Oceaneering International Inc (OII) 2016 Q4 法說會逐字稿

Good morning. My name is Sarah and I will be your conference operator today. At this time I would like to welcome everyone to the Oceaneering's 2016 fourth quarter and full year conference call. (Operator Instructions) Please limit your questions to two or three. You are welcome to queue up again. Thank you.

Thank you Sarah. Good morning. My name is Suzanne McLeod -- Suzanne Spera, excuse me, Director of Investor Relations for Oceaneering. Welcome to our fourth quarter and full year 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 fourth-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. One year ago, on our fourth quarter and year-end 2015 earnings call, I talked to you about what a tough year 2015 was, and with such limited visibility we could not predict how weak 2016 might actually be. Well, one year later, with 2016 in our rearview mirror, we can hardly wait to welcome back those tough times we experienced in 2015. For 2016, adjusted operating income of $135 million represented a 69% fall from the $440 million achieved during 2015. We really did not foresee the extent of this precipitous drop caused by a major production of activity levels and pricing across all of our oilfield operating segments.

Regardless, we are very pleased that during the year we were able to adjust our cost structure to remain profitable within all of our operating segments and continue to generate a substantial amount of free cash flow. Today, we still have limited visibility and activity levels continue to indicate a downward trajectory, with customer offshore spending levels still being curtailed or even lowered. Consequently, we are forecasting a further decline in our profitability or operating margins for 2017.

On last year's call, I mentioned that we had undertaken a series of initiatives to align our operations with the then current and anticipated declines in activity and pricing levels. Our focus has been organizing more effectively in managing our cost structure. Accordingly, these restructuring steps included a sizable reduction in our workforce. We made these difficult decisions to enable our organization to be leaner and appropriately sized for the expected level of business. We believe our demonstrated cash flow generating capabilities and our liquidity provide us ample resources not only to manage our business through this prolonged downturn in offshore activity, but to also position ourselves for the eventual up cycle.

Like many of our customers, we remain committed to deepwater. We intend to continue investing in our current and adjacent market niches with more focus on our customers' operating expenditures and the production phase of the offshore oilfield lifecycle. Beyond 2017, with stable and improving oil prices, we foresee an increase in deepwater expenditures and improving demand for our services and products. Now moving on to our earnings results.

As reported in our press release, for the fourth quarter we incurred a loss of $0.11 a share as we recognized $12.9 million of pretax charges and an increase in the annual effective income tax rate. On an adjusted basis, our quarterly earnings of $0.03 per share approximated our expectations and the consensus estimate. For the fourth quarter, adjusted operating income was $21.6 million lower than that of the immediately preceding quarter due to reduced profit contributions from most of our segments, with the exception of asset integrity.

Almost one-half of the decline was driven by lower activity levels and profitability in subsea projects. The increase in the 2016 effective tax rate was primarily due to a change in the mix of income or losses between the US and certain foreign jurisdictions. This resulted in a recapture of prior-year US manufacturing deductions and a limitation of the current benefits from certain foreign tax payments.

Looking at our business operations on an adjusted basis for the fourth quarter compared to the third quarter, ROV operating income was down, resulting from a 14% reduction of revenue and 16% fewer days utilized. As we have 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 fourth quarter, ROV depreciation and amortization equated to 27% of revenue. Our adjusted fourth quarter ROV EBITDA margin remained respectable at 35% compared to 36% in the third quarter.

During the fourth quarter we added one new ROV to our fleet, ending the year with a total of 280 vehicles. Our ROV fleet utilization for the fourth quarter was 50%. As in recent quarters, the decline in utilization percentage of our ROV fleet is attributable to the reduced number of working floating drilling rigs and the overall low level of deepwater vessel activity. While we endeavor to place more of our ROVs on vessels, we need a sizable increase in our customers offshore spending levels for there to be a discernible increase in ROV fleet utilization and profitability.

Our fleet mix during the quarter was 67% in drill support and 33% on vessel-based work. At the end of December, we had 89 ROVs on 80 contracted floating drilling rigs or 53% of the 151 floating rigs under contract. During the quarter, we were on 14 of the 17 rigs whose contracts ended or terminated early and four of the six rigs that got contracted.

