Oceaneering International Inc (OII) 2016 Q3 法說會逐字稿

Good morning. My name is Katlyn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oceaneering's third-quarter 2016 conference call.

(Operator Instructions)

Suzanne Spera, Director of Investor Relations, you may begin your conference.

Thank you, Katlyn. Good morning and welcome to the Oceaneering third-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 of the Private Securities Litigation Reform Act of 1995.

Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our third-quarter press release.

We welcome your questions after the prepared statements. I will now turn the call over to Kevin.

Good morning and thanks for joining the call today.

On last quarter's call we highlighted the challenges in the offshore market arena. Today, three months later, the industry conditions we face have not changed, and we expect to see more of the same for the foreseeable future. The leading indicator for deepwater activity, contracted floating rigs, declined as the rate of rigs being idled either by contract termination or expiration continued unabated. This prevailing market condition required us to reassess the number of remotely operated vehicles, or ROVs, we have in our fleet as well as the associated inventory.

As a result, we recorded $36 million charge related to the retirement of 39 ROVs and established an associated reserve for excess inventory. Additionally, we recorded an $8.2 million charge for our Subsea Products segment, predominantly for tools and inventory in our portfolio used to support deepwater drilling and operations.

As reported in our press release, we incurred a loss of $0.12 a share in the third quarter. On an adjusted basis, our EPS of $0.17 was in line with our expectations and the consensus estimate. Sequentially, adjusted operating income declined 27% due to reduced profit contributions from Subsea Products and ROV, partially offset by improved results from Subsea Projects and asset integrity.

While we remain concerned by the near-term headwinds buffeting the offshore markets we serve, we are pleased that for at least one more quarter all of our operating segments remained profitable on an adjusted basis. And while some companies struggle to generate cash flow, our mix of business, year to date, generated $263 million of cash from operating activities, which was substantially more than the $83 million we reinvested in organic capital expenditures.

Even in these challenging times, we are generating substantial free cash flow to expand the range of services and products we offer and return cash to our shareholders.

In light of the projected low level of offshore activity through 2017, yesterday we also announced that we reduced our quarterly dividend to $0.15 a share. We believe it was prudent to lower our cash distribution to shareholders through a more appropriate and sustainable level. This decision should not be misinterpreted to indicate a change in our belief that we will continue to generate substantial free cash flow and maintain a very sound balance sheet with ample liquidity.

Now turning your attention to our outlook. We are expecting that our fourth quarter will be considerably lower than our adjusted third-quarter results due to a continuation of weak demand for our services and products, exacerbated by seasonality. We expect sequentially lower operating results from each of our oilfield business segments and slightly improved results from our non-oilfield segment Advanced Technologies.

For our ROV segment, we are expecting lower operating income due to fewer working days and lower average revenue per day on hire. Our ROV segment results are largely determined by the number of floating rigs working and the level of vessel-based inspection, maintenance and repair, or IMR activity, undertaken. We expect to see declining demand for drill support as 17 of the 91 rigs with Oceaneering ROVs on-board at the end of September have contract terms expiring during the fourth quarter and the future work prospects for all rigs with expiring contracts remains questionable.

It is noteworthy to observe that the contracted floating rig count has declined 27% year over year and is down 41% from December 31, 2014.

We continue to adjust our costs and resources based on anticipated fewer working days and lower average revenue per day on hire, and in light of the current shrinking available drill support market, we remain focused on maintaining our ROV market share on contracted rigs. We are also actively working with vessel owners to increase the number of ROVs onboard third-party vessels.

For Subsea Products, our outlook is for margins to weaken further into the low-single-digit range due to pricing degradation, lower throughput in our Manufactured Products business unit as well as softer demand and reduced pricing for short-cycle work in our service and rental business unit. For Subsea Projects, we expect lower operating income due to a seasonal decrease in Gulf of Mexico diving activities and drydocking of the Ocean Patriot.

