Oceaneering International Inc (OII) 2016 Q2 法說會逐字稿

Good morning, my name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Oceaneering 2016 second quarter conference call.

(Operator Instructions)

Thank you. I will now turn the call over to Suzanne Spera, Director of Investor Relations. You may begin your conference.

Thank you, Mike.

Good morning and welcome to the Oceaneering second quarter 2016 results conference call. Today's call is being webcast and a replay will be available on Oceaneering's website.

Joining us on the call are Kevin McEvoy, Chief Executive Officer, who will be providing our prepared comments, Rod Larson, President, Alan Curtis, Chief Financial Officer; and Marvin Migura, Senior Vice President. Before we begin I would just like to remind participants that statements we make during the course of this call regarding our future financial performance, business strategy, plans for future operations and industry conditions are forward-looking statements made pursuant to the Safe Harbor provisions for the Private Securities Litigation Reform Act of 1995.

Our comments today also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our second-quarter press release. We welcome your questions after the prepared statements.

I'll now turn the call over to Kevin.

Good morning and thank you for joining the call today.

The challenging offshore market environment we are enduring has not changed since we last spoke with you in April. For the second quarter, we reported EPS of $0.23.

These results include $7 million of bad debt expense and foreign currency exchange losses. Excluding these items, adjusted EPS of $0.27 was in line with consensus. Sequentially, quarterly operating income declined 20% on reduced profit contributions from Subsea Products and Remotely Operated Vehicles with slight increases in subsea projects in advanced technologies and lower unallocated expenses.

Without the impact of $5.8 million of bad debt expense, adjusted operating income was down 8% sequentially. Despite the ongoing market conditions, we are pleased that each of our operating segments remained profitable, excluding the negative impact of the bad debt expense recorded primarily in Asset Integrity. Relative to our peers, overall EBITDA margin of 15% is noteworthy.

Now turning our attention to our outlook, we are expecting the second half of 2016 to be weaker than our first half. In light of uncertain commodity prices, customers continue to postpone capital investment decisions and curtail operating expenditures. This results in reduced demand for our services and products.

While much has been written about the increase in oil prices during the second quarter, this has not yet translated into increased offshore activity. We believe that our customers are changing their mindset towards increasing CapEx and OpEx, but they are waiting for a more sustained improvement in oil prices before increasing activity levels. For our ROV segment we are expecting a lower operating income contribution during the second half of this year due to less utilization and lower average revenue per day on hire.

However, much depends on the number of floating rigs working during the remainder of the year, than on the level of vessel base inspection maintenance and repair or IMR activity undertaken. We expect to see declining demand for drill support as 29 of the 101 rigs with Oceaneering ROVs on board at the end of June have contract terms expiring during the balance of the year. And the future work prospects for all rigs with expiring contracts remains questionable. To mitigate the impact of our results due to lower anticipated utilization and pricing, we have recently taken further steps to align our cost base and expect lower average daily cash costs in the second half of 2016 relative to the first half.

With respect to our Subsea Products segment, we have integrated our operations into two business units to improve organizational efficiency: manufactured products and service and rentals. The manufactured products business unit includes production control umbilicals and specialty Subsea hardware, while the service and rental business unit includes tooling, Subsea work systems and IWOCS, or installation and workover control systems. Just to be clear, this internal reorganization in no way affects the segment reporting structure or historical comparability of results.

For the remainder of this year, our Subsea Products outlook is for lower throughput and single-digit margins, primarily from manufactured products while services and rentals are expected to remain flat. For Subsea Projects we're expecting some seasonal increase in Gulf of Mexico activity and a reduction of our vessel fixed cost when the Olympic Intervention IV charter obligation expires in July.

These factors however, are not expected to be enough to offset the reduced scope of work in Angola, which included the early release of the Bourbon Oceanteam 101 from its field support services contract with BP that occurred at the end of May. For Asset Integrity, we expect to reported results for the second half of 2016 to be slightly up as the first half included a $3.3 million bad debt provision. Global demand for inspection services remain subdued as customers continue to differ expenditures whenever possible.

