Oceaneering International, Inc. (OII) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Tammy, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2015, Q1 Earnings Release Conference Call. [Operator Instructions] Thank you. Mr. Jurkoshek, you may begin your conference.

Thank you. Good morning, everybody, and thanks for joining us. As usual, a webcast for this event is being made available through the StreetEvents Network service with Thomson Reuters. Joining me today are Kevin McEvoy, our Chief Executive Officer, who will be leading the call; Marvin Migura, our Executive Vice President; and Cardon Gerner, our Senior Vice President and Chief Financial Officer. Just as a reminder, remarks we make during the course of the call regarding our earnings guidance, business strategy, plans for future operation, 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 to turn the call over to Kevin.

Good morning. Thanks for joining the call and your interest in Oceaneering. Year-over-year and sequentially, our quarterly earnings were down, primarily as a result of lower demand and pricing for many of the services and products we offer. This was attributable to the significant drop in crude oil prices since June 2014, which in turn has led to oil and gas industry reductions in both capital and the operating expenditures. 2015 is shaping up to be a very challenging year despite first quarter EPS exceeding our guidance. Our above guidance performance through a considerable extent was attributable to an acceleration of forecasted work in Subsea Products, notably umbilical plants, throughput of our – throughput in our Panama City, Florida facility and Subsea Projects, specifically a large high-grade remediation projects in the Gulf of Mexico. We also benefited from cost reduction measures we put in place, including rightsizing our workforce, reducing training expenses and obtaining price concessions from our suppliers. Since our last earnings release, our oilfield business outlook for the remaining quarters of this year has weakened for ROVs, Subsea Projects and asset integrity. We are challenged with materially lower demand, customers demanding price concessions and competitors willing to dramatically reduce prices to secure utilization for their assets. Consequently, we are lowering our 2015 EPS guidance to a range of $2.80 to $3.20, down from $3.10 to $3.50. As I stated on our last quarterly earnings call, we do not pretend to have a better crystal ball than others. Our revised EPS guidance represents our view of our business prospects at this time. We acknowledge that the precipitous declines in demand and pricing taking place within the oilfield markets we serve are unrivaled in recent history. Our earnings for the balance of 2015 will largely be determined by a vessel-based inspection maintenance and repair or IMR work and floating drilling rig use. The majority of IMR activity is performed on a callout or spot market basis, and it impacts the results of our ROV Subsea Products, particularly tooling, and Subsea Projects business. These short-cycle jobs normally have low visibility, but in 2015, when many of our customers are curtailing OpEx spending, the risks associated with this works materializing are high. Additionally, our results will continue to be dependent on floating rig use, especially, those rigs with contracts expiring during the remainder of this year. During the quarter, we paid $27 million in cash dividends, and repurchased 1.1 million shares of our common stock at a cost of about $86 million. Additionally, earlier this month, we completed the acquisition of C&C Technologies, a global provider of survey and satellite-based positioning services. The acquisition price of approximately $230 million was paid in cash. I’d now like to review our operations for the first quarter. Year-over-year and sequentially, ROV operating income declined due to a decrease in days on hire, largely to provide drill support services, and lower average pricing, mainly due to a weakening of the Norwegian kroner, and exchange rate relative to the U.S. dollar and a reduced average manning level per ROV day-on-hire. Our fleet utilization rate during the quarter was 73%, compared to 86% a year ago, and 80% last quarter. Operating margin for the quarter was 28%, down from 30% a year ago, and 31% last quarter. During the quarter, we put four new ROVs into service and retired four. At the end of March, we had 336 assistants available for operations, up from 314 a year ago. Two of the new ROVs went to work in drill support service and the other two went to work on board a vessel. Our fleet mix during the quarter was 71% in drill support and 29% on vessel-based work, compared to a 72%, 28% mix, both sequentially and year-over-year. At the end of March, we had 155 ROVs on 151 floating drilling rigs or 58% of the 261 floaters under contract. This compares to having ROVs on 59% of the rigs contracted at the end of March 2014, and the end of December 2014. Asset integrity operating income declined year-over-year and sequentially on lower service demand in most of the areas in which we operate, notably Norway, due to reductions in our customers operating and capital expenditures. Our customers are deferring maintenance work whenever possible, which is affecting our inspection and NDT services, and reducing their CapEx programs, which is affecting demand for our engineering services. As for our remaining business operations for the first quarter, year-over-year Subsea products operating income declined primarily due to lower demand for Subsea hardware, mainly BOP control system replacements and clamp connectors. Operating income declined sequentially, largely on lower demand for tooling and BOP control system replacement. Our Subsea products backlog at quarter end was $788 million, up $98 million from December 2014, but down $106 million from March 2014. Sequentially backlog improved on the strength of two large umbilical awards, including a contract for the Offshore Cape Three Points Block Project located offshore Ghana, which added over $100 million to our backlog. Year-over-year the