Oceaneering International Inc (OII) 2015 Q1 法說會逐字稿

Good morning, my name is Tammy, and I will be your conference operator today. At this time I would like to welcome everyone to the 2015 Q1 earnings review conference call.

(Operator Instructions)

Mr. Jurkoshek, you may begin your conference.

Good morning, everybody. I'd like to thank you for joining us on our 2015 first quarter earnings call. 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 Chief Executive Officer, who will be leading the call; Marvin Migura, our Executive Vice President; and Cardon Gerner, our Senior Vice President and Chief Financial Officer.

Just as a reminder, remarks we make during the course of the call regarding our earnings guidance, business strategy, plans for future operations and industry conditions are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. And I'm now going to turn the call over to Kevin.

Good morning. Thanks for joining the call and your interest in Oceaneering. Year-over-year and sequentially, our quarterly earnings were down, primarily as a result of lower demand and pricing for many of the services and products we offer. This was attributable to the significant drop in crude oil prices since June 2014, which in turn has led to oil and gas industry reductions in both capital and operating expenditures.

2015 is shaping up to be a very challenging year despite first quarter EPS exceeding our guidance. Now our above guidance performance, to a considerable extent, was attributable to an acceleration of forecasted work in Subsea Products, notably the umbilical plans we imported in our Panama City and Florida facility, and Subsea Projects, specifically a large hydrate remediation project in the Gulf of Mexico. We also benefited from cost reduction measures we put in place, including right sizing our work force, reducing training expenses and attaining price concessions from our suppliers.

Since our last earnings release, our oil-field business outlook for the remaining quarters of this year has weakened for ROVs, Subsea Projects, and Asset Integrity. We are challenged with materially lower demands, customers demanding price concessions, and competitors willing to dramatically reduce prices to secure utilization from their assets. Consequently, we are lowering our 2015 EPS guidance to a range of $2.80 to $3.20, down from $3.10 to $3.50. As I stated on our last quarterly earnings call, we do not pretend to have a better crystal ball than others. Our revised EPS guidance represents our view of our business prospects at this time. We acknowledge that the precipitous declines in demand and pricing taking place within the oil field markets we serve are unrivaled in recent history.

Our earnings for the balance of 2015 will largely be determined by vessel based inspection, maintenance and repair, or IMR work, and floating drilling rig use. The majority of IMR activity is performed on a call-out or spot market basis, and it impacts the results of our ROV, Subsea Products, particularly tooling, and Subsea Project businesses. These short cycle jobs normally have low visibility, but in 2015, when many of our customers are curtailing OpEx spending, the risks associated with this work materializing are high. Additionally, our results will continue to be dependent on floating rig use, especially those rigs with contracts expiring during the remainder of this year.

During the quarter, we paid $27 million in cash dividends, and repurchased 1.1 million shares of our common stock at a cost of about $56 million. Additionally, earlier this month we completed the acquisition of C&C Technologies, a global provider of survey and satellite based positioning services. The acquisition price of approximately $230 million was paid in cash.

I'd now like to review our operations for the first quarter. Year-over-year and sequentially, ROV operating income declined due to a decrease in days-on-hire, largely to provide drill support services and lower average pricing, mainly due to a weakening of the Norwegian krone and exchange rate relative to the US dollar, and a reduced average manning level per ROV day-on-hire. Our fleet utilization rate during the quarter was 73%, compared to 86% a year ago, and 80% last quarter. Operating margin for the quarter was 28%, down from 30% a year ago, and 31% last quarter.

During the quarter we put four new ROVs into service and retired four. At the end of March, we had 336 systems available for operation, up from 314 a year ago. Two of the new ROVs went to work in drill support service and the other two went to work on board a vessel. Our fleet mix during the quarter was 71% in drill support and 29% on vessel based work, compared to a 72% / 28% mix both sequentially and year-over-year. At the end of March, we had 165 ROVs on 151 floating drilling rigs, or 58% of the 261 floaters under contract. This compares to having ROVs on 59% of the rigs contracted at the end of March 2014 and the end of December 2014.

