Oceaneering International Inc (OII) 2017 Q2 法說會逐字稿

My name is Carissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oceaneering Second Quarter 2017 Earnings conference call. (Operator Instructions)

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

Thank you, Christa (sic) [Carissa]. Good morning and welcome to the Oceaneering Second Quarter 2017 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 Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments; 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 second quarter press release.

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

Thank you, Suzanne. Good morning and thanks for joining the call today.

For the second quarter, we are pleased that our overall operating results were in line with our expectations and our reported earnings per share of $0.02 and $62 million in earnings before interest, taxes, depreciation and amortization or EBITDA were ahead of consensus. Sequentially, quarterly operating income increased by $9.5 million on improved profit contributions from all of our business segments except for Subsea Products, which was slightly lower.

We were pleased that each of our operating segments remained profitable. On a consolidated basis, for the first half of 2017, we've generated $112 million of EBITDA and $61 million of free cash flow. We believe our cash flow and liquidity position us well to manage our business and provide optionality through the continuing industry downturn.

At the end of the quarter, we had $482 million in cash and an undrawn $500 million revolving credit facility. Based on these strengths, the board maintained our dividend and declared a $0.15 per share dividend to be paid during the third quarter of 2017.

I'd now like to review our business operations by segment for the second quarter compared to the first quarter. ROV revenue and operating income increased $9.4 million and $4.5 million respectively on higher activity per vessel-based services. Our fleet mix during the quarter was 61% in drill support and 39% for vessel-based activity compared to 69% and 31% from the prior quarter.

Due to change in mix partially driven by seasonality, our second quarter ROV operating margin of 10% improved from 6% in the immediately preceding quarter on increased days on hire and revenue per day on hire, and our ROV EBITDA margin of 38% improved slightly from 37% from the first quarter.

But let me be clear, ROV pricing has not hit an inflection point. We do not have the leverage to begin raising prices in this environment. Quite to the contrary, we have a few legacy ROV contracts expiring this summer, and we expect that in this competitive market, we will mark those contracts to market to maintain utilization of these assets.

Our fleet utilization for the second quarter was 48%, up from 46% in the first quarter. We held our share of the contracted floating drill support market with 53% for the 153 floating rigs under contract. During the second quarter, we put 1 new ROV into service and retired 4. At the end of June, we had 279 vehicles in our fleet.

Turning to Subsea Products, sequentially, operating income was slightly lower-than-expected due to the continued weakness in competitive nature of the service and rental market. Our Subsea Products backlog at June 30, 2017, was $328 million, compared to our March 31, 2017 backlog of $407 million. This decline is primarily related to our umbilical business. Our book-to-bill ratio year-to-date was 0.69. For Subsea Projects, revenue and operating income increased driven by seasonal improvements in U.S. Gulf of Mexico deepwater vessel work and survey services. Asset integrity revenue and operating income were up due to seasonality.

For our non-oilfield segment, Advanced Technologies, revenue and operating income improved, primarily due to continued increased commercial activity and work for the U.S. Navy. Unallocated Expenses were essentially flat. Additionally, during the quarter, capital expenditures totaled approximately $24 million, most of which was invested in our ROV, Subsea Products and Subsea Projects segments. We also paid $15 million in cash dividends.

Now let me address our outlook for the third quarter of 2017. We are expecting a sequential increase in our overall quarterly operating income. This improvement should be led by Subsea Products and Subsea Projects with slight declines in profit contributions from our other operating segments and flat unallocated expenses. For the second half of this year, relative to the first half, on a consolidated basis, we're expecting to generate higher operating income on relatively flat revenue. We anticipate generating higher operating income from Subsea Products and Advanced Technologies, considerably lower Subsea Projects results and a similar operating income contribution from ROVs and asset integrity.

First, let me talk about the 2 segments that are expected to be up. Our Subsea Products profits are expected to be higher as projected increases and service from rental activity are expected to more than offset lower manufacturing products throughput. Further, we continue to project our Subsea Products operating margins to be in the mid- to high-single digit range.

In our non-oilfield segment, Advanced Technologies, operating income should improve due to a projected uptick in our commercial businesses.

For Subsea Projects, we anticipate our second half results to be considerably lower due to the release of the Ocean Intervention III currently operating offshore Angola, and a project continued low vessel price environment due to the vessel market being oversupplied.

