Oceaneering International Inc (OII) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Aaron, and I will be your operator today. At this time, I would like to welcome everyone to the 2015 Q2 earnings call. (Operator Instructions) I'd now like to turn the call over to Mr. Jack Jurkoshek. Mr. Jurkoshek, you may begin your call.

Good morning, everybody. I would like to thank you for joining us on our second-quarter earnings call. As usual, a webcast of this event is being made available to 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, the remarks that we make during the course of this 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.

(technical difficulty) the call and your interest in Oceaneering. Our reported EPS of $0.66 was within the guidance range we gave last quarter. However, these results included a couple of items that had not been considered in our guidance. Specifically, a $9 million or $0.06 a share inventory write-down and a $6 million or $0.04 a share of net foreign currency exchange losses.

The inventory write-down reported in Subsea Products gross margin was result of a decision to exit the business of manufacturing subsea BOP control systems. We intend to continue providing aftermarket parts for the installed base.

The foreign exchange -- foreign currency exchange losses reported in other income and expense included $8.9 million of losses in Angola attributable to its central bank's devaluation of the kwanza, primarily in June.

Therefore, operating results for the quarter of an adjusted EPS of $0.76 surpassed what we had anticipated. This was attributable to performances by our ROV and Subsea Projects segments. ROV benefited from better-than-expected revenue per day on hire due to more vessel-based services, and Subsea Projects profited from higher US Gulf of Mexico demand for deepwater intervention and diving services.

Year over year, quarterly operating income declined on lower profit contributions from Remotely Operated Vehicles, Subsea Products and Asset Integrity. Net income was down due to the operating income decline, the foreign currency exchange losses and higher interest expense as a result of the debt we put on the balance sheet during the second half of 2014.

Sequentially, quarterly operating income was about the same, but obviously would have been higher if not for the inventory write-down. Earnings declined due to the foreign currency exchange losses.

Our overall outlook for the second half of this year is down somewhat from the 2015 guidance we issued last quarter. This is primarily due to the reduced expectations for Subsea Products and Asset Integrity. We now expect to report EPS of $1.34 to $1.54 during the second half of 2015.

Given this outlook and our year-to-date performance, we are lowering our 2015 EPS guidance to a range of $2.70 to $2.90 from $2.80 to $3.20, down about 7% at the midpoints.

Compared to 2014, we continue to forecast income declines for all of our oil field operating segments in 2015. And as a reminder, our guidance does not assume any foreign currency exchange gains or losses.

Before I get into our second half of 2015 outlook by operating segment, I'd like to address our lowering of the earnings guidance without sounding too defensive. Yes, we are again lowering our 2015 annual earnings guidance. I am not aware of too many if any oilfield service or products companies onshore or offshore to have not repeatedly revised their internal 2015 expectations downward. Maybe the only difference is that we published our guidance, and we still believe it is prudent for us to set external earnings expectations even in this fluid, challenging, difficult to predict market.

So, at the midpoint, our new guidance range is 7% lower than our prior guidance. That is if you choose to only consider our reported second-quarter GAAP EPS of $0.66. If you choose to add back the $0.10 adjustment and use the more operationally reflected $0.76 adjusted EPS for the second quarter, the midpoint of our new 2015 guidance range is $2.90, down 3% from the guidance range we gave last quarter. Either way, 7% or 3%, we're still feeling pretty good about the results of our operations and our outlook relative to the results of others in or around our space.

Now addressing our operating outlook, relative to the first half of 2015, during the second half, we expect to generate higher operating income from Subsea Products and Advanced Technologies, lower ROV and Subsea Projects results and a similar contribution from Asset Integrity.

Subsea Products profits are expected to be up on an increase in throughput at our umbilical manufacturing plants and higher umbilical distribution hardware sales and higher tooling and subsea work system sales.

Advanced Technologies operating income is forecasted to increase primarily on higher theme park activity.

ROV operating income is expected to decline on a decrease in days on hire and lower average revenue per day on hire. Our guidance assumes a projected fleet utilization for the second half of 2015 of around 67%. This estimate takes into consideration our exposure on floating rigs and callout vessel-based work.

If we achieve the expected second-half utilization, our annual 2015 utilization would be about 70%.

