Oceaneering International, Inc. (OII) Q3 2008 Earnings Report, Transcript and Summary

Good morning. My Name is Andrea, and I will be your conference operator today. At this time I would like to welcome everyone to the Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be an question-and-answer session. [Operator Instructions] Thank you, Jack Jurkoshek, you may begin your conference call.

Good morning everybody. We'd like to thank you for joining in on our 2008 third quarter earnings conference call. As usual a webcast to this event has been made available through the StreetEvents Network Service by Thomson Reuters. Joining me this morning is Marvin Migura, our Chief Financial Officer who'll be leading the call and Bob Mingoia, our Treasurer, Jay Collins our President and Chief Executive Officer regrets that he could not be with us this morning as he is attending to a certain and urgent personal matter. This is a reminder of remarks we make during the course of this call regarding our earnings guidance, 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. And I'm now going turn the call over to Mark.

Good morning and thanks for joining the call. And even though Jay could not be here this morning to do his usual great job on his call, I'm inviting you to stay on the call a bit and hear what he wanted me to share with you. Again Jay seriously regrets not being able to talk to you about our results and outlook. I will do my best to stand in for him; it is a pleasure for me to be here with you today to talk about Oceaneering. We achieved record quarterly earnings of $55 million which demonstrates the healthy demand we are experiencing for our subsea services and products. We continue to expect two achieve a fifth consecutive year of record earnings per share in 2008 in the range of $3.53 to $3.61. At the midpoint our guidance is up slightly from what we indicated on our last call. This is based on our year-to-date earnings performance and improved fourth quarter business outlook for our subsea Products business to perform inspection and repair work in the after months of Hurricanes Gustav and Ike. We expect to report record fourth quarter earnings. During the third quarter we purchased approximately 1 million shares of our common stock at cost of about $55 million, this completed our outstanding Board authorized stock repurchase program. To enhance our future financial flexibility during the quarter we obtained a one year unsecured $85 million term loan to augment our existing $300 million revolving credit facility. We had 122 million of available credit on committed credit lines at the end of the quarter. As of September 30 we had $303 million of debt and $981 million of equity on our balance sheet. Our debt to capitalization percentage was 24%. As you have read, heard or written about the financial markets are in turmoil, oil prices have declined perceptively and we are facing the possibility of a global recession. It would be presumptuous to claim we have all the answers as to the impact this environment will have on our business particularly with regard to commodity prices, the level of our customer's capital spending on deepwater exploration and development and the timing of sanction project. Consequently we're not at this time going to give our customary detailed annual earnings guidance for the up coming year. We do believe however that with average oil prices above $70 per barrel, we will achieve record earnings in 2009 for the sixth consecutive year. Under this scenario we further believe that next year's EPS growth will be double-digit on a percentage basis and we will have earnings at least $4 per share. We believe our 2009 growth in earnings will be led by profit improvements from ROVs and Subsea Products. We anticipate adding 24 to 30 vehicles to our ROV fleet next year and expect to achieve an increase in days on hire and will continue to push for higher average pricing. Our Subsea Products earning growth is projected to come largely from increased demand for our specialty products like ROV tools and field development hardware and from efficiency gains through manufacturing process improvements. Our preliminary forecast for 2009 includes Subsea Projects operating income to be at about the same level as that of 2008, and we are expecting a decline in most operating of about $10 million next year. This anticipated reduction is due to the likelihood that our FPSO, the ocean producer will be off contract for an extended period of time as it comes to the end of its seven year contract offshore, Angola. And we will not have the $2 million gain from the sale of Los Angles center, we realized earlier this year. At $4 of EPS in 2009 we should generate at least $340 million of cash flow defined simply as net income plus depreciation. We believe our anticipated cash flow from future operations and our debt availability gives us ample liquidity to continue to invest for the future or sustain a slow down in business activity should