TechnipFMC plc (FTI) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Robbie, and I will be your conference operator today. At this time, I'd like to welcome everyone to the FMC Technologies' First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Matthew Seinsheimer, you may begin your conference.

Good morning, and welcome to FMC Technologies' first quarter 2016 earnings conference call. Our news release and financial statements issued yesterday can be found on our website. I'd like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current expectations, beliefs and assumptions regarding future developments and business conditions, they are subject to certain risk and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Known material factors that could cause our actual results to differ from our projected results are described in our 10-K, 10-Q and other filings with the SEC. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. I will now turn the call over to John Gremp, FMC Technologies' Chairman and CEO.

Good morning. Welcome to our first quarter 2016 earnings conference call. With me today are Maryann Mannen, our Chief Financial Officer and, Doug Pferdehirt, our President and Chief Operating Officer. I’ll begin my comments today with highlights from the quarter as well as provide some remarks on the Deepwater market and our Subsea order outlook. Maryann will provide specifics on our finance performance and update our financial outlook for 2016. We will then open up the call for questions. Our first quarter results reflect both the challenge of our current market and our continued success and execution performance. For the first time in nearly three decades EMP spending is set to decline for a second consecutive year. The North America land markets were impacted almost immediately and activity continued to decline into the first quarter. Deepwater revenue has been supported by project backlog but low orders are now beginning to impact our Subsea business. Despite the market challenges, we have made considerable progress in addressing the things that we control. We are driving operational success by improving execution and taking aggressive restructuring actions that permanently lower our cost. The improvements are most evident in our Subsea technology segment. We posted another solid performance this quarter reporting margins of 13.1% when excluding charges, these are strong results for a business whose revenue sell 25% over the last 12 months, very good execution and restructuring savings were key drivers to deliver these solid margins. In our surface technology segment, we faced a much more difficult challenge. The average U.S. rig count continued to decline in the quarter falling 23% sequentially. This hit our North America business much harder than we expected. We don’t believe the current level, low level of activity is sustainable, the timing and pace to recovery in North America land markets however remains uncertain. Compared to North America, our international surface business has been more resilient. And our results came in largely as expected. We continue to benefit from our geographic mix of business with relative strength coming from the Middle-east and North African markets where rig counts have held up better than most other parts of the world. Across all of our businesses, we will continue to take further restructuring actions that go beyond workforce and facility reductions. We are committed to delivering a global footprint that is moiré efficient and scalable and that can provide sustainable savings well into any market recovery. I’ll close my remarks on the quarterly results with a comment on the balance sheet. We continue to stay focused on preserving our financial strengths and liquidity in these uncertain times. We generated cash flow from operations of $109 million in the quarter and we reduced our net debt to $209 million. Turning to the Deepwater outlook, the industry significant reduction in capital spending will ultimately lead to a decline in global production that will drive oil prices higher. With higher oil prices, the combination of operators improved cash flows and greater confidence in the market will move spending higher. Shale investment will come first given the smaller commitment and faster payback. But it will take more than shale to fill the supply gap. There will be a need for both conventional and Deepwater productions to meet global demand. But for Deepwater to be a creditable source of future supply, project economics must improve. For many operators some of the best prospects can be found offshore, but there has been challenged by poor returns. For these returns to improve