Subsea Projects operating profit is anticipated to be substantially lower, due to a reduction in work for BP Offshore in Angola, including the release of the Bourbon Evolution 803 that occurred at the end of April. Lower pricing for deepwater intervention services in the US Gulf of Mexico and lower demand and pricing for diving services in the Gulf.

We believe the full impact of competitive vessel pricing will be realized in the second half. The impact on the first half was muted due to jobs at higher day rates and backlog carried over from 2014.

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 Projects 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 higher.

Additionally, our results will continue to be dependent on floating rig use, especially those rigs with contracts expiring during the remainder of this year.

For 2015, we anticipate generating at least $660 million of EBITDA. At the end of the quarter, we had $191 million in cash and an undrawn $500 million revolver. We believe our liquidity and projected cash flow provide us ample resources to continue to invest in Oceaneering's future and returning capital to our shareholders.

I'd now like to review our second-quarter segment results. Year over year, the decline in second quarter Subsea Products results from operations was largely attributable to lower demand for tooling and subsea work systems and BOP control systems and a reduction in umbilical plant throughput.

Sequentially our operating income margin was essentially flat with that of the first quarter, excluding the BOP control system and inventory write-down. Our Subsea Products backlog at quarter end was $703 million compared to our March backlog of $788 million and $850 million one year ago.

Year over year, the backlog decline was attributable to umbilicals, tooling and BOP control systems. Sequentially, the backlog decline was primarily due to umbilicals and umbilical distribution hardware. Year-to-date our book-to-bill ratio was 1.0, and for the trailing 12 months, it was 0.87.

Now, turning to ROVs. Year over year, ROV operating income declined on lower demand and a reduction in average revenue per day on hire. Our ROV days on hire decreased 11% to approximately 21,700 days, largely on reduced demand to provide drill support services. Average revenue per day on hire declined 9% due to lower pricing, a weakening of the Norwegian krone exchange rate relative to the US dollar and geographic mix.

Sequentially, operating income was essentially flat. Our average revenue per day on hire was also unchanged, despite the fact that the pricing concessions we previously agreed to went into effect. This was attributable to a change in work mix to a higher percentage of vessel-based services.

Our fleet mix during the quarter was 69% drill support and 31% on vessel-based work. This compares to a 71%/29% mix last quarter and in the second quarter of 2014.

Operating margin during the quarter was 28%, the same as in the first quarter and the second quarter a year ago. Our forecast -- our focus on cost reductions is having an impact in a period when customers are requiring price concessions. The fleet utilization during the quarter was 71% compared to 73% last quarter and 84% in the second quarter of 2014. Year-to-date our fleet utilization was 72%.

During the quarter, we put three new ROVs into service and retired three. At the end of June, we had 336 systems available for operation, up from 323 a year ago. All three new vehicles went to work in drill support service. At the end of the quarter, we had ROVs on 142 or 58% of the 243 floating rigs under contract. We had ROVs on 151 contracted rigs at the end of March 2015 and on 170 rigs a year ago.

Looking at Subsea Projects, segment operating income was higher year over year on an increase in demand for diving services both in the Gulf of Mexico and offshore Angola. Sequentially, Subsea Projects operating income increased on an seasonal pickup in the Gulf of Mexico demand for deepwater intervention and diving services and lower regulatory vessel inspection expenses. Our success at securing deepwater intervention work was related to our ability to provide subsea work systems, which we offer as part of our tooling business in Subsea Products to perform flowline hydrate remediation and well stimulation projects.

We also benefited from the first full quarter availability of the Island Pride, which we chartered late last year. Notably, in the current environment, Subsea Projects operating income for the second quarter and year-to-date 2015 exceeded operating income for the same period in 2014.

As for our remaining business operations for the second quarter, Asset Integrity operating income declined year over year on lower demand and increasing pricing pressure for our services globally. Sequentially, operating income declined primarily on lower demand and pricing for inspection services in the United Kingdom.

Advanced Technologies operating income was higher both year over year and sequentially. Year over year this was attributable to higher demand for engineering services by the U.S. Navy and increased activity and operational efficiency on theme park projects. Sequentially, it was due to higher U.S. Navy demand for engineering services.

