Oceaneering International Inc (OII) 2014 Q2 法說會逐字稿

Good morning. My name is Kelly, and I will be your conference operator today.

At this time I would like to welcome everyone to the 2014 Q2 earnings conference call. All lines will be placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

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

Good morning, everybody. Would like to thank you for joining us on our 2014 second quarter earnings conference call. As usual, the webcast of this event is being made available through the Street Events network service by Thomson Reuters.

Joining me today our Kevin McEvoy, our President and Chief Executive Officer will be leading the call, Marvin Migura, our Executive Vice President and Cardon Gerner, our Senior Vice President and Chief Financial Officer. This is a reminder, remarks we make during the course of the call regarding our earnings guidance, business strategy, plans for future operations and industry conditions are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. And I am now going to turn the call over to Kevin.

Good morning, and thanks for joining the call. I'm pleased to be here with you today to discuss our 2014 second quarter earnings results.

Our record quarterly EPS of $1.02 was slightly above our guidance and was up 21% over the first quarter of this year and up 12% compared to the second quarter of 2013. Year-over-year quarterly EPS increase on profit improvements by subsea products, ROVs and subsea projects. Sequentially, quarterly EPS rose on higher operating income, principally from subsea products and subsea projects.

We achieved record quarterly operating income from subsea products, which was up 23% over the previous record set just two quarters ago in the fourth quarter of 2013. And for the first time, quarterly profit from subsea products exceeded that of ROVs.

Our outlook for the second half of this year remains positive and unchanged overall from last quarter. We still believe we will achieve record results for the year and are narrowing our 2014 EPS guidance to a range of $3.95 to $4.05 from $3.90 to $4.10.

Compared to 2013, we continue to forecast income growth for all of our oil field operating segments in 2014. Compared to the first half of 2014, we expect to generate higher income during the second half from each of our operating segments led by ROVs and subsea projects. ROV profits are expected to be up on an increase in days on hire and a slightly higher operating margin as we benefit from the additional days worked, a favorable change in geographic mix to more work off Africa and the Gulf of Mexico and improved execution on our new ROV startup operations.

For subsea projects, we are forecasting a higher contribution, primarily from our deep-water vessel service and diving operations in the US Gulf of Mexico. We also anticipate that advanced technologies will have considerably better results during the second half of 2014 due to expected better job execution and increased activity on work for the US

Navy and theme park activity. For 2014, we anticipate generating at least $855 million of EBITDA. Our balance sheet and projected cash flow provide us ample resources to continue to invest in Oceaneering's growth, and we intend to do so. Our focus in 2014 continues to be on earnings growth and investment opportunities, both organically and through acquisitions.

I'd now like to review our second quarter segment results. Year-over-year second quarter subsea products operating income increased 28% on a 27% increase in revenue due to a higher demand for all of our major product lines. Operating margin was flat.

Sequentially, operating income rose 46% on the strength of higher revenue and increased profitability from tooling and subsea hardware resulting in a 3% increase in operating margin. Our subsea products backlog at quarter end was $850 million compared to our March backlog of $894 million and $902 million one year ago. During the quarter, we announced one large umbilical contract for offshore Indonesia.

Year-over-year and sequentially, the backlog decline was primarily attributable to umbilicals, the market for which we continue to note can be quite lumpy. Year-to-date, our subsea products operating margin has been 23%, and given our outlook for the second half of 2014, we are now forecasting that subsea products operating margin for the year will likely be around 21%, the high end of our previous guidance range.

Now turning to ROVs, year-over-year, ROV operating income improved on higher demand to provide drill support and vessel-based services. Our ROV days on hire increased 10% to approximately 24,500 days. Sequentially, operating income was sequentially flat at operating margin declined to higher repair and maintenance expenses, unanticipated costs associated with placing new systems in service and slightly lower fleet utilization. Revenue grew on increases in days on hire and revenue per day on hire.

Our fleet utilization during the quarter was 84% compared to 86% sequentially and 83% in the second quarter of 2013. Year-to-date, our fleet utilization has been 85%, but we are now projecting that our fleet utilization for the year will be around 84%, which takes into consideration our exposure on floating rigs rolling off contract during the remainder of this year. We still expect to achieve record ROV segment operating income for the 11th consecutive year.

Operating margin during the quarter was 28% compared to 30% in the first quarter and 29% a year ago. During the second half of this year, we should benefit from an increase in days on hire with a favorable graphic mix and more work off Africa and in the Gulf of Mexico. Compared to the second quarter, we anticipate quarterly operating margin will be slightly higher in the third and fourth quarters.