Turning to subsea products, adjusted operating income declined due to lower margins on manufactured products as we processed backlog and new orders with lower pricing. Our subsea products backlog at the end of 2016 was $431 million compared to our September 30 backlog of $457 million. The backlog decline during the quarter was primarily related to umbilicals. Our book to bill ratio was 0.82 for the quarter and 0.68 for the full-year of 2016.

For subsea projects, operating income was down substantially due to lower contribution from our diving operations, lower vessel pricing, the previously scheduled drydock of the Ocean Patriot, and a seasonal decrease in survey work in the Gulf of Mexico. Also in December, the Normand Flower charter expired and we reached an agreement with the vessel owner to maintain our ROVs on board and to only pay for the vessel when we use it.

Looking at asset integrity's quarterly results, adjusted operating income was up due to better execution and the completion of several jobs. For our non-oilfield segment, advanced technologies, operating income declined, primarily due to a seasonal slowdown in work for the US Navy. Unallocated expenses were in line with the prior quarter.

During the fourth quarter our cash position increased $9 million to $450 million. Our adjusted EBITDA was $65 million. Our organic capital expenditures for the quarter totaled $29 million. Additionally, we paid $15 million in cash dividends and yesterday we declared a $0.15 per share dividend to be paid in March.

I'd now like to turn my focus to our results for the full-year 2016 on an adjusted basis. For 2016, we reported adjusted net income of $75 million or $0.76 a share. Reflecting the prevailing market conditions, our operating income fell substantially from 2015. However, each of our segments were profitable on both an unadjusted and adjusted basis. Operationally, we generated adjusted EBITDA of $369 million.

We generated $341 million of cash provided by operating activities, which resulted in $228 million of free cash flow after $112 million of organic capital expenditures. It is interesting to note that on $206 million less net income compared to 2015, our free cash flow was reduced by only $132 million because of our ability to control capital expenditure spending. Our free cash flow allowed us to return $94 million to our shareholders in the form of cash dividends during the year.

To accomplish these financial results in this challenging market, we had to take cost-cutting and optimization measures. In doing so, we right-sized our workforce. After taking into account the restructuring steps at the end of 2016, we will have reduced our workforce to approximately 8,800 people from approximately 12,400 employees at the end of 2014. These are never easy decisions and we are committed to treating employees affected by these actions with respect and transparency.

We combined operating groups with a focus on eliminating layers of management to reduce costs and created efficiencies by pooling offshore technicians crosstrained to support multiple service line activities. We delivered supply chain savings by partnering with our customers and suppliers to develop cost-effective solutions that deliver value through quality and contract management and increased responsiveness. We benefited from a shared service model as we continue to leverage resources, people, processes, and technology across our worldwide organization to lower costs by gaining efficiencies through continuous improvements and standardized processes.

Also of note, we are pleased with these other achievements during 2016. We maintained our impressive safety record while restructuring our workforce. We successfully acquired the OpEx-focused assets of Blue Ocean Technologies and Meridian Ocean Services to complement our existing assets and further penetrate the well-enhancement and underwater in lieu of drydocking, or UWILD, markets.

We announced a two-year extension through January of 2019 under the field support vessel services contract with BP in Angola. Under this contract we are also pleased to announce that BP has decided to exercise three of its five 1-month option periods, extending the Ocean Intervention III from April to July 2017, leaving two remaining option periods for further extension of one month each.

We entered into a long-term ROV vessel support services contract with Heerema for multiple vessels. We recently entered into a long-term contract with a high-spec vessel operator to provide eight work class ROVs, including subsea tooling, survey and associated services, engineering, communication, and data solutions to support their global operations. We reduced our vessel charter obligations when the Olympic Intervention IV and Normand Flower charter obligations expired in July and December, respectively.

We strengthened our liquidity, as evidenced by our substantial increase in cash, and our bank group extended 90% of our $300 million term loan and our $500 million undrawn revolver each for an additional year. These achievements were possible thanks to the dedication and support of our employees.

