Oceaneering International Inc (OII) 2017 Q3 法說會逐字稿

Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Oceaneering Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Suzanne Spera, Director of Investor Relations, you may begin your conference.

Thank you, Denise. Good morning, and welcome to the Oceaneering Third 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 remarks; 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'll now turn the call over to Rod.

Good morning, and thanks for joining the call today. But before I begin my prepared remarks, I'd like to address the 2 elephants in the room. First, I would like to reiterate our #1 priority for cash use remains growing the company. That's through organic investments and bolt-on acquisitions. As many of you probably noticed, our press release yesterday did not mention the board declaring a dividend for the current quarter because they did not.

With an outlook for diminishing cash flow from operations in the fourth quarter and for the full year of 2018, we feel it's prudent at this time to focus our resources on growth and positioning the company for the future. While we will continue to review our dividend position on a quarterly basis, we don't anticipate our Board reinstating a quarterly cash dividend until we see a significant improvement in the market outlook and projected free cash flow.

Second point. Regarding our 2018 projected cash flow. In the press release statement that indicated we expected to generate sufficient cash flows to service our debt and fund our anticipated maintenance and organic growth capital expenditures. We did not mean to imply that 2018 EBITDA or cash flow will equal the total of debt service and CapEx. We were simply reiterating that we will continue to generate positive cash flow and invest in our future. And perhaps we should have written more than sufficient cash flows.

Now back to my originally prepared remarks. As we reported in our press release, we incurred a loss of $0.02 per share in the third quarter. However, these results included 3 items that have not been considered in our outlook, specifically, $1.5 million for prior year non-income-related taxes, $1.3 million for foreign exchange losses and $2.4 million for discrete income tax expense items. Therefore, adjusted operating results during the quarter reflected EPS of $0.02 and $65 million in EBITDA, and we're relatively in line with our expectations.

Sequentially, adjusted operating income improved 28%, mainly due to increased profit contributions from Subsea Projects and Subsea Products and reduced unallocated expenses, offset primarily by lower profits being realized by RVs.

Our tax provision as adjusted was higher than the statutory percentage of pretax income due to the geographic mix of tax jurisdictions in which we generated our earnings and losses. We believe these results are commendable in the light of an offshore oilfield services and products market landscape that remains extremely challenging due to continued pricing degradation and the sluggish rate of Subsea Project approval and progression. We are pleased that for another quarter, each of our operating segments remained profitable.

On a consolidated basis, for the first 9 months of 2017, we have generated $179 million of adjusted EBITDA and $84 million of free cash flow. Furthermore, we believe our cash flow and liquidity position us well to manage our business and provide optionality to expand the range of services and products we offer through the continuing industry downturn.

At the end of the third quarter, we had $472 million in cash and an undrawn $500 million revolving credit facility, which does not expire until October 2021. Over $350 million of the cash on our balance sheet as of September 30, 2017, was in the United States.

I'd now like to review our business operations by segment for the third quarter compared to the second quarter. ROV operating income declined more than expected due to lower average revenue per day on hire and an increase in average daily operating costs. Average ROV revenue per day on hire trended 3% lower due to legacy contracts ending and a shift in geographic mix. Our cost increased due to incurring additional costs associated with demobilizing ROVs, maintaining personnel due to delays in vessel start-ups and higher repair and maintenance expense. Consequently, ROV adjusted EBITDA margin declined to 33% from 38% for the second quarter.

Days on hire increased 4% to approximately 12,700 days as our fleet utilization improved to 50% from 48%. We continue to bid work at currently prevalent market rates in an attempt to maintain or grow market share and utilization. Our fleet use mix during the quarter was unchanged from the immediately preceding quarter at 61% in drill support and 39% vessel-based activity.

At the end of September, we had ROVs on 83 or 55% of the 151 floating rigs under contract. This compares to having ROVs on 53% of the rigs contracted at the end of June and the end of March of 2017. At the end of September 2017, our fleet size remained at 279 vehicles.

Now turning my comments to Subsea Products. Our third quarter operating income improved as expected on an 18% decline in quarterly revenues. Operating margin improvement due to a higher percentage of segment revenue being generated by our service and rental business units and excellent execution by our umbilical business unit.

Our Subsea Products backlog at September 30, 2017, was $284 million compared to our June 30, 2017, backlog of $328 million. The backlog decline was largely attributable to lower umbilical order intake and production associated with Shell Appomattox. Our book-to-bill ratio year-to-date was 0.69, and the past 12 months has been 0.72. No change from the prior quarter.

For Subsea Projects, revenue and operating income increased, principally driven by seasonal improvements in the U.S. Gulf of Mexico deepwater vessel work. Asset Integrity operating income was down slightly as projected.