For our non-oilfield segment Advanced Technologies we expect increased demand and improved execution on theme park projects to generate improved earnings. Having said all of that, we anticipate our third-quarter 2016 results to be lower when compared to the second quarter, predominantly from reduced volume and lower margins in Subsea Products. We anticipate other segments to be relatively flat with the second quarter adjusted results.

I would now like to review our second-quarter operations by segment. Sequentially ROV operating income was down, resulting primarily from the 6% decline in average revenue per day on hire due to lower pricing and a shift in geographic mix. Lower operating margins can be partially attributable to depreciation becoming a higher percentage of revenue during periods of low utilization and pricing.

During the second quarter, ROV depreciation and amortization equated to 24% of revenue. If you add back the depreciation and amortization to our operating income, you will find that our ROV EBITDA margin for the second quarter compared reasonably well to the EBITDA margin for all of 2015. For the second quarter ROV fleet size at 318 vehicles and utilization at 55% was unchanged from that of the prior quarter.

Fleet mix during the quarter was 68% in drill support and 32% on-vessel based work, compared to a 69% - 31% mix last quarter. At the end of June, we held our drill support market share essentially flat compared to the prior quarter. We had 114 ROVs on 101 contracted floating rigs, or 58% of the 174 floating rigs under contract.

In spite of the current shrinking available drill support market, we remain focused on maintaining our market share of ROVs on contracted rigs and placing more ROVs on high specification third-party vessels as demonstrated by our recent arrangement with Heereema Marine contractors. Under the Heereema arrangement, we will provide ROVs and subsea tooling aboard Heereema's deepwater construction vessels and 70 sub crane vessels on a global basis through 2020.

Turning to Subsea Products operating income declined as expected, due to a combination of lower margins realized on manufactured products as we process backlog and new orders with lower pricing and reduced demand for services and rentals -- which is more short cycle or call out in nature. Our Subsea Products backlog on June 30 was $503 million compared to our March 31 backlog of $576 million. The backlog decline was primarily related to manufactured products.

Year-to-date, our book to bill ratio was 0.61 and for the trailing 12 months it was 0.77. For Subsea Projects operating income increased mainly due to lower regulatory vessel inspection expenses and additional revenue as the Ocean Alliance returned to work after a scheduled drydocking. Asset Integrity operating income declined, primarily due to the bad debt expense recognized during the quarter.

For our non-oilfield segment Advanced Technologies, operating income was higher due to increased engineering services and support for the US Navy. Unallocated Expenses were lower during the second quarter compared to the prior quarter due to reductions in performance-based incentive compensation expenses. During the quarter we generated $97 million in EBITDA, increased our cash position to $393 million and had $500 million available under our revolving credit facility, which does not expire until October 2020.

We believe this provides us the financial flexibility, not only to operate through the cycle, but invest in Oceaneering's future and return capital to our shareholders. Our cash priorities have not changed for some time. Our number one priority remains growth via organic CapEx and bolt-on acquisitions.

Our second priority is to return cash to our shareholders by paying a quarterly dividend and possibly repurchasing shares. Capital expenditures for the quarter totaled $38 million, most of which was invested in our ROV and Subsea Products segments. We are lowering the organic capital expenditures estimate for the year to a range of $100 million to $150 million, including $65 million in maintenance capital and some uncompleted project CapEx carried over from 2015.

The revised estimate adjust for spending that has slipped into 2017, related to the delivery of our Jones Act-compliant multiservice support vessel, The Ocean Evolution, which we now anticipate in the second quarter of 2017. Looking forward, we envision our 2017 CapEx could be considerably lower than our 2016 estimates.

During the second quarter we paid $26 million in cash dividends and yesterday our board maintained the current dividend rate and declared a $0.27 per share dividend to be paid during the third quarter. Payment of future cash dividends will remain at the discretion of our Board of Directors.