Looking ahead to our 2017 macro outlook, we are likely to face a third consecutive year of declining offshore spending totaling almost 20%. With this type of spending forecast, most analysts and rig owners are forecasting further reductions in the contracted floating rig count. At the end of 2016, there were approximately 25 floating drilling rigs that had contract end dates in the first half of 2017. We have ROVs on board 21 of these rigs. We also expect 17 rigs to begin new contracts during this same period and we have ROVs on 11 of them.

However, we are encouraged by signs of improvement in certain long-term industry drivers and fundamentals in the markets we serve, including the price of oil, which has rebounded higher. Crude oil prices ended the year above $50 a barrel. The Brent price ended 2016 at $54 a barrel, $17 higher than at the end of 2015. OPEC and non-OPEC countries are seemingly more interested in cooperating to support the long-term health and price of oil. Many economists and analysts are projecting the long-term price of oil to be in the $65 range.

Our customers have become focused on improving their returns, thereby driving efficiency and standardization, resulting in overall lower-cost breakeven and shorter duration to first oil. This makes many offshore developments and brownfield opportunities competitive with many shale plays. While the industry has decreased or deferred offshore FIDs, our top 20 customers in the oilfield sector -- which comprise approximately 70% of the revenue in our oilfield-based segments -- remain committed to the portfolio development of their reserves and have not decreased their long-term exposure mix away from the offshore sector. Lastly, we believe the new administration in Washington is more offshore knowledgeable and energy friendly, which may result in a positive change for our industry.

Turning to our outlook for 2017, on our last conference call we projected 2017 to be marginally profitable at the operating income line on a consolidated basis. Today, we reaffirm that projection as we expect a further decline in our profitability. Below the operating income line, we are projecting a loss from our equity investment in the Medusa Spar as production has declined, and our interest expense is expected to be slightly higher in 2017 than 2016 due to higher rates and less interest being capitalized. As mentioned previously, we have taken steps to right-size the organization for our anticipated 2017 planned business volume. Should the market rebound earlier, we believe we will be able to attract the required talent, including rehiring many former employees.

Directionally for our business operations by segment, we see ROV results being down, driven by a reduction in the number of working days and further reduction in average revenue per day on hire across our geographic areas of operation due to the expected continued decline in contracted floating rigs. With the down cycle in offshore rig activity expected to continue, our fleet mix is projected to shift towards vessel-based utilization while our overall fleet utilization is expected to be in the 50% range for the year. We need a sizable increase in our customers' offshore spending levels for there to be a discernible increase in ROV fleet utilization and profitability. We expect our ROV EBITDA margin to be above 30% for the year.

Subsea products results are expected to decline due to lower pricing in current backlog and new orders. Until we see an increase in backlog and throughput, we expect our subsea products operating margins to be in the mid to high single digit range. Our expectation considers the impact of the cost restructuring measures taken during the fourth quarter. For subsea projects, we expect another challenging year with reduced vessel activity offshore Angola and continued competitive pressures on vessel day rates in the spot or callout market in the Gulf of Mexico. For asset integrity, we expect results to be down slightly. For our non-oilfield segment, advanced technologies, operating income should improve due to a meaningful increase in activity and profit contribution levels within the commercial theme park arena if the expected project come to fruition.

On a year-over-year basis we expect higher unallocated expenses, as 2016 results included the impact of reversing earlier accruals associated with our long-term incentive compensation plans, as it became evident during the year our performance targets would not be achieved. Unallocated expenses are estimated to be in the mid to upper $20 million range per quarter. For our first quarter 2017 outlook, we anticipate that our results will be considerably lower when compared to our adjusted fourth quarter results due to a continuation of weak demand for our services and products, exacerbated by seasonality. We expect sequentially lower operating income primarily from our asset integrity business segment and higher unallocated expenses. We also expect a discrete additional income tax provision in accordance with the new accounting standard associated with our share-based incentive plan.

And lastly, let's turn to our liquidity and potential uses of cash. As mentioned earlier, we ended the year with $450 million in cash and cash equivalents with no near-term loan maturities. Our bank debt maturities are now $30 million in October of 2018 and $270 million in October of 2019. We have $500 million available under our undrawn revolving credit facility, $450 million of which does not expire until October 2021. The $500 million of public debt is not due until November of 2024. Over $300 million of cash our balance sheet at December 31 was in the United States. We believe this provides us the financial flexibility to operate through the cycle, invest in Oceaneering's future, and return cash to our shareholders.