In summary, 2015 is turning out to be a very challenging year, but we believe we are well-positioned to make the most of it. We generated $165 million of EBITDA during the quarter. Capital expenditures for the quarter totaled $275 million, of which $230 million was spent in early April on the acquisition of C&C Technologies, a global provider of survey, autonomous underwater vehicle or AUV, and satellite-based positioning services. These results are included in our Subsea Projects segment.

Moving on to our third-quarter outlook, we are projecting EPS in a range of $0.65 to $0.75. Sequentially we are expecting a quarterly income improvement from Subsea Products and similar or declining profit contributions from our other segments. Subsea Products is forecasted to be up on higher tooling and subsidy work systems sales. Year over year, we are anticipating that all of oilfield business segments will have lower operating income. Advanced Technologies is forecast to be up on an increase in theme park activity.

In conclusion, for 2015 we are focused on cash flow generation and cost control and have already taken actions where needed to right-size our workforce and streamline our onshore support functions, and we will take further measures if demand falls short of our expected levels.

We believe our cash flow and liquidity position us well to manage our business through the current low commodity price environment. Longer-term, deepwater is still expected to continue to play a critical role in the global oil supply growth required to replace completion and meet projected demand.

The oil and gas industry in general and the offshore market in particular are experiencing demand destruction not seen since the mid-1980s.

Given all of the unknowns in this offshore market, we've decided to give you advanced notice that we will not be providing 2016 EPS guidance in our third-quarter earnings release as we have done in the past. We will continue to assess the market and perhaps provide a 2016 annual outlook when we report our 2015 year-end results in February of 2016.

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

(Operator Instructions). Ian Macpherson, Simmons.

Thanks, gentlemen. My first question I was wondering if you might share with us the historical materiality of BOP control systems just so we have an idea of what's being wound down there and whether you're contemplating winding down any other segments within products due to the demand situation?

The answer to the first question is it is not really material, and the answer to the second question is not at this time.

Straightforward, thanks. A follow-up question. It is the midpoints of your Q3 guidance and your second-half guidance suggests Q4 higher than Q3, which is really atypical for your earnings seasonality, and I'm wondering if you might share what leads you to that and what specifically looks like it would be stronger in Q4 than Q3, which is to me a little bit counterintuitive at this point?

That's a good question. It really is in products, timing of projects and products, and also Advanced Technologies.

I think we've got, Ian, is the timing of umbilical throughput in the fourth quarter is greater than that of the third quarter, and commercial theme park activity in AdTech is expected to have a better fourth quarter than a third quarter. (multiple speakers) It's not all offshore activity unfortunately.

Got it. Thank you very much.

Jim Wicklund, Credit Suisse.

You talked about how future EPS are going to depend on IMR work and the rig counts, and you had said before that as long as there's one vessel operator with bad behavior, it makes for a difficult market. You guys are in the boat business. You're taking delivery of your new boat next year. You guys study it and are much closer to it than we do. When should we kind of start to hit equilibrium? When should the bad actors no longer be incentivized to be bad actors, and when should we expect the vessel market to at least stabilize if not improve?

That's a hard question to answer given that it really is demand related, and demand is so unpredictable right now. I mean the basic problem is there are too many out there, and they are like the floating rig market trying to survive and so they're going to cash neutral pricing as necessary to get enough utilization to survive. So until we get a more predictable demand trend, it's pretty hard to answer that question.

But I think you read in the press the same things that we do about some of those boat folks are in trouble, and they may not all survive, and that will obviously have some positive impact, if that's the case.

Okay. I appreciate that. So I won't ask you to tell me when the rig count is going to bottom then.

(laughter) Thank you. You are not going to ask when the oil price is going to go up either, are you?

Well, that was going to be my third question now.

You only get two, sorry. (laughter)

There you go. C&C, I'm assuming that the pickup in projects in the quarter was at least partially a contribution by C&C. Can you talk about how that's working out?

C&C is working out well, Jim. I mean the integration is really kind of just under way in the quarter. I would say that none of that better-than-expected performance in projects was associated with C&C. C&C is neutral to earnings in 2015.

Okay. Well then, the rest of your business did better than expected, that's good.

Right.

And my final one if I could, you guys have demonstrated your ability to control CapEx just by not adding new equipment and buy back a chunk of stock. I'm assuming that I won't ask questions if you are going to raise your dividend, but it looks like the dividend is safe for a long-term foreseeable future, and you'll still be generating free cash flow. Is that the bright side of this market?

