Oceaneering International Inc (OII) 2013 Q3 法說會逐字稿

Good morning. My name is Megan and I'll be your conference Operator today. At this time I'd like to welcome everyone to the 2013 Q3 earnings conference call.

(Operator Instructions)

I'd like to turn your call over to Jack Jurkoshek, you may begin your conference.

Good morning, everybody. We would like to thank you for joining us on our 2013 third-quarter earnings conference call. As usual, a webcast of this event is being made available through the StreetEvents Network Service at Thomson Reuters. Joining me today are Kevin McEvoy, our President and CEO, 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 very pleased to be here with you today.

We achieved record EPS for the quarter, reflecting the high level of demand we continue to experience for our subsea services and products. Our third-quarter results were highlighted by all-time high operating income from our ROV segment and better-than-anticipated subsea products operating margin. Overall, we remain on track to achieve record EPS for 2013, which we now believe will be up more than 25% over 2012.

Given our third-quarter results and an improved fourth-quarter outlook for subsea products and subsea projects, we are raising our 2013 EPS guidance range to between $3.35 and $3.40, up from our previous range of $3.20 to $3.35. We are well positioned to participate in the growth of deepwater and subsea completion activity that is currently underway, and we are initiating 2014 annual EPS guidance with a range of $3.90 to $4.10. This is up 19% at the mid-point over our forecast for 2013.

We anticipate continued global demand growth for our services and products 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 growing, and backlog to perform offshore construction projects is at a record high level.

For 2013 and 2014, we anticipate generating at least $735 million and $845 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 doing so. I'll talk more about our 2014 guidance later. But, first, I'd like to review our 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, notably in the Gulf of Mexico and off Africa. Our ROV days on hire for the quarter increased to a record high of nearly 23,700, and our fleet utilization rate rose to 86%. This was up from 83% last quarter and 81% year over year. We expect 2013 utilization to be 84%.

Sequentially, operating margin increased about 70 basis points, but not enough to round up to the 30% level we had hoped for. We continue our efforts to raise prices and control costs to achieve margin improvement.

During the quarter, we put seven new ROVs into service and transferred one system to advanced technologies for non-oil field use. At the end of September, we had 302 systems in our fleet, up from 285 a year ago. All of the new ROVs went into drill support.

Our fleet mix during the quarter was 73% drill support, and 27% on vessel-based work, the same as in the third quarter of 2012. We had a 74%, 26% mix last quarter. We continue to anticipate adding about 30 new vehicles to our ROV fleet in 2013, approximately 13 during the fourth quarter.

Now, turning to subsea projects, year over year and sequentially, operating income rose due to increased demand for deepwater intervention and shallow water diving services in the US Gulf of Mexico, and additional vessel activity offshore Angola.

Year-over-year operating margin increased to 21% from 17%, and this was largely due to a favorable change in Gulf of Mexico deepwater job mix to include more installation work.

At $30.7 million, quarterly operating income was second only to the $31.6 million we achieved in the third quarter of 2007, at the height of the hurricane damage repair work being performed in the US Gulf of Mexico. This was accomplished due to our international expansion in Angola and the Gulf of Mexico deepwater mix previously mentioned.

During the quarter, we commissioned the construction of the Jones Act compliant Subsea Support Vessel with an expected delivery by the end of the first quarter of 2016. This vessel will allow us to maintain our competitive position to meet what we believe will be growing demand and more rigorous technical requirements for ultra-deepwater subsea project services in the Gulf of Mexico. Of note, this vessel will have a 250-ton heave-compensated crane, 100 tons greater capacity than any of the vessels we currently operate. This will increase our capability to safely handle heavier subsea payloads for our customers in deeper water depths.

As for our other business segments, year over year, subsea products operating income improved on higher demand for tooling and subsea hardware. Sequentially, operating income did not decline as we had anticipated, as our operating income margin benefited from a higher contribution from tooling.