Asset Integrity operating income declined year over year, and sequentially, on lower service demand in most of the areas in which we operate, notably Norway, due to reductions in our customer's operating and capital expenditures. Our customers are deferring maintenance work whenever possible, which is affecting our inspection and NDT services, and reducing their CapEx programs, which is affecting demand for our engineering services. As for our remaining business operations for the first quarter, year-over-year, Subsea Products operating income declined primarily due to lower demand for subsea hardware, mainly BOP control system replacements and clamp connectors. Operating income declined sequentially, largely on lower demand for tooling and BOP control system replacements. Our Subsea Products backlog at quarter-end was $788 million, up $98 million from December 2014, but down $106 million from March 2014. Sequentially, backlog improved on the strength of two large umbilical awards, including a contract to the Offshore Cape Three Points Block Project, located offshore Ghana, which added over $100 million to our backlog. Year-over-year, the backlog decline was attributable to decreases in orders for umbilicals, tooling, and subsea hardware.

Subsea Projects operating income improved year-over-year on the commencement of diving services offshore Angola. Sequentially, operating income declined from a record high on lower vessel activity and pricing in the US Gulf of Mexico, and an increase in regulatory vessel inspection expenses. Advanced Technologies operating income was higher year-over-year on an increase in profitability on theme park work. Sequentially, operating income declined on lower US Navy and industrial project activities.

In summary, 2015 will be a very challenging year, but believe we are well positioned and up to the task of making the most of it. We generated $165 million of EBITDA during the quarter. Capital expenditures for the quarter totaled about $49 million. $22 million was invested in ROVs and $22 million was spent on Subsea Products.

Now let's talk about our 2015 EPS outlook. As I mentioned earlier, since our last quarterly earnings release, our oil field business outlook for the remainder of the year has substantially weakened for ROVs, Subsea Projects, and Asset Integrity. ROVs on lower service demand primarily to support drilling. 50, or roughly a third, of the rigs we had ROVs on at the end of March have contract terms expiring during this year. The future work prospects for these rigs have significantly deteriorated. We currently anticipate follow on rig work for about half of our approximately 7000 uncontracted ROV days on these rigs.

Subsea Projects, primarily on lower demand and pricing for deep-water vessel and diving services in the Gulf of Mexico. Lower demand is attributable to a decline in installation activity and the postponement of maintenance work. Lower pricing is due to an oversupply of vessels related to the level of demand, and Asset Integrity on lower demand and increasing pricing pressure for our services globally. Subsea Products is also expected to be down somewhat on lower demand for field development hardware related service work, and lower tooling rentals to support field development and well abandonment activities.

We are challenged with materially weaker near-term demand, customers demanding price concessions, and competitors willing to dramatically reduce prices to secure utilization for their assets. Consequently, we lowered our 2015 EPS guidance to a range of $2.80 to $3.20. We anticipate generating at least $515 million of EBITDA during the remaining three quarters of 2015, for a projected total of $680 million. At the end of March, we had $305 million in cash, $50 million available to be drawn on a three year delayed draw-term loan, and an undrawn $500 million revolver. We have subsequently drawn down the remaining $50 million on the term loan. Our organic CapEx estimate for this year remains between $200 million and $250 million, down from $387 million in 2014. We intend to continue paying a quarterly cash dividend which is currently $0.27 a share. Other uses of capital may include share repurchases. At the end of March we got authorization to repurchase 8.9 million shares, about 9% of our shares outstanding. We intend to continue our practice of announcing share repurchases, if any, on a quarterly basis.

Moving on to our second quarter outlook we are projecting EPS in the range of $0.64 to $0.70, which sequentially takes in to account normal seasonality and project timing issues. On a year-over-year basis, it reflects lower demand in pricing for many of the services and products we offer, higher interest expense and a lower share count. Sequentially, we anticipate quarterly operating income declines from ROVs on decrease in days-on-higher, and lowered average pricing due to customers demands for discounts and Subsea Products on lower umbilical plant throughput. We anticipate sequential operating income improvements from Subsea Projects on normal seasonal increase in demand in the Gulf of Mexico and a reduction in regulatory vessel inspection expenses. Asset Integrity on seasonally higher services as we perform refinery turnarounds in Europe and offshore platform inspections in the North Sea and the Gulf of Mexico, and Advanced Technologies on higher demand for US Navy ship repair work.