the industry must realize significant and sustainable reductions in the cost of Deepwater development. As we have all seen the industry is demonstrated significant efficiency improvements and cost reductions in onshore and conventional shale. We believe that a similar transformation can occur in current Deepwater. But unlike shale where most of the big savings and efficiencies have been achieved, we are still on the early innings for Deepwater. We are confident the industry can deliver these savings because of the rapid progress we are seeing on multiple fronts. First, operators themselves are changing their approach to Deepwater development, for instance the final design for BP's Mad Dog Phase 2 project would be substantially different than originally proposed. Significant savings would be realized by more closely matching infrastructure spend to the pace of fuel development. And while not project specific, Statoil highlighted their success in reducing project breakevens from $70 a barrel to $41 per barrel, with expectations to push that number even lower. Achieving this level of savings required more than overhead and vendor price reductions. It required fundamental changes in their development approach. Two significant components of Deepwater development cost are drilling and top side facilities, together these two can be as much as two thirds of the cost of a Deepwater project. The cost of drilling has been particularly impacted by the historic high level of day rate that will provide substantial savings as legacy contracts expire in the future. There are also many ways to reduce the cost of top side facilities. While we have yet to see much of these saving so far, we think many of them will be sustainable. In addition to these savings our company is focused on reducing the cost of our scope of supply. We know that we can significantly reduce the cost of subsea production equipment and installation through better execution, product standardization, innovative technology and new integrated business models. We are specially encouraged by the industry's early adoption of a differentiated business model that integrates the scope of both the subsea production system and the serve scope to our Forsys Subsea joint venture and our alliance with Technip. While we are confident improved returns will lead to future Deepwater development, the Subsea outlook in the near term is being impacted by aggressive cut backs in spending for major projects. In the first quarter, our total Subsea orders have $346 million were driven largely by Subsea services. This order level highlights the relative stability of our service business and supports our view that full year service orders should approximate $1.2 billion to $1.4 billion for the year. Our confidence in these service revenues is driven by our visibility around installation activity and our maintenance and repair work. Much of this work is funded by operating budgets, not capital budgets. These expenditures maximize production uptime and improve operator cash flows. Small orders for Subsea equipment were light in the quarter but these orders are typically lumpy and never spread evenly throughout the year. We only expect to see a modest decline in small orders for the full year. These orders are typically tied to smaller projects but have lower capital cost and offer higher returns and accelerated cash payback. Over the next 24 months, we see the potential for nearly 20 large projects to move forward. Some large projects are considered strategic and could be awarded this year. But there is a likelihood that even these projects could be pushed into 2017. And we still do not expect any projects in excess of $500 million to be sanction before the end of the year. The full recovery in Deepwater will come when cash flows move higher, project economics improve and operators gain confidence in the business outlook. In the meantime, Subsea activity will reflect Subsea service resilience, small project associated with tie backs and brownfield opportunities and some large strategic projects. Clearly, there are significant challenges our industry faces today, but at FMC Technologies we remain focus on the things that we can control. We will continue to improve project execution to protect on margins and competitiveness. We will take further restructuring actions that both respond to the declining market and sustainably lower our cost. We’ll remain focused on improving project economics through standardization, technology and integrated business models. And finally, we’ll preserve our unique customer partnerships to secure awards in this highly competitive market. I’ll now turn the call over to Maryann.