Our subsea products backlog at quarter end was $857 million, down 5% from $902 million at the end of June but up 38% from $619 million a year ago. Year over year, the substantial backlog increase was largely attributable to umbilical awards and contracts we secured for subsea hardware. The 5% sequential decline in products backlog was primarily in umbilicals. Given the episodic nature of umbilical awards and their relatively large value compared to our other product offerings, we expect our quarterly products backlog to fluctuate depending on the timing of major umbilical contracts.

Asset integrity operating income improved year over year on higher service sales in Africa; sequentially operating income was unchanged. Advanced technologies operating income increased year over year on additional vessel maintenance work for the US Navy. Sequentially, operating income declined, as we had expected, on a lower level of activity and operating margin on theme-park projects.

In summary, our third quarter results were exceptional, 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 the major secular growth trend in the oil field services and products industry.

We were pleased with our EBITDA generation of $204 million during the quarter. Capital expenditures for the quarter totaled $105 million, of which $53 million was invested in ROVs and $33 million was invested in subsea products. We are raising our CapEx estimate for this year to between $400 million and $425 million. The $75 million increase over our previous guidance is to accommodate the expenditures for the new vessel we are having built, and additional investments to enhance our subsea products capabilities.

Now let's talk about our year-end outlook. For the fourth quarter of 2013, we are projecting EPS in a range of $0.80 to $0.85. We expect our fourth quarter EPS to be up year over year on operating improvements from ROVs, subsea products, and asset integrity. Sequentially, we anticipate a quarterly operating income increase from ROVs as we put additional new vehicles into service. We also project ROV operating margin to show some improvement in the fourth quarter.

The rest of our oil-field business segments are forecast to have operating income and margin declines, due to normal seasonality or project timing. Advanced technologies operating income is forecast to drop precipitously. This is attributable to projects having been pulled forward into earlier quarters this year, and the uncertainty of US government funding for the services we provide to the US Navy.

Looking forward to 2014, we are initiating EPS guidance with a range of $3.90 to $4.10, based on an average of approximately 109 million diluted shares. We believe our upcoming year guidance is a bit more aggressive than in years past, as our market drivers are transitioning from ROVs to our other oil-field business operations for which we have less annual visibility.

Demand for these other operations is tied to secular growth in field development and inspection, maintenance, and repair activities, which is occurring. But the exact timing of this work is more uncertain and, outside of umbilicals and our Angola project, the work is very short cycled, with little visible backlog.

We have not completed our detailed planning process, but the big picture changes we envision for 2014 compared to 2013 can be summarized as follows. ROV operating income is projected to grow on the strength of greater service demand to support drilling and vessel-based projects led by increased activity off Africa.

We are projecting that our fleet utilization rate will improve to 85% and anticipate adding 30 to 35 new vehicles to our fleet in 2014. We intend to retire systems when they reach the end of their useful lives and will continue to report these 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 in the range of 29% to 30%. 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 higher demand for each of our major product lines. Products operating margin is expected to be in the range of 19% to 21%. Subsea projects operating profit is expected to be better on growth in deepwater intervention activity in the Gulf of Mexico, and additional work offshore Angola. Projects operating margin is expected to show a slight improvement over 2013.

During 2014, the operating profit of our Gulf of Mexico operations is expected to benefit from the addition of another chartered multi-service subsea support vessel, the Normand Flower, to our Gulf fleet. We also anticipate an increase in other vessel availability and a decrease in drydock expenses.

Our asset integrity segment profit contribution is forecast to be higher, on increased service sales in most of the geographic areas in which we operate. Asset integrity operating margin is expected to show a slight improvement over 2013.

Advanced Technologies performance is expected to be about the same.

Unallocated expenses are estimated to increase at a rate slightly less than revenue growth.

At the mid-point of our guidance range, we expect our overall operating margin in 2014 to remain approximately the same as the 17% we anticipate for 2013. During 2014, we anticipate generating at least $845 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 is that it will be similar to 2013, or around $400 million.

Our focus in 2014, 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 2014. For those of you who intend to publish quarterly estimates, I'd like to remind you that, historically, our first quarter is the lowest of the year due to seasonality.

On a macro basis, 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 increase its investment in deepwater, as it remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates and relatively low finding and development costs.