During the quarter, we put 13 new ROVs into service and retired four for a net addition of 9 systems. At the end of June, we had 323 systems available for operation, up from 296 a year ago. Nine of the new ROVs went into vessel support service and four into drill support.

At the end of the quarter, we had ROVs on 170, or 60% of the 284 floating rigs under contract. Sequentially, the contracted rig count increased by 1 and the number of rigs we had ROVs on increased by 3 Year-over-year, the contracted rig count increased by 7 and the number of rigs we had ROVs on increased by 10.

Our fleet mix during the quarter was 71% in drill support and 29% on vessel-based work. This compares to a 72%/28% mix was quarter and a 73%/27% mix in the second quarter of 2013.

During the second half of this year, we expect to place at least 13 new ROVs into service and we have contracts for all of these. When these new vehicles are placed into service depends upon the actual commencement dates of each new drilling rig and vessel project work. On a gross basis, we now anticipate adding 40 or more new systems to our ROV fleet in 2014.

Looking at subsea projects, segment operating income was higher year-over-year as a result of adding the Bourbon Evolution 803 to our field support vessel services contract with BP offshore Angola and the Norman Flower to our US Gulf of Mexico fleet. The increase from operating these two vessels was partially offset by the fact that last year's second quarter results benefited from a subsea well stimulation service project offshore Ghana utilizing a customer-provided vessel.

Sequentially, subsea projects' operating income increased largely as a result of adding the Bourbon Evolution 803 and a higher profit contribution from the Ocean Alliance in the US Gulf Mexico. The Ocean Alliance was out of service for much of the first quarter undergoing a regulatory dry dock inspection. Our overall Gulf of Mexico results did not seasonally improve as we benefited from subsea hardware installation work during the first quarter of 2014, which was an unusual occurrence for that time of year.

We have not yet received an official contract extension from BP on our field support vessel services contract. Discussions to extend this contract should conclude during August, and we continue to expect a favorable outcome.

As for our remaining business operations for the second quarter, asset integrity operating income declined year-over-year on a lower level of work in Africa. Sequentially, operating income improved slightly due to a seasonal increase in activity in Europe in the Caspian Sea area. Advanced technologies' operating income was lower, both sequentially and year-over-year. Sequentially, the decline was attributable to execution issues including slow progress on scheduled Navy submarine work and industrial project engineering design problems that caused in increased costs associated with rework and schedule delays.

In addition to these execution issues, the decline year-over-year was attributable to decreased activity on theme park projects and US Navy submarine repairs and engineering services. Furthermore, operating income for the second quarter of 2013 included an incentive bonus for meeting theme park's scheduled completion dates.

In summary, our second quarter fiscal were slightly above our expectations and we were pleased with our cash flow generation of $217 million of EBITDA during the quarter. Capital expenditures for the quarter totaled about $157 million, of which $60 million was invested in ROVs, $29 million was spent on a subsea projects, $26 million on subsea products and $40 million in the announced acquisitions of AIRSIS to enhance the asset tracking service we offer on offshore drilling rigs and vessels engaged in subsea activities and spectrum sales and service to add subsea pipeline inspection capability based on the use of electromagnetic acoustic transducer technology. AIRSIS' financial results are included in our subsea project segment and spectrums in our asset integrity segment.

Moving on to our third quarter outlook. We are projecting EPS in a range of $1.10 to $1.15. Sequentially, we anticipate quarterly income improvements from all of our operating segments led by ROVs. We are also expecting year-over-year third quarter profit increases for each of our business operations led by subsea products.

On a macro basis, we remain convinced that our strategy to focus on providing services and products to facilitate deep-water exploration and production remains sound. We believe the oil and gas industry will continue its investment in deep-water as it remains one of the best frontiers for adding large hydrocarbon reserves at high production flow rates at relatively low finding and development costs. We anticipate that demand for our deep-water services and products will continue to rise and believe our business prospects for the next several years remain promising.

At the end of June 2014, 119 of the 165 existing high spec drill ships and fifth and sixth generation SMEs were contracted to operators other than Petrobras in Brazil. We had ROV contracts on 95 of these for a market share of 80%. There were a total of 97 new floating rate on order, and we expect 68 of these will go to work for operators other than Petrobras in Brazil. Of these, 21 ROV contracts have be let, and we won 19 of them. 42 to the remaining 47 contracting opportunities do not have announced drilling contracts.