Now I would like to wrap up by referring back to the first sentence of my prepared remarks. The challenging offshore market environment we're enduring has not changed. At Oceaneering we remain focused on the things we can control, or at least influence. We are driving operational performance by improving execution and taking actions that tailor costs and resources to match our current demand profile.

We are proactively working with our customers on developing cost-effective and efficient solutions to earlier engagement and project planning and standardization that may enable more projects to progress despite a low commodity price. And we will remain focused on maintaining our market position while working to preserve the core capabilities of the Company. Longer-term deepwater is still expected to play a critical role in the global oil supply growth required to replace depletion and meet projected demand.

I'm happy to take any questions.

(Operator Instructions)

We'll pause for a few moments to compile the Q&A roster. Mark Bianchi, Cowen.

Hey, good morning -- on the outlook for the ROVs here in the back half -- I appreciate that your offering a little bit of direction here. How do we think about the utilization there? Is that something that can stay above 50%? Just kind of curious how your thinking about the utilization shaping up?

Well, it certainly could stay about 50% but it could also go down. There's two variables here that are still somewhat okay -- the first being obviously drill rigs and the ending of contracts and whether they'll continue, so that is one big piece. We see the potential for further decline before that starts to stabilize and potentially go up.

The other big variable of course is vessels and utilization on vessels themselves -- is the question, Mark, that is pretty invisible at this point in terms of short cycle type work that is around the world on vessels that we have ROVs on. Those two variables are still very directly related to activity that is still somewhat stagnant because of oil prices and so until we see movement there, its pretty hard to give any better prediction than the direction that we see.

Obviously I think the expectation is that we're nearing the bottom of the rig decline. I think there's still a little bit to go but not a lot and I think that would be a good sign.

Okay. You've got this Heereema project you've been able to achieve. How does that benefit? Maybe if you could quantify to some extent and offer some comments on the timeline?

It is only nine ROVs, it is going to be mobilizing these ROVs are going to take place in the latter half of the fourth quarter this year and into the first quarter next year. And this is project work so utilization is going to play a big part. I would not look at this as some movement that you are going to be able to see -- I would think about it more in terms of being a buffer against the declines we've been seeing in the business.

But maybe more importantly, it is a reflection of our efforts to try and get position for the upturn by having ROVs on a high specification assets that will be the first ones going to work. There is project work scheduled for the Heereema vessels in 2017 and beyond and so that is where we wanted to be in position to take advantage of that.

Okay thanks for that. Maybe if I could one more on the FX and bad debt? Can you offer some commentary on how that was allocated within the segments?

Yes, Mark. We noted that the Asset Integrity group had about $3.3 million. The other components were within Subsea Products.

We had about $1.8 million -- ROV accounted for $500,000 and about $100,000 in projects, and we had a bit of rounding there took it all up to $5.8 million. ForEx was about $1.2 million for the quarter, which primarily related to our Angolan balances.

Got it. Okay. Thank you, I'll turn it back.

Ole Slorer, Morgan Stanley.

Hi there. Just a quick one on allocated expenses -- I'm sorry if you went through it, I didn't quite catch it. It came down quite a bit this quarter. How should we think about modeling that for the next couple of quarters?

This is Alan. When you look at the Unallocated Expenses you're aware a lot of that pertains to our incentive compensation plans which we have a short-term and a long-term. And our long-term goes over a three year vesting period.

So a lot of what you saw, I'll say in Q4 of last year and again in Q2 this year is we look at our forward forecast, we go in and make adjustments to our long-term incentive plans at that point in time. And so in Q2, when we look at the forward forecast we made an adjustment that impacted Q2 pursuant to our long-term. And we're still have a short-term plan that is pursuant to our 2016 bonus scheme that we adjusted slightly as well.

When you start looking at how to model it going forward, looking at Unallocated Expenses, I think if you look at the second half I would say it would be slightly above the first half. We are probably more evenly split between the quarters. I'm not modeling to put anything in as far as a correction at this point in time to either quarter.

Okay so model something in the low mid 20s for the next couple of quarters?

Perfect.

And on Heereema is this all new incremental work for you? Do you already have a relationship with Heereema but this is more or less formalizing your relationship?