For asset integrity, we expect our results for the fourth quarter of 2016 to be considerably lower, due to a seasonal decrease in global demand and competitive pricing for inspection services. For Advanced Technologies we expect a slight improvement due to increased throughput and improved execution on subsequent theme park projects.

I'd now like to review our third quarter operations by segment. Compared to the second quarter, ROV adjusted operating income was down substantially due to a 4% reduction in revenue per day on hire and 6% fewer days utilized. As we've said on our past conference calls, lower operating margins can be partially attributable to depreciation becoming a higher percentage of revenue during periods of low utilization and pricing.

During the third quarter, ROV depreciation and amortization equated to 35% of revenue. If you add back the depreciation and amortization to our adjusted operating income, you will find that our adjusted ROV EBITDA margin for the third quarter was 36%, down only slightly on a sequential basis. The impact of lower utilization and pricing was partially offset by cash cost reduction measures.

At the end of September we had 279 vehicles in our fleet and utilization for the quarter was 52% compared to 55% the prior quarter. During the quarter we retired 39 ROVs. These ROVs worked an average of nine days each for a total of 349 days in the quarter. Excluding the impacts of the retired ROVs, pro forma quarterly fleet utilization would have been 58%.

Our fleet mix during the quarter was 66% in drill support and 34% on vessel-based work compared to a 68%, 32% mix last quarter. At the end of September our drill support market share was within our typical 55% to 60% historic range. We had 104 ROVs on 91 contracted floating drilling rigs, or 56% of the 162 floating rigs under contract.

Turning to Subsea Products, operating income on an adjusted basis declined as expected. This was due to a combination of lower pricing and activity in our service and rental business unit, which is more short cycle or call out in nature, and lower margins on Manufactured Products as we process backlog and new orders with lower pricing. Our Subsea Products backlog at September 30 was $457 million, compared to our backlog of $503 million at the end of quarter two. The backlog decline was primarily related to our service and rental business unit. Our book-to-bill ratio for the third quarter was 0.71 and year to date it was 0.64.

For Subsea Projects, operating income was higher despite a decline in revenue as a result of seasonal increase for diving services and survey work in the Gulf of Mexico, lower costs on the Olympic Intervention forward charter and the completion of the Ocean Alliance drydocking in the second quarter.

Looking at asset integrity, operating income improved primarily as a result of workforce reductions and the fact that the second-quarter results included a significant bad debt expense. For our non-oilfield segment, Advanced Technologies, operating income was down slightly on flat revenues. Sequentially, unallocated expenses were slightly lower during the third quarter due to lower corporate expenses.

During the quarter we generated $93 million in adjusted EBITDA, increased our cash position to $442 million, and have $500 million available under our revolving credit facility, which does not expire until October 2020. Over $300 million of the cash on our balance sheet as at September 30 was in the United States. We believe this provides us the financial flexibility not only to operate through the cycle but invest in Oceaneering's future.

Our cash priorities remain unchanged. Our number one priority remains improving our portfolio, both organically and through bolt on acquisitions. Our next priority is to return cash to our shareholders through dividends and possibly repurchasing shares.

Capital expenditures for the quarter totaled $33 million. We are narrowing our organic capital expenditure estimate for 2016 to a range of $110 million to $125 million, including $65 million in maintenance capital and some uncompleted project CapEx carried over from 2015. We expect delivery of our Jones Act compliant multi-service support vessel, the Ocean Evolution, in the second quarter of 2017. Looking forward, we envision our 2017 CapEx to be lower than our 2016 estimate.

During the quarter we paid $26 million in cash dividends. As I mentioned earlier, we also announced yesterday that in light of the projected low level of offshore activity, we lowered our quarterly dividend to a more appropriate and sustainable level.

Now I would like to share with you our view of 2017. Based on the number of floating rigs currently working and our expectation for continued low levels of offshore activity, we believe 2017 will be a more challenging year for our operating results. Our outlook for 2017 can be characterized as marginally profitable at the operating income level on a consolidated basis. We expect the largest decline in profitability, year over year, to occur in Subsea Products and ROVs.

