Oceaneering International Inc (OII) 2014 Q4 法說會逐字稿

Good morning. My name is Melissa. I will be your conference operator today.

At this time, I would like to welcome everyone to the Oceaneering International 2014 Q4 and annual earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.

(Operator Instructions)

Mr. Jack Jurkoshek, you may begin your conference.

Good morning, everybody. Thanks for joining us.

As usual, a webcast of this event is being made available through the StreetEvents network service by Thomson Reuters. Joining me today are Kevin McEvoy, our President and Chief Executive Officer who will be leading the call this morning; 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 operation, and industry conditions are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

I am now going to turn the call over to Kevin.

Good morning, and thanks for joining the call.

I would like to start out by addressing four key points in our earnings release. First, 2014 was a record-earnings year for Oceaneering. Earnings per share increased for the fifth consecutive year, up 17% over 2013, and we realized the highest annual operating income margin in our history.

Second, heading into 2015, we are faced with a slow-down in deep water activity. This is attributable to the significant decline in the price of brent crude oil since our last earnings release and the growing prospect that this depressed oil price environment could be prolonged. This has lead to announced plans by our customers to reduce their 2015 exploration and development expenditures, which have adversely impacted our earnings prospects.

While work on most deep water projects already approved and underway is likely to continue, the urgency to start new projects is in question until the commodity price environment stabilizes and improves. Therefore, we are resetting our 2015 EPS guidance to a range of $3.10 to $3.50. While all oil field services and products companies face the same uncertainties, we are attempting to frame our outlook to be within a realm of probabilities under a variety of scenarios.

We are not pretending to have a better crystal ball than others. We are simply sharing our view of our business prospects at this time. Within this framework, we are initiating first quarter 2015 EPS guidance of $0.58 to $0.62.

Third, despite the current uncertainty surrounding deep water activity, our longer-term outlook remains positive. Deepwater is expected to continue to play a critical role in global oil supply growth despite its large capital commitments, technical challenges, and the current commodity price environment. An industry research report published late last month indicated that about one-third of future incremental oil supply, estimated at more than 25 million barrels per day, by 2020 will come from deep water.

And finally, we recently announced an agreement to acquire C&C Technologies, a global provider of survey services, principally to the oil and gas industry in deepwater. We believe this transaction, which is expected to be completed in April of this year, is a unique opportunity to strategically expand our service line capabilities and underwater service offerings. We anticipate C&C to be accretive to our 2015 earnings and plan to include its results in our subsea project segment.

I would now like to briefly review our operations for the fourth quarter. Record fourth quarter EPS of $0.99 for 2014 was 15% above that of the fourth quarter of 2013 on income improvements from our ROV subsea projects and advanced technologies business operations.

ROV operating income rose on an increase in days on hire and an improvement in operating margin. This was accomplished despite the fact that our fleet utilization dropped to 80% from 87% a year ago, due to declining demand to provide drill support services on older generation floating drilling rigs. ROV operating income margin for the quarter was 31% compared to 28% a year ago. The fourth quarter 2013 results included a charge we recorded related to the OGX receivables.

During the quarter, we put eight vehicles into service and retired four. Our fleet mix usage during the quarter was 72% in drill support and 28% on vessel based work, compared to a 73%/27% mix a year ago, and a 71%/29% mix last quarter.

Subsea projects operating income grew on increased demand for deepwater vessel intervention services in the US Gulf of Mexico and the commencement of providing diving services offshore Angola. Advanced technologies operating income improved on the strength of increased demand for engineering services and shipyard repairs by the US Navy and completion of several industrial projects.

Moving on to our total year 2014 operations, we achieved record earnings of $428 million and EPS of $4 and realized the highest annual operating income margin in our history. These results were largely attributable to our global focus on deepwater and subsea completion activity and solid operational execution.

For 2014, our ROV subsea products and subsea project segments achieved record operating income. ROV operating income rose for the 11th consecutive year, an accomplishment of which we are very proud. This was attributable to the expansion of our fleet in response to higher global demand to provide drill support and vessel-based services principally in the US Gulf of Mexico and offshore Africa, and an improvement in operating margin.

We increased our days on hire by 7% to over 98,000 days. Our fleet utilization declined to 83% to 85% in 2013. During the year, we added 49 vehicles and retired 17 older systems increasing our fleet to 336 vehicles compare to 304 at the beginning of the year.