This is new work -- we have historically had work with Heereema in the past but in the last several years we had not been supporting our operations so this is new work for us.

I noticed also that one of your competitors closed its doors in the Gulf of Mexico just recently, for oil intervention. Are you seeing any signs that supply boat operators and others are pulling out of segments where you traditionally have played a bigger role? I mean we saw [high water] with ROVs, we have seen others going to oil services and I would imagine that some of these companies give current capital constraints might be reevaluating, so to speak?

Well I think some of the vessel companies that more recently tried to get into the intervention business more particularly like Harkand, and Halland Marine and some others and those, those obviously are not surviving in that business. There are probably a couple out there that may not be able to stay in it just because of cash flow constraints and liquidity, but as a general market condition I wouldn't say that there's a lot of people exiting. I mean everybody is trying to survive, especially the boat folks by stacking assets and whatnot, so they're certainly is that continuing to go on.

Yes and I just heard FTO may be shutting down, and there's JV between a couple of boat appraisers, anymore signs.

We've heard that rumor but I don't know any facts about that.

Okay finally just on Angola -- you had three vessels last year and you're down to one now. Is that what we should model for the next, say, several quarters? Are there any Angola difficult country for various reasons to get your head around, but you said BP will use one vessel? Do you think that is the way we should think about it?

Yes, I would.

Okay. Thank you very much, I will hand it back.

Waqar Syed, Goldman Sachs.

Thank you. Kevin, in the past you mentioned you would [seek] and spend dividends if they fall below EPS line. Could you clarify that position now? What's the current position on dividends -- are you still generating free cash flow, balance sheet looks relatively healthy, so how are you thinking about dividends going forward?

I don't think the position has changed -- I will let Alan give a more complete answer.

Okay, thank you, Kevin. The dividend policy -- our philosophy still remains unchanged. The first thing we're going to look at is obviously earnings, second we projected earnings, third one would be cash flow and we discuss with our Board as well as our liquidity at the position in time. We remain steadfast in that, we'll continue to meet with our Board on a quarterly basis and make that determination at that point in time.

Okay. And then on the ROV business side what do you think where the bottom in margins could be in terms of EBIT margins?

I don't think we can answer that.

Okay thank you very much.

Jim Wicklund, Credit Suisse.

Good morning, guys. First of all Kevin, congrats to you and your team for managing the Company in this market as well as you have and your straightforward approach with us. You guys are a class act. Unfortunately, we trade stocks instead of people and companies but on the Company and people part you win.

I knew there was going to be a but there, but go ahead.

Always, always. Bad debt seemed to hit across the board. You rattled up all the places where you had bad debt and usually it is like Venezuela, or one Company, so this is a pretty broad bad debt run for you guys? Is this an indication of the health of the whole supply chain? And when did you last see it this broad?

No, Jim this was really -- the lion's share of this was one customer that we had, so I wouldn't characterize it as across the whole spectrum. It was one primary customer we had and we had one smaller customer as well we took a reserve on.

Okay, that's a positive then, I like that. Second question -- could you guys have a business plan the next few years with some base case in mid case and high case? Kevin, do you guys stay cash flow positive in your base case?

Jim, we're not going to make that kind of predictions --

Do you think you'll ever go cash flow negative? That's a question you can't answer. I'm just wondering you guys have a business and can you envision, according to the business plan you have, or I'll just ask you do you think you can stay cash flow positive every quarter through the down cycle?

Jim, this is Marvin. Our crystal ball is as fuzzy as it ever has been.

I understand, I understand but you still have a crystal ball. But you still have a business plan on file with the board, so I'm just talking about from that perspective -- I am not asking you.

We see our liquidity as being a strength of the Company, and we do not see going cash flow negative.

Thank you very much, I appreciate it guys. Thank you for the help.

Sean Meakim, JPMorgan.

Good morning. Also, I want to touch a little more on the Subsea Products. You mentioned that you're expecting margins to continue to trend lower the rest of year, perhaps single-digit levels.