Nevertheless, we continue to believe that longer term deepwater will play a critical role in the global oil supply growth required to replace depletion and meet projected demand. Our belief is based, in part, upon discussions with our major clients. They continue to reassure us that offshore oil and gas is a meaningful component of their portfolios.

We are told that recent efficiency gains, standardization efforts and cost [deflation] are making offshore opportunities competitive with shale and conventional plays. In the interim, our customers' focus is on a quick payback, higher returns that certain brownfield opportunities offer.

Meanwhile, we intend to continue our strategy to expand our service and product line offerings as evidenced by our two most recent asset purchases from Blue Ocean Technologies LLC and Meridian Ocean Services. These transactions underscore our focus on the production phase of the offshore lifecycle. We believe this strategy will position Oceaneering well for the eventual offshore and subsea market upcycle we expect.

We are also pleased to have announced yesterday that BP agreed to a two-year extension through January 2019 under our field support vessel services contract to work offshore Angola. Under this contract term extension, the Ocean Intervention III will remain chartered through April 2017 with five option periods for further extension of one month each. Additional vessels and services, if any, would be provided during the remaining period of the contract on an as-needed basis. This extension strengthens our long-term commitment in Angola, which we see as a vital deepwater market for our services and products.

In conclusion, at Oceaneering we remain focused on the things we can control by organizing more effectively, managing costs, and working with our customers to develop safe, cost effective and efficient solutions that deliver greater value through earlier engagement in project planning and standardization. We are committed to maintaining our market position while working to preserve the core competencies of our Company.

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

(Operator Instructions)

Haithum Nokta, Clarksons Platou Securities.

I wanted to touch on the acquisition of Blue Ocean. Can you just walk us through a little bit more what the value proposition is there for you, and what presence you may have already in the intervention side, and what this does to strengthen that over the next, call it, two years?

We are already engaged in activities such as asset stimulation, and this gives us a wider portfolio of services to offer customers in the future. And so it's a greater capability. It allows access internal to the well bore, and we think this is a good place for us to go.

Would this make you a competitor with someone like Helix who owns the assets, or is this more of a acquisition that makes you more competitive with the service company? If you'll help us understand that part.

This is a market niche that is likely below what Helix is after. They have larger assets, more expensive, with risers, and this is a market niche that is below that and can be more cost effective.

Okay. Then separately, I wanted to ask on ROVs. It looks like, obviously, you scrapped or removed a significant number this quarter. One, do you feel like this is the last clean-out in the near term or is there more to come?

Secondly, and there's that operating cost per ROV day increase significantly. Is that just based on the smaller number of ROVs with the cost spread or --?

I'll answer your first question. Alan will answer the second one. As far as whether this is the last write-down of something, I can't say that. This is certainly what we feel is appropriate at this moment in time. But as the market continues to change, we may need to do something else in the future. Right now, this is what we think is appropriate.

Going to your question regarding the cost side on ROVs, we don't see that our costs increase in the sector.

Okay.

Particularly if you exclude depreciation. And on an adjusted basis, you exclude the 25 to inventory write-down, you will notice that our cash cost per day, per ROV day worked, actually went down sequentially.

Understood. Okay. Thank you.

Scott Gruber, Citigroup.

There's a number of deepwater rigs that are under contract currently but are either idle or working intermittently. When the floating rig isn't working, I believe you begin to receive a standby rate. Is that correct? If so, how much is that weighing on realized day rates in the ROV segment?

Typically when the rig goes idle, we are not being paid. There are some cases where we might get some equipment rate or something, but typically we're not being paid.

Got it. Are you able to then reduce your costs materially?

Yes. I mean, we remove the people from the rig and essentially there's no cost at that point in time.

Got it. How should we think about the trajectory and realized day rates here heading into 4Q, and any color on 1Q?