one occur. Preliminary, we anticipate spending no more than $175 million on capital expenditures next year as compared to our estimate of $250 million for 2008. Our 2009 CapEx will be primarily dedicated to support growth of our ROV fleet to meet firm demand. Our CapEx estimate is all inclusive and contains maintenance CapEx projects as well as potential acquisitions. We will not add further Subsea Products manufacturing capacity, and we will be more selective in our acquisition criteria. In summary, with our ability to generate significant annual cash flow and our decision to reduce capital expenditures, we expect to generate a substantial amount of cash which will be available to pay down our debt in 2009. We do not pretend to have a bulletproof business strategy. But do believe our customer spending on deepwater prospects will be less susceptible to a decline in commodity prices than those in shallow water or on land. We continue to like our position in the overall oil field services and products market. Market conditions may change but our commitment to our shareholders remains the same. We have seasoned management in place that has experienced previous oil field service industry cycles. We are confident in our ability to adjust our business plan as maybe dictated by the market. One last comment about 2009, based on our preliminary and conditional estimate of at least $4 earnings per share, we would expect our EPS for the first quarter in the year to be in the range of $0.70 to $0.80. This is consistent with our historical quarterly earnings profile and takes into account normal seasonal declines in activity for our ROV Subsea projects and inspection business. Moving on to our third quarter results; our ROV business achieved record quarterly operating income as we attained all time high days on hire and average operating income on hire of over $3000 per day. During the quarter, we added nine systems to our fleet. At the end of September we had 223 systems available for operations, up 19 from September a year ago. We now anticipate adding approximately 26 new systems to our fleet this year, 10 in the fourth quarter. Our fleet mix utilization during September was 64% in drill support and 36% in construction and field maintenance, this compares to a 61.39% mix in June of this year and a 68.32% mix in September 2007. Sequentially, operating income rose 6%, at 31% operating income margin percentage for the quarter was the highest achieved over the last five years. Average revenue and cost per day on hire declined primarily as a result of a change in job mix to more drill support work. Our fleet utilization rate was 84%, the same as the second quarter but our days on hire increased by 5% as we grew our fleet size. Year-over-year operating income was over 25% higher due primarily to higher than the first three quarters of 2007. We are now projecting annual 2008 ROV operating income growth to be $40 million or more. This would represent a growth rate of about 28% over last year's record. Our Subsea Products segment operating income during the third quarter improved sequentially due to higher throughput at our Multiflex umbilical manufacturing plants. Year-over-year Subsea Products operating income declined on lower sales of specialty products and higher BOP control system engineering and manufacturing cost. We had a good third quarter and remain optimistic about our outlook. However, we did not achieve an improvement in operating results to the extent we had projected earlier. We realized a lower than anticipated operating income margin during the third quarter due to higher development cost on BOP control system and a different mix in specialty product sales. Consequently we now expect our Subsea Products annual operating income growth this year to be approximately 11% or at least $10 million more than 2007 which was up 73% from the prior year. On a general note, we believe our sector of the greater Subsea Products market continues to experience project delays and an overall lower level of activity than we would otherwise expect in a rising deepwater and the Subsea completion market. At the end of the quarter, our products backlog was $334 million down 10% from the end of June largely, due to a drop in umbilical backlog. Given the record level of throughput at our umbilical plans this was not particularly surprising. While bid activity remains at a high level the lack of visibility on timing of the placement of orders causes us to be cautious about forecasting backlog. At this time we're expecting our Subsea Products backlog to remain at the same level or be slightly up at year end. Given the uncertainty of when a umbilical order flow rate will increase we are implementing steps to improve our manufacturing efficiencies. This includes the recent internal announcement of up to a 25% reduction in workforce at our U.K umbilical plant. This right sizing is not expected to diminish our ability to respond to our customer's needs in 2009. It has