For our non-oilfield segment, Advanced Technologies, revenue and operating income declined as expected, primarily due to lower levels of work for the U.S. Navy. Unallocated expenses were lower during the third quarter compared to the prior quarter due to lower corporate expenses.

Organic capital expenditures for the quarter totaled approximately $19 million, most of which was invested in our ROV and Subsea Products segments. Additionally, we made an $11 million equity investment to expand our presence in the Caspian region. We also paid $15 million in cash dividends.

Now let me address our outlook for the fourth quarter of 2017 by segment. We believe our fourth quarter results will be considerably lower than our adjusted third quarter results due to seasonality and the reduced level of activity. Most of the decline is expected to be in our ROV and Subsea Projects segments with modestly lower operating income from our other oilfield segments as we foresee very few near-term catalyst to support an improvement in our oilfield markets. For our non-oilfield segment, Advanced Technologies, we are projecting a modest quarterly improvement and slightly higher unallocated expenses.

Sequentially, for our ROV segment, we are expecting reduced operating income due to the fewer working days, largely on decreased demand to provide vessel-based services and lower average revenue per day. Lower demand is partially attributable to seasonality. We also expect the decline in our average daily operating costs compared to the prior quarter.

Our ROV segment results are largely determined by 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. Consequently, we are adjusting our guidance for our ROV fleet utilization for the full year of 2017 to the high 40% range and ROV EBITDA to the mid-30% range. We expect to maintain or slightly increase our ROV market share for drill support.

At the end of September, there were approximately 20 floating drilling rigs that have contract terms expiring during the fourth quarter, and we have 14 ROVs on 12 of them or a 60%. Of the 20 floaters, 4 are rolling to new contracts. There are 18 additional floating rigs set to begin new contracts during the same period. Of the total 22 floaters receiving new contracts, we have 20 ROVs on 18 of them or 82%. While this is encouraging, we anticipate fewer drill support days in the fourth quarter as many of these rigs are expected to incur some idle time between contracts or wells drilled.

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 Subsea Products, our outlook is for margins to weaken further into the mid-single-digit range due to legacy umbilical contracts with better pricing having been completed and recent contracts at more competitive pricing being executed.

For Subsea Projects, we expect lower operating income due to the seasonal decrease in deepwater vessel work in the U.S. Gulf of Mexico, a continued low vessel price environment, current global oversupply of vessels and a lower profit contribution from our Angola operations due to the release of the Ocean Intervention III by BP during the third quarter of this year.

Our 2-year term contract for the Island Pride Offshore India is scheduled to end in early November. Our customer has several option periods available to them, however, they have not exercised their right to use them. The future IMR vessel requirements for this work in this field is out to tender, and we are bidding for the work.

For Asset Integrity, we expect our results in the fourth quarter of 2017 to be lower due to seasonal decreases.

For our non-oilfield segment, Advanced Technologies, we expect a slight improvement due to increased activity on theme park projects. While our fourth quarter outlook has been revised downward, we continue to believe that we will be marginally profitable at the operating income line on a consolidated basis for the full year of 2017.

Turning to our CapEx expectations. We are narrowing our estimated organic capital expenditure total for this year to a range of $90 million to $110 million and lowering our expected amount of maintenance CapEx to approximately $40 million to $50 million. Regarding our Jones Act vessel, the Ocean Evolution, we expect it to be delivered at the end of December 2017 and placed into service first quarter 2018.

From a macro perspective, offshore activity is showing some signs of life. Project FIDs and subsea awards have began to trend positively. Offshore operators working with the service and product providers have made considerable progress towards lowering development costs and improving field economics amidst stable oil prices. End of the contracted floating rig count has been somewhat resilient with no change from December 31, 2016, and down only about 7% year-on-year.

For project FIDs, year-to-date, 21 offshore projects have already been sanctioned compared to 16 for all of 2016, and there are hints that more projects are to come in the fourth quarter of 2017. Almost half of the sanctioned projects are smaller tiebacks, leveraging existing infrastructure with only a few requiring significant CapEx investment.

Operators are looking to invest in smaller less CapEx-intensive developments to capture first oil earlier and minimize risk with short cycle projects. We are encouraged by these FIDs, and this change in operator focus as it bodes well for our integrated service and product offerings. Typically, the lag time between FID and umbilical order placement for us is about 6 months to a year, usually influenced by the size of the project.

Regarding subsea trees, which is a leading indicator for project development, current research estimates indicate that the number of tree orders is expected to rebound from about 90 trees in 2016 to 156 in 2017, which represents a year-over-year increase of 73%. A further increase in subsea tree demand is projected for 2018. Subsea tree installations continue with a challenging outlook, down about 2% in 2017 from 294 tree installations in 2016 and projected to decline another 16% in 2018 compared to 2017 estimates.