On the average revenue per day? Yes, I would expect to see them go a little bit lower, as Kevin indicated in his call notes, and in Q4. How low they'll go, we're not certain.

As you look at the geographic mix, it can certainly play a component of it. As you look at the vessel versus rig component, could play a little bit, and then even FX can play a component. Due to pricing pressures, we certainly see that, and expect them to go down a little bit in the foreseeable future. But to the extent that currency plays or the geographic mix happens, all of those factors weigh in on the average revenue per day.

Now, the 3Q drop was less than the 2Q. Should we expect something close to 3Q or should it continue to moderate from here in terms of percentage decline?

I would think that the percentage decline would be closer to the model of the Q3 that we just saw.

Got it. And just (multiple speakers) one question on -- go ahead.

I was just going to say, it's not like there's a lot of new bid activity on floating drill rigs out there; there's just not much activity. Most of what's occurring is the result of discounts that we have to continually give, and then whatever's playing out on the vessel side of the market, which is still pretty low demand, particularly outside the Gulf of Mexico.

Understood. One question on products: Obviously, the margin compression there will be impacted by a continuation of the revenue decline and lower throughput. Can you just provide some color on the revenue outlook for 4Q? How should we think about the decline there?

Bear with me one second here.

I'm not sure I understood the question, really.

Color on the revenue decline potential in products, 4Q versus 3Q.

Scott, we're not giving guidance on modeling. We've said that we're going to single-digit, low single-digit margins in products, and we're giving the answer but not giving the numbers.

Revenue is dependent on backlog, and we all read and know what the FID story is there. We're getting some new orders in smaller areas, but not enough to reverse the decline in working through the backlog that we already have.

What Kevin talked about in his call notes was lower throughput in the manufactured products business unit, coupled with softer demand in our service and rental business.

Got it. I appreciate the color. I'll turn it back.

Chase Mulvehill, Wolfe Research.

A question on ROV: If my math is correct, it looks like your cost of services, your cash cost of services, so excluding D&A, was about $74 million in 3Q. Could you help us understand how much of that is variable versus fixed? That's before SG&A and before D&A, just your cash cost in ROV, what's the mix between fixed and variable there?

We don't have it broken down that way, Chase.

Okay. All right. On the ROV side of the Business, your margins have held up fairly well. As we get into 2017, I would assume probably as some of the higher priced backlog rolls off that we see EBITDA margins decline from here. Do you think we maintain a three handle with EBITDA margins throughout 2017?

I don't think we're prepared to go into margins on 2017 at this stage.

Okay. All right. I thought you might have a view of that. All right.

No, we're still building our 2017 plan. We're in the early stages, so -- .

Got it.

We're not prepared to go there.

Okay. I'll save that one for next quarter's call, then. So when we think about the extension of BP Angola, does the new contract reprice materially lower, or is it similar to what, on a pricing standpoint, that you're realizing in the third quarter?

We did have to negotiate some discount. I think, just to be clear, because it appears that some people may have misread what we wrote, the extension for the contract is two years, and we're providing engineering support and project management support and the rest of it for that two-year period. However, the Ocean Intervention III, the vessel, is firm through April of 2017 with five one-month extensions. And so the vessel potentially goes away sometime between the end of April and five months after that.

We have an expectation that at least some of those options will be taken up. But after that, it is BP's call whether they feel the need for another vessel or to keep that one on for the remainder of the two-year period.

Okay.

Chase, the variability associated with the contribution from that contract has a lot more to do with activity level than it will be pricing.

Okay. All right. It sounds like there's still -- the scope of this project in 2017 is still up in the air. It could be more, or it could be less relative to what you're showing in 3Q. Is that fair?

Post April, that's correct.

Okay. All right. Last one and I'll turn it back over: The dividend cut -- you still generate enough free cash to cover your dividends, so how should we be thinking about the dividend cut? Does it imply you'll be more aggressive on pursuing acquisitions going forward?