As you think about 2017, what levers do you have to pull? Just thinking about perhaps visibility in your backlog pricing that could help, or additional cost measures, how you're thinking about looking to improve those margins, given your current outlook for next year?

Well, for 2017, its going to be all about getting backlog to replace what we're burning through right now. At each of our plants, we are continuing to adjust manpower and resources with the decline in backlog and expectation for anything new. FIDs are pretty topical, umbilicals and the connection hardware that go with them are really the single hardware piece, generally, that we contribute to CapEx stuff.

So we're certainly hoping that the Brownfield tie back part of the market that everyone's talking about actually comes to pass because it happens a lot quicker and that would be really good. But FIDs are going to be somewhere down the road from the time they pull the trigger to where we would get the opportunity to get an order. That is a big question mark.

To reiterate, we are adjusting our cost bases in our two primary plants, along with the backlog execution and work that we potentially see coming. That's a challenge. Like it will be for anybody in manufacturing in the subsea arena.

Okay, that's absolutely fair. I'm not sure if I heard you right, just looking to clarify -- you talked about not having much line of sight on the service and rental side of the -- Can you elaborate on that a little bit for us?

Well, most of these OpEx things, they're the things that really make the money for us are interventions, generally, and they are not planned events. So there isn't any big visibility for it until the phone rings and the customer says -- hey, got a problem can you help me. That's why we characterize that as short-cycle and we don't have good visibility because there's no business plan out there on the oil company side that says they're going to have to do this because they don't know what's going to happen.

These are things like -- subsea control module goes out, has to be replaced. Or flow line hydrates up, or they need some acid STEM job because of reduced production rates or those kinds of things.

So I guess you've managed to clarify -- are you suggesting that short cycle business, therefore historically visibility is low? Or there's a delta versus prior cycle versus today, there's less visibility.

There is no change in the visibility. The only change, in that part of our business, the only change is there is a lot less going on so it is hard to predict any sort of trend rate or anything. It is just the phone call data points.

There was just as little visibility in 2014, and before, its just that there was a run rate trend that we could count on. And that's how we did our projections, but right now is pretty difficult.

The phone rang a lot more.

As the sample rate drops, the variability increases.

Got it. That's fair and one more -- I was hoping to talk about on Heereema? Maybe if you could expand a bit on potential opportunities, kind of leveraging off that agreement. Tekmek has an alliance with Heereema?

There other opportunities you could leverage off the existing agreement? And perhaps any other, the broader opportunity set for these types of alliances, given your focus on trying to expand in the third-party vessel market?

Well first of all, with regard to leveraging off of the Heereema contract that we have been awarded -- I mean this is to put it simply, ROV assets placed on construction assets that will get to work whatever projects that Heereema's got. There may be some increases related to the amount of tooling required for a particular project or not.

But more broadly, as we said earlier I think this is an example of what we are trying to do. There are other opportunities that we are chasing and hopefully we'll be able to talk about those at a future date. But it's all about getting into position for the upturn as opposed to viewing a particular contract or even two or three contracts as being a turning point for our business.

And I would not extrapolate our relationship with Heereema into extending it into relationships they have with others, particularly (inaudible).

For sure, these are ROVs on very particular assets and that's what we're going to be doing.

Understood, very helpful, thanks a lot.

Yes.

Blake Hutchinson, Howard Weil.

Good morning, guys.

Good morning.

First of all, Kevin, just from your prepared remarks -- you mentioned that the implied pricing that we see in the ROV segment decline was mainly geographic mix influence? Can you just give us a little background color on that? And is that the case -- its more mix than pure pricing?

Yes, we saw it as more of a mix issue geographically, and that what we saw was more of the North Sea vessel days that we brought on board did not offset some of the reduction that occurred in West Africa and the Gulf of Mexico.

Okay, great that's exactly what I was looking for. And then one of the things -- you talked a little bit about margin impacts of pricing and product and backlog as well as the service and rental business as impacting product margins in 2Q. There was no real mention of under absorption?