For 2017, we expect our organic capital expenditures to total between $90 million and $120 million, including approximately $55 million to $65 million of maintenance capital expenditure and some amounts required to complete the Jones Act vessel, Ocean Evolution, and the well intervention equipment recently purchased as part of our Blue Ocean Technologies acquisition. In an operating income breakeven level and with this level of organic growth, we should still generate a substantial amount of free cash flow in 2017. Our cash priorities remain unchanged. Our number one priority remains improving our portfolio organically and through bolt-on acquisitions. Our next priority is to return cash to our shareholders through dividends and possibly repurchasing shares.

In conclusion, heading into 2017 we are faced with a third consecutive year of declining offshore activity for the oilfield services industry but we remain confident in our ability to manage our business through this cycle. We intend to stay focused on our operations, organizing more effectively, and maintaining our market positions. We have a stable balance sheet and are confident in our cash flow generating capabilities. We have been and will continue adapting and making changes as necessary and take advantage of opportunities that may emerge, with more focus on our customers' operating expenditures in the production phase of the offshore oilfield lifecycle. We are leveraged to deepwater and longer term, deepwater is still expected to play a critical role in the global oil supply growth required to both replace depletion and meet projected demand.

Finally, I want to thank our employees and management teams. It has been a difficult and stressful two years. We have been tenacious and resilient and will continue to adapt as we prepare for the eventual offshore market up cycle. We appreciate everyone's continued interest in Oceaneering. We'll now be happy to take any questions you may have.

Vebs Vaishnav, Cowen.

A couple of clarifications. So, if maybe I wasn't able to jot down everything correctly, but did you guys do about 30% EBITDA margins for ROVs?

No, I think we reported to 35% EBITDA margin on our ROVs. When Kevin's comment was for 2017, we expect to be above 30%.

Okay, okay. And under unallocated, did you guys speak about mid-220s unallocated expense per quarter, or did I miss it? (multiple speakers)

Mid to upper 20s for the unallocated expenses going forward in 2017.

Okay. Speaking about ROVs, what drove such significant improvement in a number of ROVs on the support business? Was it driven by Heerema or something else? And then, more importantly, is that sustainable going forward?

Actually, Vebs, we didn't really see an appreciable difference in the vessel market versus the rig market in Q4. I think it was nominally the same. It may have actually ticked up a percent in favor of rig support during Q4, but we were anticipating seeing more of a shift to the vessels side of the market in 2017.

Okay, okay. And one quick question on subsea products. If you can help us think about the manufacture, was it service and rental space for the fourth quarter?

I'm sorry, I didn't hear the question.

The revenue split between the service and rentals and how much came from the backlog of manufactured products.

I think we'll report that when we report the K, Vebs.

Okay. Thanks for taking my questions.

Blake Hutchinson, Howard Weil.

A couple of questions, just broad strokes on the product segment. First of all, you cited in the release that in terms of backlog umbilicals is depleting in terms of percent. I would imagine that would stand for what we are seeing in terms of order flow, and I was just looking for commentary on what that might do to the velocity of the order flow turn. Should we consider the incoming for Q4 as something that may be turning faster within your business than maybe we would normally if umbilicals were crowding the order flow?

I would not say it's increasing.

I think, Blake, your question is (multiple speakers). What we are seeing coming in (multiple speakers) yes.

Our short cycle is representing more of our subsea products so therefore the turn of orders to revenue is quicker and the answer is, in that case, absolutely.

Okay, okay. And is it does meaningful -- I think you pointed out that the trend is now meaningful in your backlog away from normal percentages of umbilicals. Is that true for what we are seeing it from order flow as well?

I think because of the lumpiness of umbilical orders, it's really hard to try to develop a trend with one quarter of data. So, I would say that's yet to be seen. For us to be able to maintain that single to mid or -- mid to high margin rate, we are counting on some pending orders being awarded. And so the mix going forward is really going to be -- is yet to be determined, and it is going to be a significant factor in our profitability.