An early 2013 industry report by Douglas Westwood forecast global capital expenditure spending on deepwater oil and gas projects will double over the next 5 years. 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 September, 103 of the150 existing high-spec drillships and fifth- and sixth-generation semis were contracted to operators other then Petrobras in Brazil. We had ROV contracts on 82 of these, for a market share of 80%.

At the end of the quarter, there were a total of 101 new floating rigs on order. 72 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 72 rigs, 26 ROV contracts have been let, and we have won 23, or 88%, of them, leaving 46 non-Petrobras ROV-contracting opportunities left to be pursued.

If all 72 of the non-Petrobras rigs I mentioned are placed into service, we believe our ROV fleet supporting the rig market should grow by at least 55 to 60 vehicles. 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.

As the use of floating rigs grow, 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. The current trend indicates that there will be approximately two vessel-based ROVs for every floating rig in operation; so, the 101 rigs under construction should represent incremental demand for approximately 200 ROVs on vessels. We estimate Oceaneering's market share of the global vessel-based ROV fleet in about 20%, and see no reason we would not at least maintain this share in the future. This incremental demand would result in our ROV-fleet supporting-vessel market activity growing by some 40 vehicles.

In summary, by maintaining our current market share of the visible growing rig and vessel services requirements we are forecasting, we will add 95 to100 incremental ROVs to our fleet. We anticipate the ROVs to support the rigs on order will be in service by 2017. The in-service timing for the vessel-based ROVs cannot be predicted at this time, but will most 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 more than 60% over the previous 5 years. In 2013, subsea tree orders are projected to grow to 556, an all-time high, eclipsing the previous record of 462 trees in 2006 by 20%. In 2014, tree orders are projected to be about the same, at 551.

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 32% increase in umbilical orders for the five-year period 2013 through 2017 compared to the previous 5 years.

Umbilical orders in 2013 are forecast to rise to about 1,685 kilometers, up over 45% from 2012. In 2014, umbilical orders are projected to increase 15%, to the 1,945 kilometer level.

Based on their subsea tree order forecast, Quest Offshore is projecting average annual subsea tree installations over the five-year period 2013 through 2017 will increase by 140, or about 45%, from the previous 5 years. The number of subsea completions in service compared to 2012 is projected to increase by 35% by the end of 2017. We believe the projected rise in tree installations, and the growing number of subsea completions in service, will act as catalyst for further growth in our subsea products and subsea projects, operations, and profits.

Furthermore, 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 oil-field services market, and are leveraged to the growth of deepwater and subsea completion activities that is currently under way.

The longer-term market outlook for our deepwater and subsea service and product offerings remains promising. Industry and regulatory emphasis on reliable equipment, and redundant safety features at deepwater operations, 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 anticipate that we will achieve another record year of EPS performance and that 2014 will be even better. We think this distinguishes Oceaneering from many other oil-field service companies. We appreciate everyone's interest in Oceaneering, and I will now be happy to take any questions you may have.

Megan, we're ready for questions.

(Operator Instructions)

Your first question comes from the line of Ryan Fitzgibbon with Global Hunter Securities. Your line is open.

Hi good morning guys. Nice quarter as usual.

A question on the 2014 guidance. Can you maybe help us out a bit just to how we should think about the three oil field segments, ROV products and projects. Which would grow the fastest in your expectation if you could rank order those for us?

On a percentage basis, on a dollar basis, which are you asking, Ryan?

Let's go percentage year-over-year on the EBIT level.

I don't know. Jack, do you got that?

I would say that products and projects would be pretty close, neck and neck, followed by ROVs.

Okay. And then I guess in your guidance, in the Press Release you talk about Angola actually being up year-over-year for projects. Have you guys gotten the third vessel contracted with BP or where do you guys stand on the scale of that project right now and what's your expectation for 2014?

We have a temporary third vessel if you will, that's been there for probably what, close to five months now, that is going to go away eventually. BP is still extending it weekly but we do anticipate a third permanent vessel will be in place at some point during 2014.

Okay, so they have exercised the 2, 45-day options at this point?

Yes, they did and we expect to stay on until kind of the middle or the end of December.