Thanks John. Our first quarter diluted earnings per share were $0.22 when excluding certain charges of $48 million or $0.13 per diluted share. Included in our reported results are pretax impairments and other charges of $36 million or $0.10 per diluted share. Restructuring and other severance charges of $12 million or $0.03 per diluted share. The impairment charges were related to our North American business in our Surface Technologies segment. Further reductions in market activity have impacted our outlook for revenue and profitability of certain assets requiring a reduction in their carrying value. We have provided a schedule in our press release issued last evening to show the quarterly impact of all these costs incurred. We continue to take actions to restructure our organization, both in response to reduce North American land activity as well as the outlook we have provided for lower revenues for our Subsea business in 2016. Our Subsea technologies segment delivered solid results in the quarter. Subsea technologies revenue in the quarter was $864 million quarter-on-quarter revenue comparisons were negatively impacted by lower project activity as well as $57 million of foreign currency translations. Subsea Technologies operating profit was $113 million in the quarter with a margin of 13.1% excluding restructuring and other severance and other impairment and other charges of $4 million. Operating margins decreased 155 basis points quarter-over-quarter when excluding charges for both periods as revenues were down approximately 25%. While down from the prior year quarter, solid operating margins were the results of strong project execution as well as the benefits of restructuring activity. Segment backlog exiting this quarter was $3.4 billion which compares to a prior year backlog of $4.8 billion. Moving to our Surface Technologies results, Surface Technologies revenues for the quarter were $266 million, down 41% from the prior year quarter. The revenue decline was driven by the steep contraction in our North American business somewhat mitigated by more moderate declines in our international business. Geographic mix continues to provide some offset to the weak domestic markets as rig declines have been more muted in international markets, particularly in the Middle East. Surface Technologies operating profit for the first quarter was $13 million when excluding impairments and restructuring and other charges of $42 million. Margins in the quarter were 5% when excluding these charges. We have taken significant restructuring actions in our Surface Technologies segment. These actions were based in part on a planning forecast for 2016 that assumed U.S. rig count would decline to approximately 500 working rigs during the first quarter and then maintain that level for the remainder of the year. The actual rig count decline proved to be even more severe than we anticipated declining 36% from year-end levels to just 450 rigs at quarter end. The rig count has since declined to 431 rigs as of the end of last week. While we have made good progress in adjusting to the lower activity levels in North America, the severity of the rig count decline will require us to take further actions. However, these actions will be balanced against our need to preserve operational capabilities that can respond to the market recovery. Segment results reflect this challenging market, but excluding charges, we remain profitable due in part to the benefits of our significant restructuring actions to-date as well as the relative strength of our international business. Segment backlog existing the quarter stands at $429 million, this is predominantly related to our wellhead business outside of North America, which continues to show resilience. Moving to our energy infrastructure results. Revenue for the quarter was $84 million, down 17% from the prior year quarter. We reported a minor loss in the period when excluding charges. The segment continues to be negatively impacted by lower oil prices. Our measurement solutions business has been most affected due to the contraction in energy related infrastructure spend in our North American markets. Overall, we recorded $10 million of restructuring cost in our segment operating results during the first quarter. We expect to incur additional restructuring cost of approximately $25 million to $30 million in total over the coming quarters as further actions are taken primarily in our Subsea Technologies segment. These headcount reductions and other restructuring actions will be more significant than previous as our Subsea activity levels are reduced. Let’s turn to the corporate items. Corporate expense in the quarter was $14.3 million. We now expect to spend approximately $14 million to $15 million per quarter through the remainder of 2016. Other revenue and expense net reflects expense of $30 million. Our first quarter expense is typically higher than the remaining three quarters of the year, due to the amortization period for certain equity compensation awards made in the period, we therefore also impacted by foreign exchange losses. In the quarter, we experience further impact from the Angolan kwanza and Nigerian naira. For the remaining quarters of 2016, we still expect that other revenue and expense will be an expense of approximately $13 million to $14 million per quarter. This quarterly estimate remains subject to foreign currency fluctuation. Our first quarter tax rate was 23.4% which reflects the lower percentage of overall earnings subject to U.S. tax. We now anticipate our 2016 tax rate to be between 21% and 23% for the full year given the mix of earnings. Capital spending this quarter was $35 million primarily directed towards Subsea technologies. We now expect capital spending in 2016 to be approximately $150 million. This spending does not include any contingent capital that maybe needed to respond to a contract award. We generated cash flow from operations of 109 million in the period. At the end of the first quarter we had net debt of $210 million, it is comprised of $1 billion of cash and $1.2 billion of debt. Net debt has been reduced by more than $1.2 billion from its peak in the first quarter of 2013 due largely due to strong operating cash flow of the company. We averaged 229 million diluted shares outstanding in the quarter. We repurchased 1.1 million shares of stock during the first quarter at an average cost of $25.58 per share. Looking forward, we continue to expect full year Subsea revenues to approach 3.6 billion, excluding the impact of foreign exchange, driven by approximately 2.2 billion of backlog conversion and 1.2 billion to 1.4 billion of Subsea service revenues. We remain confident in full year Subsea margins in a range of 11% to 13% excluding charges. As we continue to execute well on our backlog and realize further benefits from our restructuring actions. Surface technologies revenue is now likely to be down approximately 25% to 30% versus 2015. North America activity has fallen more than expected and we are now basing our forecast on the assumption that the U.S. rig count remains near current levels through the end of the year. We now expect operating margins in the low to mid-single digits for the full year excluding charges. Energy infrastructure revenue is now likely to be down 5% to 10% year-over-year as market activity continues to be negatively impacted by our measurement solutions business. We now expect that operating margins should approximate low to mid-single digits for the year, excluding restructuring charges. The first quarter results reflect the operational improvements we have made in our Subsea business as well as the challenges our surface and energy infrastructure business faced adjusting to the rapid pace of activity decline in North America. We have responded aggressively to the lower activity experienced in these markets and as we indicated in our guidance we are accelerating the pace of restructuring in the next few quarters in our Subsea technologies segment. As John earlier discussed, this is not only headcount reduction but also structural changes to the global management of our operations. We will continue to conservatively manage our balance sheet through this period of uncertainty, our net debt was further reduced in the quarter, our liquidity remains robust, we lowered our guidance for capital expenditures in 2016 and we maintain the flexibility to continue share repurchase as we have done consistently for many years. Operator, you may now open up the call for questions.