In 2014, 20 new floating drilling rigs were placed into service and we had ROVs on 16 of them. We believe we continue to be the largest ROV owner with an estimated 36% of the industry's work class vehicles at year end. This represents a fleet more than twice the size of the next largest ROV competitor. We remain the primary provider of ROV drill support service with an estimated market share of 59%, more than three times that of the second largest supplier. We had 182 ROVs on contract on 162 floating drilling rigs.

Subsea products operating income increased on higher demand for each of our major product lines led by tooling and umbilicals. Tooling results were up from continued strong demand for subsea work systems, which are used for projects such as flow assurance and well stimulation, services we provide to conduct a large subsea field abandonment project in the North Sea, and the sale of a chemical distribution unit for use in an emergency oil spill response equipment package, which can be economically deployed from a vessel instead of a rig.

Operating margin increased slightly to 23% from 22% in 2013 due to good execution resulting in higher margins on tooling, umbilicals, and IWOC service sales. Umbilical revenue as a percent of our total products revenue in 2014 grew to 32% from 29% in 2013. Our year-end subsea products backlog was $690 million, down from an all-time high of $906 million at the end of 2013. This backlog decline was attributable to umbilicals.

Regarding subsea projects, operating income grew in 2014 on an increase in deepwater vessel service activity and the commencement of providing diving services offshore Angola in the fourth quarter. During the year, we obtained three notable contract commitments for future work. We obtained from BP Angola, a field support vessel services contract extension through January of 2017, and a contract to provide diving services through the first quarter of 2016. We also secured a two-year term commitment from Shell that started January 1, 2015 for use of one of our chartered vessels, The Ocean Alliance, in the Gulf of Mexico.

To augment our ability to provide deepwater vessel services, we chartered late in the year, an additional vessel, The Island Pride, for two years. This vessel commenced worked in US Gulf of Mexico earlier this month. The initial work program for this vessel is to perform a well stimulation project that is anticipated to last around three months.

Asset integrity operating income was about the same as in 2014, and adtech operating income declined on lower activity on theme park projects and vessel maintenance work for the US Navy, and lower margins on the theme park work that we did perform.

Moving on from operating results to a financial strategy overview, in November, we issued $500 million of 10-year senior notes through a public offering to add a layer of long-term debt to our balance sheet and achieve a more efficient capital structure. We also more than doubled our committed bank facilities in 2014 to $800 million, consisting of a $500 million revolver and a $300 million three-year delayed draw term loan on which we had drawn $250 million at year end.

Our total capital allocation spending was approximately $1.1 billion in 2014. We invested $387 million in organic capital expenditures and $40 million on acquisitions. We paid $110 million of cash dividends and we repurchased $590 million or 8.9 million shares of our common stock, approximately 8% of our shares outstanding at the end of 2013. Shares repurchased during the fourth quarter totaled 5.4 million at a cost of $354 million.

We completed our 2010 stock repurchase program in mid December, and our Board of Directors authorized a new 10 million share repurchase program. The cash dividends, share repurchases, and our new share repurchase program underscore our willingness to return cash to our shareholders and confidence in Oceaneering's financial strength and future business prospects. At $858 million, our 2014 EBITDA was also a record high.

In summary, we believe our annual 2014 earnings performance and cash generation results were excellent. We are committed to our customer's success and our results reflect their recognition of our ability to provide value.

Now, let's talk about our 2015 EPS outlook. Compared to 2014, our revised 2015 EPS forecast assumptions are that demand and pricing for many of the services and products we offer will be down. Consequently, we are projecting that all of our oil field business segments, principally ROV and subsea products, will have lower operating income in 2015 than in 2014.

We are resetting our 2015 EPS guidance to a range of $3.10 to $3.50 on an estimated number of 100.3 million diluted common shares outstanding. This EPS guidance takes into account the pending acquisitions of C&C. Our EPS range also includes the impact of right-sizing and cost initiatives we have underway, and we will take further measures if demand falls short of our expected levels.

Compared to 2014, our earnings outlook for 2015 includes the following major considerations for our oil field business operations: lower demand for ROVs for both drilling and vessel support work and reduced average pricing. We are expecting our fleet days on hire and utilization to be lower. At the end of 2014, there were 82 floating drilling rigs that had contract end dates in 2015, and we had ROVs on 55 of them.