We are expecting year-over-year second quarter operating profit declines for each of our oil field business segments due to lower demand and pricing for many of the services and products we offer. AdTech operating income is expected to be higher due to improved operational execution and increases in US Navy and theme park activity. On a macro basis we remain convinced that our strategy to focus on providing services and products, and facilitate deep water exploration and production remains sound. Deep water 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. Therefore, we anticipate demand for our deep-water services and products will rebound and rise over time, and believe our long-term business prospects remain promising. 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, and have the cash flow and liquidity to manage our business through the current low commodity price environment.

In conclusion, for 2015 we are faced with a slowdown in deep-water activity and consequently are expecting that our EPS will be lower than in 2014. Certainly, this is a challenging time, but we believe we are well positioned in the market, and up to the task of managing the company through this turbulent period. Market conditions may change, but our commitment to deliver results to our shareholders remains the same. We are focused on cash flow generation and cost control, and have already taken actions to right size our work force where needed, and we will take further measures if demand falls short of our expected levels. We appreciate everyone's interest in Oceaneering, and I will now be happy to take any questions you may have.

(Operator Instructions)

James West, Evercore ISI.

Kevin, you mentioned a couple times, dramatically reduced pricing from your competitors. Curious: It sounds like that's more on the real heavy asset side. Is that -- is it ROVs, is it diving? Which segment in particular are you seeing the most aggressive, or predatory, pricing?

It's on the vessel side.

Okay. And are they working at rates that you're just unwilling to work at, or they are just undercutting you on contracts?

Well, everybody is trying to get utilization. And at times like this, it's all about price. So, in order to keep our assets employed, we've got to be at the market price, so margins are getting compressed.

Okay, fair enough.

And then, on the -- maybe on the Subsea Products side -- hearing from FMC yesterday and Cameron today, while this year is going to be a little bit challenging to FMC maybe on orders, Cameron a little bit more rosy about orders, both were pretty optimistic about a recovery in 2016. I know your business may be a little bit shorter cycle, but did you agree with that assessment that this is kind of -- we're going to bottom out here in 2015, and we'll see an upturn in 2016?

Well, I'll preface my remark by saying nobody really knows. My feeling at the moment is that even if prices rebound to what the general consensus seems to be, i.e, circa $70 or so, I find it hard to believe that the big oil companies are going to immediately just go back to business as usual, given that they were already struggling at $100.

I think there's some structural changes that will be taking place. And they'll be inwardly focused on how to reduce costs, trying to manage their free cash flow, and figure out what they will do with the capital that they have. And I expect that it could be beyond 2016 before it really gets back into a more predictable mode.

James, this is Marvin. The other thing -- I mean, if it does recover for Cameron and FTI, that will be good news for us, but we're way more impacted by the rate at which trees get installed, than at the rate at which they get ordered. So, we're looking for development work to increase. So, if they order trees, we know it's coming down the line, but we just don't know when.

Okay, fair enough. So, for you guys, it may be a little bit of a prolonged downturn relative to others?

Could be.

Okay.

Jon Donnel, Howard Weil.

Regarding the pricing commentary, and specifically on the project side, is any of that flowing over into the BP contract that you have in Angola, or is it just more on the call-out work at this point in time?

It's kind of everywhere.

Everybody wants a concession, even if it's already contracted.

Sure. Are you able to get anything from the operators in return, in terms of more volume or longer terms? Or at this point is it just purely pricing concessions?

Well, we are obviously trying for both of those in return. But as demand is weakening, that's kind of counterintuitive how much that's going to be.