been apparent for some time that industry servicing umbilical manufacturing capacity exceeds current market demand. We believe a more efficient manufacturing operation will make us more competitive and service well in the intermediate and long term. Our Subsea Projects business as expected and discussed in our last earnings conference call was sequentially comparable to last quarter. Our results included the cost we incurred to mobilize our new charter deepwater vessel the Olympic Intervention IV to the Gulf of Mexico and to complete its final outfitting for service. The OI IV charter began in late July and the vessel commence work in mid December performing inspection and repair work in the aftermath of Hurricane Gustav. Also in mid September one of our dynamically positioned vessels The Performer began work under a one year term contract. This vessel is primarily being used to support man diving in ROV services offshore Angola. This contract represents our first step-out to expand our Gulf of Mexico projects business into the rolling West African Subsea market. Year-over-year Subsea Projects operating income decline is expected due to a softer market for our services as a result to the substantial completion of work associated with the damaged caused by hurricanes, Ivan, Katrina and Rita. For the reasons we've previously discussed including the line down of hurricane work and our vessel dry docks schedule, we anticipate that our Subsea Projects operating income for the year 2008 will be about 25 to 30 million or 27% less than the phenomenal amount we earned in 2007. Moving on to cash flow, if you add depreciation back to our net income, we generated nearly $83 million in cash flow during the third quarter. If you add depreciation back to our operating income, you get $118 million. However you choose to measure our cash generation you'll find an increase of more than 5% over last year's third quarter results. Capital expenditures during the quarter totaled $52 million. These investments were predominately for upgrading and expanding our ROV fleet and our Subsea products manufacturing facilities. Over 80% of our investments during the quarter and over 90% year-to-date have been in our ROV and Subsea product segment. At present we anticipate spending about $250 million in capital expenditures in 2008. The remaining projected expenditures are approximately $50 million, consists mainly of additional ROV fleet growth and organic growth investment in Subsea products. Our balance sheet remains in good condition. As I mentioned earlier, at the end of September, we had debt of $303 million and equity of about $1 billion. Our debt to cap percentage was 24% and as noted in the press release, we believe we will have ample cash flow in 2009 to fund additional growth and to generate the funds to repay debt. If our actual cash inflows fall short of our expectation, we will further reduce capital spending in response to a weaker market environment. The vast majority of our projected CapEx is to fund ROV growth and only a small percentage of the total $175 million is actually committed at this time. Unallocated expenses declined sequentially and year-over-year as a result of lower incentive compensation expense particularly that element related to restricted stock units awarded under a long term plan adopted in 2002, which fluctuates with the closing price of Oceaneering stock at the end of each quarter. Two-thirds of the remaining outstanding restricted stock units under the 2002 plan vest in 2009 and the balance vest in 2010. No awards subsequent to those made under the 2002 plan require mark-to-market accounting. Our other expenses during the quarter consisted primarily of currency translation losses as the U.S dollar strengthened relative to the real in Brazil where we use the dollar as the functional currency. To give you some sense of this, the value of the U.S dollar versus the real increased 20% from the end of June to the end of September. This U.S dollar strengthening, and the resulting expense basically negated the gains recorded in other income as the U.S dollar weakened against the real earlier in the year. For clarification, currency translation gains and losses related to the changes in the U.S dollar exchange rate against the British pound, sterling, or the Norwegian kroner do not flow through our income statement because we use the local currency in those countries as our functional currency for accounting purposes. With this in mind, and based on the relative exchange rate of the U.S dollar to other currencies at this time, we see no material risk to our 2009 EPS estimate of $4 a share related to future currency movements. In summary our third quarter performance overall was in line with what we had anticipated. And we are looking forward to achieving record earnings in 2008 for the fifth consecutive year. Our focus on providing products and services for deepwater and Subsea completions, positions us to participate in a significant secular growth trend in the oil field services and product industry. Looking forward, we see specific signs of a healthy deepwater and Subsea market that will drive demand growth for our services and products in 2009 and beyond. As of the of the end of September, over 95% of the existing 210 floating rigs in the world were under contract. And over 80% of these are contracted through 2009. 