As these rigs roll off their existing contracts, we are anticipating that a high number will experience substantial idle time or become cold-stacked. The extend of the impact of reduced rig activity is unknown and difficult to forecast at the present time.

We are not anticipating that our overall fleet size will materially change. We have firm contracts from more than ten new ROVs expected to be placed in service during 2015. These fleet editions could be offset by retirements, which in these market conditions may be more than our normal average annual prediction of 4% to 5% of our fleet.

For subsea products, we expect our short cycle businesses such as tooling to experience lower demand. We also expect lower demand to support field abandonment projects and BOP control system replacements. Based on our backlog and forecast bookings, we expect umbilical revenues to be flat.

For subsea projects we are projecting lower vessel pricing in the Gulf of Mexico and reduced use of a third dynamically-positioned vessel by BP on their Angola project. We expect The Bourbon 803 to be released by BP at the end of April.

The decline in our subsea projects business should be mitigated by the expected income contributions from our acquisition of C&C during the last three quarters of the year and our data solutions group, including our acquisition of AIRSIS in 2014 and for asset integrity, a lower level of activity as a result of planned maintenance deferrals by our customers and generally lower pricing. In some cases, our customers are seeking price reductions for work we have already contracted. In this regard we are working with them to develop lower cost alternatives rather than simply dropping our prices.

We continue to expect that our advanced technology segment operating income performance to be significantly better in 2015. This is attributable to additional industrial project work and a resolution of execution issues on certain US Navy and industrial projects that adversely impacted results in 2014.

Unallocated expenses are estimated to be higher as we improve our information technology infrastructure, notably with regard to cyber security. Given the uncertainties in our plan for 2015, including a level of floating rig use and a short cycle nature of demand for many of our services and products, we are not giving additional segment guidance. We are expecting our overall operating margin in 2015 to be down over 200 basis points compared to 2014 and that our effective tax rate will be about the same.

In spite of the current and anticipated market conditions, we expect our liquidity and projected cash flow will provide us with ample resources to continue investing in Oceaneering's future and returning capital to our shareholders. At year-end, we had $431 million in cash and anticipate generating at least $725 million of EBITDA in 2015.

We also expect to reduce our 2015 organic CapEx to between $200 million and $250 million, largely on lower ROV spending. And as previously announced, we have an agreement to acquire C&C Technologies Inc. for approximately $230 million which we expect to complete in April. We intend to re-evaluate our quarterly cash dividend payment annually during the second quarter of each year.

Our residual use of capital is share repurchases. At the end of 2014, we had authorization to repurchase 10 million shares. We intend to continue our practice of announcing share repurchases only after they occur.

Moving on to our first quarter 2015 outlook, as I stated earlier, our EPS guidance range is $0.58 to $0.62. This takes into account normal seasonality, project timing issues, and generally lower demand due to the recent decline in the price of oil. Our first quarter 2015 guidance is down year-over-year as we expect all of our oil field business segments to have lower operating income. It is down sequentially as we expect lower operating income from all of our operating business segments except asset integrity, which is expected to be slightly up.

Our first quarter guidance takes into account that on a year-over-year and sequential basis, we will have higher unallocated expenses and net interest expense and a lower share count. On a macro basis, we are well-positioned to supply a wide range of the services and products required to support the safe deepwater efforts of our customers. Our commanding competitive position, technology leadership and strong balance sheet and cash flow, enable us to continue investing in the Company's future as opportunities arise and returning capital to our shareholders, and we intend to do so.

In conclusion, in 2014, we achieved another record year of EPS performance, and I would like to recognize and thank our over 12,000 employees who made this happen through their commitment to safety, quality and creativity within the framework of our core values. Heading into 2015, we are faced with a slow-down in deepwater activity, and consequently, are expecting that our EPS will be lower than in 2014.

Certainly this is a challenging time, but believe we are well-positioned and up to the task of making the most of us. Market conditions may change, but our commitment to deliver results to our shareholders remains the same.

We have a seasoned management team in place that has experienced serious oil field industry down cycles before. We are confident in our ability to quickly adjust our business plan and take advantage of opportunities that may emerge. We are focused on cash flow generation and cost control and have already taken actions to right-size our workforce where needed.

We appreciate everyone's interest in Oceaneering. I will now be happy to take any questions you may have.