In summary, we are encouraged that projects have been reworked and cost reduced, driving breakeven points down, thereby enabling project sanctions to begin moving forward. However, we expect the recovery is likely to be slow and laborious.

Looking forward to 2018. Based on the current and expected number of floating rigs working and expectations for further reductions in oil and gas industry capital and operating expenditures as offshore activities get pushed into 2019, we believe our 2018 earnings will be significantly lower than 2017. However, during 2018, we expect that each of our operating segments will contribute positive EBITDA.

On a consolidated basis, we should generate more than sufficient cash flows to service our debt and fund our anticipated maintenance and organic growth capital expenditures.

For 2018, we expect our organic maintenance and growth CapEx to range from $80 million to $120 million. While we are anticipating an increase in offshore activity levels during the second half of 2018, we do not expect this shift in momentum to be adequate to offset the near-term market weakness or to present the opportunity to meaningfully improve pricing. However, we do anticipate being busier in 2018 than we have been in 2017. However, due to lower pricing, we are expecting a decline in our profitability.

In closing, although the offshore oilfield services market have been challenging for the last 2 years and 2018 is going to be even more difficult, we remain confident in our ability to manage our business through this cycle. While Oceaneering's core business of offering offshore services and products is driven by the offshore macro oil dynamics, I'd be remiss not to mention our Advanced Technology segment that serves our non-oilfield customers.

During the current low level of offshore activity, we are pleased to have a noncyclical business unit in our portfolio as we can leverage existing resources to provide services and products to an entirely different customer base. This approach has served us well as the Advanced Technologies segment contribution to our overall earnings has become substantial.

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

Longer term, given the lower levels of investment over the past 2 years coupled with ongoing reservoir depletion, we believe that the oil and gas industry will again need to meaningfully invest in deepwater projects to meet projected demand.

And we appreciate everybody's continued interest in Oceaneering, and we'll now be happy to take any questions you may have.

(Operator Instructions) Your first question comes from Ian MacPherson with Simmons.

Rod, I'm sorry to kick off with a question that I know you simply don't want to answer and don't intend to. But I mean, you've opened this Pandora's box with '18 outlook and the stock prices only gotten worse since the call started. So I want to give you an EBITDA range for '18 and ask you to bless it or not. And I would say right now, the bogey seems to be between $150 million and $200 million for '18 EBITDA. Any comment on that?

I mean, you got it right. I think we've given as much guidance as we can give for right now for 2018. So it kind of stands with what we said about the funding levels.

All right. Well, I tried on that. So let me have another one. So for ROVs this quarter, revenue per day comes down, but the cost per day comes down as well. So when we look at the 33% EBITDA for Q3, are we expecting it to stabilize in that area on a leading edge basis? And is that a plausible range to think about for the next couple of quarters after Q4?

I think when we look at it, we've looked at it in the totality of the year. And we guided towards the mid-30% range, Ian, and I think that would suggest we would still be in the lower 30% range in Q4.

Your next question comes from Waqar Syed with Goldman Sachs.

With respect to your macro guidance of CapEx being lower in offshore and OpEx being lower as well, what's the sources? Is it a third party? Is it to your own kind of analysis and discussions with the E&Ps? And so what's your confidence level in that macro assumption?

It largely comes from what our customers are publishing. It's not a private conversational cards so we're following those headlines.

Okay. And on the ROV side, you've already -- if we compare the day rates to -- in the back in 2014, we're down about 25% or so roughly. And in general, that's kind of a deflation you see in subsea. Do you think that there used to have a lot more room to go down further?

Waqar, I think one of the -- and it's not really that much different than what we've seen over the past few quarters. It is largely depending on where the work drops off and where the work moves forward. So if we see more of the activity shift to sort of the lower dollar environments, there is chance for -- more pressure there. But if we get back to activity and some of those higher priced environments, it could be more stable or even some little blips up in regard to that. So I would say it really depends on where those activities happen.

But in your guidance, what are you assuming? It shifts to the low-priced regions into high-priced regions. Are you implying more like Norway and Gulf of Mexico or...

Yes. And that's what you're seeing. We mentioned in the call notes, the other thing that happens here that's not readily apparent, but it shows up a little bit utilization is when we were working on a 5-year contract where we were just on the rig, collecting day rate and the rig was moving from well to well to well, then we had good utilization because there weren't these breaks between either contracts or wells. And now we're starting to see -- we're working harder to bid more jobs and there is some gap between even what a single rig is doing. So we're fighting sort of the inefficiency that's in the drilling system right now that's affecting us as well. But hey, one of the things that's working for us, Waqar, and I hope you noticed that and everybody noticed it is because of that, that sort of disruption long-term contracts, we're winning more than our fair share of the new contracts that are being let.