100 additional floating rigs were scheduled to be delivered during the remainder of 2008 through 2012 and 70 of those have been contracted long-term for an average of six years. This year, seven new rigs have been delivered, four during the third-quarter. All of these have been placed into service and we have ROVs on all of them with two on one rig for a total of eight vehicles. In addition to the delivered rigs, ROV contracts have been led on 22 of the remaining 100 new rigs and we have won 19 of them to provide 23 ROVs. We anticipate three additional new rigs will be delivered by year-end 2008, and we have the ROV contracts on them to provide four ROVs. In 2009, according to ODS-Petrodata, 25 new rigs are scheduled for delivery. Of these, we currently estimate 19 will actually we placed in service next year. We have the ROV contracts on 13 of these rigs to provide 16 vehicles. And another company has the ROV contracts on two of these rigs. That leaves 4 2009 ROV contracts yet to be awarded, and we are pursuing them. 30 of these rigs are going to work for Petrobras in Brazil, and the others going to work for Reliance in India. Given the recent deterioration in the global credit markets, the decline in the price of oil and the threat of a global recession, it is quite possible that some of the new rigs currently on order may not be built. In fact, construction had not yet started on 34 of the 100 rigs on order as of the end of September. Assuming that 20 of these rigs were either be delayed beyond 2012 or cancelled, this would still represent an additional 80 rigs to the current fleet of 210. So, we're still talking about growth of nearly 40% in the floating rig fleet. And growth of a 190% in the high specification fleet which currently totals 42 rigs. This is the ROV service market we dominate and we believe we're in the pole position to seize this growth opportunity. Moreover, the delays or cancellation being envisioned should not affect 2009 or our projected ROV drill support growth. We believe yesterday's announcement by Transocean of a five year contract award for a new build also a deep water drill ship at a high day rate to begin the fourth quarter of 2010 underscores the strength of the deepwater exploration market even in the current environment. In addition to the current rigs being built an international ship broker reports that about 180 Subsea support vessels are under construction with anticipated delivery days by the end of 2011, of these we estimate that a minimum of 125 will require at least one ROV each. While our ROV business represents our single largest growth opportunity, we like our position in Subsea products as well as our other business segments. With our existing assets, we are well positioned to supply a wide range of the services and products required to support the growing deepwater exploration, development and production efforts of our customers. We believe Oceaneering's business prospects in 2009 and beyond remain promising. We have the financial resources to continue our growth and intend to do so albeit on a tempered basis until we have a better clarity as to how 2009 unfolds. For 2008 we expect our net income to result in record earnings per share of $3.53 to $3.61. For the fourth quarter of 2008, we're projecting EPS in the range of $0.88 to $0.96. Sequentially, we expect quarterly operating income improvements from Subsea products on the strength of higher OIE specialty product sales and Subsea projects due to inspection and repair work necessitated by hurricanes Gustav and Ike. We expect the results from ROV's and mobs to be about the same as that of the third quarter. And we anticipate a sequential quarterly decline in profit contribution from inspection due to normal seasonality. In summary, our quarterly results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well for both the long term and the short term. Our technology gives us operating leverage to take advantage of the high level of deepwater and Subsea completion activity currently underway. The long term market outlook for our deepwater and Subsea service and products offering remains promising despite the recent deterioration in global economic condition. Deepwater remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates at relatively low finding and development cost. We're expecting record annual earnings for the fifth consecutive year in 2008 and with escalating demand for our ROV's and Subsea products, 2009 should be even better. We appreciate everyone's interest in Oceaneering and we'll be pleased to answer any questions. Question And Answer