Looking forward, we see no reason why we will not continue to be the dominant provider of ROV services on high spec rigs working for operators other than Petrobras in Brazil. We are, however, anticipating that some of these new rigs will likely be used to displace existing less technically capable rigs and that this will partially offset the gains we achieved on the newer rigs.

The outlook for floating rig demand in the US Gulf of Mexico remains encouraging. There were 49 rigs under contract in this area at the end of the second quarter, up 9 from a year ago and up 1 from last quarter. We had the ROV work on 43 of them.

Furthermore, there are five additional floaters scheduled to commence working in the area during the rest of the year, and we have the ROV work on all of them. So, even with the possible release of some of the rigs currently under contract, there should be a good level of rig activity for the balance of this year.

At the end of 2013, there were more than 500 discoveries in deep-water that had not yet developed. We expect that many of these will eventually be put into production and consequently, it is likely that orders for subsea hardware will grow to levels not previously experienced. And demand for ROVs to support vessel-based activities should follow.

Quest Offshore's latest subsea hardware forecast for the period 2014 to 2018 includes an increase in tree orders of about 55% and a 44% increase in umbilical orders over the previous five years. While subsea tree orders are leading indicator of future field development activity, it is subsea tree installations and trees and service outside of Brazil that matter most to Oceaneering. Based on their subsea tree order forecast Quest Offshore is projecting average annual subsea tree installations of 365 outside of Brazil over the five year period 2014 through 2018, an increase of approximately 60% over the previous five years.

The number of subsea completions in service compared to 2013 is projected to increase by around 1,000 trees, more than 30% by the end of 2018 in spite of the fact that about 800 wells are forecast to be removed from service. The projected rise in tree installations and a growing number of subsea completions and service should lead to umbilical and connection hardware sales, demand for IWOC services and vessel based ROV and tooling demand. Furthermore, industry and regulatory emphasis on safe and reliable operations is providing additional opportunities for us to demonstrate our capabilities.

We are well positioned to supply a wide range of the services and products required to safely support the deep-water efforts of our customers. We believe Oceaneering's business prospects for the long term remain promising. Our commanding competitive position, technology and leadership, and strong balance sheet and cash flow enable us to continue to grow the Company, and we intend to do so.

In conclusion, we are anticipating that we will achieve another record year of EPS performance in 2014. We appreciate everyone's interest in Oceaneering. I will now be happy to take any questions you may have.

(Operator Instructions)

Jim Wicklund, Credit Suisse.

Good morning, guys.

Good morning.

Subsea products is rocking and rolling. When we came down to the tooling analyst day it was exceptionally impressive. There are a number of pieces that we saw that you're going to add to that provide significant growth rates.

Is ROV income going to be eclipsed permanently by the subsea products business?

Do you say permanently, Jim?

Well, they beat you this quarter and ROVs going to grow, but this thing is growing a whole lot faster, it would seem. I am just wondering how big this thing can get.

It can get pretty big. I would not extrapolate one quarter into the full year. I think with the number of ROVs that we are adding and the contribution they are making, they are still going to remain dominant for a while longer.

Okay. That's still not a bad up and comer though.

No. We think it's great to have something else working on our behalf.

Absolutely. If they don't like the short --heavy guy, at least you got big feet.

In the ROV business, you are adding more ROVs net this year than had previously been expected. Is that market opportunity? Is that just accelerating growth because you got the capital?

I realize that you have a dominant market share anyway, but what's driving that?

First of all, Jim, I think we intentionally said that we are adding 40 gross systems to the fleet --

I'm sorry. I didn't mean to say that, 40 gross. Right.

Right, and so it remains to be seen, A, how many we end up retiring between now and the rest of the year, which will play out over the next two quarters and we record those at the quarter end.

I think the question a lot of people are grappling with is why, if utilization is falling, are we adding new vehicles? And I think the answer to that is pretty clear, it's when the customer demands new vehicles to go on new rigs or vessels being -- that we get contracts on, we're doing that to meet customer demand. And we're always taking a look at our idle fleet and retiring those that are not market ready or cannot be made market ready in an economic way.

I think the fact that we are increasing our gross adds was a pleasant, a positive news from the ROV group. They think the market continues to grow and yet, the big question is, how many of these new rigs that could be placed into service in the second half of the year are going to be replacing old rigs already in service that we are on?

But just as a data point, I would not extrapolate that either, but it is good to know that the net working fleet increased by one and our ROVs and drill support increased by three.

I agree, that's impressive. Increased demand is always a good thing. Last question if I could.