Your next question comes from Stephen Gengaro with Loop Capital.

As we sort of think about the progression of the business segments next year, would you be willing to give us a sense for the areas that you think are going to drop the most year-over-year versus the least next year?

I would say our manufactured product is probably to be the one where we'd see a steeper decline. And that's going to be really, as you've seen the backlog trend down in our umbilical business.

Okay. And then you said something on the call, I may have missed this, about being busier with lower margins? Did I hear that right? Are you suggesting revenues is less harm next year than the margin profile?

That's correct. Yes, we actually see that. It's just going to be harder one, the work that we're doing.

Your next question comes from Chase Mulvehill with Wolfe Research.

So I'm not going to try to push on '18 EBITDA, but I don't know maybe if you could talk to your outlook for margins in 2018 for kind of the ROV and the products business. Maybe some color there on the margin side.

I don't think we're prepared to have that level of discussion yet. We're still in the planning phases.

Okay. Understood. I guess if we look at 3Q and we kind of backed out DNA and backed out SG&A and called that kind of cash cost for the ROV business and look at cash cost per on hire day, and it looks like it was up about $300 per -- on hire day. Was there anything that kind of drove that? We know one-off was there kind of higher maintenance expense in 3Q that might come back down in 4Q or anything like that?

Yes, and if you -- in Rod's comments he talked about, we had some demobilization cost as well as higher R&M costs within the quarter. So we do not anticipate and we do see a little bit of a mix shift coming into the fourth quarter probably as well as we'd probably expect the vessel utilization to get down as it typically does during the fourth quarter. So we do see cash cost coming down per day in Q4.

Okay. All right. Last one, and I'll kind of jump back in. In the press release, you talked about looking at opportunities to grow the company and noted that you favor more exposure to customers operating spending as opposed to kind of, I guess, CapEx. So could you kind of elaborate on that? And if you want to be -- when looking at acquisitions, is it asset-light acquisitions, asset heavy?

Right now, it's asset light. I mean, I'll give you some examples. We continue to invest in well intervention and we kind of following up on our Blue Ocean acquisition. We believe that's one of those places we can do well. We're pushing hard on our Asset Integrity business as well. That's an ongoing OpEx-type business. But the Caspian business that we talked about, that is more exposure to the offshore IMR market, so we like that. That offers us more OpEx exposure and some geographic push as well. So those are the kinds of things that we're looking at. And we also continue to look at some of our -- some of the non-oilfield things that -- where we can leverage some of our expertise with automation outside the oilfield business, so it's a mixture of those kinds of things.

Okay. Actually, I have a couple more. When you said you expect to be busier in 2018, do we take that to mean that revenues could be flat?

Directionally, that's what we're talking. Yes, it really does look like there is going to be activity out there. We talked about some of the softness in price and there is -- it continues to be very competitive, especially when things are still being -- the bids are being let at shorter term, shorter pieces. So you're out there fighting the battle more often than we were in the past.

Yes. And I think we see a more of a pick up in the second half of the year as well.

The next question comes from Sean Meakim with JPMorgan.

So just thinking about the ROV business, what areas (inaudible) in the third quarter, what portion of that incremental utilization was due to Gulf of Mexico seasonality? Just thinking about some -- to kind of parse out what was kind of the quarter-over-quarter change due to some uplift in the Gulf?

I don't have it broken down at that level right now, Chase -- or Sean. Sorry. You can think about -- I mean, one of the things we've mentioned, and it does give us some sensitivities, the seasonality of IMR market, which is a Gulf of Mexico, we do have some of that. And so that is in any time the vessels come off, we've spoken to you about vessel day rates can be a little bit strong, while they're working. So there's some of that softness, but there's also a mix in there. So it's hard to nail it down, as Alan said.

Okay. That's better. Let me just -- let me touch on the ROVs. The vessel-based supply agreements with Heerema and Maersk, are those still implemented at this point? Just any indication of how accretive those agreements are actually in the overall business.

We do have the assets on board. All of the Heerema assets. We do still have a few to place on the Maersk vessels. And as you probably saw last quarter, I think Maersk announced that they were delaying a few of those into 2018. So we still have a few assets to place on board their vessels when they come out.

And as far as how accretive they are, it's going to be following sort of that project business and how might -- how active those vessels are going to be doing installations and other subsequent work.

Okay. Got it. Fair enough. Let me just -- one last just on the product side, thinking about umbilicals, how should we think about the fourth quarter budget exhaustion for some customers? Year-end product sales? How that -- how are you thinking about the seasonal impact in the fourth quarter for that part of the products business?