(Operator Instructions)

Your first question comes from the line of Byron Pope. Your line is open.

Good morning, guys. Very helpful color on the 2015 outlook. I just have one question as it relates to the ROV business.

You mentioned lower demand for both drill support and work class ROVs, you have pretty good geographic coverage across deepwater theatres for both types of ROVs. I'm just wondering are there any particular -- one or two geographies that are likely to drive the year-over-year lower demand or is it just more broad-based given where we are with brent prices?

First of all, the ROVs are kind of the same. It's just where they are working is different, but the ROVs are the same.

We're expecting across the board that there will be pressure on pricing and as rigs go idle that's going to create a decrease in demand. But Norway is probably going to be an area that we'll see lower demand, particularly on the vessel side.

Yes, I think the Gulf of Mexico continues to look to be the bright spot and Africa from a drill rig support basis is declining.

Okay. And if I think back to the 2009 down cycle and the resiliency of your ROV business relative to most other oil service businesses, is the pricing dynamic -- are the competitive dynamics somehow different this time around? Because I look back then and you really didn't give up all that much in terms of your revenue per days worked.

No, I don't think the pricing dynamics are any different. I think the rig utilization dynamics are significantly different.

I think, in 2009, it was a blip, and it was a V-shape and deepwater wasn't impacted. And right now, deepwater is being impacted.

Okay. And then last question for me. I just wanted to -- Kevin, maybe if you could -- I know you touched on this a little bit in your prepared remarks.

But could you speak to some of the medium to longer-term opportunities you see as a result of bringing C&C Technologies in-house? And just thinking about what they do verses what you already provide in terms of products and service opportunities?

Well, I think this provides a new branch, if you will, for us to expand services that they provide. We are particularly interested in the deepwater AUV part of their business. They are primarily Gulf of Mexico centric.

And we obviously provide a geographic platform there where we can expand that and help to grow that business. Obviously, it will be -- we'll see what happens in 2015 in terms of demand for that, but longer-term, we're very happen way that business, and like the ability to really jumpstart an AUV presence in the marketplace.

And there are synergies between our projects business, our vessel base -- our vessel use survey. And oftentimes ROV bids require a survey capability. So we saw unique attributes to C&C and we were very pleased that we were able to come to an agreement to acquire them.

Thanks, guys. I appreciate it.

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

Thanks. As we look at 2015 from here, as you look at the ROV side -- you touched on this a little, and also on the subsea project side, how much of visibility do you have right now? How much is under contract that you are very confident? How much is sort of out there that you are -- that's a little looser as far as your expectations are concerned?

As far as the projects group, we have some long-term contracts in Angola, and we have the Shell two-year contract that we alluded to in the remarks there. Outside of that, it is project work. We have some visibility on that in the shorter term, but not so much past first quarter, let's say.

On the ROV side, it really is all about the rig utilization and how much vessel work is going to be done in areas, particularly Norway. That all seems to have pulled back quite heavily and it's still unclear what they plan to do in the coming year, but we're expecting it to be less.

I think we quantified the rig exposure that we had 55 ROVs on 82 floating rigs that have contract end dates in 2015. I think other than that, the ROV drill support -- barring any other cancellations is pretty firm.

Yes.

Okay. That's helpful color.

And then as we any about the usage of cash -- it may be hard to compound, but when you think about the desire to continue this trend of raising your dividend verses share repurchases, how should we think about that?

Well, as we said in the remarks, we evaluate that at the second quarter of each year and we'll announce that accordingly.

Okay.

I think just further answer to that is we expect that the continuation of dividends is way more stable than our episodic purchases of treasury stock. And we'll always continue to put growth first, dividends second, and acquisition and treasury shares third or fourth depending point of view with growth in organic and acquisitions.

Okay. That's helpful. Thank you, gentlemen.

Your next question comes from the line of Kurt Hallead. Your line is open.

Good morning.

Good morning.

I appreciate the color, and the information in a tough market backdrop, obviously, it's always difficult to predict the magnitude and everything else. I am just curious when you went through your own internal assessments and you looked at the different segments, I was just wondering if you could give us some insight as to what segments would be hit? If you give us a descending order, which ones are going to be hit the most down through the ones that will be hit the least?

Well, I think we indicated in the remarks that it is going to be principally ROV, and then followed by products.