[Operator Instructions] Your first question comes from Neil Dingmann [ph], your line is open.

Good morning, guys, excellent quarter.

Thank you, Neil.

Say, I was wondering you'd mentioned on at least the cut back in the UK based on sort of what you thought is a I guess, overbuild on the build in the umbilical market. It seems that you think of built weak in that area, are there other areas that you think that are sort of making up for this? Or other particular regions that you think would be exceptionally strong?

I think we've been talking about our lower margins and Subsea products as we added capacity for an order flow rate that did not occur. And we're going through our entire Subsea products operations looking for manufacturing efficiencies. And I think the UK that I indicated where we will be reducing our workforce of up to 25%, it's kind of a leading indicator. We'll be looking at our other operations, but right now there is no current plans that we're prepared to announce.

Okay. And then, wondering, still looks like that ROV looks like demand still seems to be quite good although cut it back to slightly for next year. With that do you envision the operating income per days continuing to move up slightly?

Well, that's ... well with the uncertainty out there. And, but yes, I think even with the strong deepwater, I was just thinking about the new additional rig should be coming in and then adding to that. Yeah, I think the answer is we expect operating income per day to continue to improve.

Okay. I'd like to slip one last one in, just on share buybacks you're still considering increase in that or what is that do?

Well, right now, that is under consideration by our Board and I think it'll probably be discussed at the next meeting in November.

Alright guys, thanks a lot.

Thank you.

Thank you. And next question comes from Byron Pope. Your line is open. Byron Pope - Tudor Pickering & Co.: Good morning.

Yes. Bryon. Byron Pope - Tudor Pickering & Co.: Yes. I just wanted to within the Subsea Products segment, I wanted to get an update if we could on you mentioned the Subsea control systems and just where are we on those? Are we still expecting a delivery caught Q1 in next year, I mean what's the current status on those four and you mentioned kind of higher than expected development cost just wanted to status check on that one?

I think there is no new news on BOP controls, I think the higher manufacturing and engineering cost was a carry over and it's related to the first two systems and they should be delivered either at the end of this year or during the first quarter. Byron Pope - Tudor Pickering & Co.: Okay.

And we expect improved operations for the systems coming after that. Byron Pope - Tudor Pickering & Co.: Okay and then for Subsea Projects with the post Gustav, Ike and work is that, is there is a visibility there such that we should expect stronger activity levels for you guys in that segment extending well into '09, is there that much visibility and just wondering of you could help us quantify the opportunities subsequent to the Hurricanes?

Not at ... the visibility does not extend in to '09 at this time. I mean right now there has mostly been in inspection and emergency repair work. We're not looking for the kind of hurricane related work that Ivan, Katrina and Rita brought us. So I would say not at this time. We're expecting an improvement or I should say strong results from our Subsea Projects in 2009 based on the additional capabilities that the OI III and IV bring us and most of it to be in deep water IRM work. Byron Pope - Tudor Pickering & Co.: Okay. And than one last quick question if I could sneak it in, just your thoughts on maintenance CapEx if I think about it in the context of your '09 CapEx guidance, how much of your maintenance?

We debate that internally and so much of maintenance CapEx is really going to depend upon the market environment that we're in. To give you just a broad number as what I think it's going to be a part of that $175 million estimate I would have to say somewhat around $30 million. Byron Pope - Tudor Pickering & Co.: Okay thanks Marvin, I appreciate it.

Thank you.

The next question comes from Chris Weinstein [ph]. Your line is open.

Yeah thanks. Good morning.

Good morning.

Question regarding ROVs, assuming $65 to $70 a barrel next year, you think under that assumption, how does that change your outlook for ROVs and the operating income you can gone up per day?

Chris, we really haven't correlated our operating income results to a specific price per barrel of oil. I think what we started with was the assumption that it was going to be over 70 and that under the assumption of over 70 we could go ahead and do at least $4 per share. The assumption underlying assumption is at normal deepwater and Subsea completion activity will continue. If we ratchet down oil $5 a barrel I have no way of quantifying that. For ROVs though most of the work that we have is for vehicles under contract. Now will oil companies come to us and want a lower price because the price of oil is dropped I can't predict that. We really don't track ROV contract backlog our premise is that we are on ratings that are under the long-term contract. And if the rigs continue to work, we will continue to work.

Right. If you include the 30 that you expect to add next year, what percentage of the entire fleet is booked through '09?

Well, the answer to that is that the significant portion of our contracts are subject to only to 30 to 90 day cancellation process.

Right.

The stated terms in the contract really don't matter.

And that's what I tried to address that, but I don't see if the rig is continuing to work under interesting contract, the oil company is coming to say, I think an average day rate of 9600 for you is too high because we're spending $800,000 to $1 million a day and we would like to squeeze years by $500.

Right.

So, the likelihood of that we don't imagine as being ... really that being very high. And, I think that if the rigs continue to work, our ROV business segments will be very well. And we believe that the rigs will continue to work under the long term contracts. I mean the Transocean rig, I also read today that, I think it was a pride [ph] rig that got renewed to 1500 foot same line [ph]. So, I see no signs of weakening in deepwater demand for our ROV services.

Okay. Just one quick one, what are ... do you have any estimates in terms of what are your ... what are you thinking for industry wide ROV additions for '09, on top of this 30 that you're expecting to put in there?