There's really not much seasonal impact, I would say. I mean, it's in backlog for revenue-producing it in the fourth quarter for umbilicals. The service in rental part is the one that is more of the when the phone call comes, we're able to react rapidly and give a little bit more revenue if that happens. But umbilicals, we typically -- we have in backlog at September 30, we're prosecuting that work during the fourth quarter. We don't have a lot of book-and-ship kind of business in the umbilicals.

Your next question comes from Jim Wicklund with Crédit Suisse.

Can you give us some guidance on '18 on depreciation on the new Jones Act vessel? And can you talk a little bit about what you expect it to be working on?

I don't think we're going into the depreciation aspect, Jim, but we do have a line of sight for work for the vessel when it comes out. We talked last call about -- we had a contract to do some work for our Shell Appomattox filled when the vessel goes into work in the first quarter. So we're certainly excited about having a first-rate customer to put it to work on a top-notch field feel like Appomattox. Give you a little something to think about though, Jim. I mean, we are down, too. We don't have a lot of our own vessels were operating. So if we can keep our own vessels working on the work that we get in this case, think about the depreciation versus being out there hiring a boat, it's still a good thing for us to be operating our own boat if we keep it busy.

Can you tell us over how many years a vessel like that would be depreciated theoretically?

Yes. Probably just 20 to 25 years.

Okay. Because we know how much it costs, we're doing the best we can on our model. The next question is the one that liked the first question, Ian's question, you probably can't answer, but you can maybe give us some guidance. The board set the dividend. You guys have talked about the dividend a lot in the last couple of years. Can you tell us what we should maybe think about in terms of dividends going forward? What the board is thinking or what the ideas, what the recommendation is for the board for management?

We recommend, Jim. I mean, it is largely based on continuing to generate free cash flow to pay the dividend in a way that it doesn't interfere with that ability. And I say use resources whether that's cash on hand or cash that we're generating. We want to have sufficient resources to take advantage of opportunities for growth, and there's other things that we put as #1. And so you get a situation like this where you got diminished cash flow because of the pricing and really pricing more than activity, if you look at the entirety of the year. You want to be able to have that opportunity. And we think that, especially in the near term, there's going to be opportunities. So when we start to see that shift, when we see maybe there's fewer opportunities, cash flow comes back and we start allocating more money to our #2, which is the dividend.

Okay. And -- go ahead. Sorry.

Jim, and kind of looking at your depreciation question as a little bit higher level for total Oceaneering, I think looking at '17 to '18, I think we model it very similar.

Well, perfect. That's very helpful. I appreciate that. And the last one if I could. Acquisitions are out there, you're looking for them. They've all gotten cheaper, your stocks gotten cheaper. If you had to choose today between buying back stock or making an acquisition, do you have a preference?

I could give you an easy answer. It depends on the acquisition. But we like things that make us grow. I mean, it's the biggest thing.

Your next question comes from Vebs Vaishnav with Cowen and Company.

As you think about the offshore macro from fourth quarter and progression into 2018, would you agree or what would you say if it has already bottomed or its still going down? Or how do you think about 2018 from fourth quarter levels for offshore?

I mean, there's seasonal, there's some shift with -- for us, where the activity is. But I think we see -- we've seen sort of that resolution of the business and as well as we can determine it as being flat from Q4 into the first part of the next year.

Okay. So if I think about your fourth quarter guidance and then think about the flat bit to be flattish going forward outside the seasonality factor, what would be I'm missing?

I'm not sure I understand the question, Vebs. Could you give me another try?

So basically, it's thinking about whatever I think about the fourth quarter EBITDA if I just think that should be I should think about that being analyzed to get to 2018. What are the bigger pieces of the pie that I'm missing, while doing that?

I think we have to think about that question a little bit more, Vebs. I don't have...

I think I understand.

The nature -- I mean, if there's a significant piece that shifts -- are you talking towards the end of the year like we'd said that knows as we start...

What I'm thinking is, does it get better or worse from here on? So let's say if I think about -- or just for assumption's sake, let's say if I think about ROV EBITDA is $30 million for fourth quarter. Should I think about that being annualized $120 million for 2018? If I do that, am I missing something? What would be the process to the upside or downside while thinking that?

This is more of an -- I think the thing you're missing if you annualize any particular quarter for Oceaneering is the seasonality that happens in the second and third quarter. So I wouldn't ever try to take 1 quarter from Oceaneering and annualize it because you could be substantially off. We know we've said on the call in the press release that we inspect fourth quarter to be lower, and then the first quarter is usually the weakest point of activity level in the year and then the second and third quarters are better. So I would not annualized any of our quarters if I was trying to test something for sanity.