[Operator Instructions] Your first question comes from the line of Sean Meakin from JPMorgan. Your line is open.

So as we think about your Subsea margins, I guess to start off it would be helpful if you can just give some sense of how backlog pricing compares to current inbound pricing? What that deltas look like as things are coming out now versus what's going back into the backlog?

The margins currently in backlog Sean actually are holding up a pretty well and the reason is because most of the inbound we got is service related which carries pretty good margins. But we have to be realistic. New projects that we eventually enter are going to come -- are going to reflect competitive pricing environment and so that will be a different story. But right now the margins actually are holding up very well, but it's a function of really the new inbounding service oriented. But I think Maryann might want to make some additional comments.

Yes, Sean and just to give you some confidence around our ability to achieve the 2016 margins, most of our forecast for revenue is coming out of our backlog as well as the expectation for Subsea services holding up and so we have got very little assumption in 2016 for any current inbound. So that should also give you some confidence, one look at the margins in the first quarter, our conviction in the full year rate and the fact that we are not counting on inbound this year to generate those margins.

And then the order side for Subsea, we've seen some recent pick in Gulf of Mexico joint permits, small EMP tender activity, is there any potential brightened outlook for some of the onesie-twosie as we go through the rest of this year into '17?

Well at this stage we want to be careful about brightened outlook, but when I described in my prepared remarks is that we’re counting on the inbound coming from services that seems to be resilient and we saw that in the first quarter where the level of service inbound was very consistent with the guidance we’re giving. And the next area where we also have some confidence is on the onesie-twosies the smaller orders and it's the larger projects that as I said in my prepared remarks that are the most questionable right now. When you look at those smaller projects it makes sense that they would come from the Gulf of Mexico and in fact even in the first quarter although our small orders were a little bit late, the ones that we did get some of them were for the Gulf of Mexico and it just makes sense Sean because the infrastructure is there, they tend to be smaller, the paybacks are faster. So as we look forward at the small projects it wouldn’t surprise us at all that those are going to, not all, but a number of them were going to come from the Gulf of Mexico, that's certainly what we’ve seen historically and I think that will be the case this year as well.

Your next question comes from the line of Ole Slorer from Morgan Stanley. Your line is open.

Thank you very much. Just to clarify the structural changes that you’re implementing in the Subsea Technologies Group, what type of like for like, cycle over cycle, call it mid cycle if you want to improvements are you ultimately looking for in terms of let's say margins?

Well, let me tell you Ole the kinds of restructuring that we’re referring to, obviously we’re doing some restructuring just to contract our capacity in light of the market. But the restructuring that we believe is going to be more sustainable is the restructuring that we’re taking by the leaning out particularly our manufacturing organizations as a result of improved execution. When we are executing but we don’t need the same structure to maintain our -- to deal with our performance, so we’re in a position now where a lot of the restructuring is about delayering, it's about leaning out the organization. Again, something we can now do because of our execution improvements. The other thing we’re doing is we’re doing more consolidation because of standardization. We can consolidate our manufacturing in fewer locations, again an example of restructuring that is sustainable cost reduction.

So we’re talking you are saying a couple of hundred basis points of mid cycle margin improvements cycle-over-cycle, or is it bit bigger than that?

So certainly from a 2017 perspective as we mentioned before, it is our intent to be able to maintain those double-digit margins into ’17. So, when you look at the potential for revenue decline in ’17, we would need to see roughly 150 basis points to 200 basis points improvement coming from those structural changes that John mentioned. So yes I think that’s a reasonable place for us to be thinking about.

Your next question comes from the line of Michael LaMotte from Guggenheim. Your line is open.

If I can just follow up on Ole’s question, obviously lean manufacturing is important. I am just wondering what you’re all doing on the procurement and supply chain side? And where we might be in that time line of improved efficiency across the organization, not just in the manufacturing?

Several years ago Michael we consolidated all of our supply chain procurement globally. So, for a couple of years, our procurements been done in an aggregated global fashion and we’ve gotten a lot of benefits from that. We’ve also done low cost country sourcing. So I would say we’re not done yet but we’re pretty mature in the progressive supply chain strategy and we did that consolidation and globalization of our supply chain several years ago. So I think we’re well into that. We’ll see obviously in today’s environment we’re seeing improvements in supply chain cost as a result of the downturn in the industry. But in terms of significant gains through consolidation we’ve been experiencing that over the last couple of years.

Your next question comes from the line of Bill Herbert from Simmons. Your line is open.

Commentary with regard to the resilience of Subsea service pricing. I recognize that it's an enormously assertive positive mix contribution to your subsea market. And I am just curious to see your confidence with regard to retaining the pricing and margin resilience associated with those services?

Well, Bill I mean in the competitive environment that we’re in now we’re under tremendous pricing pressure from all of our partners. So, I can’t think of a single partner we haven't had a serious discussion about our pricing levels and service. Now offsetting that is we’ve made a lot of investments in service, we’ve done some reorganization, we’ve done leaning out our execution service continues to improve. And all of these things help mitigate the effects of a lot of pricing pressure on service. I think I mentioned this in Maryann’s and probably in previous calls, we expect some margin erosion in services as a result of this downturn but we also believe that we can push back on a lot of it through the efficiency improvements we’re making. So I would say a modest margin pressure as a result of the downturn, but we've got cost to partially offset that.