We really don't have any good industry data. No one tracks that and ... but I will say that our primary competitors or I should say the other company that have the next largest ROV fleets are adding those vehicles predominantly to service their own internal needs.

Okay.

But I can't quantify how many vehicles they are adding to their fleets.

Okay. Well, thanks a lot. I appreciate it.

Thank you.

Your next question comes from Kevin Pollard. Your line is open.

Hey, Kevin.

Hi. Good morning, everyone. I have a question about your Subsea project's guidance and for to be relatively flat going forward in '09. I guess I was a little surprised by that given, there's probably some element of work to be done from these recent hurricanes. Plus you have the new vessel, the OI IV, plus you're not going to have the headwinds of all the dry docking of your deepwater vessels. I was wondering if you could sort of ... I know the BPE contracts you got to contribute next year. But I was wondering if you could clarify what's causing that defrag, given all the pluses there?

Well, first of all, I think you understand the moving pieces. Secondly, I think with the uptick in Gustav and Ike related work, we're not going to see the decline to the extent that we had earlier envisioned it from 2007. So, it's rising to a higher level. Our fourth quarter results are expected to be better than we had anticipated. So, staying flat is staying at a better level than what we would have envisioned a quarter ago. And lastly, when you look at what segment is more susceptible to a slowdown in activity and dependent upon independence where it is our Gulf of Mexico projects business. So, one of the reasons we are not giving detailed guidance, but Jack made me give the estimates on Subsea projects saying that it's going to be flat, is that there are a lot of variables and we have not been able to quantify yet.

Okay. All right that's fair enough. And then, with regard to the pro forma, moving to West Africa is that something you expect us to see more over where you may be moving additional vessels or perhaps even chartering new vessels to expand in operations internationally?

That is really going to depend upon the opportunities that come up. I mean, it's ... the answer is, we are prepared to look at that. I don't know we'll be moving any more over because demand in the Gulf of Mexico for our lead looks pretty strong but putting the pro forma on a one year contract at good rates was something that we seized that opportunity and we hope to do more other but that really is going to be on a contract by contract opportunity basis.

Okay. If I could squeeze a one last quick one with regard to your headcount reduction in the UK facility how soon will you start to see an improvement in margins from some of these efficiency initiatives. And in addition to the timing I was realizing those, do you think you can those margins back to the '07 levels as with the impact of these initiatives?

Well, it's really going to depend upon the market that we see in 2009. The answer to your first question is we're going to see some of those efficiencies start to flow into our operations in the first quarter of 2009, on a apples-to-apples basis. But whether or not that's going to translate to an improvement in margin ... I mean you got a lot of things that go into our margins. What we're seeing is we're squeezing cost out of our operations to be more competitive. And hopefully, that translates into us wining more work and being more profitable. I haven't taken a look at it in such detail I can tell you these is going to me some quantifiable impact on the operating income percentage line.

Okay. Thanks a lot I appreciate it.

Thank you.

The next question comes from Joe Gibney. Your line is open.

Hi Joe.

Yes, guys.

Good morning.

Most of my questions has been answered just want to follow-up on the mix side relative to ROV a good job on the operating income side. There's obviously a little modest degradation in the average revenue per unit, just curious higher drill support mix this quarter in the wake of the hurricane any change to that as we look into the fourth quarter a little bit higher work class mix or you are kind of still probably holding the 65%ish drill support range?

We knew that one day we were going to break our strength of consecutive quarter increases and average day rate per our average revenue per day on hire. We're real pleased to broken that strength when we set an improvement in our operating income from margins, so there is some correlation there that we were able to reduce our cost. Those snapshots that we give you at the end of or during the month of the quarter end are really that and I don't ... I think they're indicative of that quarter's activity and nothing more. As many rig opportunities there are we seem to be learning of as many vessel opportunities. So we have no crystal ball to tell us if that's going to move 1% either way or not and I don't think it had anything to do with the hurricane.

Right.

Just Joe, I mean ... right when we told you we intended to add 10 vehicles in service in the last quarter and only three of those according what we told you are going to on new rig.