For our ROV segment, much depends upon the number of floating rigs actually working during the remainder of the year and on the level of vessel-based Inspection Maintenance and Repair or IMR activity undertaken. Our guidance assumes a projected ROV fleet utilization for the second half of the year approximating 50%, and ROV EBITDA to remain in the mid to high 30% range.

We expect to maintain our ROV market share for drill support. At the end of June, there were approximately 38 floating drilling rigs that have contract terms expiring during the balance of this year, and we have ROVs -- 29 ROVs on 23 of them or 61%. Of the 38 floaters, 14 are rolling to new contracts. There are 16 additional floating rigs set to begin new contracts during the same period. Of the total 30 floaters receiving new contracts, we have 22 ROVs on 18 of them or 60%. In addition, we anticipate that there will be some incremental contracting of rigs based on current bid activity.

Although, we endeavor to maintain our drill support market share and place more 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.

For the second half of 2017, we are expecting similar operating income contribution from Asset Integrity and unallocated expenses to remain essentially flat. In summary, our overall outlook for the full year of 2017 has not changed. We continue to project that we will be marginally profitable at the operating income line on a consolidated basis.

Now turning to our CapEx and free cash flow expectations. Our estimated organic capital expenditure total for this year remains between $90 million and $120 million, including approximately $55 million to $65 million of maintenance capital. The balance will be utilized to complete the Jones Act vessel, Ocean Evolution and the well intervention equipment purchase as part of our Blue Ocean Technologies acquisition last year. The Ocean Evolution is now expected to be delivered at the end of December 2017 and placed into service early first quarter 2018.

Based on this level of organic growth and our expectation of being marginally profitable at the operating income line, we should still generate ample free cash flow in the second half of 2017.

On a macro basis, the fundamental industry problems remains to be a challenging oil price environment. This has led to reduced capital and operating expenditures for our customers resulting in lower activity levels. In addition to the forecasted price of oil, there are several significant leading indicators that influence our outlook for our oilfield service and product segments. Namely, the contracted floating rig count and subsea tree orders and projected subsea tree installations.

With respect to the active floating rig count, we have noticed the recent rise in floater contract awards and reported bid activity. While this is encouraging, we still expect the recovery will take time and do not anticipate offshore activity levels to move appreciably higher in the near future.

Regarding subsea trees, there have been more than double the number of trees ordered during the first half of 2017 compared to the first 6 months of 2016. According to industry estimates, subsea tree orders for all of 2017 are forecasted to increase 87% over 2016. Subsea tree installations for all of 2017 are expected to be down 10% year-over-year.

We are encouraged that offshore operators working with service and product providers have made considerable progress toward reducing breakeven costs through more efficient processes, standardization and simplification. These efforts have reportedly made offshore development breakeven points competitive with many onshore shale plays. We are also encouraged by operators focusing more on short cycle projects, including fast-track developments and well [firebacks] to existing structures. This change in focus plus an increase in operating budgets, including intervention, stimulations and Hydrate Remediations would bode well for our integrated service and product offerings.

In closing, our focus continues to be defending or growing our market share in each of the markets we participate in, controlling our costs and maintaining an organization commensurate with the existing level of business, driving efficiencies throughout our organization, engaging more directly with our customers to develop value-added solutions that increase their cash flow. And finally, looking for opportunities to grow our company with more focus on our customers' operating expenditure in the production phase from the offshore oilfield life cycle.

Longer-term, given the lower levels of investment in the past few years, coupled with ongoing reservoir depletion, we believe the oil and gas industry will, again, need to meaningfully invest in deepwater projects to meet projected demand. And we appreciate everyone's continued interest in Oceaneering, and we'll now be happy to take any questions you might have.

(Operator Instructions) Your first question comes from the line of Jim Wicklund from Crédit Suisse.

I think, you guys are doing a great job coming through what has continued to be a difficult market. So congratulations on your effort. You take delivery of your new vessel, Jones Act vessel, the end of this year. There's been a lot of talk about ending some exemptions for non-Jones Act vessels in the Gulf of Mexico, I realize that the market's oversupplied in general. Can you talk a little bit about what's the capabilities of the boat? Have you discussed about how much is going to finally cost you? And then more importantly, what kind of market you're going to bring it into early next year with those capabilities?