Okay. And I guess the question with regard to subsea margins overall. Maryann, you touched on 2017; I didn't quite retain what you were saying. So maybe kind of taking it from the standpoint: one, I get the retention of the original kind of margin forecast in terms of the range. I'd be curious with regard to the glide path. And in light of the meager inbound that is coming this year, for the balance of this year, likely, what does that set up with regard to a likely scenario for 2017 conceptually?

Yes sure Bill. So yes, we are maintaining the 11% to 13% as we have, I mentioned earlier it doesn’t require us to get a significant amount inbound this year, so most of that margin as it relates to the project is already in our backlog. And then secondarily John just addressed the question with respect to services. So assuming services hold up as we see, we feel very confident in our ability to execute 2016. As I also mentioned, over the next several quarters, remember our Subsea service activity and our Subsea project activity it has been very strong, we had one of the strongest years in 2015 and we are still executing a fairly large number of projects in 2016. As we get closer to the end of '16 of course, we begin to see those activity levels tail off. So we are forecasting as I mentioned in my comments, a relatively significant amount of reductions coming in the next three quarters to address that tailing off. Given our estimates for inbound and given that benefit from those restructuring again we feel pretty confident in our ability to maintain double-digit margins going into 2017. A little bit difficult for me to give you an exact quarter-by-quarter as you can imagine. The timing and the mix of projects as they come through will certainly impact that. But that’s really the rationale for why we feel comfortable in the 11 to 13 this year, and our ability to maintain double-digit going into '17.

Your next question comes from line of Jim Wicklund from Credit Suisse. Your line is open.

John, you talk about permanently leaning out subsea and making the whole operation more efficient. I noticed in Maryann's comments that most of the CapEx in the quarter was spent on subsea and that's where most of the charges will be taken. So are we swapping out taking out people and putting in new equipment? Are we getting out with the old and in with the new overall? Can you kind of tell me what logistically that is?

The CapEx that we spend is mostly service related. So it's mostly to support our service energy.

That's the intervention work, right?

Yes, well it could be that it could be other -- there is lots of tooling that is involved in service beyond light well intervention. So actually the money that we spent had less to do with light well intervention and more to do with other service related installation assets. But service is a critical part of our strategy and it does require -- you need real assets that you then lease to the, and rent to the customer. That’s what that was about, when it comes to leaning out the organization it's less about machine tools and that sort of thing those investments were all made several years ago when we were growing. This is about a manufacturing strategy that allows us to standard manufacture -- and let me just give you one example Jim we manufacture Subsea equipments in multiple regions to be close to our customers and that strategy has served us well. But we manufacture that equipment, the same equipment different in each geographic region. Today, we have identified one manufacturing process, one assembly process, one machine process and we do it in all the locations. And that’s the kind of leaning out or savings that we are envisioning as opposed to big capital investments in machine tools. Quite frankly, because the growth that we saw three years ago, the machine tools that we invested in then are state of the art. So what we are talking about in terms of leaning out is manufacturing processes taking advantage of standardization, taking advantage of global practices and really leveraging our good execution, you have seen for eight quarters now where we have had solid execution you have seen that in the margins.

You have, you have.

What it means is, that we are delivering on time, we don’t need to build safety nets and other structure to overcome core execution and we are just leveraging that and that's what is allowing us to lean out the organization and streamline the manufacturing process.

John, I think everybody understands that you guys internally are doing everything you can and a fabulous job of battling this downturn. My follow-up question, if I could, your onshore business you noted that it was a little bit weaker than you expected. Of course we all -- rig count was worse than all of us expected, so you were in good company. What does it take to come back? We made a foolish statement the other day saying that we think the second quarter will be the revenue bottom for onshore activity. I don't know if you think that's right, but when we do start to come back, eventually, what does it take for you to put more capacity -- that you've already got, I understand -- but what does it take to put it in the field?

I am going to let Doug handle that, good question though our surface business is a important business and we got really been hit hard over the last couple of quarters. So thanks Jim for the question. I am going to let Doug take it.

So Jim as you well know our surface business is quite broad in our offering. So it just depends on which portion of the business but in speaking particularly to the North America market there is the portion of our business that’s more tied to the pressure pumping industry and then there is our integrated offering. So let me first talk about the pressure pumping industry. Clearly as capacity comes back into the market it will require new treating iron equipment or new flow line equipment to be associated with that equipment. We talk about cannibalization in the industry there is different types of cannibalization, some if you will more severe than other. But in all cases that treating iron is not necessarily associated with the horsepower or with the unit, it's used as a kit. And we are the largest provider of that and we are the largest provider of inspection and repair services for that treating iron so we have a good idea and a very good understanding of the state of that equipment and the capacity that’s in the market today. So, we are confident that it does not require a significant pick up for us to be beginning to see those orders flow more aggressively as that equipment will be needed to put that horsepower back into service. On our integrated offering, yes, increased activity we will certainly benefit from that but we’re benefiting from the fact that we’re changing our operating model and we’re changing the commercial model. By putting together the most holistic offering on surface to be able to help our customers most efficiently go from the last frac stage to selling of their commodity here if you will to the point of sale. By being able to bring that together, we’ve actually been able to increase our market share even in this down market.