Okay, great. And then just again a bigger picture question. It looks like the second half of last year you did some paring of the ROV fleet. As we enter the current year and we look at your listed fleet count, is this -- are we at the point where we consider all this extremely viable? There's not a lot of carry issues or deterioration and all applicable to what you see out there in today's market?

No, our fleet is in great shape, Blake. So for us there's not a lot of slow movers that we would be taking out. So we've got a good-looking fleet. We are just looking for more places to put it.

Great. That's exactly what I was looking for. The major paring was done. Appreciate it. I'll turn it back.

Ken Sill, SunTrust Robinson Humphrey.

I had a question on asset integrity. You are guiding that to be down modestly, and I was wondering if you guys have any feel for how much of that is projects or maintenance being deferred, and when some of that might actually have to start being done, given the increased amount of offshore infrastructure that's out there, even in a low rig count environment.

Well, we have continued to be somewhat surprised at the low level of activity in the asset integrity space for the reasons that you alluded to, i.e. regulation and the rest of that, but we are still seeing reduced spending in this area. Hopefully it will pick up, but first quarter is going to be slow just because of seasonality in any event. And so by second quarter we should maybe start seeing some indication of what the business volume is going to be in 2017.

Yes. And I think one you look at quarter four to quarter one, quarter four we benefited from some projects that we closed out on and were very successful. So that helped out our fourth quarter, and Q1 we are expecting seasonality, as Kevin alluded to. But I think when you look at his comments earlier, we are only expecting asset integrity to be down slightly for the year.

Which is, which is positive. And there is a lot of people writing comments that you are going to have to see an uptick in FIDs, that you can't just not approve projects forever. I was wondering if you could give us -- based on your discussions with customers or other contractors, what do you see in terms of the potential projects that could be approved or put up for approval this year? And how that might progress through your crystal ball if oil prices can get in the $60 to $65 range?

I would say we are out talking to people all the time, and so the positive nature of what we hear is largely based more on their ability to cut their costs, to standardize, to get the project costs down so that they can move ahead. So I don't think it's entirely predicated on the price of oil, which is good. I mean, barring a further drop. So if I take that and I put it out against the predictions that we will have more FIDs in 2017, I think it correlates really well with what we are hearing from the customers.

But how would that compare to what we were seeing a few years ago?

I still think that we would be behind a 2014 level, obviously.

All right. Thanks, guys.

Chase Mulvehill, Wolfe Research.

So, quick question on the subsea product margins. You guided them to mid to high single digits for 2017. As we look to 1Q, could you talk to it a little bit? It seems like you've got some cost cuts coming. So could you talk to margins as you see it unfolding in 1Q for subsea products?

The numbers that we have, have included a lot of the cost-cutting that we took towards the end of the year and some of it falling into the beginning of this year. So I think that's pretty much taken into account when you see those mid to high single digits.

Okay. Are we going to be mid-single digits? Are you going to hold it flat in 1Q versus 4Q? Or do we dip down in 1Q and then flow through higher margins as we go through?

It looks pretty flat throughout the year.

Okay, all right. That's helpful. And then as we think about 1Q, do you think that you can have positive EBIT in 1Q? I know you've got seasonality in the first quarter so I think that your underlying assumption is that things get better after a seasonally slow 1Q, so just trying to dial in 1Q appropriately.

Chase, let me give this a shot. This is Marvin. If we are going to be marginally profitable on a consolidated basis for the full year, and Q1 is historically and always has been affected the most by seasonality, and we do expect some pickup in activity in the -- during the summer months, I would say that I think all signals point to a pretty weak Q1.

Okay, all right. That's very helpful there. Last one and I'll turn it back over. You said two to three so I'm going to use all three (laughter). So, you are saying that greater than 30% ROV margins for 2017. So does this reflect -- does the greater than 30% margins, does that reflect leading edge margins? Or do you still think you have downside risk going into 2018 as backlog potentially rolls off?

Okay. We talked about 30% EBITDA margins, just to make certain we are speaking the same.

Yes, yes, sorry.

And I think that includes any kind of ramp down that we may be seeing coming in to the pricing for the 2017 (multiple speakers)

Down from 2016.

