things. But when they start off, none of them are needle movers. And we would create some false sense of expectation if we talked about every little thing that we tried, because sometimes it's hard to know whether it is a project-type of activity or whether it really is going to be an ongoing business line that we can develop.

Right. And we do appreciate your conscientiousness on that front. But thank you for the comprehensive overview. That was helpful.

Your next question comes from the line of Jim Wicklund. Your line is open.

Good morning, gentlemen. It's actually Jonathan.

Okay, Jonathan. We'll hear your question, too.

Kevin, wanted to ask you, I think you were at NOIA last week, and you will be a good voice on this. There's been some pretty high-profile project postponements as of late in the media and other publications. Is there anything that we as the investment community should be reading into about your products business in the long-term, slow down in orders or anything like that?

Well, I would say that so far there are a couple of data points that, as you mentioned, I think that some of them are, for reasons of what really is in the reservoir not being what they thought it was, and so that has caused maybe one or two to fall off the chart for the time being. And there are one or two that I've heard about. I don't know if they are published, so I won't mention the names. But where the CapEx coming in at the stage gave for approval process was a lot more than what the original AFE expectation was, and so they're putting the brakes on it for that reason. But I would say that, obviously, if this sort of activity continues to increase and we start seeing a lot of data points this is happening, then that will obviously have some implications for the industry in general, and us accordingly. But so far, I would not characterize it as significant enough to say the sky is about to fall.

Appreciate that. And then secondarily, if I could cue in on something you said on the onset of the call. What would make you more aggressive about your view in 2013? If you could walk us through that.

A blowout second and third quarter. (Laughter)

So calm seas and winds out of the south?

(Laughter) Don't use that word, blowout. (Laughter) I think the Gulf of Mexico, probably more than anything, could be a mover in that regard. If the non-drill support segment of that market really picks up more than what we are currently expecting it to, then that would obviously have a pretty positive effect and push us towards the upper end of the range.

Now you guys mention the Gulf. Are there other regions of the world that could be a tailwind that you're just being conservative with, which is I understand is your nature, but are there other regions?

I wouldn't say so. I think that the other regions are maybe a bit more predictable in their run rates right now, compared to the Gulf of Mexico.

I think our visibility one quarter out is pretty good. Sometimes we get surprised, like timing of Asset Integrity and [Adtech] this quarter. But I would say that even though we "are conservative", we've got pretty good visibility. And what I think the point is, with 38 rigs working in the Gulf of Mexico, the timing of the follow-up work and in the projects business and the vessel-based business and the products business is where we are looking for some upside. But it is all call out, and right now there is nothing booked that we could say could move forward. So I think it's a pretty reasonable forecast.

Okay. Appreciate it. Thank you, guys.

Sure.

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

Thanks. Good morning. Just one quick one for me, just on the project side, a clarification. You referenced the commencement of the charter of the Alliance, getting the work on an IMR job in the Gulf of Mexico. I know within your projects forecast previously, you'd indicated Gulf of Mexico ops flat year over year, given some of the regulatory dry docks in your existing fleet. Has that forecast changed at all, or is it still generally a flat expectation embedded in your [GAM] portion of your projects business?

It is still -- the expectation -- we had that vessel on short-term charter at the end of 2012 and decided to put it on a longer-term charter to have that available to us. And at the end of the quarter, it did get to work immediately on a project. But again, this is a call out business, and we don't have a long-term contract on it. It is project by project sort of business, and our outlook is pretty much the same as we've indicated previously.

Sure. Okay. Helpful. I appreciate it. Thanks guys. Nice quarter.

Thank you.

Your next question comes from the line of Darren Gacicia. Your line is open.

Hello. Thanks very much for taking my question. Referencing one of the prior questions, you had mentioned the build out on a geographic basis. Is there a sense -- obviously, you're going to follow the rigs. But is there a sense of where you may need to build that geographically and a sense, within the CapEx context, but also within an OpEx context, of what we may have to expect there?

I thought that was a great question regarding the OpEx context, because when you go to East Africa, there is no infrastructure and you can't support the East from the West. So when you've got to see -- and the same about North. What we are looking at is increasing in our indirect costs associated with shore-based activities And we're trying to do that as efficiently as you can. But I think you're right, we'll follow the rigs and we'll build out appropriately in leased space. But it does take some facilities there.

And regarding CapEx, I think what we look for is to build more equipment to support that. And we may have to open a warehouse facility somewhere, or an assembly play somewhere. And that's the kind of product support AFEs or CapEx that we talk about when we say what we're spending our money on. It's just enhancing our capabilities in various local areas, ranging from Norway, the North Sea to Angola, and beyond.