I think actually it has a little bit more to do with the fact that -- how much was that dividend being valued? We just didn't feel, especially with the reduction in the stock price, that rate was appropriate anymore. What we'll do with the cash -- I think you go back to what we've always said our uses of cash are, is organic growth and M&A. So you can kind of take that as you will what we'll do with that cash.

Okay. That's helpful. All right, I'll turn it back over. Thank you.

Ian Macpherson, Simmons.

The 39 ROVs that you retired, would they have been, on average, older or less competitive than your average, such that this write-down is an effective high-grade of your marketed fleet going forward, or would you say that it was a push?

I think directionally that would be correct. These would be older systems.

I think if you look at the fact there were 39 of them, we talked about ROVs being $4 million to $5 million a piece, and the net book value we wrote off was circa $10 million. So I think you could tell just from the write-off that it was -- tended to be a lot older assets that we wrote off.

And the number one factor for the write-down, Ian, is marketability. What was the likelihood those assets would be going to work in the near term? And as Kevin indicated, with an average of 9 days -- or 349 days total in the quarter, these weren't working and we didn't expect them to return to work anytime soon.

All right. Thanks. My only other follow-up is: Could you just give us a -- just a cleaned-up depreciation number for ROVs and maybe for consolidated for Q4 after the charges?

I would think on an adjusted basis it wouldn't change that much.

It's going to be down marginally, not enough.

So the adjusted clean depreciation for Q3 will be down just a tick from Q3 to Q4?

Yes, on an adjusted basis.

If you take out the $10 million -- .

Yes.

Okay. Thank you.

Matthew Marietta, Stephens.

Thanks for taking the questions. I think I heard the comment that in some of the loose guidance in 2017 you offered marginally profitable. Can you just elaborate? Are you talking about the individual segments, or are you talking about the corporate level?

On a consolidated basis, we said.

Okay. Thanks. Back to the conversation around uses of cash, in the past you've executed buybacks. Could that be an option as well, or do you think there's more attractive opportunities in M&A and organic growth?

Buybacks are always an option. As we always say, we'd prefer to spend it on organic or M&A activity. In today's market, finding organic things to do are kind of difficult, since the market's not really buying much at the moment. M&A, I mean, we're always looking, as we always say, and it really depends on what's out there that becomes available that fits our industrial logic and adjacency to what we're doing.

We're looking for M&A opportunity, as you can tell with the Meridian and Blue Ocean, that these are things that have near-term opportunities that we're not waiting for a return of the drilling cycle to be able to put these things to work.

Right.

And to focus on the OpEx side of the Business, too; I think that's one of the key criterion we've been looking at.

When I look at the drivers of the products backlog, I'm trying to calibrate when that may stabilize. What do you think the best look is for us? Are we looking at the number of offshore rigs that are drilling? Because contracting activity -- the spread between contracted rigs and drilling rigs is very wide, as wide as it's been. How do we think about the evolution of backlog because of that big spread that historically we can't really point at a time where the contracted rig fleet is this high (multiple speakers)?

Our products revenue is driven by two key factors. One is FIDs of new projects where people are ordering umbilicals and connection hardware for new developments or tiebacks to existing infrastructure. Secondly, it's driven by OpEx demand on producing fields for primarily the services part of that business unit, which has been pretty lackluster for the last 18 months or so.

Okay. One more out of me, just getting back to ROV comments: Can you give us some color on -- the operating cash costs in ROV, how much of that is labor, the pilot, and how much of that is equipment related?

We're not breaking it out at that level. I'm sorry.

I tried. Well, thanks a lot.

Vebs Vaishnav, Cowen.

Thanks for taking my question. It has been touched upon in an earlier question, but if I think about the 2017 guidance of marginal profitability at the corporate EBIT level, implication is that on a net income level it could still be positive or it could actually turn negative. Any color would be helpful.

I think that's why we used the word marginal. It's too difficult really to tell for us at this point, too early.

Yes, as we indicated earlier, we're still building our 2017 plan, and early indications are, as Kevin indicated, marginally profitable at the operating income line. That's our guidance that we're giving for 2017.