I think the bright side is our liquidity and ability to generate cash flow. And I'll comment on the dividend and say that we think it's safe until we reconsider it in May as we do annually. And on treasury stock repurchases, we're going to report those after they occur.

Okay, gentlemen. All the best. I wish you luck.

Jon Donnel, Howard Weil.

I had a question on the products bookings tier. They've obviously been pretty lumpy over the first half of the year, but still holding at that book-to-bill ratio of about 1.0. I was wondering if you had maybe some expectations here for the remainder of 2015 and if you could hold that book-to-bill ratio or kind of how you see that part of the business unfolding as we go through the remainder of the year?

Well, as you noted, it is a lumpy business, and I think particularly now with -- I mean we do have line of sight of potential projects that are out there. But whether they actually go forward or move to the right is anybody's guess, and so it's pretty hard to answer that question.

And we stopped predicting future backlog and jobs just for that very reason some time ago. But there is still considerable interest in our products. It's just whether or not they're going to pull the trigger.

Have you seen any change maybe within the comps -- within the sub segments of that group either or maybe more umbilical projects or RV tooling, etc., or is this still just kind of your comments more sort of broad-based for the entire segment?

Broad based.

Pretty broad based. You've got some projects for umbilicals primarily in the connection systems, and then you have got the callout work for the higher value, you know, subsidy work systems and tooling park.

And then on the ROVs, I was wondering if you might have any update on either the number of rigs that you guys currently have vehicles on that may be rolling off of contract here over the remainder of the year and also maybe the new systems you have scheduled to be coming on for the rigs that are still under construction?

Jon, we'll get you that number real quick. Jack is looking it up right now. But we've really stopped focusing on the number of uncontracted days because we don't find much sanctity in the contracted days right now. So when every time I read something about another rig was canceled or idled prematurely or whatever, counting days doesn't seem to have a lot of relevance anymore as we thought it once did. But at the end of June, we had 33 -- we had ROVs on 33 rigs that had contracts rolling over in the second half. But again, with Kevin's notes and introductory notes mentioned, we've got exposure on done rigs and on expected but unbooked callout work. So there's a lot of speculative days in our forecast that need to materialize.

Okay. Fair enough, guys. Thanks a lot. Appreciate you taking my questions.

Chase Mulvehill, SunTrust.

Good morning. Good afternoon. Let's see, I guess first on the ROVs, the margin held up in the second quarter. You had some seasonality with the vessel base support being up quarter over quarter. You are guiding utilization lower in the second half versus the second quarter. So how should we be thinking about margin progression in the second half of the year?

We're trying to hold the line on certainly on further discounts. We think that's behind us, although that's now starting to run through our operating earnings. But we are doing everything we can on the cost side to mitigate that, and I think that is what was reflected in the maintenance of the margin from the second quarter. And we're going to do everything we can to try and continue to do that.

We're focused on every area that you would expect in this kind of a market in terms of costs that can be eliminated or avoided.

And I think our margin is too directly tied to utilization percentages, too. We just got through discussing all of the work we need to win and the spec days that we have in our forecast as normal in the callout business. So it really depends upon the level of activity out there and utilization that will determine. I think there is a lot of effort trying to maintain it, and there is a lot of pressure to bring it down from external sources.

Okay. Alrighty. So moving onto the Subsea Projects business, you've got a decent amount of contract coverage there. So could you just talk to how you expect utilization to unfold over the next year or so here and if your customers have come back to you about price concessions on these contracts?

Well, in the projects business, I mean if you look at the two different places where we have that, Angola and the Gulf of Mexico, Angola is a term contract, and we have made some concessions to BP there. Those are already beginning to roll through our financials. And as far as the Gulf of Mexico, I mean that market gets priced to market every day.

And so, you know, the term contract that we have with one customer is I think okay, but the balance of the fleet is subject to the daily fluctuations in that market, and it is hard to predict that. But I think it's going to be challenging for the remainder of this year.

And utilization of our vessels really -- why we get call out work and others don't is because of the whole package of project management, tooling and ROV that we bring. But still, utilization is so dependent on whether or not the phone is going to ring. Does somebody have a problem out there that they need fixed?

Okay. Are there any vessels that are scheduled to be redelivered over the next 12 to 18 months?