Okay, that's helpful. Second question for me is also on the project side of the business. Can you talk about what the contracting environment is like in the Gulf of Mexico on the deepwater intervention side? I know specifically it's generally been a spot-market at a business, but for the Normand Flower are you seeing any contracting opportunities to date and the same thing for the new build? I know that's coming out quite a bit, but just trying to get your sense as to whether that markets changing at all.

Well we think that market is strengthening. There is more activity on the horizon for 2014, and I think in 2015 in particular, and so we do see opportunities for the Normand Flower even prior to its arrival here, and as far as the new build vessel, we do, we will have the flexibility as needed to get rid of one of the charters if the market dictates that, but we're at this moment in time expecting that will just add to the fleet and continue the expansion there.

Okay, and then on the new vessel, can you disclose what the CapEx requirement is there and what your expectation is for a return?

Not at this time.

Fair enough. Appreciate the time guys, thanks.

Your next question comes from the line of Kurt Hallead with RBC Capital Markets.

Good morning, everybody.

Good morning.

I was just --I think we're all pretty much aware of the secular growth dynamic that's at play as you guys outlined. Looks like some of the growth rate percentages are in excess of potentially what you guys may be expecting to achieve, just on the back of the envelope process, right? So let me ask you this, when you look at it over the next three, four, five year period and you take some of these top-line kind of growth rate dynamics, how do you think that translates to an earnings per share growth rate for Oceaneering over time?

Kurt, we're the first ones out with 2014 and you're asking us beyond that?

Hey, I'm just trying to get a longer term and you know we're not going to --I'm not asking for specifics but just generally speaking when you look at the market dynamic.

If you look and just kind of correlate the secular growth with our track record, I would think that we would continue to participate in the way that we have, and the way that we project for 2014. I mean, I think our whole Investor Relations presentation is based on that five-year look of continuing growth in drilling and development and IMR and I think what we're saying is it gets a little bit more difficult to project the future as you transition from something that is so exploration based as our ROV field support has been with really great visibility, to more inspection, maintenance, and repair type production support activity as we see the next five years becoming, so it is really hard for us to have that crystal ball with a lot of visibility right now, but we see it as being all good.

Okay.

And it really is the short-cycle time related to those other businesses that make it hard to go too far out on a limb and say what's going to happen.

Right. Okay, that's fair enough and when you look at a subsea products element vis-a-vis the ROV element, if you compare and contrast the two, which one of those do you think would experience a higher growth rate from here?

I think where we're headed is to more production-based, if you have pull through of some ROV work, but as we said our vessel base work is kind of mid 20%s number, you know 23%, 24%, 26% of our vessel use, I mean of our ROV utilization, but I think what you see is great opportunities for tooling and deepwater work systems, you know for flow remediation and that type stuff, production support and also integrating with our products, with our vessel-based operations.

I mean if you've got 300 ROVs in your fleet and we said roughly, we said we hope to add another 100 --right?

Over time.

Over time. I mean you can do the math. That isn't going to get you 25% annual compounded rate of growth.

If we add 30 to 35 next year and we retire some, you can see that it's not keeping up with our projected growth rate of operating income growth overall.

So tooling by definition, products and tooling, hardware become a higher growth dynamic than ROVs over time?

We think so from here.

Fair enough. Okay, I appreciate that. Thanks.

You're welcome.

Your next question comes from the line of Stephen Gengaro with Sterne Agee.

Thanks, good morning, guys.

Hey, Steve.

So when I think about the margin profile going forward, obviously ROVs has been up an easier --a little bit easier business to think about on a forward basis. The margins in products and projects specifically, can you just give us some sense for the primary drivers of them both in general terms and also seasonally so we can just help us better understand what the drivers are of those margins so we can get a little bit better shot at getting the model more accurate going forward?