Okay. And then the others are not going to be impacted as -- impacted about the same when we talk about projects, for example?

It will be projects will be third. Asset integrity will be fourth. And adtech is counter cyclical and going up.

Okay.

But within the product segment, we said umbilicals was the easiest to predict because of visibility of backlog and longer term and said it's going to be flat. So as the short cycle, high margin business of providing solutions by providing tooling is the least visible.

Okay. Well, thanks again for that color. If I missed some of that earlier, I apologize for having to rehash it.

The other dynamic I was wondering, because you gave some good information here on aggregate decline in overall margin. And I just, again, wonder from a revenue standpoint, are you expecting aggregate revenues to decline by more than 10% or less than 10%.

Kurt, I haven't looked at the revenue at the $3.10 to $3.50. I would say at the top end it would be less, and I haven't really looked at the $3.10. I don't have a $3.10 number with me as far as revenue.

I think we're looking at -- so much speculation as to the level of activity that we just ran a various -- a variety of scenarios, and kept coming up with numbers that fell between that range. We are not saying the midpoint is any more predictable than either end of them.

Okay. And that is really helpful. I do appreciate that color. Thanks.

Yep.

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

Good morning, guys.

Hey Jim.

Excellent acquisition of C&C. Very good company. The chance family strikes again.

You found something that is your value so I congratulate you on that. That is a good deal.

Thank you.

You guys have said a couple of times -- Marvin, you were talking about it's different this time. Pricing is the same, but the dynamic with the rigs are different, and before that, you mentioned weakness in 2015 and 2016. Instead of asking you what your revenue is going to be in the third quarter for ROVs, can you tell us how long you think this cycle will take to readjust and come back? Is this a one-year period of push to the right, a two-year period of push to the right?

I know you guys don't know. But nobody is in a better position to speculate. How long does it take for all the things that have to happen, all the step changes and everything, to actually start deepwater back on an upward track again?

Jim, is this a pool that we're betting on or what?

Yes, exactly. Like my Christmas luncheon. We're all going to put $20 in. (laughter)

Yes. Tell me the exact oil price scenario, and I'll think about the other.

Well, let's say if we don't go above $75 for two years?

I don't know. If you look at a lot -- this is a variety. Is it a U, a V or a W, or whatever, and we're not taking any position on that because it really depends upon what segment and what sector you are in.

And we think that deepwater has more potential for coming back or not going as low as land and for stabilizing sooner. Before the oil price collapse, we had the problem of oversupply in the drilling market. And that was starting to hurt utilization and then the oil price dropped.

So It really is a matter of oil price visibility. I think if it comes back to $75, we could see some recovery in 2016.

And I think that one consistent thing that we get from talking to the major oil companies that are our customers is that they are not going to stop in deepwater. I think what may be a bit different this time from previous down cycles is that there seems to be a fair realization among the major oil companies that they need to structurally change the way they are doing their business, and so they're going to be working through that.

I would say that even if the price magically spiked back up to $80 tonight, we're to still going to go through this same travail with the large operators in particular because of the way they are doing their business is not very cost effective. And that is what they are going to be working on.

And that is my biggest concern, Kevin. And I see that's going to happen. I am just trying to figure out how long that duration of those oil companies taking will be. That's all.

And if you all don't have a handle, I'll understand. That was really the crux of my question.

Well, I mean I think they are obviously going to continue to proceed with projects that are already underway. I have got to believe that they have enough inventory out there to prioritize which ones are the lowest cost in today's environment and they will work towards those. There may be delays and whatever else, but they'll do that. And in the meantime, they'll continue to work on changing the way they're doing their business in order to reduce cost.

We're in pretty detailed conversations with several different operators in that regard, as they are with lots of other companies, not just us, to try and make these changes. So I don't think that they are going to go back to business as usual with this oil price. As we all know, they were kind of getting beat up for a long time way before for the oil price went down on their increasing costs, and with a static oil price. And so they need to address that issue and I think they are starting to do that right now.

And lastly, Jim, just because we were bold enough or foolish enough to give 2015 guidance, we are not taking a position on our 2016 earnings, okay?

And I think that's prudent, Marvin, but I also have to tell you you're the only guys with the cojones so far to put up 2015 numbers at all, so congratulations.

Thank you. We appreciate that.

Your next question comes from the line of John Donnel. Your line is open.