In --

In projects.

In 2016, we have three vessels, one of them at the end of the year, but we've got one in the middle of the year I guess in August is the first one and July --

We had two in the fourth quarter.

Two in the fourth quarter. We are taking on, as Jim indicated earlier, our newbuild-owned vessels should be delivered in April and whether it goes to work in Q2 or Q3 after it gets -- goes through the shakeout crews and all of that is yet to be determined.

Do you have a contract for that newbuild?

No, it's going to be participating in the callout market.

Okay. Got it. Okay. I'll squeeze one more in real quick. So on the Subsea Products, how should we be thinking about the progression of margin as you get the mix shift, kind of fourth quarter you mentioned about umbilicals, and then you have lower price backlog starting to run through the P&L as we kind of get two or three quarters out?

We really don't give guidance on our margin. Again, we're doing everything we can to keep it up. We said that it would've been flat if we had had BOP controls inventory write-down. I don't see much degradation, but I mean I think it's going to be a challenge to hold it where it is.

All right. I mean I guess in 2014 you guys used to kind of give some guidance around 19% to 21%. Would you consider that in a normal mix, normal margin way that's kind of where you know we should be thinking about normalized margins?

I would think that was normal for 2014. I don't think this market is very comparable.

We had bigger umbilical backlog, which is the lower of the mix, and the callout piece, which is the higher margin, this is what we can't really predict until we know what happened.

I think the most difficult to predict is the utilization of our subsea work systems in our tooling group, and when there is a well stem or a flow remediation problem, we get utilized and we have contribution from that. When that equipment is on the beach, not so. That's what makes our margin --

Variable.

Variable and difficult to predict. It's timing of offshore callout work.

Got it. Alrighty. Thanks for all the color. I'll turn it back over.

Ole Slorer, Morgan Stanley.

Thank you and thanks for the update on the guidance. I'm impressed that you guys have the systems in place to be able to tweak it 4% to 7% given the volatility of the current environment, and certainly appreciate that.

One thing, on the strength in this last quarter in the ROV business, a little bit -- I am not quite clear on how come that it was driven by vessel work. Because it's quite different to what we're hearing from some of the other companies that also have vessels involved in intervention work in particular. It's been quite weak for them. So what was it that delivered such a differentiated performance for you guys?

Well, we just have -- we had reasonable utilization in our vessel fleet where we have ROVs installed on those vessels, mostly two ROVs per unit, and that's a much higher day rate of profitability than on the rig. So I guess for us, maybe the difference was we had better utilization of our assets during that time. And that's the rig market goes down, our percentage of vessels goes up.

I think, Ole, if you're comparing intervention vessels to across the board, I think our differentiated services and flow line remediation and well stem in the second quarter helped us, helped carry some vessel utilization that otherwise wouldn't have been there on a callout basis.

Now, the (inaudible) difference in the type of services that you provide that give you access to a different part of the market. I'm just not sure if I fully understand the differentiation?

I really think it is the integrated ROVs and the tooling services, including particularly focusing on well stimulation and flow line or hydrate remediation.

And a fair amount of this is difficult to forecast given that it is, as you say, that you're responding to a problem. Is there any reason to assume that the high market share that you must have enjoyed in this quarter will change going forward? Or do you think it's a little more structural around the products that you supply?

I think it really depends on the amount of more complex intervention jobs that arise during the quarter. That is really a differentiator. If there's a lower amount of that going forward, then we lose some of our advantage against the other competitors. I mean that's really the differentiator.

Two comments. When we talk about intervention, we're talking about outside the wellbore. I mean I know you know that, but I want to make sure everybody doesn't compare us to doing well intervention inside the wellbore. And secondly, I totally agree that it's not difficult to predict. It's almost impossible to predict callout work. (multiple speakers)

Yes, no, I mean the inside versus outside wellbore, yes. Good point. So, as long as the business environment unfolds, which is, of course, close to impossible to predict similar to what you did, there's no reason to assume that you won't be able to maintain your shares, if I understood correctly.

(multiple speakers) That is what we would say, yes.

Well, thanks a lot for clarifying that.

Waqar Syed, Goldman Sachs.