Okay.

But 37 of others are going on lot of other things.

Sure. Absolute, you're right, I appreciate.

Butif we give you an answer to that in next quarter results may not turn out to exactly what we tell you now.

Sure, fair enough. Alright, I appreciate it.

[Operator Instructions]. The next question comes from Victor Marchon. Your line is open.

Good morning, guys, and thank you. Marvin just had a question I apologize if you had talked on this already. It's just on the ROVs on operating margins. It was a significant jump in the quarter and somewhat of a step change coming out of that mid to high 20% range of the last couple of years. And I just want to see if that was sort of the new run rate for that business going forward or was there something that was one time or an anomaly in the quarter that pushed it up a couple of 100 basis points?

There wasn't anything in the quarter that was an anomaly that pushed it up a couple of 100 basis points. However, I would not take one very good quarter and extrapolate it. I don't think there's a new shift to a higher plateau of operating income margins, I think costs are not daily, I mean, everything in our operations that those costs change and not a fixed daily amount is what I was trying to say. And I would not change my model based on one quarter operating income margin of 31%.

That's great. And then, another one I had was on The Producer. Are you guys going to be looking to sell that asset or are you going to be looking to a market that vessel?

I think at this time we would be looking to redeploy the producer and find another contract for it.

Okay.

But I think what our expectations are is that it would take some time to do that. And after being on location for 7 years without interruption, 7 plus years, it would take some maintenance CapEx to get it back into shape that it could stay on the next location for an extended period of time. And I haven't included that maintenance CapEx in my $30 million assumption. That will be based on a contract that we will be building towards.

Great, okay, I appreciate that. That's all I had, thank you.

Thank you.

The next questions come from Brad Hambler [ph], your line is open.

Thanks, good morning.

Good morning Brad [ph].

Couple of unrelated things I guess. Just first on the performer, a 1 year contract, can you speak to what you might see sort of longer term. Someone else I know, asked about other vessels, but you think for The Performer like this, might this yield sort of follow yearly contracts or something kind of be a longer term position do you think?

The answer is, yes, it could be. There is no indication now that it's for anything more than a one year period. So, I mean, I really don't know what the market's going to be like 365 days from now. But the answer I mean, if we stay there one year we could definitely extend it.

Okay, but the scope for work if you understand it for now is 1 year?

Yes sir, very much so.

There is no options being considers? There is nothing actively being considered?

Not at this early, it was in mid September not in not at this early in the game.

No, I didn't know that was sort of the basis under what you even started to talk to.

I appreciate your question. Yes, I understand but no, we have nothing to add that would indicate that it would be longer than that.

Okay, that's fair enough. On unrelated follow up then, in your comments and I understand there was lot of prudence brought to a number of things in these comments. But you mentioned I think something about acquisitions and maybe a different tone with respect to acquisitions. I'm hoping to draw you out a little bit on that in the sense that if things soften up as they might here. There is presumably a chance to pick up some companies in interesting businesses that you, I think have been targeting for some time any way. So, again some sort of an open ended question but maybe you could speak to philosophically how you might think about acquisitions now?

Philosophically, the first way we think of acquisitions in this environment is we've seen a serious compression in multiple is to Oceaneering stock. And if a potential seller have the same expectations as he may have had a year ago, we would not be interested at that price. One of the things that we are fortunate is our financial flexibility allows us to do what you just suggested and to be opportunistic should something come across the board, it says they are willing to sell at a reasonable price, and we want to be able to move on that. I don't know that's going to occur in 2009 or not in the space that we play. So, but, if that is, I mean, we definitely are going to stick to our tradition of being opportunistic in making acquisitions when that is the best use of our cash flow. But it is going to be on a much stricter criteria because I think the evaluations are out of lack right now, but as long as they are, we are not going to pay somebody a higher multiple than we are getting in the stock market.

Makes sense. And that spread if you will as why do not that in your comments this morning, you would suggest that there's probably very little that you will do. Again then being the prudent kind that they are because that's [indiscernible].

I think that's fair, and, I mean, that says that we have a very little in the queue. But if we do, pull the trigger on any of them, it will be because they represent to us growth opportunities and a better opportunity than buying back Oceaneering stock as treasury stock.