We certainly have gotten some concessions. We've traded some work for some other work, and it depends on the operator and what not. But I'd say, at this point, the bulk of conversations across the spectrum of our oilfield customers is really short term about the price.

And, Jon, it is on a case-by-case basis, depending upon the customer and the region.

Okay, yes, fair enough.

And then, similar vein on the C&C Technology acquisition here, I think when you first announced that, you were thinking somewhere in the neighborhood of $20 million to $30 million of EBITDA over the next 12 months. How, if any, has that outlook changed here, just given the changes in the market since that was first announced?

Jon, I think, since we've owned them for less than a month, it would be easy to say that it's too early to tell. But we'll also say that C&C's operations are definitely not immune to the downturn, and we took this possibility into consideration during the acquisition process.

However, the rate of deceleration offshore may be greater than we anticipated. So, we're not going to go ahead and revise our subsegment EBITDA look or outlook at this time. And regardless of the near term, we acquired C&C for the long term, and we believe it will be a very good part of Oceaneering's portfolio.

Okay.

Ian Macpherson, Simmons.

I was wondering if you could say, based on your assumptions for uncontracted time when your ROVs go down for the year, do you see your ROV activity flattening out or continuing to decline significantly from where we saw it in the first quarter?

Ask that again, Ian. I'm sorry.

I'm wondering if there's meaningful downside in your outlook to the ROV activity level, in terms of days worked relative to Q1. Is the trough going to be much lower, or do you see it flattening out based on the assumptions you're using right now.

Well, I think Kevin discussed that we had 7,000 uncontracted days on -- ROV days on rigs that we are on that have contracts expiring in the balance of 2015. And we have assumed a 50% utilization of those specific rigs, in general. I mean, we went rig by rig looking at it, and it just came up to be -- which rigs we thought we were going to continue to -- that they were going to continue to work, and then we would.

So, I think -- is there a downside? Yes, I mean, we've tried to quantify that part of it, but also, as Kevin mentioned, the vessel-based call-out work is really going to be, and the amount of IMR that the operators are going to do, is really going to be the determining factor of our ROV utilization. And both of these are unknown, but we will say that our guidance assume that utilization of ROVs will hover around 70% for the balance of the year.

Okay, that's good, thanks. And --

Jim Wicklund, Credit Suisse.

I know that you don't know when things are going to turn. You said one day, over time.

But what should we look for, or what do you look for, to see that the market is improving? I mean, other than waiting for oil prices to come back, you mentioned a structural change. Kevin, what are the things we should look for over the next year, two, three, four, five, or however long it takes, to know that deepwater is coming back?

Well, I think the first thing is new projects going ahead, and orders for trees. And then eventually we'll get orders for umbilicals, and that will tell you it's coming back closer to when things are going to get installed is usually when it really starts to make a difference to us.

Chase Mulvehill, SunTrust.

This is Josh Large on for Chase.

I just want to continue with the ROV question. So, we got utilization for the balance of the year. How should we think about margins? Is this the bottom this quarter, or should we think of a deterioration going forward?

Well, I mean, that's pretty hard to predict. I mean, we certainly are hoping that we're seeing the bottom, in terms of pricing and margins, certainly on the rig side of the ledger sheet here, but we'll have to see. We're not -- there's nothing out there that we see that would suggest that it will deteriorate significantly more, apart from what happens on vessel pricing, that would impact our ROV pricing there.

And I don't think that the full extent of the pricing concessions negotiated in Q1 have been flown through the income statement. But offsetting that are some pretty substantial cost reduction, so we're not going to call the bottom. Right now, we think it's going to be -- so much is, what Kevin said before, is timing and rate of utilization of vessel-based ROVs and the call-out work.

Okay, great. And then, on buybacks, should we think of that more as free cash flow? I know you've mentioned in the past a net debt to EBITDA that you were kind of comfortable with. Should we think of the Company levering up to that, or just free cash flow for this year?

I think that our leverage ratios that we gave before -- we are certainly going to be fairly conservative during this period of time. And we will tend to hold on to more cash than we would otherwise if the market was really good.