Thank you for taking my question. In Advanced Technologies, the team (inaudible) that you are mentioning could show up in the second half, could we get quarterly income up to that $10 million a quarter or $10 million number that we've seen in the past, the kind of the high number? Can we get in that kind of a ballpark?

On a run rate basis?

No, just for one quarter when you're doing all of that theme park related work.

Waqar, I don't know. It would be a pretty serious step up from the level that we are doing right now. So to go from $5 million or $6 million to $10 million, that's quite a leap. I don't know that we have that much, but there is -- I mean it is a notable increase, so. But --

But it's very project timing related and the number of projects and also where they are in the course of delivering those projects. So it's pretty lumpy, just like the umbilical business perhaps. It's just fortunate that they are in a time right now where they do have some good projects that they're working through.

Okay. But you could get into that $8 million that we've seen maybe even a little bit more regular, $8 million or so in a quarter?

We're real happy with the progress that we've gotten, the issues that we incurred last year kind of look like they are totally behind us, and we are running at a substantially better operating income contribution rate than last year. And I think depending on the timing, but I mean I don't see a problem with $8 million, $9 million maybe. Maybe $8 million. $10 million is a little bit more of a stretch.

All right. I'll take my family to Disney, maybe that will help.

There you go. (laughter) Make sure you do that.

David Smith, Heikkinen Energy Advisors.

So you mentioned the pricing concessions on the RV drills before they have gone into effect, and I get there's a mixed shift impact that favors the vessel support. But could you talk about how pricing has moved on an apples to apples basis, whether those are rig-based apples or vessel-based apples?

No, sir. We're really trying to hold pricing concessions pretty close to our vest because if we gave a number and somebody got less than that, they would want to come back. And if somebody got more than that, they might want to come back.

That makes sense. Then I guess a follow-up just real quick. Circling back to C&C, I wanted to ask of those EBITDA margins compared to the legacy business, the legacy projects business, and if it safe to assume that the C&C margins should be more resilient maybe than the legacy business going into the second half?

Right now, it just depends upon what legacy business we would be tying it to. Again, if you look, the level of activity offshore really helps determine the level of activity and the margins associated with the survey work. And then we use the term lumpy for a lot of callout work, but we hadn't really seen lumpy until we looked at the AUV business. I mean if you've got an AUV job ongoing, your margins are very good. If your AUV is waiting for the next job, your margins are not so good.

So over time, we think we can integrate that service offering into what we do and where we do it, and we think it's got a great fit within Oceaneering.

Right now, we think that everything we are doing offshore is challenged, and it would be hard for me to pick. I mean if you look at it compared to callout high logs and tooling? No, that legacy business is way better than C&C's offering. But if you look at it compared to some of the projects and other products work, it's right in line.

Okay. Great. Thank you.

Ken Sill, Seaport Global.

Good morning, guys. I wanted to go over the Asset Integrity business, inspection, maintenance and repair. Did you guys say that you expect that to be flattish or down in Q3?

Asset Integrity, we said, I think we said flattish.

So one of the things (multiple speakers)

Second half. We will double check because -- the answer your question I think would be yes. We said it was flattish to downish, but I'm pretty sure we said it would be similar.

Okay. So that is similar. And that leads to my real question, which is that business obviously gets cut pretty sharply when CapEx cuts happen. But that seems like more of a deferral rather than revenues going away permanently. How long can people defer inspection, repair and maintenance before it becomes a problem? And I guess what I am leading up to is, should you see some bounce back or rebound in that business sometime next year?

Ken, let me -- and then I'll turn it over to Kevin to answer, but I'm going to start with it really is not related to CapEx. It is -- this is -- most of our work is inspection and Asset Integrity associated with existing facilities, and it's very much more associated with production.

So, the one surprise we have in 2015 that made a surprise is we didn't think production OpEx would be cut as quickly and as sharply as it was.

Now some of this inspection has to occur, and they're just deferring it. I'd liken this way more to having your car needing an oil change, and you don't have to do it today, even though it's been the requisite number of miles. You think you can keep running it for a while and you can, but then there's always more cost if you don't get the oil change.

Right now they have in the customers in the interest of cash flows have stopped spending this discretionary timing money, and I think we're expecting it to come back but not in the second half of 2015. We're expecting similar results in 2015.

Go ahead, Kevin.