backlog decline was attributable to decreases in orders for umbilicals, tooling and Subsea hardware. Subsea project’s operating income improved year-over-year on the commencement of diving services offshore Angola. Sequentially operating income declined from a record high on lower vessel activity, and pricing in the U.S. Gulf of Mexico, and an increase in regulatory vessel inspection expenses. Advanced Technologies operating income was higher year-over-year on an increase in profitability on theme park work. Sequentially, operating increase declined on lower U.S. Navy and industrial project activity. In summary, 2015 will be a very challenging year, I believe we are well positioned and up to the task of making the most of it. We generated $165 million of EBITDA during the quarter. Capital expenditures for the quarter totaled about $49 million. $22 million was invested in ROVs and $22 million was spent on Subsea Products. Now, let’s talk about our 2015 EPS outlook. As I mentioned earlier, since our last quarterly earnings release, our oilfield business outlook for the remainder of the year has substantially weakened for ROV, Subsea Projects, and Asset Integrity. ROVs on lower service demand, primarily to support drilling. 50 or roughly a third of the rigs, we had ROVs on at the end of March had contract terms expiring during this year. The future work prospects for these rigs has significantly deteriorated. We currently anticipate follow-on rig work for about half of our – approximately 7,000 uncontracted ROV days on these rigs. Subsea Projects, primarily on lower demand and pricing for deepwater vessel and diving services in the Gulf of Mexico. Lower demand is attributable to a decline in the installation activity and the postponement of maintenance work. Lower pricing is due to an oversupply of vessels, related to the level of demand, and Asset Integrity on lower demand, and increasing pressure for our services globally. Subsea Products is also expected to be down somewhat on lower demand for field development hardware related service work, and lower tooling rentals to support field development and well abandonment activities. We are challenged with materially weaker near-term demand, customers demanding price concessions and competitors willing to dramatically reduce prices to secure utilization for their assets. Consequently, we lowered our 2015 EPS guidance to a range of $2.80 to $3.20. We anticipate generating at least $515 million of EBITDA during the remaining three quarters of 2015 for our projected total of $680 million. At the end of March, we had $305 million in cash, $50 million available to be drawn on a three-year delayed-draw term loan, and an undrawn $500 million revolver. We’ve subsequently drawn down the remaining $50 million on the term loan. Our organic CapEx estimate for this year remains between $200 million and $250 million, down from $387 million in 2014. We intend to continue paying a quarterly cash dividend, which is currently $0.27 a share. Other uses of capital may include share repurchases. At the end of March, we had authorization to repurchase 8.9 million shares, about 9% of our shares outstanding. We intend to continue our practice of announcing share repurchases, if any, on a quarterly basis. Moving on to our second quarter outlook, we are projecting EPS in a range of $0.64 to $0.70, which sequentially takes into account normal seasonality and project finding issues. On a year-over-year basis, it reflects lower demand and pricing for many of the services and products we offer, higher interest expense and the lower share count. Sequentially, we anticipate quarterly operating income declines from ROVs on decrease in days-on-hire and lower average pricing due to customer demands for discounts and Subsea Products on lower umbilical plant throughput. We anticipate sequential operating income improvements from Subsea Projects our normal seasonal increase in demand in the Gulf of Mexico, and the reduction in regulatory vessel inspection expenses. Asset Integrity on seasonably higher service demands performed refinery turnarounds in Europe and offshore platform inspections in the North Sea and the Gulf of Mexico, and Advanced Technologies on higher demand for U.S. Navy ship repair work. We are expecting year-over-year second quarter operating profit declines for each of our oilfield business segments, due to lower demand and pricing for the many – for many other service – services and products we offer. ADTECH operating income is expected to be higher, due to improved operational execution and increases in U.S. Navy and theme park activity. On a macro basis, we remain convinced that our strategy to focus on providing services and products to facilitate deepwater exploration and production remains sound. Deepwater is expected to continue to play a critical role in global oil supply growth, despite its large capital commitments, technical challenges in the current commodity price environment. Therefore, we anticipate demand for our deepwater services and products will rebound and rise over time, and believe our long-term business prospects remain promising. We’re well-positioned to supply a wide range of the services and products required to safely support the deepwater efforts of our customers, and have the cash flow and liquidity to manage our business, due to current low commodity price environment. In conclusion for 2015, we’re faced with a slowdown in deepwater activity and consequently, are expecting that our EPS would be lower than in 2014. Certainly, this is a challenging time, but we believe, we are well-positioned in the market and up to the task of managing the company through this [indiscernible] period. Market conditions may change, but our commitment to deliver results to our shareholders remains the same. We are focused on cash flow generation and cost control and have already taken actions to right size our workforce where needed, and we will take further measures if demand falls short of our expected levels. We appreciate everyone’s interest in Oceaneering. I will now be happy to take any questions you may have.