In terms of tooling in subsea products, what's your best, most popular product these days?

(Laughter) That's like looking at the Chinese menu and asking which one is the most popular.

I'm not asking for the revenues of it. I know you won't answer that, but I'm just wondering what sub segment, what use, what particular service is most in demand these days.

I think general ROV interface tooling still is the bulk of what we do. The things that have the most leverage are the specialty subsea work system tools, some of which you saw at that analyst day presentation. But you can't predict something that clients aren't even planning for, because they don't know it until it breaks. It makes it really hard to do a trend line of something like that, but having that capability is very important and powerful to us.

We've noted the Ghana job offshore that gave us a nice bump in the quarter that that happened. That's the kind of leverage you can get, but they are one off projects, is the only thing about it. Rather have them than not.

Perfect. That's what I was looking for, Kevin. Thanks, much. Thanks, guys.

Jon Donnel, Howard Weil.

Thank you. Good morning guys.

Hi.

If we could drill down a little bit more on that ROV question. In terms of the incremental demand you guys are seeing, as I recall, the original plans for the ROV additions were based off of contracted, and it sounds like the rest of the ones that you have for the remainder of the year are also under contract.

Can you give us a breakdown as you compare to the original expectations how many of those new contracts are for drill support work versus vessel-based work?

Not really, no. When we had the list of opportunities, Jon, it got us to 30 to 35. And now to get us to approximately 40, there's just so much movement in there and assumptions as to probability of when. When we picked 30 to 35, we had a lot contracted, but we had also quite a few on spec. And some of those have firmed up, some of those went to others,

No, I can't give you a split between why we are adding more grows than we originally expected because of increased demand. We do know that the mix has changed the words more vessels because of the 13 that we added, 9 of them went on vessels support and 4 went to ROVs.

Okay. That's what I was just -- I was trying to get maybe -- it seems like there is certainly the perception that the drilling market is slackening here, yet you continue to add more vessels, certainly more that what we're seeing in rig additions. I guess another way of asking that is when you have the more drill support ROV additions compared to overall rig count add, has that been typical for you guys in the past two? Or has this -- has that rate slowed down or sped up here as we think about the numbers you put up for the first couple of quarters?

I think the new market dilemma that we're facing is the replacement of the rigs. Rigs going idle. It used to be if you won 80% of the rigs coming out of the yard, you would when 80% of the incremental rigs working.

Today if you win 100% of the -- this quarter, for example, we won 100% of the rigs being placed into service, and we went up a net of two because two went away. The only thing the math works is five rigs went idle and -- make sure to get this right. We added three ROVs net and the fleet added one. So, three went in and one went -- four went out -- two went out.

The new rigs coming in, Jon, are pretty visible. We know what those are. The old rigs going out, we don't really know. And vessels, usually we don't have very good line of sight to. So, those would tend to be more of the variable in there apart from a rig that we might displace someone else on that obviously you don't predict that too far in advance.

Yes. I appreciate that. And it just seems like you -- the drill support side of the business seems to be holding up better than what the perception of the market is out there. It just doesn't seem like you are getting credit for that.

But as we think about the subsea products topics here, can you give us any help on maybe geographies that were driving the big uptick in tooling? Was it still mostly Gulf of Mexico related, or are you branching out into other markets there as well?

I think Norway has been very good to us this year. Gulf of Mexico is pretty steady, and West Africa. Those really are the primary places.

Okay, great. Appreciate the help, guys. Thanks.

Thanks.

Byron Pope, Tudor, Pickering, Holt and Company.

Good morning, guys. When you frame the ROV business in terms of Q3, you talked about favorable mix towards Gulf of Mexico and Africa. You guys also have a decent presence in the North Sea. I'm just curious how you're thinking about, you just touched on it, that market -- Norwegian market being healthy in terms of the subsea product side. But just curious as to how you see the outlook on the Norwegian side for your ROV business and maybe for asset integrity as well.

I would say for asset integrity it would remain fairly steady. The ROV side, we've got about as many ROVs working there as we do in the Gulf of Mexico and West Africa. That looks to be really steady as well.

Okay, and then for subsea products, I couldn't write fast enough, but I thought I heard you say with regard to for the full year subsea products, were you adding to 21% op margins? I wasn't clear on exactly what -- what you guys were referring to there.

The operating income margin for that business.

Okay. And so in the back half of the year, is that just a function of some of the umbilical projects that you guys have won starting to flow through that's bringing down the full year margin expectation?