Good morning, guys.

Good morning, Jon.

Just another question here regarding the guidance. Just the seasonal progression that is imbedded with it. It looks like just from the first quarter numbers compared to the full year that you are baking in the same 18% to 20%-ish earnings achieved during first quarter, implying that there is going to be the typical seasonal build-up.

But it seems that just given the status of the drilling market and the number of rigs rolling off contract et cetera, that it ought to maybe dampen that seasonal increase a little here through the middle of the year. Could you help us reconcile those two phenomenon and how you see the earnings progressing throughout the year to get to the annual number compared to first quarter? And will that be very different than we are used to seeing in the past?

Right now, Jon, we may be just creatures of habit, and there's very little visibility as to quarters. We know we think we have a handle on what is going to happen in Q1. And we think our guidance is, as you noted, traditionally based as far as seasonality.

Does the dampening of the market and rigs rolling off contract year-over-year impair our earnings progression to be something that is not traditional? We haven't really been able to focus on that enough with any certainty. Right now we're looking at more of a traditional lay-out.

I would add to that too. We can tell you that the earnings contribution from C&C is highly seasonal. (multiple speakers) basis they're a second and third quarter.

Okay, but let's not overweigh that because we know that we said the first year, we're going to own them. They're going to generate -- we expect to generate $20 million to 30 million of EBITDA over the 12 months after April 1. And if you take that after depreciation and taxes, let's just make sure that we're not overweighting the contribution from C&C. Especially in year one with integration costs.

Okay. That makes sense. I appreciate the extra clarity on those numbers and the rest of my questions were answered. Thanks.

Your next question comes from the line of Chase Mulvehill. Your line is open.

Thanks for letting me in. I guess back on the buy-backs and leverage -- if I remember correctly, back in December, you put out a release talking about the buybacks and the desire to more optimize your capital structure, potentially taking your net debt to EBITDA up to 1.5 times.

Is that still in the cards? Are you still wanting to optimize your capital structure or are we now thinking a different way?

Well, I think we are probably are going to be a little more conservative about that in the shorter term. Longer term we are still committed to that principal that we laid out. But obviously in the uncertainty that we have right now, we're going to be a little more conservative about what our leverage is going to be until things stabilized a bit.

All right, that makes sense. On the subsea products, revenues have basically doubled since 2010. Can you just walk us through the main drivers of what drove the doubling of revenue, and then the outlook of those businesses in a $60 oil price environment?

Is that in two sentences or less? (laughter) I think over that time period, we had some reasonable growth in the contribution from our umbilicals business over that time period. We had some good growth in the demand for a lot of our subsea work systems out of the tooling group over that period of time. We also had some significant projects in our GRAYLOC subsidiaries that made some meaningful contributions.

Going forward -- and IWOCs has been a good contributor as well. And moving forward, all of those things. The GRAYLOC business doesn't have the set of large projects that contributed over that time frame. It's still going to be a great business, but it won't be as high as it was.

We already know what we see for the umbilical business for 2015. And I think there, it really is a question of how much of a gap, if any, is there in the offshore development cycle if people don't make orders for some period of time. It's going to affect everybody in the manufacturing sector. They'll have a gap in their factories, but 2015, we have reasonable visibility of that.

Lastly, on the subsea work systems side, that is a function of call-out demand from our customers, and you could expect that if there is anything they can defer, they might be deferring it. So it's pretty cloudy in terms of what might come there, and in general, even when times are good, we don't really have a clear visibility. It's just a market momentum and an expectation that we are going against as opposed to orders in the end or anything like that.

Okay. Awesome. Thanks for all the color.

Yep.

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

I certainly appreciate you not wanting to get too deep into the segments given the uncertainty that we are facing this year. I was wondering if maybe we could just talk about projects a little bit in terms of the sequential improvement in 2Q. And just the fact that you have got C&C, you have The Island Pride, and of course the Shell vessel charter that has already started.

Do we see the most dramatic rebound in the projects business, at least sequentially, in Q2, and then a more dramatic fall-off? Or can you help us think about that a little bit?

Well, I think while we have those positive things there, we also have a number of other vessels in our fleet and vessels coming here from the North Sea trying to get work because there isn't any over there. I think the competition is going to be even more heightened here in the Gulf than it was in 2014.