[Operator Instructions] And your first question comes from the line of James West, Evercore ISI.

Hey, good morning, guys.

Good morning.

Good morning.

Kevin, you mentioned a couple of times, your dramatically reduce pricing from your competitors, I’m curious, it sounds likes that’s more in the, the heavy asset side. Is that – is it ROVs, is it diving, which segment in particular you’ve seen kind of the most, kind of aggressive predatory pricing?

It’s on the vessel side.

Okay. And I know they are working at rates that you’re just unwilling to work at or that is under-cutting you on contracts?

Well, everybody is trying get utilization and at times like this, it’s all about price. So, in order to keep our assets employed, we’ve got to be at the market price. So, margins are getting compressed.

Okay. Okay. Fair enough. And then on the – I mean the maybe on the Subsea kind of products side, we’re hearing from – FMC yesterday and Cameron today, while this year is going to be a little bit challenging to FMC maybe on orders and Cameron were rosy about orders, I think both were pretty optimistic about recovery in 2016, I know, your business might be a bit shorter cycled, but did you agree with that assessment that this is kind of a – kind of bottomed out here in 2015 and we’ll see an upturn in 2016?

Well, perhaps, I will go ahead with my remarks by saying, nobody really knows, but…

Sure.

My feeling at the moment is that, even if prices rebound to what the general consensus seems to be i.e., circa $70 or so, I find it hard to believe, that the big oil companies are going to immediately just go back to business as usual, given that they were already struggling at $100. So I think, there is some structural changes that will be taking place. And they’ll be inwardly focused on how to reduce cost, trying to manage their free cash flow and figure out what they will do with the capital that they have. And I expect that it could be beyond 2016 before it really gets back into a more predictable mode.

James, this is Marvin.

Sure.

The other thing, I mean, if it does recover for Cameron FDI and that will be a good news for us. But we are way more impacted by the rate at which fees get installed than at the rate of which they get ordered. So we’re looking for development work to increase, so if they order trees, we know it’s coming down the line, but we just don’t know when.

Okay. Okay. Fair enough. So for you guys it maybe a little bit of a prolonged downturn relative to others.

It’d be.

Okay.

Your next question comes from the line of John Donnel, Howard Weil.

Good morning.

Good morning John.

Good morning John.

Regarding the pricing commentary and specific on the projects side, is any of that flowing over into the BP contract that you have in Angola or is just more on the call out work at this point in time?

It’s kind of everywhere.

Yeah. Everybody wants a concession.

Okay. And then, is the...

Even if it’s already contracted.

Sure. Are you able to get anything from the operators in return in terms of more volume or longer terms or at this point, is it just purely pricing concessions?

Well, we are obviously trying for both of those in return. But, as demand is weakening, that’s kind of counterintuitive of how much of that’s going to be. We certainly have gotten some concessions, we’ve traded some work for some other work and it depends on the operator and what not. But, I’d say – at this point, the bulk of conversations across the spectrum of our oilfield customers is really short-term about the price.