Well, that percentage, that margin is always a result of the product mix that we have. Umbilicals we can see. You can't always see what's coming on the tooling and IWOCs and some of those higher margin parts of the business.

We've had a good data point, and we feel good enough about it to go the upper end of the margin range, but we don't have enough visibility of the higher margin mix that could come to make a declaration on that for the second half.

Yes. And I think the good news is we have significantly increased our throughput in umbilicals, and yet we're posting, we expected -- when we said -- when that was going to happen, when we expected that to happen, we said we would have margins in the high teens, and we've been able to do numbers better than that. And -- but I still think it's product mix, as Kevin said, and it makes it -- we just had a very good second quarter and it affects our year to date and we don't think we're going to have two more of those in the second half.

Understood. And then last question for me, it's been a while since we've had an active Gulf of Mexico hurricane season. I know some of your businesses actually benefit from it. Could you just frame at a high level, during hurricane season, the typical impacts, if we have activity disruptions for the ROV side of your business, as well as for subsea projects?

Well during a hurricane, everybody comes to the beach, so everything stops. And so that negatively impacts, certainly all the vessel-based business work. And depending on the path and the size of the hurricane and the rest of it, when they start evacuating drilling rigs and whatnot with personnel, then that affects us as well.

I think our view on hurricanes is that overall it's more negative than it is positive. And the only positive thing that would come out of it would be if there was a lot of work to be done due to damage on shallower water structures and flow lines and whatnot. My personal view of it is that probably most of what was going to fall down already fell down, and you would not see a repeat of the amount of damage that occurred back in 2005, 2006, 2007.

Those were very unusual years with the number of major storms and the amount of damage that was done and number of downed platforms that caused an incredible spike in work.

And mostly older stuff. And I think since then, operators have taken out platforms that were -- that they didn't deem to be strong enough to withstand a similar type event in the future, or they beefed them up so that they could.

That's helpful. Thanks guys.

Yes.

Kurt Hallead, RBC Capital Markets.

Hey. Good morning.

Hey, Kurt.

Just had a couple of questions, first, again, just going to beat the ROV horse to the ground here.

Of the -- when you think about the potential of rigs being displaced throughout the course of the year, and I'm sure you've gone through your own assessments, I was wondering if you might want to share your views on what you do think could be displaced, new rigs vis-a-vis old rigs as the year goes on?

I'll give you my model, okay, Kurt? And then -- it is a guess and an assumption and it's what we said, is how we base our forecast, just how it impacts us.

We have 39 ROVs on 33 rigs that according to IHS Petrodata have contracts expiring in the second half of 2014, and their average remaining contract term is around 100 days. And of course the exposure is weighted more to the fourth quarter than to the third. What we have assumed is that essentially 18 rigs will continue to work through the end of the year and 15 will be sacked. Based on this assumption, we've forecasted these 39 rigs will be on day rate for approximately 55% of the uncontracted exposure on these rigs.

So, that frames how it affects our drill support. How accurate those assumptions are, it does conclude that no contract will be terminated before its Petrodata database says it's going to expire. And then we had to make a number, and we did it based on our assessment of rigs, the customer information and rig operator conversations.

That is fantastic color. I really appreciate that.

The next follow-on question as it relates to ROVs is, I know, over time, ROV pricing is not a significant make or break decision for an operator, especially vis-a-vis the rig rates. I think we're all aware of the pressure on the ultra deep-water rig rates that has and continues to occur. Any inkling on your part, any push back from customers whatsoever, even at the margin as it relates to what you guys are asking for on ROV pricing?

I'll say there has really been no change in that regard from prior recent quarters. As we continue to say, we bid on every job. We do have competition trying to get these job away from us, usually at some discount, and we're successful 80% of the time.

And it is difficult to raise rates per se, and we have still managed to raise them enough in the face of increasing labor costs and in some cases, increasing CapEx costs for deep-water systems to largely maintain our same margin. And that fight just continues on like that and expected that it will going forward for as far as I can see right now, anyway.

I think it is important, Kurt, for everyone to remember that our average revenue per day on hire also is influenced by the mix between vessel work and drill support. Sometimes you might see a change in mix and it might be interpreted as a price increase or price decrease, and all it is the change in the number of crew.

Got it. Appreciate that.

Now, one last, if I may, on the subsea products side. You guys continue to provide the very positive macro data, 500 discoveries not yet developed. And again, I want to make sure I understand the driving dynamics here. When investors and ourselves think about the offshore products business, it is really being driven by those discoveries not yet developed. The way that I have always thought about it is installation, repair, maintenance on subsea infrastructure that's not directly tied to rig rates or so on and so forth.