So do those all balance out? I don't know. We will have to see because, again, other than what we have stated as being a long-term, everything else is call-out. And it's --

And we have the 803 in Angola going off contract in April. So there are too many moving pieces to be able to give you much color as to whether or not sequentially Q2 over Q1 projects rebound. Normally, most affected by the seasonality, so you start with thinking that being a logical approach, but there's just too many moving pieces, and I don't think C&C is going to move the needle in Q2.

Okay. I can appreciate that. And I'll certainly stand on Jim's comment about the brass to give out guidance.

Can you maybe help us think about just ROV pricing a little bit more. And I guess I'm really thinking along the lines of the fact that you do have ten ROVs coming in that I believe are sort of a higher revenue, higher margin ROV, but -- and then presumingly what is going off contract would be some lower revenue, lower margin stuff.

If we think about an imputed day rate or pricing for ROVs, net-net those suggest they might cancel out a little bit, but then there's the pricing dynamic. And I know you have said in the past that you are always a little reticent to really push ROV pricing, but that might suggest to the downside it's also less sensitive. Can you just help us think through all of those moving pieces?

Ed, first of all, I don't think ten ROVs coming in to a fleet of over 300 is going to have much impact. And the other thing I want to say is what impacts our ROV average day rate a lot is the mix between drill support and vessel-base, with vessel-base having a larger crew and having a larger day rate because of the higher crew component. And so that mix with the low visibility on vessel utilization is probably the biggest thing that we have to concern ourselves with about average day rate or, aka, pricing.

Okay. Fair enough. That's very helpful.

And in terms of the relative price compression or ability to give away pricing on the different product lines. Would ROV be, for the most part, the least effected or the least decline in pricing?

Historically in that business, we have faired very well in these down cycles. I think it's hard to tell how aggressive the oil companies are going to be in, what in our view, is a pretty small part of the overall cost issue that they have.

They're all asking for discounts. They're all asking for discounts on the order of, not just to us and not necessarily in the ROV business, but generally across the board. They're talking in terms of 30% to 35% reduction in cost on the basis that, hey guys, we just lost 50% of our revenue. Help us out here.

And so these are very difficult conversations. But back to the point, at this point, it's hard to see that the ROV business will be immune. It certainly is not going to be immune.

We're thinking that it won't be dramatic or drastic or anything like that, but it could be affected a little more than it has been historically.

And instead -- as Kevin said in the opening comments. Instead of just looking for ways to give them lower pricing, we're looking for ways to eliminate cost. And so if we can do the same job without the up-manning during a completion on a drilling rig, instead of having additional crew costs and additional crew pricing in there, they could see a lower cost solution. So we are working on ways to achieve some of their goal without giving all of them, what they're asking for out of pricing.

Okay. Fair enough. Thanks. That's very helpful.

Your next question comes from the line of Brad Handler. Your line is open.

Thanks. Good morning.

I guess I was hoping you could share a little bit more color about your work in Angola. Is it your sense as -- you've said the Bourbon 803 is going to be let go at the end of April. Is it your sense that your customer has found an ability to do the work over the long term with two vessels verses three? Has there been some change in the pace of work to be done there?

I think they're slowing down. I think they're cutting costs because they have to across the board, and slowing down is one way to cut costs.

Right. So maybe that's not optimal from their standpoint, but it does cut costs for now.

Correct.

Okay. Let's switch back to the Gulf of Mexico where you are obviously a little bit more optimistic about project work. Maybe you can string some of your contracts or some of the visibility you do have together.

Is it a behavior? Is there some behavioral change? Is this a good way to manage the economics for some of your oil company customers in terms of having -- in terms of are they doing more work from a flowing well perspective or something? I don't know.

Do you see anything in the demand profile there that I guess is a little more encouraging? What can we draw from some of your --?

The Gulf of Mexico, right now, has got more project activity ongoing, and so it's going to be a stronger market compared to some other places, particularly, let's say the North Sea. But in terms of any up fundamental shift in what they are using vessels for today verses yesterday, no, I don't see that at all.

I do see -- or have the expectation that if they can defer some work like abandonment type of activity or inspections that don't have to be done, but they were doing them before, because they wanted to or whatever, then those things are going to get deferred. So there is no fundamental shift in how things are being done in the Gulf of Mexico. It's just that there is more activity there that is going on and that's a good thing.