Got it. So outside seasonality, that is the biggest thing I need to think about. That's fair. You mentioned about Island Pride and Ocean Evolution. Can you elaborate on what is going on with Island Pride and Ocean Evolution? And what kind of work prospects we could think about for 2018?

As we understand it, our customers are looking for a not full-time or lower cost alternative, less both capability in India. And so they're rebidding for basically a different kind of scope of work. So that's the change there and we're trying to adjust so that we can continue to participate. We think we've got a good relationship there, so hopefully we'll be successful. With the Evolution, the Evolution is installation for Appomattox. So that is work that is we're already starting some of that work with the vessels we have today. So that work is there and ongoing. So we know that it's not like something we're looking to materialize. And so when the boats are available and we've got all the testing done, we're looking forward to putting it to work.

Okay. And last question on M&A, it has been touched a couple of times. Just wanted to think about like what the sweet spot for you guys when you think about the deal. Like I think the last one was about $200 million. Is that the sweet spot? Or how do you guys think about the size of M&A?

I mean, going that high, it's got to be something that's pretty material. It's something different. We really like getting maybe slightly lower to that and having something that's a nice bolt-on acquisition that fits well with the other things we do that gives us the ability to offer more comprehensive package, say, on the back of a boat or on a drilling rig. So those are the things that we can really provide a value-added service for our customer. That's probably, I mean, some of the things that we look at or more in than that, say, $50 million to $75 million range.

Your next question comes from Brad Handler with Jefferies.

Could you speak please -- I'm not sure how you have done this in the past, actually, but could you -- once the Evolution comes into play in the Gulf, how many vessels do you expect to be marketing in the Gulf?

As many as we can. And the reason I say that is because a big part of what we do in the Gulf is project management. We supply the ROVs, we supply some of the ancillary services, but we're not boat constrained. Meaning, we are happy to go, we've got great relationships with a lot of the vessel providers in the Gulf of Mexico, so we'll spot higher when necessary. If we get to a level of activity, sometimes we have a little more robust agreement to take more days from them. But we are always looking for the next job, and it's not dependent on whether or not we have a boat at the dock.

So we don't need to -- we should not think anymore in terms of how the alliance is on charter until next date or another vessel? It just doesn't need to work that way and it sounds like it doesn't move that way anymore?

We're working great with some of the other guys. We've got some of the other vessel providers boats active all the time. We're continually rotating through finding the best boat for the job and being able to pick them up. So we got I would consider the best of both worlds. I think we've got some capacity of our own, it keeps our cost down on the big side. And then we've got access to a lot of other stuff at a spot price. So I think that's working pretty well even in a challenging environment. And Brad, just to we confirm the alliance, we do have under charter through March of 2018.

Okay. And is there anything else under Charter still?

Well, until we finish with reliance, we do have the vessel there under Charter, so. And that's a back-to-back. So soon as we end that, the charter agreement ends as well.

Okay. I think I understand. Okay. Can you comment on, I guess, sort of within the guidance framework for '18. Can you comment on allocated expenses for 2018?

At this point in time, we would see them by sort of mid-$20 million range per quarter, very similar to this year.

They're unchanged. Okay. Got it.

They're unchanged.

Okay. And then I guess in terms of the AdTech business. Maybe sort of the same question. I mean, I guess, I'm just chipping away at some other things. Do you have any insight yet from the Navy? What -- when does that get set and how reliably in advance that does get set?

I don't think we're really prepared to go segment by segment on our 2018 outlook at this point in time.

(Operator Instructions) Your next question comes from Brian Clarke with Royal Bank of Canada.

Actually, it's Kurt Hallead here. Okay. So I completely respect your dynamic on leaving guidance very generic. And obviously, the investor base is kind of speaking with their wallets right now. I think what I gather is the biggest concern or one of the biggest concerns relates to the dividend as was referenced a little bit earlier. You guys indicated that it's a #2 priority. You have an opportunity here and a forum here to kind of asway your concerns. What would be your best words here to help investors from continuing to jump off -- jump out the windows here?

I hope I can say it maybe in a different or a stronger way. But a lot of this is really is to focus our resources on the future and to have those funds available. We really believe that at a time like now, being able to follow the market. I mean, there's a market dynamic here. There's an opportunity to invest in new technologies and pick up companies that may be available that wouldn't be in another time and to have that extra capital available to work on growth opportunities, it is very important to us right now. So we want to have that flexibility and leverage in the way I believe that, that's hopefully what people can redirect their attention to is that it is definitely meant to be forward focused. It's not a duck and cover, it's not a hunker down. It's to keep that ability to push ahead.