So, we need to be conservative. We want to be able to take advantage of opportunities if they're there. We also need to be very conservative about maintaining our liquidity.

All right, thank you.

(Operator Instructions)

Ole Slorer, Morgan Stanley.

Your Subsea Products margins at 20.8% were very strong. Is there a different dynamic going on, in that market, with maybe more proprietary products? Or what are the pricing trends that you see there compared to your other businesses?

Ole, our products are stronger than many others because of the service element that we have in tooling and IWOCs. And I would say that the market trend for IWOCs has been -- remained strong, as most of the work that's being done offshore from a drilling rig relates to completions and, therefore, IWOCs demand has held up rather well.

Going forward, the pricing on umbilicals continues to be challenged, and tooling is really going to be a matter of utilization on vessel callout. And I think that sort of covers the top three. I mean...

It's really how much maintenance work are companies able to postpone and, therefore, what will that mix be in our product results.

Well, they've postponed a lot, so hopefully that has to come back again at some point.

My follow-up question would be on your repair and maintenance side. I mean, you come, in a way, long multi-purpose supply boats. And I think we all realize how bad the overcapacity is in the supply boat market, and where the capacity also being delivered into that market for the next 12, 18 months. And just wonder, to what extent -- how long vessels are you at the moment? And how much of an issue is that for you when you're talking about your margin outlook, let's say, compared to if you had them on short-term contracts and you were able to pass those costs on?

Well, I think, first of all, what the market demand is going to end up to be in the Gulf of Mexico in terms of us being able to keep our vessels here employed remains to be seen. But in 2016, we do have opportunities to release a boat or two, if we should deem that to be the right thing to do.

So, you can reprice in 2016?

We can release (multiple speakers) -- [all the fee] contracts can reprice, yes.

Let's say prices have dropped a fair amount, you can [retract] with much lower prices?

We could, yes.

And the timing of that in 2016 -- how should we think about that?

Late second quarter or -- at the end of the second quarter or early third quarter.

Okay, thanks for that.

It will be consistent with delivery of our new boat, the Jones Act vessel that we're building, which -- we still believe that the Jones Act vessel will have a marketing advantage in the Gulf of Mexico over other foreign flag vessels of similar capability.

Daniel Burke, Johnson Rice.

Just had one left on Subsea Products. Understood that the timing influence and the pull forward in Q1, and how that affects Q2, and understand that visibility is limited. But whether this is -- this question is specifically directed at umbilicals or more broadly on products, do you have visibility into products top line in the second half of 2015 looking stronger than first-half 2015?

I think, just generally, our -- all of Oceaneering's second half is stronger than first half, consistent with every year. And I think it really depends on project timing, and at the rate at which we push it through. But I would say that we are expecting a stronger second half in products than first half.

And, Marvin, is that true across all four of the major product subsegments, or can you differentiate amongst them as you look to the second half? I'm surprised, for example, that tooling would be stronger second half than first half maybe.

Well, it really depends. I mean, the third quarter is when -- I mean, we almost sound like a broken record about a lot depends on the rate at which our customers do inspection, maintenance and repair, particularly in the Gulf of Mexico, but globally, because vessel utilization drives our utilization of ROVs and demand for tooling. So, there's a lot of call-out work in short cycle expected in our second-half forecast, even though we are saying it will be lower than last year.

Okay, guys. That's helpful. That's really all I had left, thank you.

Ian Macpherson, Simmons.

That's it for me; I was going to ask the same thing on the second-half weighting. I guess the only thing I would ask for clarification is, do you think the ROVs will be up in the second half or the first half? That's the one where I'm struggling a little bit.

Not at this time. We're not -- and at our midpoint, we don't see it up.

Got it, okay, thanks for that clarification.

There are no further questions. Do you have any closing remarks?

Yes. Since there are no more questions, I'd like to wrap up by thanking everyone for joining the call, and this concludes our first-quarter 2015 conference call. Have a good day.

Today's conference is concluded. You may now disconnect.