Your next question comes from the line of David Anderson from Barclays. Your line is open.

John, I was wondering, could you give us an update on the status of those two Forsys FEED studies; maybe where they stand in terms of that whole process? Have you got the cost savings you have targeted? I guess I'm also kind of wondering; in the past you've talked about the possibility of these projects moving ahead this year. Where is your confidence on those two, if you don't mind?

Yes I am going to let Doug take that.

So, actually what we’ve publicly announced it was three integrated FEED studies and we have activity actually beyond that. So let me just talk in general about the activity that we have experienced and where we are in terms of the conversion of those projects. As we talked about when we first announced some of the original integrated FEED studies, some of them were all the way back to the concept stage and we said those studies would take nine to 12 months to complete, typically another six months plus or minus for the project to be sanctioned. So you were looking at anywhere from about 15 to 18 month cycle between the conceptual integrated FEED all the way through the conversion to a integrated EPCI or to the execution phase. On other projects where we start pre-FEED or FEED that cycle time is reduced by three to six months. We remain confident in the conversion of a project and we had said in 2016 now for budgetary reasons that may fall into the first quarter of 2017 but we certainly remain confident in the conversion from the integrated FEED to the integrated EPCI as we were able to demonstrate to our customers the significant savings by moving towards an integrated offering from a standalone SPS and surf offering.

And have you achieved those kind of -- I think it was 20% to 30% cost savings? Is that kind of the target that you achieved there?

Yes, we have.

And a follow-up question there. We had another capital equipment company announce the cancellation of a deepwater wellhead order on a project yesterday. Can you talk a bit about any kind of risk to cancellations within your backlog? Have any customers tried to renegotiate pricing on the backlog?

Yes David in the subsea industry it's pretty typical that once a project is sanctioned and it goes through FID the projects don’t get cancelled, they’re just too invested and we’re pretty much seeing the same thing in this cycle. That doesn’t mean that there aren’t conversations around rescheduling and I think we’ve referred to that before, Petrobras, but even other customers are talking about rescheduling delivery dates. As I have alluded to earlier, the pricing, there is conversations about pricing on service so these discussions are going on with virtually everyone of our partners. But on the subject of cancellations, it's really just not typical in this industry once a project gets through FID. Where there is situations where maybe there is long lead raw material or inventory then there are some discussions around possible cancellation. But by and large those aren’t material.

Your next question comes from the line of Dan Boyd from BMO Capital Markets. Your line is open.

Just wanted to see where M&A might fit into your strategy. You talked early in the call about the diversification of your business, are there -- how do you think about growing or increasing your exposure to surface and particularly the North American land business?

So Dan if you look at some M&A activity that we’ve had in the last six or seven acquisitions, every single one of those has been to support our strategy. We do have a clear strategy to grow and improve our market position in North America land business. Actually our largest acquisition was Pure Energy three years ago that was to promote the integrated services and products directly to serve the North America market. So I think our historic M&A activity is very much in line with not just promoting our general strategy but our strategy of going on market position or proving our market position and growing our market in North America lands. There aren’t big gaps in our portfolio right now, but given the environment today whether it's opportunities to progress our strategy through acquisitions we are certainly looking at it.

That sounds like you would not be or you would look to add products and service lines targeting North America land, not just building on what you currently offer?

That’s right. Again you saw you have to just look at our M&A history and it is to expand the products and services and then integrate them, which is very different than a consolidation strategy. And one of the things that we are gaining some real traction on in North America is the idea of consolidating services and equipment from that last frac to first oil. It is an area in shale that hasn’t been fully exploited and the acquisition of Pure, expansion of our product line, expansion of services and then the integration of those capabilities creates real value for the operators and reduces lead time. So yes, you are right. The M&A is to fill the breath of our services and product as opposed to say consolidating amongst other providers.

Your next question comes from the line of Waqar Syed from Goldman Sachs. Your line is open.

Has the competitive landscape in the surface business changed for you with this -- the merger between Schlumberger and Cameron?