Well Stephen my quick answer is just going to be very helpful. I think it's mix and geography. And it really is, I mean that's almost an impossible question to ask, but I mean when you look at products, it really has a lot to do with mix and the more I want in tooling that we can sell, the better our margins going to be. And the more umbilicals we can sell, the more money we're going to make but it should tend to bring down the percentage of our operating income, our margin. And on project, that's really the hardest one because the difference between any IMR, or you know we've got seasonality and we have location between Angola and the Gulf of Mexico --

And the mix of work within that Gulf of Mexico vessel-based work can vary dramatically between whether you're doing an installation of something or just an IMR project, so it really is all over the board.

Okay, that's what I thought you were telling me but when you think of products right now, how does the backlog look on the umbilical side versus other work relative to where you were a year ago?

Well we have much more umbilical backlog than we've ever had, and it's way more than the other project. The key thing here I think, is that the other product work is much shorter cycle-time from order to delivery, sometimes it doesn't even show up, I mean it's cleared out within a quarter. You get the award, you finish your job, it's in a quarter, and it makes it hard to really to predict, relative to maybe the heavier backlog businesses like the big three companies or what not, and so that's why quarter to quarter, sometimes we get a better result than we were expecting from the tooling and IWOCS sales that we didn't see when we gave the last guidance.

And I do want to remind you that we gave pretty specific guidance in Kevin's opening remarks about our operating margins. And what we said, was that products would come in between 19% and 21% next year, so we've got 23% year-to-date, so we expect to come down a little bit in Q4 as we said, and then next year it will be a lot like this year, but a little bit different mix.

Okay, that is helpful. Thanks for the comments.

Sure.

Your next question comes from the line of Byron Pope with Tudor, Pickering, Holt.

Good morning guys.

Just one quick question for me relating to the ROV segment with regard to the 2014 guidance and thinking about the margin profile. I think you've got more of your ROVs in the Gulf of Mexico and Africa than any of the other regions and I think of those two geographic regions as being accretive to the overall ROV fleet average margin. So even if you weren't able to pass through and get increased revenues per day, is it fair to think if those two geographic regions drive the growth next year that you can get to that --say close to 30% margin range even without increasing your average revenue-per-day on hire?

That is a hard thing to do, I mean you can maybe imagine that for the Gulf of Mexico where operations are pretty concentrated, but when we say Africa, we're not just talking about Angola or Ghana, we're talking about North, East, West, South, the whole continent and so we are spread out all over the place and there is cost involved in trying to support those activities and whatnot of particularly one or two ROV operations like we have been on the East Coast of Africa in Mozambique and Tanzania and such. So Africa is just a whole different deal when you've got units spread out all over the place very remotely and your opportunity to lower cost is just really limited.

I think what we're trying to do is trying to frame that we should be within 29% to 30% for next year which isn't a bad place to be.

Agreed. That's it for me. Thanks, guys.

Your next question comes from the line of Jon Donnel with Howard Weil.

Good morning.

Hi, Jon.

I had a question for you on the subsea products and with the discussion here about the ROV tooling and IWOCS potentially driving that growth here as we think about longer term, I know from the umbilical, side we always think about there being a lot of extra capacity there but would this growth on the tooling side create any labor or supply chain issues for you going forward here or is that something that's on your radar screen?

We believe we've got plenty of capacity in all of our productline businesses to match up to the growth that we hope is coming.

I mean competition for labor, engineers and technicians is intense but it always, it has been for -- so we don't see any new challenges there.

That's helpful and in terms of the Angola work for next year, is the third vessel already in place or is that one that you could use the existing one that's one of the options right now to do that work or is there the potential that you might need to bring in a different vessel and maybe some incremental capital costs come along with that?

We're working with BP on that and they're working towards a solution. I mean it's a mutual agreement maybe more driven by their side on the vessel that they want to have for the third vessel all around both cost and utility for what they want it to be doing, but so I don't, I would not say -- I would not expect that we would move another one of our vessels from the Gulf of Mexico to Angola if that was part of your question.

Yes and I think one of the things that we need to keep in mind is that we're not going from two to three vessels. We've had the Maersk Attender there for quite a bit of time this year, so maybe we're going from 2.5 to 3 depending upon the timing of when the third one gets there, so it may be that all these things kind of factored into what we try to pick a range. There's a lot of unknowns.

But it may need to be a separate vessel from the Maersk Attender to do the work in 2014?