I mean there are regulatory requirements that have to be adhered to, but these are all around individual plans that they lodge with the authorities in various countries wherever they are operating. So they could all be different timings and whatnot. But we do certainly expect it's going to come back. We just don't know when. It really depends on when they are drop dead date would be to get the inspections done.

I guess that's where I was trying to get a ballpark thought for this, is that so you deferred it, does that start coming back within a year, or can some of it be even longer? I just don't have a feel for that. (multiple speakers)

While I'll preface it by saying that I really don't have any exact knowledge, but one would think that within a year that they would have to be getting back to business here.

Okay. Thank you.

(Operator Instructions). Stephen Gengaro, Sterne Agee.

Just one quick follow-up on the ROV front. Could you give us a sense for what the pricing looks like just even in general terms and kind of how you think about the supply/demand right now?

Well, there's plenty of supply, not much demand, I can tell you that. But as far as the pricing, I think we don't want to go into that. I mean we have, we believe, a stronger market position with respect to competitors because of our value offer, and we really, for obvious reasons, don't want to explore that publicly.

When you look at the margins in that business, the margins have held up fairly well. So I would imagine there hasn't been too much price deterioration, but you've done some other things from an efficiency perspective, the whole margin. Is that a good way to think about it going forward that you're able to kind of continue to manage it in the face of some price headwinds to keep margins flattish?

That's certainly our intent, but I would also point out that some of the -- not all of the reduced pricing has shown up in our results yet. So that's going to still -- that's going to continue to trickle through. But this is a battle, a challenge, and we are continuing to look at ways to be more efficient, reduce costs. We are stopping to do things that we were doing that eventually we will restart when the market is better, but I mean we're just doing everything we can to maintain.

And it really is difficult to maintain margins with utilization declining. That is the challenge is, where is our utilization in the second half going to be? Because suddenly depreciation becomes a larger component on a per day work basis. So we haven't turned that off yet.

And just as a quick follow-up, when you think about your value proposition and your reliability, your uptime, etc., on the ROV side, is that a more important to less important negotiating point in this kind of market, or is it about the same?

I think that kind of depends on the operator, but it is obviously of less importance to the person making the procurement decision at times like this. So there's a lot of factors involved, the philosophy of the particular client, the geographic area that you might be going to work in. So they might be a lot more concerned about it if you were headed to East Africa than if you're going to be operating here in the Gulf of Mexico today.

Great. Thanks for your answers.

Ed Muztafago, Societe Generale.

We heard one of the subsea providers talk the other day about the small project work in the Gulf of Mexico actually having an uptick in 2Q and then sort of their expectation that they expected that portion of the business to perform quite well given the better relative economics to the bigger projects. I'm just kind of wondering how the small project work in the Gulf of Mexico plays into your thinking? Do you all expect that business to be fairly robust or within your guidance, or are you not really baking much of the small project work into your guidance at this juncture?

You're talking about new development work like a tieback?

Correct. Exactly.

Well, I think when you compare the capital required to do something like that versus some other bigger project, I think that the oil companies would much rather do those, they are quick, and they're generally relatively easy. But I'm not aware that there is a overabundance of those things out there waiting to happen.

I think -- and I don't know what that products company was talking about particularly -- but I think we have seen is with low day rates, independents have plenty of access to rigs, and they are doing single well drillings. And those have always been right in the middle of our fairway because our vessels can lay short umbilicals, and we can do the installation, and the lead time is very quick turnaround from the time they decide that they have discovery they need an umbilical. So usually we see quicker turnaround and quicker from delivery. But I can't say that we've seen enough of a pickup that we put that in our second half thinking.

Okay. So presumably that could present some upside. I wanted to maybe harp just a little bit on the ROV margins a bit. If we kind of go back to 2009 when we saw utilization creep down into the [70s] around where you're talking about, margins eventually came down maybe 200 to 300 basis points. Would it be inconceivable for us from kind of a modeling perspective to think about that type of margin compression in ROVs going forward here? (multiple speakers) holding the line so.

There's not a lot of comparison in our view between the 2008 and 2009 issue with what's going on today. I mean that was really kind of a very quick and minor blip for us in our business as you can see from our financial results around that period. So this is way different. So I wouldn't make a comparison that because we had similar utilization, perhaps that the marketing compression would be the same.