So, I’ll go back to the earlier comment we made about our strategy. And what we have put together is the most holistic offering and differentiated offering by integrating the aspects from the last frac or if you will from the completion of the well all the way through the point of sale. And we really have gotten significant traction in the market as a result of that, and it's not just the offering, but it's the ability then to change the commercial model, creating incremental value both of ourselves through market share, margin as well as exposure to new customer base as well as creating value for our customers by then being able to take what was multiple interfaces take it down to a single interface and be able to work with somebody much like others had integrated the subsurface. No one has been able to integrate the surface or had the breadth of products and services to be able to integrate the surface as we are now offering today. So we remain committed to that strategy, it allows us to work with multiple different subsurface providers and being able to -- for the customer to be able to have the most integrated package available to them.

But in terms of interacting with the subsurface provider, is there -- do you need to have just like a joint venture or do you need to have some kind of more formal kind of arrangement there?

No, the customer typically separates those two packages they separate them for a variety of reasons. The subsurface typically goes through one department in the customer. If you will one of their business lines which is drilling and completions. And the surface typically runs under the facilities group or the production part of the company. So they are typically bid separately and they are more importantly managed separately. And they have very different key performance factors in terms of success and so because those are held agnostically between the two groups within the customer’s organization, you are focused on a very different customer subset when you bring these -- what our offering compared to the subsurface offering.

Your next question comes from the line of Darren Gacicia from KLR Group. Your line is open.

I wanted to ask, it seems like we are on an uptick here and I know that it seems, near term, the subsea business will be difficult. What I was trying to get a sense for is, in terms of new orders, how you expect them to come in maybe as things turn. Do they start with smaller orders from frame agreements? Do you expect the bigger projects to, when you think about year-end budgeting, to start emerging? And what are the price levels maybe for the commodity? Do you see that kind of flipping on or off? Embedded within this is definitely -- maybe if there is any change in conversation over the last month or so with customers?

As I had outlined in my prepared remarks that the sequence is going to go improved oil price, better cash flow, confidence in the market. At the same time we are seeing the project economics dramatically are improved as a result of the fundamental changes the industry is going through to make significant cost changes. When will that confidence show up? That is a little hard to predict. But your question is where will it show up first? Well as I laid out, even in the so called trough, service is resilient, small projects you would think would move first, because of the capital commitment is less and the returns are generally better. Then you’re going to see projects Darren that are more strategic. There is another reason why that project needs to move forward, maybe it is lease terms, maybe it's a national oil company that is -- it's important to that national oil company to move out in the front. So you’re going to see large projects move for some other strategic reason. And then finally, it will go operator by operator where operators have a large portfolio of undeveloped deepwater discoveries and when they look at their total portfolio and their need to raise production and they’ll do that all in concert with the improving economics. So those are the projects that will bubble up to the top. Now, what will the price be the breakeven price? Well I alluded that well shared that in my remarks. We’re seeing substantial reductions in breakeven I cited the Statoil number from $70 a barrel to $40 a barrel and I think they can continue to cut that even further. Deepwater breakevens across the portfolio it is a whole range of breakevens and so I don’t think there is one particular magic number. But the sequence of which projects will go first I think the smaller projects first, then the strategic ones and then it will depend on the portfolio of that particular operator which projects go. I’ll ask Doug to make some additional comments.

Yes you talked about maybe some leading indicators or if you will weak signals, and one that I’d allude to is up into this point we have had -- we’re in discussions on all these major projects as you would expect us to be working with our partners and with our clients to find ways to substantially reduce cost and reduce the breakeven levels as John described. Over the past year that conversation has been singularly focused on cost. More recently that conversation has shifted from cost to schedule and delivery. So we certainly see that as a positive weak signal where our customers are back to looking at not just cost as they always have, but looking at cost and delivery schedule because they’re planning out their production and wanting to be able to back -- come back from when they need the production, to when they need to place the orders to be able to move some of these larger projects forward.

And so just to follow-up, if you think about the entire inventory of projects in deepwater -- and this may be a difficult question, I understand that. In terms of what has kind of gone back to the drawing board maybe to lower costs, I think there's a pretty wide range of what people think breakevens are. I would be curious to know what percentage of projects that probably come back to the table that have costs come down, by and large. And then, just if I could tack a quick one on the back of that as well, what is the lead time now for orders on a project, given your last comment?

Yes I think virtually every major project is being relooked at I mean I can’t think of a single project that we’re engaged in that hasn’t gone back to the drawing board and why wouldn’t it not only are -- is the market allowing prices originally tendered prices to be reconsidered. But all the things that we’ve been talking about in terms of fundamental change in the industry, again I can’t think of a single project that hasn’t been re-reviewed. And I’ll let Doug talk to specifically about the lead times, because I think we’re going to see some real changes on lead times going forward.