East Africa.

And Australia, yes.

So when I think about then and I look to bucket base costs, if you will. Since I'm assuming that that's not going to show up in the corporate line. That's going to show up in ROVs, Subsea Products. Does it get -- how does that get attributed, just so I can understand how to think about things in a modeling basis?

It shows up in all the operating oil-field segments, depending upon what the facilities are being used to support. And I think that's when we say things like we're going to try to maintain a 30% margin in ROVs. That's all taken into consideration in our margin guidance.

And as you alluded to earlier in your question, it does all follow the ROV. And so you end up starting off someplace with ROVs on a rig. And if it looks like there's going to be continuing operations there, than the next thing you get is a small footprint in the area to house technicians and have repair parts and whatnot, and then tooling follows after that. And then it builds, depending on what the longevity is of the operating outlook for a particular area.

And hopefully our locks follows, and then products. So we are not building a new umbilical plant somewhere to support anyplace else. But other than that, we are trying to enhance our capabilities to respond to growing demand globally.

Got you. If I could switch gears with one more follow-up here. Guidance towards 83% utilization is definitely above recent quarters over the last couple of years run rate. It seems like that's definitely a function of increased number of rigs coming on, et cetera, so you're getting some absorption on the fleet. What you think -- if we're looking at a run rate range, if you will, rather than just a direct guidance line, what do you think -- things go well, what do you think that utilization can go? One quarter is a little slower, so to speak, what's the bottom end of the range, especially given the fact that there's always been some seasonality in the business. What is the bound we should be thinking as we forecast from here?

Well, usually we get asked what is the maximum utilization that you can sustain? And we generally say it's around 85%. I think that -- and we're close to that mark, obviously, at the moment. I think the driver behind that number, that percentage, really is the call out nature of the work that we participate in, and projects stopping, starting, some ROVs being demoved, removed and whatnot. So I would say -- I'd say 83% is pretty high on a sustained basis, and we feel pretty good about it.

Great. Well, thanks very much. I appreciate your time.

(Operator Instructions)

Your next question comes from the line of Ed Muztagafo. Your line is open.

Hello, all. Great quarter. Thanks for taking my call. I was wondering if we could just get a little bit of thoughts on your EPS progression throughout the year. You did $0.69 in the first quarter. Presumably, if we take the midpoint of your guidance and then look historically when you go from 2Q to 3Q, you all tend to have about a mid- to high teens increase in EPS on average, which would imply something that's a pretty steep falloff in the fourth quarter. And I'm not sure if perhaps we're just not looking at the typical second to third quarter EPS progression, or is this something you are thinking about there just in terms of the way EPS plays out in the back half of the year?

I think if you take as a given that our first quarter over performance, if you will, was really attributable to stuff moving forward. And the first quarter is traditionally the lowest EPS quarter of the year, followed by the fourth quarter. I think that we're -- barring, aside from what we managed in the first quarter, I think you would expect to see similar comparatives in 2, 3 and 4. At least, that's what we're expecting now.

Okay. Just looking historically, if it followed the normal pattern, where you fourth quarter was in the range of second quarter, it just seems like it would put you above the high end of the guidance. And I just wanted to understand your thoughts there.

I guess as an unrelated follow-up, and I know we've talked on past calls about opportunity for putting second ROVs on rigs. Maybe we've asked this, and I just don't remember. We've had something on the order of about 24 drill ships that were dual BOP, at least capable, if not equipped, in the last 18 months. Do those rigs present an atypical opportunity to put a second ROV on the rig, or is that not really applicable to a dual BOP rig any more than it is to a single BOP-equipped rig?

The drill ships were certainly designed with the capacity to take two ROVs, but we have not really seen that be a trend in the marketplace so far.

Right. And so I'm guessing in your negotiations to equip the dual BOP-equipped drill ships, it's still a single ROV in the discussions, for the most part?

Yes.

Very much, for the most part. Every now and then, we'll get a rig operator -- an oil company that wants two, and we provide it.

I can tell you this. We have a list of all the new rigs that we expect to go into service this year. And there are three of them that have requirements for two ROVs.

Okay. And are you far along in the discussions for the 2014 rig deliveries, which effectively would be at least the start of the dual BOP-equipped rig deliveries?

Well, we've already got several contracts in hand for '14. The answer to your question is yes.

Okay. That's fair. Thank you very much.

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

Okay. Since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. We are very pleased with our record first quarter results and anticipate producing another record year of EPS for 2013. This concludes our first quarter 2013 conference call. Thanks, and have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call and you may now disconnect.