It may. It most likely will be a different vessel.

Great, that's helpful. Thanks a lot guys, I appreciate the time.

Your next question comes from the line of Brad Handler with Jefferies.

Hi, thanks, guys. I guess a couple projects related questions for me too, maybe starting with Angola just picking up where you left off. You're obviously speaking more confidently about having the work in 2014 with BP, or at least it sounds more confident. Has a renewal contract beyond February been signed?

An extension has not been signed. It was a three year contract so we're about 1.5 years plus into that.

We'll be going into year three.

Oh, I misunderstood, I'm sorry. I thought it was actually coming up so I didn't realize. (laughter)

February of 2015 so I'm glad we're commenting on it.

Makes sense. I've got that. My bad. (laughter)

It's February of 2015.

Okay so this discussion is purely around the use of the third vessel for 2014 and settling in on what vessel and all of that?

Correct.

Presumably that would link in or integrate with the current contracts or perhaps you'd set the third vessel up through February 15, and then a full rollover potential, is that logical?

I think there's a lot of different options but yes that would be the intent.

Okay, if I try to overthink the Gulf of Mexico commentary a little too, you mentioned less drydock time in 2014. Can you calibrate for us how much drydock time there was in 2013 or there will be overall in 2013?

We could but we aren't giving all that detail. That's just really a year-to-year timing issue on one regulatory, inspections are required and we just happened to have less next year than we have had this year. How material that is, that's nothing I would tweak your model over that's for sure. We compare that in the guidance.

Okay and I understand. I think that makes sense. Just a question around that though. Have you been limited in your ability to catch work in 2013 because of the drydock time?

Well obviously when a boat is drydock if you have an opportunity you have to forego it.

Sure but I don't know how much idle time you've had so that it hasn't necessarily been an opportunity cost.

Brad, I mean let me come at it a different way. We think we have additional demand in the Gulf of Mexico, otherwise we wouldn't be bringing in the Normand Flower.

Of course.

So that's not really a drydock issue as much as a market issue.

We think the market for deepwater, IMR, and installation is improving and we want to be here with available boats to capture that work.

Sure, that's fine, thanks. I'll turn it back.

Thanks.

Your next question comes from the line of Mike Urban with Deutsche Bank.

Thanks, good morning, guys.

Hi, Mike.

The only question I had left was on the decision to build a new vessel. And I apologize if this was answered earlier, but you've had a mix of both leased and owned vessels but had a preference for leasing in the past. The decision to go ahead with a presumably owned new build here, you know is that a function of a tighter market that you see coming or just the specialized capabilities that this vessel has are limited or might you do a sale and lease-back at some point? Just interested in your thinking there.

I think first and I want to talk about our preference has basically been on economics, and what lease versus buy has always been a preference to what's being offered on a lease market versus the capital cost of buying, so most of the time when we've done that analysis, its come out with it's more economic to lease the vessel as opposed to buy it and now I'll let Kevin talk about the other aspects.

Well, there are limited Jones Act qualified vessels in the Gulf of Mexico the size and capability we are really interested in here, and so the lease versus buy didn't work under that scenario. There are just very few to choose from, and in fact, our view was that there were none to choose from that were really the type of vessel that we really wanted. So that drove us to the buy side on this time, this evaluation and we do think that having a Jones Act versus a foreign flag vessel will be more valuable in the far, offshore, ultra deepwater work that's being done, there are occasions when if you have a foreign vessel you have to have a US flag carry out to you whatever it is you're going to install if it's a jumper or something like that, so this alleviates that concern and reduces operational risk. And we think that this will be something that operators will want to take advantage of.

Got you. That's all I had, thank you.

Let's remind everybody, that boat doesn't come available until 2016.

Right.

Your next question comes from Darren Gacicia with Guggenheim Securities.

Thanks guys, nice quarter.

Wanted to ask -- when I was thinking about ROV guidance, the 85% utilization for next year is definitely kind of higher than the recent run rate. I'm imagining that because the mix is mainly geared towards drilling-centric versus vessel-centric work. But there's also some conversation about maybe gaining a little of share in the vessel market and having that kind of be a bigger growth component at some point going forward. Can you help balance that out and help me think about what's normalized utilization and how I should think about that going forward?