If we go back far enough and we think about what happened in 2008/2009, what happened in 2088 and 2009, is the down platform work in the Gulf of Mexico got completed, and even though it was in shallow water, there was a significant number of ROVs being utilized to assist in the wreck removal of the down platform?

So, Jack, correct me if I'm off base here, but it was all vessel-based days that caused our utilization to go down, and we had no compression in margin in drill support. And today, it is an amazingly different market. Right?

Yes.

No, no, it was down platform at vessel days is what happened (multiple speakers). Yes, that's what caused our utilization to downtick down there. It wasn't the global financial crisis or anything else it caused because that just didn't affect deepwater.

Okay, that's fair. So in that period, you lost some of the what would be higher margin work for the sake of lower margin work.

It was all about mix at that point in time, yes, sir.

Okay. And so presumably the mix issue that we're talking about this time around could ultimately be the reverse where you see more loss in mix on the lower margin work, which is the drilling work?

Let's make sure that -- it's the same thing about umbilicals. When you start losing that lower margin work, it doesn't mean your margin is going up.

Fair enough, fair enough.

You've got a lot more fixed costs to cover with your higher margin work, and it just doesn't work out that way.

Fair enough. I appreciate that, guys.

Daniel Burke, Johnson Rice.

Thanks for squeezing me in. One last question on Subsea Products, and I might have missed this. If so, I apologize. But the press release commentary noted that the moderate reduction to the guidance for this year reflected reduced Subsea Products expectations, but that business is still expected to be up second half of the year. It sounds like there's been a decent amount of callout work station type activity. So can you -- maybe I missed this, can you address what part of that business you dialed back your expectations for the second half of the year?

It was in the services related what you said. I think it was in tooling, IWOCS and other manufactured products that we dialed down in the second half. And we basically said that umbilicals are going to be up second half over the first half, and we didn't change our outlook from the first-quarter outlook. That's been pretty steady because that's mostly backlog.

Got it. Thanks, Marvin. And then last one, on the integrity side, what percent of integrity revenues are non-US dollar-denominated?

Way most. (laughter)

Okay. So that's one thing to keep in mind when we look at that topline year over year is just the impact of that pushing through then, correct?

Yes, I think it is -- right now I would say that we've always been Europe and West Africa centric. West Africa is -- or Africa is dollar-denominated, but it is dwarfed by UK and Norway. But I'm not going to use the FX word too much because the level of activity in the UK and Norway is down way more than the kroner or pound has weakened.

Okay. Great. That's helpful, guys.

It's a demand issue, Dan.

I understand. All right. I just wanted to explore that for a moment. I appreciate the time.

Jim Wicklund, Credit Suisse.

Thanks for the follow-up, and since I am the last question, I get to ask the fun one.

You stayed on all this time for this?

All this time just for this. So you can imagine how busy I've been. Okay. With everything we see today, you are not giving guidance for 2016. Got that. No problem.

With everything you see today and nothing we'll hold you to, which is a complete lie because we'll all remember it (laughter).

Thanks for being honest. The check is in the mail.

49% or 51% that 2016 earnings are better than 2015? And you may all have different opinions. I'll poll each of you. Jack?

Let me ask you, what part of the offshore market do you see improving in 2016?

No, no, no, I'm not going to get into this. We have published research. It's whatever you think. And I'm not even asking you to qualify. 49% to 51% are earnings up next year? You can have your own opinions. You don't need mine.

Can I pick a different number (laughter)?

I know the answer. The answer is -- yes, Jim. (laughter)

The answer starts with a 5?

I said it doesn't start with a 5. (laughter). (multiple speakers) It does not.

Well, that's not very helpful. (multiple speakers) Thank you much.

Thank you, but hey, look, when I look at you very smartest people that follow us and I could ask the same question, and it is exactly or very likely to be half would pick 49% and half would pick 51%. We are not going to give any comment on 2016 even directionally because we haven't -- we've got our own gut feel, but we have no numbers and no market intelligence to kind of give you an order of magnitude. But thanks for the fun last question.

You just answered my question completely, and thanks, guys. Appreciate it.

And we have no further questions. I'll turn the call back over to the presenters.

Okay. So if there are no more questions, I would like to wrap up by thanking everyone for joining the call. This concludes our second-quarter 2015 conference call. Have a good day.

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