So let me start with the boat, it is a highly capable boat. It's going to be one of the largest and most capable IMR vessels from a cranage standpoint, deck space and personnel onboard. The other thing we love about it, is it's probably a very unique combination of a very sleek modern Norwegian hull design with the Jones Act flag, an American flag, which is fairly unique in the Gulf of Mexico. So we think, it's highly efficient, a great work horse. So we're excited to get it out. The next question about sort of the market. I mean, we have some work that requires vessel like that. So we're excited to get it out. The cost-wise, I mean, the delays haven't really been any cost escalation. It's been a more along the lines of just getting things done. Again, it was a unique design for first-time build for ship builders. So it hasn't really been any runaways there, just a matter of time of getting it out.

Okay. And the follow-up, if I could, the improvement or potential improvement in stabilization will be great. In the deepwater rig market, and then you went through the details of which contracts are rolling and your market share, which is still strong. Is there a particular market that you're seeing potential or strength -- bidding strength in? Or are you looking at this holistically on overly broad global basis? Is there a regional hope that's better? Or are you better positioned regionally? Or can you talk about that a little bit?

I think, just generally, we're going to go get them all. And probably, in to that sense, when you say we're -- regionally where are you better, I mean, that is the point. I think, our global footprint is really what's got people happy that we maintain that global footprint. And so as they work with us, it's still going to be Oceaneering everywhere we're at. So I think, that's -- it's probably not the most precise answer I can give you. But it really is -- our strategy is to be really aggressive on market share.

Your next question comes from the line of Vebs Vaishnav from Cowen.

Wanted to touch upon the Subsea Product orders, so they declined somewhat at around $100 million this quarter. How should we think about going forward? Can we sustain $100 million? Or is there like some kind of growth that we can expect going forward in second half?

No. Vebs, this is Alan. When we look at our backlog, yes, we did burn through it quite a bit with some orders that were going through our manufactured Subsea Products businesses and we do have an expectation that in the back half this year we'll see an uptick in orders with the FIDs that occurred in the first half of this year. There is a natural progression that people have to go out to bid and then go through the vetting process. So we're expecting the back half of the year should be better on the order intake side.

Okay. I think, that's the reason why we think Subsea Products would be higher or is it more because of the rentals?

No. As Rod indicated in his notes, the back half of the year, we're seeing that the -- will be influenced by the service and rental business. And where we have that confidence is that we have lot of that in backlog at this point in time. We had announced the Shell Appomattox job previously. So it's not that we're really looking for work to come in. We already have it in backlog in that service and rental sector.

Okay, okay. In the press release, there was a comment about the M&A. Sounds like you guys are focused on increasing the exposure to customers' OpEx budgets. Could you provide some more color around, like, how -- what's your thoughts are there?

Yes, I'd be happy to. A lot of that goes along with what you've already seen us doing, you know, that part of remaining strong especially like in our products -- our projects business, excuse me, is to make sure that to move the boats, to keep that activity going, we have to have some really robust integrated solutions that deliver value for our customers. So we talk about that OpEx, especially in the IMR space. It's more things like the Blue Ocean technology, being able to do the well interventions and being able to provide a more comprehensive service on the back of that boat for our customers. So that's where we're looking to make that a more rich and robust solution for them.

Okay. And I guess, last question, in the press release, there was a comment around beyond '27, investment in deepwater would increase. Was that more of a general comment? Or was that more to do with in 2018 you guys expect the earnings to improve year-over-year?

No. That's a macro comment. It was described, it's not an indicator of '18 activity.

Your next question comes from Waqar Syed from Goldman Sachs.

So I just wanted to ask you about vessel-based work and demand for ROVs. How do you see that trending going forward? And then, secondly, how does structurally, kind of, your business model changes with -- at least for the next couple of years, we're going to see smaller tie-on type projects that are going to get FID-ed more than the bigger projects?

Sure Waqar. Let me start with the vessel-based ROVs. There are some comments out there about what would be effective to Heerema and to Maersk contracts, for example. Those have started out strong. We think that they really started to show up in Q2, which is great. We've still got deployments yet to do for Maersk in particular. So most of our deployment on the newbuild Maersk vessels is still ahead of us. So we see continued upside there. The other nice thing about the Maersk and the Heerema vessels, they're tending to work - particularly in the Heerema side, they're tending to work or projected work on construction projects, which have less seasonality than, say, big part of our work here in the Gulf of Mexico on vessel-based work. So when those boats are running around the world, they don't have the same seasonality pressure. So that vessel-based percentage looks good into the future.

Now typically, your revenue per day is a little higher on the construction work, should we assume that as that mix shift happens towards vessel-based work, you could see some pickup in revenue per day? Or is that being offset by declines on the support side in revenue per day?