As we look at your backlog runoff in terms of under absorption of the umbilical manufacturing business, the reality, is that more of a 2017 issue or will you be grappling with that you think in the back half of the year?

That's the second half issue that Kevin was alluding to in his prepared comments.

Okay. And then I guess finally, as we look at the Subsea Projects business, can you give us a little help? In terms of actual active vessel days, was 2Q pretty comparable to 1Q? Or are we just starting to see the effects of pricing counteracting what we typically be seasonally improved environment Q2 and Q3?

There may be a little fleet mix there but I think generally, the Gulf of Mexico activity has been holding up. It's just that pricing and margins continue to be very competitive.

And so I think relative to the market we're doing pretty well on utilization. I mean obviously, we would like to see demand pick up and that should help pricing a little bit but that's really the main issue right now.

Great. Thanks. I appreciate the time, guys.

Sure.

Matt Marietta, Stephens Inc.

Hey guys, good morning, thank you for taking the questions.

Sure.

So the ROV trajectory, obviously sounds down, utilization, a lot of unknowns, you won't give us the margin guess. So let me try to take a stab here on something else. As you talk about pricing sequentially and day rates on ROVs, there's a little bit steeper in the second quarter than from the first quarter obviously than the first quarter from the fourth quarter.

How can we think about -- I'm trying to get a sense here for -- as rigs roll off, coincident ROV contracts may roll. What the magnitude may be of potential further steps down there in the ROV day rates looking forward?

I think it's really going to be dependent on where the work is taking place. I mean that's one thing we experienced this quarter, we just discussed, was the mix and where the assets are working is going to impact that day rate quite a bit as well.

I mean, based on --

We said it is going lower, and we're not prepared to quantify.

Okay, is it fair to think that the step down in the second quarter is perhaps repeatable from a percentage basis?

I would use that as a trajectory -- I would not. I would not.

Okay, and I guess maybe coming at this a different way, are you able to help us get an idea of how much lower the current spot market is than the current average? Just so we can kind of get a sense for what that may look like?

It would be hard for us to give you that because there really isn't much spot market right now. Until we see some of the rigs that are not working go to work, and we start to see some of that work be rebid, there's not enough data points to really give you a spot market price.

Okay well --

And vessel market days are so dependent, as Alan said, on geographic location. The North Sea in kroner or in sterling is a lot lower than what we were getting on the rigs. And that shift -- while we got the same number of days, the average revenue per day on hire was determined by lower pricing but significantly influenced by geographic shift in days.

Got you.

I don't think we can say any more than that.

Will I appreciate it, I tried, and that's all out of me.

Thank you.

Joe Gibney, Capital One.

Thank you, good morning just a couple quick clarifications? On the Ocean Evo -- the delivery now into 2Q, was this just something you guys deferred this out a little more hoping to market it into a better window of time seasonally? Or anything going on with the yard there, this vessel is getting pretty close to delivery?

Just any color there would be helpful? Appreciate it.

It's really a yard issue. They got behind schedule. So I was just down there earlier this week and they seem to be tracking a lot better against milestones and everything, but we really are hoping to have the delivery take place when we're currently expecting it because we definitely want to get the vessel into the market for the summer season next year.

Okay, in terms of what the CapEx slip over from that -- I believe the full year on that -- in 2016 the expectation was around $40 million? Can you quantify how much of that now is pushing?

Approximately $20 million.

Okay. Thank you. One last clarification? On some of your products' margin guidance -- I apologize if I missed this but -- the single-digit percentage margins, were you specifically referring to manufactured products or are you referring to the segment as a whole? Just characterize that, I missed that earlier, I appreciate it.

The segment as a whole.

Okay. All right, guys I appreciate it.

Yes.

Brad Handler, Jefferies.

Thank you, hey guys.

Hey Brad.

I guess a couple different unrelated questions, but perhaps I can start with the ROV segment as well. Can you speak to how could you characterize the opportunity to continue to save costs? I understand, maybe some color around what you're doing, I understand you mentioned you are taking some cost out of the base for the second half of this year.