Correct. So we've been running 36% in Q3, 35% in Q4. So, I think we are looking at -- there will probably be still some pricing pressure as well as utilization and geographic mix will certainly -- where the rigs work and where the vessels work will impact that.

But with visibility still fairly opaque for 2017, it's pretty hard to say what's going to happen in 2018.

And Chase, I want to answer your question very directly. I would not misinterpret -- I would not interpret this to be leading-edge day rate margins. It's still way dependent on geographic mix, as Alan said. And also, the expected shift from -- more of a shift from rigs to vessels. So I think we're going to have to wait and see, as Kevin said, but I would not say that our projection of at least 30% is leading-edge margins today.

Okay. All right, that's very helpful. Appreciate the color. I'll turn it back over.

Ian Macpherson, Simmons.

I was interested in the guidance for your ROV utilization for the full-year to be at around 50%, since that's where you were last quarter. And we know that the rig support side is still cascading lower. I infer that the vessel-based activity is not only increasing in terms of your mix but it's increasing on an absolute basis in order to keep your utilization flat. Can you speak to that dynamic and what that tells us about activity in the market?

We are actually counting probably more on the vessels we are going onto than overall activity increasing. So we announced the Heerema activity that we are participating in now. We also told you that there is another agreement that we just reached, and so it's really more based on our participation than overall activity on the vessels.

Okay, so it's a market share story more than anything?

It would be in this case, correct.

Right. And these are staged over the course of the year. It doesn't happen all at once, and so this is something that will be gradual through the year, at least on those two specific contracts that we mentioned there. But we are certainly hoping that there will be some increase in the vessel demand to help offset the continued decline in rigs operating.

Okay. That's helpful, thanks. Another question I had was whether you might be able to provide a little more specificity or just a frame around the equity income loss that's expected to unfold from lower Medusa Spar volumes.

Yes, when we look at that, we get a kind of a tariff rate coming through the Medusa Spar, and as part of the equity investment there's still depreciation associated with the asset, and there's just not going to be enough production going through the asset to cover the depreciation.

I was just curious how much of an equity loss that could be for the year?

I don't think we are disclosing that.

Okay. That's it, thank you.

David Smith, Heikkinen Energy Advisors.

Wanted to ask just regarding the new agreement to put eight ROVs on high-spec vessels if I heard that correctly. Was that entered into last quarter or more recently, this year?

It was entered into more recently, but as I alluded to earlier, this is not an immediate thing. These are actually vessels that are going to be delivered during the year. And so this will be a staged process through the year and there might be one or two actually that go into 2018.

Okay. Is this a vessel operator you have worked with extensively before? Or is this agreement really incremental to the normal base activity?

We work with them, but this will be incremental.

It is incremental. Also I would hasten to add that all these vessels typically are in either a project role, like Heerema, so you are not getting utilization constantly, or they are on the spot market, callout market. Which, again, is not term contract, so utilization is going to fluctuate with whatever project load they have.

Sure, makes sense. And the follow-up was just -- you had the asset integrity margins were quite impressive, given the revenue drop but also the historic seasonality. It looks like the highest fourth quarter margins of the past several years. So, just given the strength of asset integrity margins in the second half of 2016, I was wondering if maybe are you being conservative on the 2017 outlook for this segment? Or were there specific things in the second half that you don't see repeating through 2017?

I think we are very confident in our ability to execute. Our concern is that we still don't see a huge increase in spending. So, I think to deliver when the projects come through we are in good shape, but we'll have to see how much gets spent next year, or this year.

Thank you.

(Operator Instructions) Cole Sullivan, Wells Fargo.

You had mentioned on the day rate commentary for the ROVs that they are expected to see some pressure over 2017, if I heard that correctly.

I'm sorry to interrupt, but can you speak up just a little bit?

Can you hear me now?

That's better, go ahead.

All right, sorry about that. So when you talked about in the prepared comments that the revenue per day could be under some pressure this year, obviously under pricing pressures, and you -- and the comments that you made on the EBITDA margins for 2017 to above 30% -- how much of the ability to maintain 30% margins is coming from cost cuts in the ROVs?

I believe most of those cuts have been made. So that takes into account things that we've already done. Obviously if we see more drop in activity than we've already seen, that would require some additional actions. But this is a pretty solid look based on what the actions that have already been taken.