It's going to be offset by both in the declines and the drill support, as Rod indicated in his notes. We're still seeing pricing that's going to be challenged a little bit. And on the drill rigs support, and at the same time, we are looking to -- geographically, we expect to see some mix shift going forward in the back half of the year. Again, more going to lower cost regions from higher costs. So we're anticipating the average day rate per day on hire to go down in the back half, but still hold the margins that Rod indicated.

Yes. And then the question regarding the smaller projects, timed jobs, what should we expect for lead time for your project to prove -- projects or FIDs? And then how did that affect the umbilical market, in particular?

I mean, certainly, those projects have a shorter lead time. I think they can come to market faster. Part of that is just due to the capacity that's out there. So some of the underutilized capacity in the manufacturing side not just for us but for some of the OEMs. So I think they can come online more quickly post FID, so that's good. The other thing is that the size of installations are sort of manageable. We could do more of that from our larger to IMR vessels. So we can do more installation work in those. We can play a bigger part, approaching almost turnkey on a project like that. So that's positive for us. From a plan standpoint on umbilical solutions, again, you can put these [through] when you got capacity, you can get them in and out, so that's quicker turnaround. The only downside is they're smaller projects, so it takes a lot of them to make a meal. But overall, I would say, that that's a good thing for Oceaneering.

Your next question comes from the line of Stephen Gengaro from Loop Capital Markets.

A few things from me. The first, just quickly, I'm not sure how much color you're willing to add to this. But when we think about your expectations going forward and you talked about Subsea Projects, I believe, what you said was third quarter is a little better, but the second half is much worse. Is that just a timing of the Angola work coming off? And any desire to give us a sense for size? Or help us kind of quantify that at all?

I can't really give you the size. You're right on the timing. I mean, that's -- the Q3 to Q4 is largely on Angola change, but it's also the seasonality change as well and then continued pressure with an oversupply of vessels in that IMR space. So it's really hard to do any more than that until we understand more the magnitude of the seasonality effect.

Okay, okay. That's fair. And then as we think about, just overall, you guys have obviously done a very good job on the balance sheet generating free cash, keeping cost in line. Where do you stand sort of the cost cutting side? Are you largely to the point where you're done? Or is there more to do if we kind of persist at these levels for a while?

I think, barring any step change in activity levels, we're where we want to be. We're looking more now along the lines of rather than just pure cost cutting and, say, personnel and facilities. We're looking at refinement, better processes, being more efficient. We still have maybe a little bit of consolidation left to go. But it isn't going to be anything large from a reduction in force that kind of idea unless we see a major change in activity levels.

Your next question comes from the line of Blake Hutchinson from Howard Weil.

Just a couple of points of clarification. First of all, the evolution kind of pushing back towards the end of the year is in no way diminishes its participation in Appomattox contract, the initial contract?

We will have a little bit of timing. There were some things that we were hoping to do with that boat, right, when it came out, but most of that can be done with other vessels, we can even spot hire or the Ocean Alliance. So we're not really pinched, but we certainly would have like to been out there and showing off the boat. But it looks like we might not make the very beginning of the start date.

Okay. But once you have it, it will -- it should at least provide you a little bit of work to start its campaign?

Yes. Definitely. Absolutely.

Okay. Great. And then, again, I guess, this goes hand-in-hand. Your visibility improvement with regard to the service and rental portion of the product segment, that's a comment for the full second half, not just a 3Q comment?

Correct.

Your next question comes from the line of Brad Handler from Jefferies.

Could you please, I guess, I was just trying to -- I guess, I would just love a little bit more color on kind of the ROV pricing trends within the respective activities. You sort of anchored some of the commentary around where the costs are different. But on an apples-to-apples basis, can you perhaps give us some perspective on how much ROV rates have declined? Whether it's sequentially 1Q to 2Q? Or if it has to be year-over-year to capture because of the slow moving dynamics, I understand?