Okay sure. I appreciate the clarification. Thank, guys.

Thank you.

The next question comes from Thad Vayda, your line is open. Thaddeus Vayda - Stifel Nicolaus & Co.: Thank you. Two quick questions, both relating to umbilicals; first, with regard to the restructuring of your U.K manufacturing facility, what you think the report of magnitude cost is going to be, and when do you expect to incur that. And then the second question it relates to the excess manufacturing capacity umbilicals, could you remind me again approximately where that stands right now? And, in that context, have you seen more pricing pressure, more aggressive pricing than usual. Thanks.

Okay. We have not quantified, we have not identified the individuals and in UK law their tenure with the company is going to depend upon their redundancy cost as they call it, so I don't have an answer as to how much that cost is going to be, I can't tell you that we will incur that cost in the fourth quarter and we have included in our estimate for the fourth quarter in that range an amount that we think is prudent. Worldwide capacity for umbilicals has not changed nobody is added a new plant or we're not aware of any one adding a new plant. And with the order rate begin as lumpy as it has been and so many orders being delayed I can't quantify where we are on capacity. I mean, that's a pretty elusive thing depending upon steel too and thermoplastic mix. One thing that I do want to say is we are, we continue to remain optimistic that the next five years of umbilical orders will be substantially over much higher rate than the previous five years that we have incurred. But we just think these manufacturing efficiencies are going to serve us well and will not limit our ability to serve our customers. As far as pricing pressure, the umbilical market, because of the excess capacity, we've reported several times and over and over again, continues to be very competitive. Has pricing pressure increased I hope not I haven't seen any signs that its gotten any worse, but I haven't seen any signs that its getting any better reason. It all depends upon which contract and who has an empty spot in their plant that they need to fill and that's what's keeps margins from umbilicals at a lower level than what we would hope they would be. Thaddeus Vayda - Stifel Nicolaus & Co.: Great thank you.

Thank you.

Our last question comes from Waqar Syed. Your line is open.

Hi, Waqar.

Hi, good morning. Couple of questions here, first are you seeing any impact on the margins because of lowering of steel prices on our steel umbilical side?

Not yet, not at this time I mean that is one of the things that we are expecting is that commodity prices steel and copper should come down. And it all depends upon the level of order rate to see if that's going to translate into better margins. And we hope that it is but I have nothing to report at this time, there's just not been enough order flow since this economic crisis started for me to be able to have two data points that I could extrapolate.

And second, on some of you're small businesses inspection or ADTECH. What is the revenue relationship of these businesses to oil prices or global GDP or how should we thinking about those businesses over the next year? And then, also more specifically on the navy contract, anything recent on the contract with the space suits?

Okay. I don't think our add-tech revenues could be co-related to the price of oil. But I think the next administration whoever that may be, is going to have more impact on government budgets than the price of oil. And how the global economy impacts that is yet to be seen. We have no new news on the consolation space suit contract. I think that's being in the process as press has reported of being reevaluated. And we still remain confident that we will ultimately be selected or confirmed as the selective provider. I don't think that's going to have much impact on 2009 one way or the other. Regarding inspection, I really see that the inspection is so key to the existing infrastructure and integrity management of the existing energy infrastructure, refineries, power plants, offshore facilities that I don't see much impact in the global economy and our inspection prospects.

Okay. And then just on the M&A side what do you see, you mentioned a few words on potential acquisitions. How do you and the Board and everybody else feels about being on other side given that you're such an attractive business and could be at current valuation look pretty attractive. Are you hearing companies make movements talking to you or anything like that?

First of all, I guess, it's better to be attractive than to be otherwise. So, I'm glad you think that this price, because we do, we think it's a very attractive investment opportunity. Secondly, we pretty much focus on what we can influence or control. And I think somebody acquiring Oceaneering is outside of our influence or control. And lastly, I am not aware ... I know no one has called me, and I am not aware of any calls to anyone about such matters.

Thank you very much.

Thank you.

We have no further questions.

Alright thank you very much for your interest, and I hope you have a good day. Bye-bye.

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