It's not just bringing down the cost, it's as John talked about earlier it's moving to standardization, it's accepting industry best practices. And we’re now able to sit down with our clients and speaking in terms of delivery schedule by taking into account, all those different aspects from standardization, technology, new business models, we’re talking delivery times that used to be 24 months being compressed down to 15 month time period.

Your next question comes from the line of Ed Veshna from Cowen. Your line is open.

I want to just touch on subsea services, could you provide some color around the bigger business buckets in that business and what pieces have more resiliency versus some other?

Yes so the bucket starts with installation services. We’re the original equipment manufacturer our equipment gets installed by FMC Technologies. We have a backlog of equipment order delivering, it has to be installed, even some of what we delivered is in our customer’s inventory, it is yet to be installed, so that’s a fairly significant bucket if you will is installation services of new equipment. We’re also seeing installation of refurbished equipment, which is another segment that is continuing to grow that makes sense, operators that have got equipment. They would rather in today’s environment would rather refurbish it rather than buy new equipment. Again, that all almost always goes back to the original equipment manufacturer and we’re seeing our refurbished equipment both the manufacturer but which accounts as service revenue and the installation of it starting to grow. And then the third bucket which we also expect to grow is in maintaining production, so this is an existing production system that maybe needs some maintenance, need to change out a choke or control system. Operators in today’s environment just they’re not going to spend their capital on new production, they’re going to want to spend their operating expense or capital on maintaining the production they have. And so we expect that segment of the services market to grow and again typically you would call up the original equipment manufacturer to do those installation services. And then finally, we have our light well intervention service as part of our service growth strategy, first quarter that revenue was and inbound was fairly light or almost non-existent, that comes back now in subsequent quarters this year. So those are the primary buckets of Subsea service, some of which we -- you can see by like nature of my comments. We are expecting to be fairly resilient and in some cases maybe a little bit of growth offsetting whatever reduction there might be in installation.

Okay. Maryann mentioned about 2017 subsea margins. Is that a factor of higher subsea services mix versus revenue from backlog in 2017? And any kind of visibility that you can talk about in 2017 subsea services, that would be helpful?

Sure, yes so impart we are assuming that we will see some continued growth going into Subsea services. But really the basis for that assumption around maintaining margins has to do with our ability to get the restructuring both from a headcount perspective as well as the comments that John and Doug talked about. And sort of reengineering if you will, our footprint and what will allow us to if you will to maintain or improve capacity on a much smaller footprint and in a much smaller cost base. So we would be able to leverage all of the benefits of what we are taking in this year and next year as those volumes begin to recover in the '17 and '18 timeframe.

Our last question for today's call comes from the line of Michael LaMotte from Guggenheim. Your line is open.

I had a technical problem that didn't allow for a follow-up. Doug, in terms of the last frac to first oil value chain, in the past we've talked about cars on the train and not needing to own every single car in integrated systems. Is this value chain similar to that? Do you need to own all of the pieces here or can you just do alliances to fill in gaps?

Certainly Michael there is opportunities to do some alliances particularly when it comes around if you will some of the like civil engineering type work. But we have rationally built out in your analogy we have built out the primary units on the train if you will. And that was part of the acquisition strategy that we have had over the last few years as well as an organic new technology development strategy that’s allowed us to come up with some very innovative technologies when it comes to increasing the performance of frac flow back as well as drilling services as a result of being able to address some of the solid removal aspects of both of those service lines. So we are fairly confident that we had in place today both from an organic as well as from our inorganic strategy over years. The primary units to be able to exploit that value chain.

So it sounds like at this point it's more marketing and market penetration as opposed to building out the portfolio and executing on the integration? You are pretty far along in this process then?

Yes, Michael I think you have captured it appropriately. It is -- I’ll add one more element to that. It's changing the commercial model, right. Because when you put together an integrated offering, if it's simply of some of the parts and you reduce a couple of headcount on location sure that’s favorable but that’s not sustainable. What we are looking for is sustainable change, so we are looking -- so what we are doing now is with that offering in place we have been able to demonstrate over the last year. The value of that to our customers and now we are looking at new and innovative commercial models again to be able to create value both for ourselves as well as for our customers.

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

This concludes our first quarter conference call. A replay of our call will be available on our Web site beginning at approximately 2:00 PM Eastern Time today. We will conduct our second quarter 2016 conference call on July 21st, at 9:00 AM Eastern Time. If you have any further questions, please feel free to contact me. Thank you for joining us. Operator, you may end the call.

And this concludes today's conference call. And you may now disconnect.