Let me start with, like you said. I think, to really feel for it, you got to try to take out the mix and the mix I'll separate. Let's say, the mix on the drill support. It's still a fairly significant geographical mix, it influences the way it looks when we show average day rates per quarter. But If you start to look at year-over-year, that's where you to see better. A lot of that apples-to-apples as you said, it has happened year-over-year. And I'm -- I've shared with some of the peoples we've talked over the past quarter. It does feel like we're leveling out, but I wouldn't say it's an inflection point. So you're approaching asymptotic, whatever you want to -- whatever term you want to use. It's flattened out when you start to look at, say, Q1 to Q2, Q2 to Q3. But again, now we're going into a change because where we're doing more short-term hire, shorter contracts, which is going to give us more market effect rather than just re-trading contracts we've had, we're going to have to go out and beat the market. And it is our intention, just like I responded to Jim earlier, that we're going to maintain our market share. So we won't try to hurt market, but we're going to continue to capture the work. So there is still a little pressure down on price on an apples-to-apples basis. We have to look at that compared to sort of that geographical mix which we talked about. And then it will be harder to separate out because we do have a higher percentage of vessel work. But again, if I said vessel work, vessel work prices face the same pressure, same downward pressure that the drill support does too. So while they are generally a higher day rate day-to-day comparison to the drill support market, if there is so many moving thesis that we're just trying to make sure that everybody understands, we will continue to have geographical mix changes, we will continue to have some shift. We see it largely going to more vessels rather than back and forth. But hopefully, there'll be a time when drill support starts to creep up again, and it starts to go the other way. But underlying pricing is still pressure.

Okay. Understand. So and, I guess, as we -- looking at couple of quarters ahead, if it winds up being and trying to parse out if it's apples-to-apples, but if it winds up being a little bit lower, if the curve goes from being somewhat asymptotic as you put it to taking another leg down in part because of the contract rollouts as well, but just given apples-to-apples pricing that won't surprise you, I guess, this is your point. And maybe there you found bottom if activity picks up in '18?

Yes. And I think what we're trying to say is as well is, if you see some of the notes we talked about utilization approximating 50%. So certainly, that's a little bit higher than where we're at today. So we see there could be an increase in days that will help offset some of the pricing pressures as well. And some of it's also the average revenue per day may look a little bit lower in the back half of the year, and it's really as Rod said, it's always the pricing, but also the geographic mix shift as we go from areas that have a higher average revenue per day to working in locations that may have lower pricing per day on a like-for-like type scenario. But the margins of an EBITDA perspective, we do still expect to be in the -- in that mid- to high 30% range, because there are lower cost environments at the same time.

Yes, that make sense. Okay, an unrelated follow-up from me, and I want to try to anticipate your reaction as I ask this. But I'm curious really about essentially where D&A is headed in 2018? Just as I try to think about it, so maybe that's reaching out to next year but maybe in a way that's approachable, you've got the evolution starting...

We're not providing any guidance on 2018 at this point in time.

But it's -- not just even from a D&A perspective, maybe just conceptual. I'm just trying to follow. So you got the Evolution starting up, but you've got a lot of underspend that will -- relative to your current depreciation. I mean, should D&A stay flat? Should it actually tick up? Just something or some thought process around that? I just don't -- I don't have a good feel for kind of how your scheduled depreciation for vehicles, anticipated retirements, all of those dynamics, and I'm sure you do. Can you comment on it even directionally at all?

No, it is still too early at this point in time.

(Operator Instructions) Your next question comes from the line of [Wills Manley] with RBC Capital Markets.

This is [Wills Manley] in for Kurt today. You already answered my first question just on the margin impact from the geographic ROV switch. If you could also though walk me through kind of which regions you're thinking are those that are lower costs that you're going to be transitioning to?

I think, it's -- if I just gave you sort of the easy way for you to look at it, think about those places that have big -- kind of big presence in a lot of activity North Sea, Gulf of Mexico. Think about those and also where -- unfortunately, there's a lot of competitors. So that's why you think about those places, their rates tend to be a little bit lower and costs going to be lower too because we've got a little more -- a little more weight, a little more critical mass. And then the other ones you can think about the far flung places on the globe. So that'd be the easiest way to answer it.

Got it. And then -- so when activity does pick back up again, do you expect that trend to reverse?

I think it depends where the activity picks up. I mean, it's going to be depending on where the vessels are working and where the rigs are working.

But generally speaking, the balance, the geographical cost and competitiveness, I don't think we'll change very much. I mean, those places will still -- they'll still have the most competitors, they -- we'll still probably have the largest presence there. So I don't think from a cash cost or just general cost standpoint or a competitiveness standpoint they tend to stay the same. Not a big shift. Unless there's a huge change in activity level that increases the interest or the shortage of supply, it will be relatively the same.

We have no further questions at this time, sir.

All right. Thank you. Well, since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. And this concludes our second quarter 2017 conference call. Have a great day.

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