Well normalized utilization would be around the 85% mark with stops and starts and projects and whatnot so that's probably a reasonable top-end. Top-end for a sustained operating. With regard to what really is driving that, I mean the drilling rig part of that equation really is --helps to drive the top end but I guess on the vessel side, it is a function of how hot is the market? How much utilization are your vessels getting, because we have very few that are on long-term contract, It is all call-out. So that percentage really is an indication of market activity, primarily between the Gulf of Mexico and the North Sea.

And we're not really protecting -- I'm sorry we aren't really projecting a major shift. We --last quarter we're at 73% drill support, 27%, in the second quarter with 74%, 26%. I don't expect a significant shift. I would say the end-of-the year drill support will be in the 70s in vessel-based work will be in the 20s, but--

Until they stop delivering all these new floating drilling rigs, I think maybe within a few percentage points it may change, but it's going to be plus or minus what it historically has been.

Right.

Well it sounds like if you're two-to-one on vessel driven ROVs relative to rigs, and I'm imagining the vessel ROVs come afterwards, then the mix shifts back at some point in the game. I don't know whether that happens from a numeric standpoint it's a matter of math. Does it happen in 2015 or 2016, but I'm also imagining that may change the normalized utilization as well, no?

It could and it is a longer term deal. I mean it follows as we say we can't really predict when those will get added but certainly, we expect it will happen some time, but it's not within one or two years of the rig fleet growth I don't think. Really you're looking at when is the subsea field hardware all installed and operating, that's going to drive the number of vessels being required and I think that's still happening in 2015, 2016, 2017.

But when you do your math and you take 70% plus of drill support of one, and you do 20% of two, on vessel base as our market share, you don't see a significant shift occurring but directionally, I agree with you that we always say that after these fields are discovered and put into production there will be more vessel-based activity going on.

But from a historical perspective our fleet utilization rig peaked in 2007 at 87% and then dropped to 75%, and now we're back to the 84% level. The rebound -- the major thing that's caused the rebounds from 75% back to 84% has been the uptick in demand for ROVs on boats.

Right.

Which is the Gulf of Mexico and North Sea.

Your next question comes from the line of Waqar Syed with Goldman Sachs.

Hi. I guess that's me. So a couple of things, number one, on ROVs, I think we discussed that but if you aren't providing, could you provide us with the split between drill support and construction support in the third quarter?

What we said 73/27, let me double check that. Yes, 73% drill support, 27% vessel based.

Okay, and then just a question on Brazil. Its been Petrobras has changed so much plans and I just wanted to see what you see over the next 2014 and 2015 for your product side in terms of sales and new awards.

I think every day is a new day with Petrobras in terms of what their plan is. I'm not sure I can really answer that question definitively.

I think what we can say is that 2014 is substantially secured by backlog in Brazil.

Right.

And that what new orders get awarded and how the timing is a question for 2015.

Okay. Now you had expanded your capacity at the plant in Rio, so is that now running at full capacity or there's still availability there?

Well we really didn't expand our capacity. We expanded our capability in order to be able to handle the much larger, heavier umbilical cross-section that Petrobras is using for their pre-salt projects, and so it really wasn't a capacity issue so much as a capability issue, and we are, I think pretty well sold-out of capacity for this year into 2014, and there's the real question mark is what is Petrobras going to do that would fill the plant for 2015 at this point. We don't have any visibility on that.

In terms of the capability enhancements, are you building pre-salt umbilicals there, or is that from more for the traditional right now?

We are building the pre salt umbilicals for Petrobras in our Niteroi plant.

Okay, great. Thank you very much.

Your next question comes from the line of Jim Wicklund with Credit Suisse.

Good morning, guys.

Hi, Jim.

Congratulations on setting records, that's always a good thing, good job.

Thank you.

From an ROV perspective, I understand you carving out Brazil and don't blame you, but it is one of the biggest markets. Is Brazil, from an ROV perspective ever really going to be a market for you guys, and why not?