And Jon, it is on a case-by-case basis depending upon the customer and the region.

Okay. Yeah, fair enough. And then, I guess, some more then on the CNC Technology acquisition here. I think when you first announced that, you were thinking something in the neighborhood of $20 million to $30 million of EBITDA over the next 12 months. How, if any, has that outlook changed here just given the changes in the market since that was first announced?

Yeah, Jon. I think – since we’ve owned them for less than a month, it’d be easy to say that it’s too early to tell. But, we’ll also say that CNC’s operations are definitely not immune to the downturn. And we took this possibility into consideration during the acquisition process, however, the rate of deceleration offshore maybe greater than we anticipated. So, we’re not going to go ahead and revise our sub-segment EBITDA. We’ll look for outlook at this time. And regardless of the near-term, we acquired C&C for the long-term and we believe it will be a very good part of Oceaneering’s portfolio.

Okay.

Your next question comes from the line Ian Macpherson with Simmons.

Hey, thank you. I was wondering if you could say, based on your assumptions for uncontracted time on your ROVs for the balance of the year, do you see your ROV activity flattening out or continuing to decline significantly from where we thought in the first quarter?

Ask that again, Ian. I’m sorry, I...

I’m wondering, if there is a meaningful downside in your outlook to the ROV activity level in terms of days worked relative to Q1?

Okay.

Is the trough could be much lower and do you see a flattening out based on the assumptions you’re using right now?

Well, I think, Kevin discussed that we had 7,000 uncontracted days on – ROV days on rigs that we’re on, that have contracts expiring in – in the balance of 2015 and we have assumed a 50% utilization of those specific rigs in general. I mean, we went rig-by-rig looking at it and it just came up to be which rigs we thought we were going to continue to that – they were going to continue to work than we would. So, I think, is there a downside? Yes. I mean, we try to quantify that part of it, but also as Kevin mentioned, the vessel base call out work is really going to be in the amount of IMR that the operators are going to do is really going to be the determining factor of our ROV utilization. And both of these are unknown, but we will say that our guidance assume that utilization of ROVs will hover around 70% for the balance of the year.

Okay. That’s good. Thanks.

Your next question comes from the line of Jim Wicklund with Credit Suisse.

Hey, guys.

Good morning, Jim.

I know – can you hear me?

Yes, sir.

Okay. I know that you don’t know when things are going to turn, you said one day over time. But what should we look for or what you look for to see that the market is improving. I mean other than waiting for oil prices to come back, you mentioned the structural change. Kevin, one of the things we should look for over the next year or two, three, four, five or however long it takes, to know that the deepwater is coming back?

Well, Jim the first thing as new projects going ahead, orders per trees and then eventually, we’ll get orders for umbilicals and that will tell you it’s coming back closer to one things you’re going to get installed is usually when it really starts to make a difference to us.

Your next question comes from the line of Chase Mulvehill with SunTrust.

Hi, thanks. This is Josh Large on for Chase. I just want to continue with the ROV question. So we’ve kind of got utilization for the balance of the year, how should we think about margins, is this the bottom this quarter or should we think of a deterioration kind of going forward?

Well, I mean that’s pretty hard to predict. I mean, we certainly are hoping that we’re seeing the bottom in terms of pricing and margins certainly on the rig side of the [ph] legacy here, but we’ll have to see. I mean we’re not – there’s nothing out there that we see that would suggest that it will deteriorate significantly more, apart from what happens on vessel pricing, and that would impact our ROV pricing there.

And I don’t think that the full extent of the pricing concessions negotiated in Q1 have been gone through the income statement. But offsetting that are some pretty substantial cost reduction. So we’re not going to call the bottom. But right now, we think it’s going to be so much as what Kevin said before is timing and rate of utilization of vessel-based ROVs and the callout work.

Okay. Great. And then on buybacks, should we think of that more as free cash flow, I know you’ve mentioned in the past that net debt-to-EBITDA that you are kind of comfortable with. Should we think of the company kind of levering up to that or just free cash flow for this year?