Maybe with regards to alliance and Shell. Presumably, Shell has been doing call-out work for a long, long time. Were you able to persuade them that a dedicated vessel achieves a lot of efficiencies. Is that the business development dynamic?

Yes, absolutely. And we were working on that for quite a long time, but anyway --

And Brad, a good observation on that is that the contract is not incremental, because they were doing a lot of project work on a call-out basis. And we are a very good preferred vendor of theirs and they are a preferred customer of ours. So the fact that we locked up the alliance doesn't mean that we took utilization risk out of the overall fleet, because we took Shell off the customer list for the call-out work.

Right. If you try to -- should we try to roll forward this concept a bit? In other words are there savings that you are offering that you might expect to be able to aggregate work and concentrate it in --?

It really is about visibility of demand on the operator side. If they see the demand, then they have a clear choice whether to take a vessel for a longer period of time or to work the stock market.

I think, generally, that is directly related to how much subsea infrastructure that operator has in the geographic area that we are talking about. It is -- not everybody has, or most other companies don't have, that kind of infrastructure there, so they're not going to see that demand.

Right. That all makes sense. Okay, thanks. I'll turn it back.

(Operator Instructions)

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

Good morning. I wanted to ask -- people have been poking around trying to get around projects. It's always the least visible to sort of understand.

The only sensitivity question I wanted to ask is that if you took one vessel off, what's the revenue impact to one vessel going down in any given quarter. On that quarter's revenue? If I wanted to make my own assumptions, how would I want to calibrate that?

I don't think we could give that out. It's just too hard to make anything meaningful out of that anyway in my opinion. It's a call-out.

Being a call-out business it's up and down all the time and that's granularity that I think would be -- and taking out that if the vessel you are talking about is the Bourbon 803, it was on charter. And it going off would not be relevant to what would happen in the Gulf of Mexico.

Okay. Switching gears a little bit and just trying to aggregate some of the comments I heard to make sure I am looking at it the right way.

I understand completely what you are saying with regard to mix changing the pricing somewhat in that vessels get higher pricing with more men verses ROVs on drill ships/drilling rigs. If I am looking at it from a utilization standpoint, usually vessel utilization is lower, so if you're mix is shifting more towards drill ships and then the drilling side just because the vessel activity is falling off a little bit faster as what I am gathering from what you've been telling me.

Is it safe to assume that maybe higher 70%s type utilization could be a fair assumption because the drilling tends to be a little bit more consistent? Even if drilling is going down as well, the overall mix is going towards drilling of what's working the utilization will be higher?

I think you're missing is that you are assuming that the ROVs that aren't working on the vessels are suddenly finding jobs on rigs. And I think utilization is impacted by both and a change in mix of the days work isn't very relevant to overall demand if there is no vessel activity for 30% of our ROVs.

Got it. So if I look over past cycles, that utilization and net can fall easily into mid/low 70%s and that may be a fair assumption here?

We're not commenting on utilization right now. We're just saying it's going to be lower. We're not quantifying it because we really don't know what the call-out work on the vessels is going to be. And we don't know what the rollover rate and the idol time between contract is -- there are too many unknowns to predict.

Too many variables.

When do you think your clients are going to have more visibility on their portfolios? Is that something that comes in March after the budgets have been filed? What is the timing of usually having a little bit better clarity for the year ahead on that?

Well, usually by second quarter we start getting a little more visibility what's out there. But I don't think in this case, from an operator's standpoint, I don't think it has so much to do with whatever their budget is, it has to do with what do they need to get done. And they're not going to spend any money they don't need to get done.

A lot of what we do is problem solving so they are never predicting what their problems are going to be. They might have a budget set aside for that, but obviously, they don't spend it unless they need to. So that's where the difficulty comes in terms of utilization.

And I think a lot of oil companies have announced that they are going to remain flexible during the year, and not commit the budgets until they have better visibility. So that's another unknown.

Understood. I appreciate the help.

Okay.

And there are no further questions in queue at this time. I turn the call back to our 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 record results for 2014, including our 11th consecutive year of record ROV operating income.

2014 marked our 50th year in business and my 35th year with the Company. I am grateful for the opportunity to have been part of the firm's evolution in growth and look forward to leading Oceaneering to another year of substantial earnings performance in 2015.

This concludes our fourth quarter and year-end 2014 conference call. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.