If you could give us a little color on that and I guess just kind of clarify or give us a sense of how much further you can continue to take it? Or do you start to bump up against -- hey, we are going to maintain a presence in this region and therefore we really can't cut costs further?

I think that is probably more in line with the color that we've given in the past. That certainly is true, I mean we are starting to cut a lot closer to the bone right now, obviously. And at some point, depending on however long this timeline continues with declining demand on the rig side and whatnot, I mean we are going to start bumping up against that.

As I said earlier, I hope that the rig market is near its bottom. There probably are some rigs yet to go that will come off contract and be stacked, but I don't think the general consensus is there is too much further to go in that regard. Once that stabilizes, I think that should help matters for sure.

Certainly help in being able to predict what our business cost base is going to be going forward and help us in that regard. And then the vessel part of it is the next -- is the other big variable that needs to pick up with increased OpEx spending. That's an OpEx thing there for us and we're still waiting for that to happen.

Sure. And the vessel thing does, as I know several of my predecessors have mentioned, the vessel thing does seem like an interesting prospect for you guys to carve out some new share. I guess on that, with Heereema, just again because it helps us understand the opportunity set a little bit perhaps. Were they owning and operating their own ROVs or did you displace the competitor?

No. We displaced the competitor.

Got it.

Along with some new vessel opportunities.

Right, I think the balder was brand-new you pointed out. Okay.

Separate question, this is maybe asking you to do some of the work that I think we're supposed to do on our side, but have you all tracked just how many vessels, relevant vessels have come into the Gulf of Mexico and therefore sort of how this applied picture has changed over the last 12 or 18 months?

We track that. I suppose the Gulf of Mexico guys that are in that business certainly are very aware of that and they're looking at those vessels all the time. Certainly a couple have gone away, but there's still overcapacity relative to demand right now and that's what's obviously causing the price challenges that we have.

But utilization is everything in that business and we're certainly more than holding our own in that regard. So I mean we just follow that trail until demand picks up.

Brad our project guys track that. They know every detail about it, but we don't in Corporate. And the other thing that I want to add to Kevin's comment is -- remember, its not just the boat.

And while we're getting good or better than most utilization, is because of all the integrated services that we offer, including services and rentals, ROV and project management and survey inspection -- all of the above.

Right. Fair point. That's good for us to keep in mind too. Thanks, guys I will turn it back.

(Operator Instructions)

David Smith, Heikkinen Energy Advisors.

Thank you and good morning. You gave us second half 2016 product margin guidance, but looking beyond 2016, do you see the potential to right-size operations to mitigate the fixed cost absorption issues and return products to double-digit margins without significant new order growth? Or is this just a single-digit margin business until deepwater FIDs start to come back.

I think we really need deepwater FIDs to occur.

Exactly. I think we need throughput. It could be Brownfield.

We don't care where it comes from.

Doesn't have to be major project FID, but we need to absorb it. We can go back to an earlier question about maintaining a presence in ROV or vessel-based. With the plant, you have to maintain a presence because you have a physical asset and people there, so it's that fixed cost that eats unless you have enough throughput to absorb it. I think we all agree it's a throughput issue.

Right, and at some point you can't cut anymore without destroying your business, so that's the way it is.

Understood and appreciate it. So going to the ROVs -- drill support demand looked relatively flat sequentially, despite the working or contracted floater count globally down 8.5%? And I was hoping to understand that disconnect -- whether that's likely a market share issue within the quarter? Or if there was any other dynamic that was different the last several quarters?

No other dynamics. It really is just a function of whose ROV is on the rig that stops working. And so there was -- I understand you have to take the number of days times the fleet mix you don't see a significant change in drill support days. And it will vary from time to time, but that needle is not moving much of that more than 55% market share on drill support. And we don't expect it to.

Appreciate it if I could squeeze in one last? Just thinking about the full scope of the work associated with the fill support contract with BP off Angola? Clearly extended well past the associated vessel revenues, project Management, engineering, ROV, DTS, IWOCS et cetera. Can you help us think about how that contribution, excluding the vessel revenue, adjusts in the transition from two vessels to one?