Just looking for some additional clarity on that, and I think there's some concern in the marketplace that what's going on in the rig market directly impacts what the subsea infrastructures is going to be. If you could you provide some clarity on that, that would be great.

Sure. I think that once there is an identified development, that is going to go forward in some sort of priority of return versus capital for each operator. But those things are going to go forward, and what's happening in the rig market per se, I don't think is really overly relevant. I think that is really going to affect how much more exploration folks are doing at that time. And certainly, once you get to a decision to go ahead on producing a field, all the other stuff happens. They order all the hardware and the equipment and the installation happens and then production goes.

I don't think that the current exploration issues are affecting the 500 discoveries or projects that we think are going to eventually get done.

Okay. I appreciate that. That's it for me. Thanks.

Thank you.

Stephen Gengaro, Sterne, Agee, Leach.

Thanks. Good morning guys.

Can you give us a little color as we think about the back of the year on the subsea project side? And are there any vessels that are being disrupted for any reasons, and how should we think about how the margins unfold there?

I'm not sure I understand the question fully. Vessels being disrupted, what are you talking about?

You had some downtime in the first quarter, is there anything like that we need to think about the back half of 2014 or 2015?

Well, okay. The Gulf -- the BP contract is a long-term thing, and so I assume we're talking about the Gulf of Mexico. That is the call-out business, and so we have virtually no visibility into 2015 right now in terms of specific projects or whatnot in terms of awards or backlog or anything like that.

We do expect reasonable utilization for the second half of this year, but again, it is a call-out business. And so we have reasonable visibility for Q3, and it starts to fade off a little bit when you get into certainly the mid and back part of Q4. And also, weather will tend to play some factor in that, depending on what that is at the time.

Okay. Thank you. And as we think just --

Stephen, generally, if you think about the first half versus second half, you've got seasonality, and we talked about the Bourbon Evolution coming on higher. Just generally, the second half is better than the first half in run rate and resulting in margin improvement generally.

Okay. That's helpful.

And on the products side, I know you're reluctant to predict any kind of increase in -- or some of the higher margin work tends to be shorter term in nature. But when you think about your guidance range for the back half of the year, is that one of the big variables? The margin profile within products, or is that something else which means the numbers around a bit as you look at your guidance range for the rest of this year?

First of all, I'm going to say with the tight guidance range, there's just not a lot of moving around, and everything is variable. Maybe it looks a lot from the outside, but it's a pretty steady state.

But we've got a lot of moving pieces, and I think the range is very reasonable. And products, projects, ROVs and asset integrity all add to the variability of that mix.

Okay. I appreciate that. And from our end, it obviously isn't easy to model those two segments. That is very helpful. Thanks.

Dan Leben, Robert W Baird.

Great. Thanks, guys.

Moving back to the ROV segment, just to go ahead to try to bury the horse, I guess. On an intermediate term looking out with the amount of installations in place, as that continues to grow, does this business naturally have to shift more towards a -- more of a vessel base than what it has been historically?

Over time I think we would expect the vessel percentage of the total to increase, but I don't think this is any sharp increase in any point in time. This is going to be a gradual over a number of years type of deal.

Okay. And then just a follow up on that, could you just talk a little bit about some of the differences when you get in that market? Either from a competitive standpoint or pricing and utilization, just how over time it may affect some of the metrics that we'd see?

Well, I guess I would explain it this way. The Gulf of Mexico, as I said earlier, is purely a call-out market. It historically always has been. We have added vessels, and as we see the market demand increasing, we will certainly seriously consider adding another vessel. And recall that we do have one under construction, but it doesn't get delivered until first quarter of 2016.

In terms of the international aspect of that business, as we said, we're looking for long-term field maintenance support contracts, long meaning probably at least two years, to make it worthwhile to go charter a vessel, if that's what the customer is looking for and operate a vessel in a foreign location. And so that's what we're looking for, but I think it's pretty obvious to the marketplace that long-term field support, if you are a boat owner, boat company, is a place where you want to play. And so there's more competition coming into that, more people looking for that, including the more traditional construction-only kind of folks like Subsea 7 and Technip.

Great. And then just the ROVs that would be attached to vessels, that piece of it as well.

Well, typically on those spreads there are two ROVs, because the work intensity is such that you either need two ROVs or you just need to have a backup, and can't afford to have the vessel not working. And the work is a lot more arduous than drill support work, so the opportunity to bang up the ROV is a lot greater, so having two is -- has become the norm. And then you would have two full round-the-clock crews on those vessels, and that's a good project for us.