And particularly with rigs re-contracting, the ones that are re-contracting, the majority are on pretty short-term contracts. And so the competition in pricing is going to be -- is continue to be intense with so much overcapacity in the marketplace. So that's just the world that we are living in right now.

But I think the point we need to make to differentiate ourselves a little bit from all the recent comments is cost reductions made in ROV have been structural and based on volume. We are not deferring maintenance or we do not have any hidden ramp up charges that -- Rod mentioned about our fleet is well-maintained and ready to go to work. So, unlike reactivation costs of vessels or rigs that have made the news lately about how cost-cutting is coming to an end, we believe we've done the structural realignment and that it's very sticky. What's not sticky is hopefully we'll put more ROVs to work and need more crew. But I think if that was your -- if there was an inference of that in your question, we can remove that.

Okay. Thanks for that. On the products business, you mentioned we'll see the service and rentals piece in the 10-K when that comes out. But can you talk about how you think the revenue from that piece of the business will trend over 2017, whether it's materially up or down versus 2016 levels?

I think we are looking for that to be more flat than anything. There is nothing to give the indication at this moment in time that there's going to be any ramp up in that business. I think I would maybe characterize as -- and this is particularly Gulf of Mexico for us when something breaks and affects production, then it gets fixed. They spend the money on it. If it's not broken, then nothing happens.

All right. That's it for me. Thanks.

Kurt Hallead, RBC.

It's a question of course I have for you guys, again, when we look out into 2017, what kind of shift in the ROV mix are you expecting for the vessels? How high do you think you can get that, maybe 40%? Do you think it will maybe get over 40% in 2017?

Kurt, I think actually that's going to be so dependent on the other side of the equation, about what happens with drill support. So, I hope -- I would say I hope it doesn't get that high because I think if we start to see that, it's going to be pressure on the drill side rather than improvements on the vessels.

Okay, I got you. And then as you look out into 2017, are we at a point now where ROV rates on vessels are now higher than ROV rates on rigs on a leading-edge basis?

Yes, Kurt, just to clarify, because of the nature of that work, crewing and the amount of time they actually spend working that requires that crew, vessel rates typically are higher than drill support rates. Even in what we would consider in normal times. So, yes, we would expect that to continue.

Okay, got you. And then last thing. As we get additional FIDs in 2017, what's a typical lead-lag relationship for when you guys are going to start to generate some meaningful revenue from those FIDs?

It really depends on the nature of the project. I'll use a recent example. Mad Dog 2, that's a huge project and we would not expect to have an opportunity to do something there until further down the line. The big orders will get placed and umbilicals, in our case, would come later. In the case of a one-well tieback to an existing production unit, it would be a lot quicker and typically you would see something happening within 4 to 6 months probably of an FID of that nature. So it really just depends on the project.

Got it. And then on the last thing on cash use, you indicated organic growth and then acquisition dynamics. So when you look at organic growth, is that leaning more -- is there one particular subgroup that that's leaning toward, like products or projects, for example?

I think probably one of our better opportunities right now is well stimulation and remediation. So, I think that's one of the places. That's an OpEx related, it's brownfield focused. That's one of the places where we see building upon our Blue Ocean acquisition and our work there. I think that's one of the better places for us to invest.

Services and rental is (multiple speakers).

In the product segment, yes.

Okay, that's great. Thank you for that color. Appreciate it.

This is Alan. I'd like to jump back in. I know Ian had asked a question regarding the Medusa Spar and what we were thinking about on that. And depending on the production profile we're estimating somewhere between $1 million and $1.5 million per quarter reduction or loss.

Brad Handler, Jefferies.

Could we spend a couple of minutes on the project side, please? Maybe I'll start with a very specific question just to see if you can share it with us and then we'll pull back up. Can you update us on what happened with the Ocean Alliance, if your contract was up at the end of 2016 with a major? I think your charter was up as well, so did you retain that vessel? Perhaps I missed something along the way, but did you retain that vessel and/or is that -- and what's your outlook for that?

We did retain the vessel.