No, we're not going to go that sublevel detail.

I've got to try.

It is significantly lower, across the board.

Right, you remove a vessel and you don't need as many engineers or project people and the rest of it, so there's obviously a negative effect there but --

Trying to hone in if you give us a one to one or something different. Appreciate the time.

Matt Marietta, Stephens.

Thank you for letting me back in. I wanted to hit on the discussion there on the products again, throughput being the issue. But can you maybe help us understand perhaps what the bare-bones level of fixed costs there in that business and that variety of businesses?

Do you think you can defend positive margins there? Maybe help us kind of think about that?

I'm going to field this one. No. We can't give you an idea of fixed costs. We're addressing our plant staffing based on anticipated throughput, but so much of it is variablized as we try to make it.

There is a substantial amount of fixed costs associated with any manufacturing facility and we're not going to get that -- I don't even know how it would be helpful if we could give you the plant cost. Because it would need to get you throughput through each plant and where the absorption is different and I think at the end it will be a lot of data and not much benefit.

And we never get to the magic mix that keeps all three plants at that threshold.

And do you think can defend positive margins in the segment?

It's going to be a question of throughput. At the segment level, it's going to be a question of mix between -- because what we see is and Kevin explained the service and rentals is short cycle, its associated with Brownfield activity. We expect to see that picking up in 2017 even if there are no FIDs.

So it's not to say that we can have a positive contribution if we don't have any manufactured products throughput. Because then the absorption issue becomes overwhelming. But depending upon the mix and depending upon the level of service and rentals and throughput we're hopeful that we can maintain positive margins.

Got it. Thank you.

David Smith, Heikkinen Energy Advisors.

Thank you for letting me back in. Just a quick follow-up on the project side? If I'm doing the math right it looks like average starter vessel expenses are around $4.5 million to $5 million per quarter? Just want to check if that was in the ballpark?

The follow-up, related question is -- given the Olympic Intervention IV is off charter this month, is it fair to think that vessel had a net negative contribution to projects in the second quarter?

We're not going to comment on --

David, I didn't -- I don't know, but we're not going to comment on vessel by vessel for sure. What was your average? Tell me how you got to that? I missed that point.

Looking in prior filings about the future costs associated with vessel charters, and dividing that by the number of days committed. It looked like it worked out to around $50,000 to $52,000 a day. I was trying to back into the margin relief, the cost relief that would come from -- if not renewing the Olympic Intervention?

I mean, it's all associated with the utilization, right? So the amount of charter hires that we have to pay, not to mention the other expenses of all the other stuff we have on the vessel of our own, is -- at the dock we get zero revenue and you've got that cost there.

So removing the charter as an obligation does relieve us of the cash cost of that by the date sitting at the dock. We still have, we may still keep all of our stuff on there, hoping to get call out work but we remove that other obligation so that should be a help.

Right, right that is what I was trying to zero in on.

You're on to something that I hadn't focused on every week. I mean we can't quantify how much it is going to be, because one of the things that we may do is keep -- if the vessel owner wants to, we keep the boat in the Gulf of Mexico on a back to back call out basis -- we might entertain that if there's enough work for it that way.

That way though the cost would become very variablized and I have to go dig into the same 10-K liabilities that you're looking at to do the math. I don't know the day rate of the Olympic IV up the top of my head.

I don't think we really want to say what that is because that is competitive pricing information and whatever. So we give an aggregate, you don't know what each particular boat is. And the particular boat, some of them trade in different segments of the market in the Gulf of Mexico so we don't want to put too much more granularity than that.

The expiry of that charter is going to be -- looks like it's going to be a positive margin impact.

We believe that absolutely -- we threw that in the call notes for that purpose.

Good deal thank you.

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

Thank you. Since there are no more questions, I would like to wrap up by thanking everyone for joining the call, and this concludes our second quarter 2016 earnings conference call. Have a great day.

This concludes today's conference call, you may now disconnect.