Right.

Fair enough. Congratulations on the extension for the BP Angola project.

Thank you.

Is there a way we can think about the magnitude of decline in the pricing that we got, and also at the same time if the charter costs decline? Are we talking about maybe 15%, 20%, or is it significantly above that?

We really can't provide any color on that. We've never broken out subsegment activity in the projects group, and we're not prepared to do that.

Or especially pricing per customer.

Or pricing per customer. You can assume that any time, no matter what asset or service we're talking about, a customer is trying to get further discounts, that we're also at the same time trying to reduce our costs, and that would include charter rates and that sort of thing.

Fair enough. Just trying to see, if I think about the floaters, which is a completely different market, but if those day rates are down 40%, 50%, are we thinking that way.

Okay. No, floaters are totally different category.

Okay. Last one from me on the Heerema project, can you update us on how well we're ramping up on that, number of ROVs are there deployed and still left to be deployed?

I can tell you that we have mobilized some of the ROVs, but really this is going to be a function of the work schedule that Heerema has on its various projects. That will show up in the results as it happens, but it's pretty -- .

I think what we've indicated is it's probably more a 2017 story than a 2016.

Right. We're really in the preparation stage now, getting mobilized onto the vessels, and they are transiting to wherever they are going; we'll see the benefit of that in the next year.

Thanks for taking my questions. That's all for me.

Blake Hutchinson, Howard Weil.

For most of the year within Subsea Products, you've pointed out that you're facing two-pronged pricing and absorption pressures. At least as it pertains to what we see as backlog and what you're forecasting for 4Q results, is it safe to say that a lot of the beneficial legacy pricing has now been flushed out of the system in backlog and we're at what you see is what you get levels at least, so we don't have to worry about that being another shoe to drop in the mix?

That's correct.

Yes.

Okay.

You would be correct.

All right. Excellent. I just want to make sure as we go along here we understand what at least we're seeing superficially in terms of your pricing in ROV or your rate per day on hire. As you said, you're not bidding a lot of new contracts on the drilling front. So we would think that pricing there would be stable, ex whatever mix factors as you peel off of contracts.

That's right.

Therefore, most of what we see in terms of price degradation, if indeed there is any, would have to be from the vessel market, which we should consider high turnover and competitive at lower rates, or perhaps much lower rates than your current drill support. Is that the way we think about how pricing plays out there?

Not necessarily because the activity there, the day rates aren't necessarily worse. The level of activity changes. Whereas a drilling rig, when it's drilling, is paid every day. The vessels are days that they work, and then you're idle the days between, so it's not quite that simple.

But that would still suggest that a lot of what we'll see in terms of what spits out on the pricing front is just as influenced, or maybe wholly or more influenced, by mix really than any pure pricing decline at this point?

That would be correct, yes.

I think it's becoming more that way, for sure.

Right. I guess what I was getting at is that you would actually, oddly, almost expect pricing to stabilize even though you're peeling off of contracts here.

Yes.

I think that's fair.

Okay. Appreciate that, guys. Thank you very much.

Edward Muztafago, Societe Generale.

Thanks for taking the call. Just wondered, some of the major service companies have been suggesting that the Gulf, which of course you all have a lot of exposure to, perhaps that the earliest potential recovery there is second half of 2017. As you guys sit there and look today, and I know you've given some preliminary operating profit guidance, do you think we could see a two-half 2017 that's lower than one-half 2017 for the Company, or can you at least comment on what you might be thinking there?

I'd say that my opinion or our opinion is probably as good as anyone else's, or as bad as anyone else's depending on how you look at it. I think that we are hoping that the second half would be a bit better, but, I mean, it's pretty hard to predict if that will in fact be true or not. If 2018, which seems to be the general consensus as to when things will start really to improve, you would think that in line with the conversations about FIDs that are expected to be approved, particularly in the second half of 2017, that should start indicating an improvement out there.