Okay. And then into that context, right, there are ways to make that happen and if it doesn't bite, I wouldn't necessarily mean you would have to completely eliminate the dividend to look for opportunities to invest. You've already reduced the dividend coming into 2017. So is that -- would there be a flaw in maybe my logic? And if I were sitting in your chair and say, "Okay. Dividend is a #2 priority. Growth is the #1 priority. But you know what? It's not completely all or nothing."

No, I mean, I wouldn't argue with that. That is definitely what I would call optionality is. You can go one way or the other. We could split it again in the middle. We just kind of felt like it was one of those things. And again, it's one of those things that you decide is it this quarter, is it next quarter? But it is just that how much do you want to have at hand to be able to move forward so...

The current decision was fully discussed with all those alternatives at our board level with management, and we decided to not declare dividend -- they decided do not declare a dividend at this time and I think Rod addressed that we don't foresee doing that until cash flows significantly improve.

Okay. And then, if I just may, just get a general sense here, right? I mean, I have a book, it's a semantics book of every company's terminology and I do kind of say that tongue in cheek. But general sense of what significantly -- what is a definition of significantly in the Oceaneering dictionary? If you can put a -- if you would bracket it on a percentage basis, what would significantly mean in terms of percentage?

Sure. I will tell you that in Oceaneering's definition, significant is the larger than substantial. But I mean, I think what we've said is it's not '18. It's not the end of 2018. And I mean, we're going to wait to look to see what the productivity rate in 2018 second half brings us for '19. I mean, we didn't stop the dividend. We didn't start the dividend with the intention of ever stopping it, and we're not stopping it with the intention of never starting it.

I appreciate the color on dividend. Clearly, what my frame of reference was in terms of your earnings being down significantly and just trying to kind of figure out what the dictionary, Oceaneering dictionary is for significantly. But again I'll --

I'm going to reiterate something we said because I think it's what everybody is asking for, but I think you've already got the information, is when people went to purely the historical maintenance CapEx plus the debt service and set a floor, we try to guide and say, we shouldn't have said only enough, we should have said more than enough. And so we're trying to, without pushing our crystal ball harder than I think, is a good idea, trying to say that is too low. And so we don't expect it to be that dire. So hopefully I'm helping you tune substantially at least a little better significant.

No. And I do appreciate that color and the ways you're trying also to help you make sure you get your message that you want to get out as well. So I appreciate it.

We appreciate all the help.

Your next question comes from Ian MacPherson with Simmons.

You mentioned the friction with utilization and ROVs, just getting interrupted by the spottiness of shorter-term rig contracts. But you also, I thought, the best silver lining data point you've given was your hit rate on recent awards for new contracts around 80% share on the recent contracts. I think you've been at probably 7 or 8 what I'll call long-term rig contract awards in the second half of this year around the world. Has your well-above market share hit rate also pertain to those longer-term deepwater rig contracts that have been awarded? Or can you comment on your share on those?

I'd have to go one-by-one, but I can say with some level of confidence at 80%, we're doing good. We're fighting our way through. So yes, it wouldn't be upside down on that.

Got it. and then lastly, your CapEx guidance for next year, it's about twice what your expected maintenance CapEx is for this year. So I'm assuming, just to clarify, you are embedding some anticipated growth CapEx that's comparable in scale to maintenance CapEx for next year?

Yes, you got it. And that's -- this is more of the color that I hope comes out is that we have got such a great position in so many of the markets we're in, so many of the businesses we're in that it's -- we don't want to give up our brand. We don't want to give up that expectation that when you're in Oceaneering, you get the latest and the greatest and the best. And so you've broken it apart I think very accurately that while we're continuing to maintain the operating fleet, we are continuing to improve what's coming next.

Your next question comes from Joe Gibney with Capital One.

Just one question for me on working capital. Just circling back to the high-level cash flow you provided here. I understand it's open ended and certainly, we'll work our way through that, but are you able to provide any color on working capital within that cash flow? DO you -- I mean, should we be anticipating any material changes in working capital on that? And is this also can be sort of material on how we're trying to put the assumption pieces together here. So any thoughts on that relative to this cash flow view in '18 would be helpful.

Well, for '18, I think we've indicated I think our activity level's going to be up a little, but revenues price somewhere in the flattish range. Receivables are probably one of the larger components of that. And I would say that I don't see a material change in that at this point in time. And inventory-wise, we might get a little bit of a uptick there. We're able to pull out of our inventory and utilize that during the year. So I'm not expecting a big change either way in our working capital at this point in time.

Okay. All right. That's helpful. And just -- could you clarify again on the vessel charter roll-offs pauses if I missed it. So has the Pride charter been re-upped? In that way, it's due in November, correct? Is this bidding process that you're undergoing with your customer...