I think that our leverage ratios that we gave before, we are certainly going to be fairly conservative during this period of time. And we will tend to hold onto more cash than we would, then we otherwise that market was really good. So, we need to be conservative, we want to be able to take advantage of opportunities that is there. We also need to be very conservative about maintaining our liquidity.

All right. Thank you.

[Operator Instructions] And your next question comes from the line of Ole Slorer, Morgan Stanley.

Thank you very much. Your Subsea Products margins at 20.8%, very strong. Is there any different dynamic going on in that market where there may be more proprietary products or what are the sort of pricing trends that you see their compared to your other businesses?

Ole, our products are stronger than many others because of the service element that we have in tooling and IWOCS. And I would say that the market trend for IWOCS has been remain strong as most of the work is being down offshore from a drilling rig relates to completions and therefore IWOCs demand has held up rather well. Going forward, the pricing on umbilicals continues to be challenged and tooling is really going to be a matter of utilization on vessel callout. And I think that – that sort of covers the top three, right? I mean, it’s really – how much maintenance work...

I understand.

How much maintenance work our company is able to postpone, and therefore, what will that next be in our products results.

And we’ve postponed a lot. So, hopefully that has to come back again at some point. My follow-up question would be on your repair and maintenance side. I mean, you’ve gone in a way long multi-purpose supply boats, and I think we all realized how bad the over capacity is in the supply boat market, and where the capacity also being delivered into that market for the next 12 months to 18 months. And I just wonder, to what extent, how long vessels are at the moment and how much of an issue is that for you when you are talking about your margin out, but let’s say compared to if you had a more short-term targets and you able to pass those costs on?

Well I think, I mean first of all what the market demand is going to end up to be in the Gulf of Mexico in terms of us being able to keep our vessels here employed remains to be seen. But in 2016, we do have opportunities to release a boat or two if we should be and have to be the right thing to do.

So you can re-price in 2016?

Well, we can release.

Or we may contract or re-price, yeah.

Let’s say prices have dropped to a fair amount.

Yes. Yeah.

You can [indiscernible] on much lower prices?

We could, yes.

And the timing of that in 2016, how should I think about that?

Late second quarter – or yeah, at the end of the second quarter or early third quarter.

Okay. Thanks for that.

It will be consistent with delivery of our new boat, the Jones Act vessel that we are building, which we still believe – well although we still believe that the Jones Act vessel will have a marketing advantage in the Gulf of Mexico over other foreign flag vessels of similar capability.

Your next question comes from the line of Daniel Burke, Johnson Rice.

Good morning, guys.

Hi.

Hi.

Just have one left on Subsea Products, I understood that the timing influence and the pull forward in Q1, and how that affects Q2, and understand that visibility is limited, but whether this is – this question is specifically directed on vehicles and more broadly on products. Do you have visibility into products top line in the second half 2015 looking stronger than first half 2015?

I think just generally our, all of Oceaneering’s second half is stronger than first half, consistent with every year. So – and I think, it really depends on project timing and at the rate at which we push it through, but I would say that we are expecting a stronger second half in products than first half.

And Marvin is that true across all, I guess four of the major products sub segments or can you differentiate amongst them as you look to the second half? I’m surprised for example that tooling will be stronger second half than first half maybe?

Well, it really depend. I mean, the third quarter is when I mean, almost sound like a broken record about a lot depends on the rate at which our customers do inspection, maintenance and repair particularly in the Gulf of Mexico globally, because vessel utilization drives our utilization of ROVs and demand for tooling. So there’s a lot callout work is short cycle expected in our second half forecast, even though we are saying it will be lower than last year.

Okay. Guys, that’s helpful. That’s really all I have left. Thank you.

Your last question comes from the line of Ian Macpherson, Simmons.

That’s it’s for me. I was going to ask the same thing on the second half waiting, I guess the only thing I would ask for clarification is. Do you think the ROVs will be up in the second half or the first half? That’s the one where I’m struggling a little bit.

Not at this time.

Okay.

We don’t. We’re not – at our midpoint, we don’t see it up.

Got it. Okay, thanks for that clarification.

There are no further questions. Do you any closing remarks?

Yes. Since there are no more questions, I’d like to wrap up by thanking everyone for joining the call. And this concludes our first quarter 2015 conference call. Have a good day. Bye-bye.