While it may take a little bit of time for an FID to trickle to an award that we would have the ability to go after, at least I think it will signal some incremental demand for the OpEx side of the Business, which has been pretty lackluster until now. That's the way I see it.

Okay. So not -- (multiple speakers).

One of the key elements is each of them is going to respond at a different time as well. When you start looking a at the projects, which we have the vessels in the Gulf, if we see the brownfield activity, those will pick up sooner than we would with a products in umbilical, most likely, which tend to be longer-lead items.

That's fair. So as a second question, which is maybe perhaps a little bit related to that, you did highlight this attempt to shift more work to vessel-based activity. As we start to see the recovery materialize, to the extent that you have a higher mix of vessel-based work, does that mean that the Business, at least relative to how it's performed traditionally, would recover a bit earlier, a bit later? How do you see that perhaps changing the inflection for Oceaneering?

The vessel business, as it relates to, say, IMR work, would definitely be on the earlier edge of that recovery, and that speaks to what Kevin just said about the OpEx. Construction -- construction and installation would be a normal type of progression because that's related more to the development work. Certainly, if we're on that IMR side, which we talked about some of our recent investments, that is an earlier recovery.

Okay. Yes, that makes sense. Brownfield, shallow water, we could make an argument that second half is higher than the first half.

Yes, that's correct.

Okay. Fair. I really appreciate that, guys.

David Smith, Heikkinen Energy Advisors.

Sorry if I missed it, but did you all give the split for Subsea Products revenue between manufacturing versus service and rental?

We did not.

It will be in our Q that's coming out.

Do you know off the top of your head if it was approximately similar to the prior quarter or --?

It was reasonably similar to Q2.

Okay. Which could imply that, I guess, third-quarter service and rentals would have been down versus second quarter? If that's right, just on the -- if that's a softer contribution from rentals and services, was just wanting to get some color on whether that's just about low activity levels or if you're seeing a greater impact from pricing competition or market share versus the second quarter?

It's really activity levels.

Okay. Appreciate it. And sorry to revisit this, but the comments about marginal profitability in 2017, just in the context of a growing view expressed by some of your peers that Subsea tiebacks and deepwater brownfield activity could improve meaningfully in 2017 versus 2016, was just wondering about your view of that activity, the tiebacks and deepwater brownfield activity, how your view of that in 2017 impacts your comments about marginal profitability?

There's talk about that happening, but until I see real projects with names on them come out from oil companies, like, when's that going to start? Do they have it in their budgets for 2017, and they'll really come? Or now they don't have it in the 2017 budget, so it's going to be in 2018. I don't know the answer to the question.

I think our conversations with our customers confirm that is a place that they are really going to be looking hard for activity, and they have some projects in mind. But until they actually come to the market, it's difficult to say when it's going to occur. I would love for it to happen in the second half of 2017.

If that prediction is true, then we will meaningfully benefit from that as well; that would be good.

Yes, so we're not counting our chickens until we at least see an egg.

Great. Appreciate it. Thank you.

Cole Sullivan, Wells Fargo.

As we think about the OpEx on a active ROV basis, how much more of that can come down? I know you said it was sequentially down in the third quarter, and you guys have been working on lowering costs there, obviously, over these last -- throughout the downturn. How do we think about how much more can actually come out there? Is it going to be more activity driven as if demand were to fall further, or is there some additional cost levers you can pull there?

It is obviously very related to activity levels. I think we have indicated in prior calls that at some point you've got a fixed-cost footprint in terms of geography where you have bases and these kind of things that at some point you just can't do anymore without destroying your business. At the moment, our thinking is that things will start to recover in time before we get to that point, and so we're not going to have to go there. It is activity denominated, and we continue to make reductions in various places and whatnot, particularly in infrastructure and support for the business onshore.