That's a day rate and (multiple speakers).

Yes.

Great. That's what I was looking for. Thanks, guys.

Sure.

Ian Macpherson, Simmons.

Hey. Thank you.

It's very easy, I think, to embrace the growth thesis for products over the long term. Shorter-term, your backlog have stalled a little bit. It more than doubled from 2011 to 2013, but it's down from around 900 to 850. So, when we're thinking about formulating our top line growth for 2015, I think we probably need to have some visibility for backlog growth or stabilization throughout the second half of this year. What kind of visibility do you guys have at this point for your orders and backlog for products for the rest of this year?

And we have a long list of projects that we expect -- we get involved early on the long lead time items like on (inaudible) and field development projects with feed studies and then budgetary bids, and then get refined. So, we're in the pipeline early and so we have good visibility of the identified projects. And every now and then if I asked turnaround project comes in, I'm talking about umbilicals and subsea field development type projects, not tooling and IWOCs.

But we have said for so many quarters, years, that the umbilical order business is lumpy. It's not so steady-state that we look at it and say, golly, we didn't get of 1.0 kind of replacement rate and we had some backlog burn, and that's doesn't foretell a demise. Or just like getting a big order doesn't say that increase in activity is going to continue. So, I can't help be very much. I think we are expecting our product's activity to grow year over year and that's -- but we don't get too excited that it fell from 900 to 850.

Okay. And then just really getting back to Byron's earlier question on the margin, your guidance would suggest a little bit of reversion product margins from the first half to the second half. There's nothing to, specifically with regard to mix or seasonality, that suggests that it could drop or fall. But you have perhaps some element of normal Oceaneering conservatism in that guidance based on the visibility at hand today. Is that fair?

I would say that we see a drop in margin contribution and products for the second half, and we think it's predominantly associated with mix. And if you look, there is some seasonality into the service side when you talk about -- Kevin mentioned that tooling was particularly strong in Norway in Q4, Norway starts to slow down. The Northeast starts to slow down, so does the Gulf of Mexico in some spots -- some areas. You can talk about it being normal Oceaneering conservatism; I see that is what is in our crystal ball.

Got it. Perfect. Thank you.

You're welcome.

Brad Handler, Jefferies.

Thanks, guys. A couple of different unrelated questions, please.

First related to your -- whatever you can share on the -- on your negotiations for your vessels in Angola. Are the contract -- does the negotiation include keeping three vessels at work? In other words, are you rolling over three vessels in what you're negotiating?

Right. The option here that is being discussed is to carry on the existing contract work that we're currently performing.

Okay. Just wanted to confirm it was sort of steady.

Yes.

Second, can you give us some more color on the higher R&M expenses in ROVs? And if I think about -- without precision, frankly, if I think about it over the last couple of years, maybe we've had a smattering of quarters where that feels like that has sprung up, but feel free to correct that perception. But can you comment on that a little bit? And is there something that we need to think about systemically?

I don't think you should think about this in terms of systemic sort of issues. We've got 323 systems operating all across the world basically isolated on a drilling rig, a growing market with a lot of new trainee people coming into the mix. And we just had a collection of a couple of data points that didn't work well, so it's nothing I would say systemic. It's just maybe the alignment of a couple of jobs that didn't do as well as they could have, and I wouldn't expect that going forward.

Okay.

Or as a consistent trend, certainly.

Okay. Got enough.

And then the last one if I may, and I'm sorry, I think I'm cheating, but the commentary about new -- I think you've sold new ROVs probably to your -- I'm guessing here. You probably went to your potential customers for a new ROVs and you said, we will give you a new ROV, which probably makes it very difficult to turn around and say, how about an old ROV?

I'm wondering if this current market circumstances might encourage you to think differently about the selling process. Might you be able to proactively sell old ROVs or a more fungible kind of ROV sale, which might allow you to do that?

We do try that. Obviously that would be first choice, so we do. And we have quite a range of age of ROVs as well. And generally we can put a new fish on the system and it is like new. And so when we are able to sell that, we certainly do. And -- but on -- maybe this situation will change. You've got an overhang of vessel -- or sorry, rigs, that don't have any contract at all on them. And so maybe that dynamic will change a little bit going forward. But up until now, all the ones that we have been successful winning, the operator has taken a longer term on that unit and they want a brand-new ROV and so that's what we would do.