No, the Pride is what we would call a back to back meaning that we have an agreement that the charter will end when our contract with the customer ends. And so we can stay on board as we intended. We'll stay on board, we'll work with the vessel owner so that we can try to find other work for that vessel as is available. I don't think it's going to apply, given what the customers asked for to what they're asking for in India. So we may have to look for a more suitable vessel for that type of work. But we won't give up on finding work for that. The good part is we won't pay for it if it's not working.

Your next question comes from Cole Sullivan with Wells Fargo.

Just have a quick one, most of them have been covered. On the services rental side and the products business, it was up in 3Q. Would seem to decline somewhat in 4Q on seasonality. How do you guys see that directionally in '18 versus '17? And I would guess that the trend would be more back half loaded like the general comments would imply.

I think the best guidance we can give kind of along the Subsea Products segment is we see that the umbilical side of the business is probably going to be down in 2018 with the lack of backlog entering the year. And that's the number of awards that we've received this year. Book-to-bill, this has not been that good. So we envision that will be probably the more challenged of the business units within the Subsea Products segment.

And the contracts being let that are coming out, and we do expect to book more of those. But when they do, they will come at a thinner margin. And then I would just -- and then you know the other part of products is the service and rental business. And that business is seasonal, so I think you're kind of you're directionally correct that, that's going to have the greatest impact in Q2 and Q3. And that's where we would do some of the light well intervention work. And we do see a lot of interest in that. We'll have to see how that materializes next year.

All right. On ROV rates, I think this is generally the case, but it seems like we've gotten to the point where you're not seeing a lot more, I guess, pricing pressure, so to speak. It's more of what we're seeing is more of a mix between vessel-based mix and geographic mix. Is that pretty fair? And how are the recent contracts for you guys have gotten some strong placement on the rigs, going back to service. How are those kind of compared, at least over the last couple of quarters, on the pricing side?

It is -- you hit the nail on the head and the best where I can demonstrate it, we saw a blip up in Q3. And we tried to keep -- we didn't take all the credit for that because we try to let people know it is mixed. So that uptick in 3 will work to our favor. We see the down kick in 4 that works against us. I think a lot of that is going to be that geographic mix. Another factor that's coming into play, we're starting to see it more is operating more integrated solutions. We're operating -- we're offering more than the ROV. Those are places where we can provide a value that then is, again, it provides a better return to Oceaneering overall as well.

Your next question comes from David Smith with Heikkinen Energy.

I understand you don't want to give '18 segment guidance, so this is just a theoretical question. Is it reasonable to think that the products could maintain mid- to high-single-digit margins going forward into '18 based on the mix of service and rentals increasing?

Anybody wants to answer? I think you hit the nail on the head. A lot of it is going to be based on the mix. So the service and rental, like I said, by quarter by quarter as we see more of that activity come up. That's going to have a significant positive influence on the rates as well, and Alan's looking for his crystal ball page, I think here.

I think it's going to be lower.

And just I was wondering if there's any ability or contemplation of taking out maybe some fixed cost from the manufacturing side of that business?

Well, definitely. One thing we talked about at the beginning of this year when we came into 2017 was rightsizing the business, and that means it was all areas of opportunities where we needed to grow the business would have resource. And at the same time, if we need to look at areas where our businesses are tailing off, we would also take recording actions. And so we will be having rightsize some business there, especially, I would say certain of our umbilical factories, we've talked about in the past, have not had the utilization that we needed. I think we will manage through that.

I appreciate that. And then one more, if I may. Just wondering if you could give us any update on the Blue Ocean acquisition and how that's going so far and whether '18 CapEx includes potential investment, additional investment in that equipment?

Yes. Absolutely. So it's going well. I mean, fully integrated. We've had some experience with the equipment now. We've got great customer feedback on the work we've done, so we feel very positive about it. And positive enough, I would say, that we are continuing to invest. So we want to grow that business and get even more out of it. And not just more of the same, but continue to push the technology further to be able to unlock more potential for the customers.

And that is included in our 2018 kind of CapEx guidance.

Your last question comes from Vebs Vaishnav with Cowen and Company.

I think I heard you guys said 2018 revenues will be flat in 2017? Did I hear that correct?

That's our initial outlook. It's somewhere in the flattish range.

Direction, yes.

Got it. And can you say how much cash taxes have you paid in this year so far?

I'll have to get back with you on that one, Vebs. I don't have that in my fingertips.

It will be in the Q. (inaudible)

There are no further questions queued up at this time. I'll turn the call back over to Rod for closing remarks.

All right. Well, since there are no more questions, I just like to wrap up by thanking everyone for joining, and this concludes our third quarter 2017 conference call. Have a great day.

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