And to your point, what happened there is, I think, based largely on the availability of vessels in the Gulf of Mexico. The customer decided that they weren't going to fully retain that vessel, so we continued to do the work, but they just decided not to put it on full-time charter.

So we are on the spot market with that, but we do expect to do a reasonable amount of business or utilization with the customer that that has been on term contract with.

Okay. All right. That seems like a pretty stable outcome then. That's helpful. More broadly, and maybe if we wrap in the diving support vessel side here as well, but how -- how can you -- what steps do you have at your disposal to manage costs in that business? You are obviously trying to maintain a certain amount of readiness. You have the Ocean Evolution coming in midyear still. With a questionable level of work -- so I'm just trying to understand how do you manage the profitability in the business? What levers do you have? Maybe I'll stop there and see if you can offer some thoughts.

In terms of trying to manage the profitability, we are subject to the market rates. And so that's mark to market every phone call, if you will. We have certainly reduced our exposure to charters in the Gulf of Mexico, and that is certainly one way. After that you are down to doing what lots of other folks are doing, which is warm-stack vessels and -- which we typically do with our smaller diving, shallow water vessels during the winter. That's something that we routinely do. But those really are your options. We believe that we've got the right size, right number of vessels in our fleet for the market. I think we expect to see similar levels of activity in 2017, albeit at very highly pressured rates in the market.

And I think you saw or heard in the notes that we have worked our way through several of our charters. So we have reduced a lot of that ongoing expense, which is great. And then we've also made some great agreements with some of the vessel owners who are very cooperative. They understand the market, so we've got some great callout rates on vessels as well. So it doesn't really limit our ability to go serve the market either.

Right. It sounded like that actually was a great accommodation, for example with the Normand Flower. That sounds very cooperative. I guess I'll just tie it together with one last question on it and then I'll turn it back. Can you -- is it in your outlook that you can maintain positive EBIT margins in the business then in 2017? Does the pricing pressure make that just too difficult, so you are bumping into negative territory perhaps?

That's kind of hard to call since it is a mark to market business and really is going to depend entirely on what the demand stream is. If it's similar to 2016, I think we'll do okay. If it's not as much activity, then it's just pretty hard to tell since it's all call-out.

We are going to need some work in the Gulf of Mexico in particular.

To make it work? Understand. All right. Well, thanks for all the color and, by the way, thanks for the color on the other questions as well. It's been very helpful this morning.

David Smith, Heikkinen Energy Advisors.

Thanks for letting me back in. I wanted to say congratulations on the contract with Statoil for the E-ROV concept. And I recognize this is fairly nascent, but with I think the first test deployment being here in May, I wanted to ask how you could see this potentially evolving, if the high-end of your view of the concept plays out.

I think there is more interest in electric ROVs and that sort of thing, but I think this is going to be a slow evolution. And so I wouldn't expect this to be a rapid, market-changing idea. I think it is an illustration of the direction the technology is going and we are at the forefront of that. And so I think that's good for us, but I think this is going to be something that evolves slowly over time.

I'll exploit the opportunity a little bit since you give us the chance to talk about it, but it is a stepping stone. I mean, to Kevin's point, this is where you start with the resident ROVs, things that stay down, that don't need to be launched from a boat or what have you. So it is -- it's probably as a step towards something that's coming in the future, remote operations and things like that. It's the first step in probably a more interesting direction overall.

Appreciate it, and a quick follow-up. I think in the past couple of years unallocated expenses have been coming in below the initial guidance. And I just wanted to ask if you have more confidence on the guide at this time, or if it's just really subject to the same uncertainties as the prior years?

There is always some uncertainty when you are trying to estimate what your incentive plans are going to spend -- cost, whether or not you hit your targets. The unfortunate part of the last couple of years, the favorable variance in unallocated is because we were not achieving our targets and the incentive plans were not paying out. Exacerbated by the fact that you start out with those accruals, and then because some of these are three-year cumulative targets, and so you start out with accruing for them. And then in this year we were, in fact, more than favorably affected by not paying much in bonuses or incentive plans, but we also had the reversal of prior-year accruals which Kevin mentioned in his call notes.

All right. Appreciate it.

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

Thank you. Since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. This concludes our fourth quarter and full-year 2016 conference call. Have a great day.

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