Cole, I think that's the critical component is, at a certain level you have the fixed-cost infrastructure, and that's what we're going after right now is looking at how we can reduce cost through shared services and combining different groups and changing the Organization structure so that we don't have four accounts payable, we have three that can do the same amount of work, standardization of processes to benefit it. All of that would actually start to benefit that ROV cost per day that you're looking at.

We have to not just attack the cost offshore, but we have to attack the cost onshore as well. That's what we're looking at doing.

We've been working on that.

I do want to state, because there have been a lot of questions about what percentage is fixed and what percentage is variable. ROV is largely, at least short term, fixed. The fixed part, as to Kevin said, it's locations. It's not plants that are non-fungible.

How much is variable? Well, the personnel are largely variable and the plant portion is fairly small, and for what it is fixed, it's more of a short-term fixed. So we can make those adjustments as we need to.

Okay. Thanks for that. On the backlog in products, how do we think about how the pacing of the backlog conversion into revenues has changed? Is it stretching out at all relative to 12 months ago? I would think that that's the case. How do we expect that to continue based on the current levels of backlog you see?

It's not really stretching out, remember, because these things all have a delivery date. We have target dates with associated [LVs], so we can't sort of slow-play this backlog work. We deliver when we deliver, and we work on replenishing that backlog quarter by quarter.

All right. Thank you. I'll turn it back.

(Operator Instructions)

Brad Handler, Jefferies.

I'd like to -- this question is going to probably seem a little forced, or at least the timing of it. I wouldn't mind just floating it and seeing how you react. Assuming that the conversations related to products, and specifically related to umbilicals, are skewing towards tieback opportunities, whenever they come, as opposed to larger projects, larger wells with set hosts and the like, can you talk to us a little about the relative opportunity -- presumably, again, in umbilicals?

What I'm trying to get at is how much does it matter, maybe on a per kilometer basis, if it's a 50-kilometer tieback as opposed to something that's a lot closer to the host? Is it at least interesting from that perspective?

They are equally interesting. I'd say at this point we'd be pretty happy to get an order of any type.

I understand.

I think it's really more -- it's not -- you used the word skewed. I just want to make sure we're thinking about this the same way. We see the tieback opportunities as something that will just happen earlier than the FIDs will, A, happen, and, B, translate into orders into the books. From the standpoint of cycle time and revenue recognition and the rest of it, a tieback is better in the short term for us from that perspective.

Anyway, but I don't think the -- I'm not necessarily seeing that the market is going to skew to tiebacks. It's not like there's hundreds of them out there just waiting to be done. Hopefully, there will be a number of them in the next 12 to 18 month time frame that will keep some activity going in plants before the FID greenfield bigger project work comes along.

I appreciate that color, actually. That is interesting. If I think about a dollar per kilometer basis, I'm still curious for this if you can give some insight to it -- ?

It is too complicated. Every umbilical is different, and it really depends on the cross-section of it, the construction of it, and that sort of thing. So it's just really not meaningful to try and put any color around that. They are all equally interesting to us, particularly at this moment in time. (Laughter).

Sure. That makes sense. Okay, so I shouldn't -- ?

If I would, though, I'd offer you one thing. It's not dramatically different because, you remember, if you offer a large product, a lot of times those are fought over because they swept the assets. That is all about absorption. So sometimes the margins on the bigger projects can actually go lower than on a short tieback or whatever because you have to be able to deliver them quickly, you have to be able to make room in the plant to get them out. It's just really hard to say which one gets the best price.

Interesting. Does a long tieback, though -- is there some engineering aspect to it where, if it happens to be very long, there is -- it does get a lot more expensive on a per-kilometer basis or is that not even necessarily true?

No, I wouldn't make that correction at all. Again, it depends on the cross-section, but the engineering activity is similar. I would say that if it has got a lot of wells involved where you have a lot of interconnects, engineering is -- maybe more is required because you've got all that connection hardware and UTAs and all that sort of stuff to do.

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

We have no further questions at this time. I turn the call back over to the presenters.

Okay. Thanks very much. Since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. This concludes our third-quarter 2016 conference call. Have a great day.

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