And as utilization falls, that gets a much keener focus. That exact issue that you mentioned about selling s refurbished ROV, a like-new ROV as opposed to a new ROV to do the same work. And if contract terms are shorter terms, then the customer's focus is a little bit different too. And so yes, we focus on that a lot and we're focusing on it more.

Okay. That's very helpful. Thank you.

Darren Gacicia, Guggenheim.

Hey, guys. Thanks. I'm going to avoid any horse commentary as I go over the next questions, I'm trying to bare down on some numbers here.

ROVs, you're saying you're going to add -- I'm trying to get the difference between gross and net here. If you say you're going to add over 40, I'm not sure if that is gross or net. You say you're going to lose 15 to contract rolls in the second half. What else do we need to fill in there by way of just natural ROV attrition aside from what may have happened with rolls?

How do I get down to the net numbers on ROV adds? I've heard a lot of comments but I haven't figured out how to get there.

Okay. And I think you're using data points that may not be relevant to the fleet size. The fact that we're assuming 15 of these rigs rolling off or going to be idle for the rest of the year doesn't mean that we're taking those ROVs out of our fleet count. That has no bearing at all. We may keep our ROVs on those rigs unless there's another alternative, because we believe the best place for those rigs, under those ROVs to go back to work is on that rig when it goes back to work.

If a rig is being cold stacked, we may take an ROV off. But the -- what I explained as our assumption for rigs rolling off doesn't have anything to do with our fleet count. And I think the only thing you can do is we say that we're going to retire 4% to 5% on average of our ROVs per year. And so on a base of 300, to make my math easy since I couldn't do it a while ago, 4% of 300 is 12; 5% of 300 is 15. And so somewhere on a normal year, you would be expecting an average of 12 to 15 retirements.

And so we look at every quarter constantly when an ROV is idle. We look at the marketability, the cost to refurbish, and then we make a decision, do we retire it, do we refurbish it or do we wait? And so I can't get any more granular than that.

And so the 84% then that you have as your utilization guidance for the back half is basically factoring whatever the -- I'm leaving it on the rig, but it's not contracted portion of say, the 15 you're saying for the rigs that go idle.

That 84% number we gave was for the year.

Got it.

Back half. The utilization includes the idle ones, as does the count.

If we haven't retired it, it is in our utilization count.

Got it.

The last question, so vessel -- I'm assuming vessels-based activity has a little bit more variance on utilization. Does that mean the average day rate per day should be creeping up to offset that to some degree, as I understand the business works? Or am I thinking about that the wrong way?

I think we've said that, because of increased crew count on vessel-based ROVs, that has higher day rate associated with it. And so if the mix changes, you also have to take into consideration the geographic area of that mix. But directionally, if we continue to get more vessel-based days as a higher percentage of our total days, day rates should be moving up if pricing was the same.

Is there an order of magnitude to that?

No. It really depends upon the vessel, the type of work that it's doing and --

No, it's really just the addition of the extra people.

Yes.

I appreciate the help. Thank you very much.

Yes. You're welcome.

Michael Marino, Stephens.

Morning.

Hey, Michael.

I know the product and projects business are big call-out businesses. And Marvin, you touched on customer conversations and planning. But I'm just, to be clear, there is nothing fundamental here that's changed, and you're not -- customer conversations aren't dragging out any further than they would normally. I'm just trying to -- one of the concerns is was maybe rig rates is just the leading indicator and customers in general are just pushing back.

But has anything changed in the conversations you are having?

No. I would say not in that regard. No. Normal business is going on and outside of the exploration part of the business.

I think what Kevin alluded to earlier is it's hard to get a price increase and at a premium to some competition. But that's been going on for some time --

I think his question was more basically all the other stuff that we do, is that slowing down as a follow-on to (multiple speakers). I would say those are not connected, at least not now.

Okay. So, there's no reason to think that the recent trend in -- especially your products business. There's no reason to think that that can't continue out into the future.

We don't have one.

Okay. So, Q2 was really good quarter in products. Maybe you don't get back there in the back half of the year, but there was nothing exceptional about the quarter in your view.

Just the numbers.

Just the good mix.

Just the good mix. And we do not think we will get back there in the second half.

Then we will have to wait until next year.

Absolutely.

All right. Thanks, guys.

Thank you.

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

Okay. Since there are no more questions, I would like to wrap up by thanking everyone for joining the call. We are very pleased with our best ever quarterly results and anticipate producing another record year of EPS for 2014.

This concludes our second-quarter 2014 conference call. Thanks, and have a great day.

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