Well first of all it is a market for us. We continue to operate there, we have how many, we'll tell you how many vehicles. We have a number of vehicles there and there are a few other that are non-Petrobras as well.

Yes, but you wouldn't be carving it out if it was your best business.

Well, no. There's two things, Jim. Number one, Petrobras has always been a lower margin business than almost anywhere else in the world, and number two, when Petrobras went to their procurement strategy 2.5 years ago to order ROVs in lots of 20 and 30 over time, and to get the lowest possible pricing that they could get, those awards were going for single-digit returns and operating income margins and we just weren't disposed to going after that business under those circumstances, so there were two orders that went under that scenario.

The first one was awarded, Subsea 7 won that order and it was 30 ROVs. The second one was awarded, I don't know, six months ago, give or take and that, was for 20 to 24 ROVs or somewhere in that neighborhood and ultimately, the company that won that was disqualified or the contract never got signed. They were not capable of performing the contract. We suspect it's because they -- before they bid, had never owned an ROV before, or never operated one and that could be the reason, we aren't sure, but anyway so Petrobras has not come out with another procurement at this point, and we don't know whether we're going try and change the strategy as a result of this last go around or not. But in the meantime, we have been able to extend a couple of our systems down there that were due to be replaced by this new order that hasn't happened, so it's a total question mark as to where they go in the future here with that.

And Subsea 7 said they've gotten killed in that market and aren't going to be as aggressive anymore? I don't want to put this into numbers or anything, but should we get more optimistic about them changing that in the future with one player disqualified and the other saying they aren't going to do it anymore, just theoretically?

No, I don't know that Subsea 7 --I'm not sure, I think that they had said, really on their construction side of their business, is that they aren't going to take contracts where they have a lot of risk at the time that they did by not knowing all of the details of the contract. I think that is what has hurt them and they're not taking those contracts anymore, so I think that there will still be competition for the drill rig support part of the Petrobras business there.

And my follow-up, you had commented before on revenues out of backlog for products in 2013, 75% of the backlog. Do you have a projection for 2014 just for modeling purposes on what revenue out of backlog for products might be?

No.

Gentlemen thank you very much.

Let me just end that with we have 35 ROVs in Brazil, and we have 32% market share, 21 out of 66 Petrobras rigs, and of the 21 that we're on, 16 of those are their high-speck rigs. So if you look at that, I mean and then we've got seven on non -- nine on non-Petrobras rigs and then seven on vessels and an FPSO. so if you have a third market share somewhere, you're not exactly out of that business. But I don't see the dynamics changing, if somebody else goes, if somebody says we're not going to do that anymore, they still got a long-term commitment there to be there to operate those that they bid, and I don't think Petrobras is ever going to pay the kind of margins we're looking for on brand new equipment.

Very good point. Thank you, Marvin, I appreciate it.

(Operator Instructions)

Your next question comes from the line of Darren Gacicia with Guggenheim Securities.

Hi, I think I already managed to get into the queue, but if I could with one follow-up, just in the ROV forecast, do you have any equation for any rig retirements over the next few years? Because I know that's something that seems to be an emerging issue with some of the older rigs getting cold stacked in the rest.

Yes, we have taken into consideration that Jack did a whole detail analysis here. Go ahead.

Here is the status. We have a definition of high speck and low speck rigs. At the end of September, we had ROVs on 63 low speck rigs, and 22 of those have contract-end dates by the end of 2014, and we scrubbed that list down. And based on conversations we've had with the operators and rig owners, we are expecting four of these to be idled and possibly retired by the end of next year and we've taken that into account into our financial forecast for ROVs.

Interesting, that's great color. I think that's it for me, I'll turn it back. Thanks again.

There are no further questions at this time.

Very good. So since there are no more questions I'd like to wrap up by thanking everyone for joining the call. We're very pleased with our best ever quarterly results and anticipate producing record EPS for both 2013 and 2014. This concludes the third-quarter 2013 Conference Call. Thanks, everyone, and have a great day and holiday season. Bye-bye.

Ladies and Gentlemen, this concludes today's Conference Call. You may now disconnect.