Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oceaneering’s 2016 Fourth Quarter and Full Year 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.

Thank you, Sarah. Good morning. My name is Suzanne Spera, Director of Investor Relations for Oceaneering. Welcome to our fourth quarter and full year 2016 results conference call. Today’s call is being webcast and a replay will be available on Oceaneering’s website. Joining us on the call are Kevin McEvoy, Chief Executive Officer, who will be providing our prepared comments; Rod Larson, President; Alan Curtis, Chief Financial Officer; and Marvin Migura, Senior Vice President. Before we begin, I would just like to remind participants that statements we make during the course of this call regarding our future financial performance, business strategy, plans for future operations, and industry conditions are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our fourth quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Kevin.

Good morning and thanks for joining the call today. One year ago, on our fourth quarter and year-end 2015 earnings call, I talked to you about what a tough year 2015 was and with such limited visibility we could not predict how weak 2016 might actually be. Well, one year later, with 2016 in our rearview mirror, we can hardly wait to welcome back those tough times we experienced in 2015. For 2016, adjusted operating income of $135 million represented a 69% fall from the $440 million achieved during 2015. We really did not foresee the extent of this precipitous drop caused by a major reduction of activity levels and pricing across all of our oilfield operating segments. Regardless, we are very pleased that during the year, we were able to adjust our cost structure to remain profitable between all of our operating segments and continue to generate a substantial amount of free cash flow. Today, we still have limited visibility and activity levels continue to indicate a downward trajectory, with customer offshore spending levels still being curtailed or even lower. Consequently, we are forecasting a further decline in our profitability or operating margins for 2017. On last year’s call, I mentioned that we had undertaken a series of initiatives to align our operations with the then current and anticipated decline in activity and pricing levels. Our focus has been organizing more effectively and managing our cost structure. Accordingly, these restructuring steps included a sizeable reduction in our workforce. We made these difficult decisions to enable our organization to be leaner and appropriately sized with the expected level of business. We believe our demonstrated cash flow generating capabilities and our liquidity provide us ample resources not only to manage our business to this prolonged downturn in activity, but to also…

[Operator Instructions]. The first question comes from the line of Vebs Vaishnav from Cowen. Your line is open.

Good morning and thank you for taking my question. Couple of clarifications, so maybe I wasn’t able to jot down everything correctly, but did you guys do about 30% EBITDA margins for ROVs?

No, I think we reported 35% EBITDA margin on ROVs. When Kevin’s comment was for 2017 we expect to be above 30%.

Okay, okay. And under unallocated, did you guys speak about mid-to 20s unallocated expense per quarter or did I misheard that…

Mid-to-upper 20s for the unallocated expenses going forward in 2017.

Okay. Speaking about ROVs, what drove such significant improvement in number of ROVs on the support business, was it driven by Heerema or something else? And more importantly, is that sustainable going forward?

Actually Vebs, we didn’t really see an appreciable difference in the vessel market versus the rig market in Q4. I think it was nominally the same, it may have actually ticked up a percent in favor of rig support during Q4, but we’re anticipating seeing more of a shift to the vessels outside of the market in 2017.

Okay. And one quick question on Subsea Products, if you can help us think about the manufactured versus service and rental split for fourth quarter?

I’m sorry, didn’t hear that question.

The revenue split between the service and rental and how much came from the backlog of manufactured products.

I think we’ll report that when we report the K.

All right. Thanks for taking my questions.

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

Good morning.

Good morning.

Couple of questions just kind of broad strokes on the product segment, first of all, you cited in the release in terms of backlog umblicals is depleting in terms of percent. I would imagine that would stand for what we’re seeing in terms of order flow and I was just looking for commentary on what that might do to kind of the velocity of the order flow turn. Should we consider the incoming for Q4 is something that may be turning faster within your business than it would normally if umblicals were crowding order flow?

I would not say it’s increasing. I think Blake your question is…

Our short cycle is representing more of our Subsea Products, so therefore the turn of orders to revenue is quicker, and the answer is in that case, absolutely.

Okay, okay. And is it as meaningful I mean you pointed out that the trend is now meaningful and your backlog away from normal percentages umbilicals, is that true for what we’re seeing from order flow as well?

I think because of the lumpiness of umbilical orders, it’s really hard to try to develop a trend with one quarter of data. So I would say there’s yet to be seen I mean for us to be able to maintain that single to mid – high margin rate, we are counting on some pending orders being awarded. So the mix, going forward, is really going to be – yet to be determined and it is going to be a significant factor our profitability.

Okay, great. And then, just again bigger picture question, it looked like the second half of last year, you did some pairing of the ROV fleet. I guess as we enter the current year and we look at your listed fleet count, I mean is this -- are we at the point where we consider all this extremely viable, there’s not a lot of carry issues or deterioration and all applicable to what you see out there in today’s market?

No, our fleet is in great shape, Blake. And so for us, there’s not a lot of I guess slow movers that we would be taken out. So we’ve got a good looking fleet, we’re just looking for more places to put it.

Great. That’s exactly what I was looking for that the major pairing was done. Appreciate it. I’ll turn it back.

Your next question comes from the line of Ken Sill from SunTrust Robinson Humphrey. Your line is open.

Yeah, good morning. I had a question on Asset Integrity, you’re kind of guiding that to be down modestly and I was wondering if you guys have any feel for how much of that is projects or maintenance being deferred and when some of that might actually have to start being done given the increased amount of infrastructure that's out there, even in a low rig count environment.

Well we have continued to beat some of the prices of low level of activity in the Asset Integrity space, for the reasons that you alluded to i.e. regulation and the rest of it, but we are still seeing reduced spending in this area. Hopefully, it will pick up but first quarter is going to be slow just because of seasonality in any event, so by second quarter we should maybe start seeing some mitigation of what the business volume is going to be in 2017.

Yeah, and I think if you look at quarter four to quarter one, quarter four we benefited from some projects that we closed out on and we’re very successful and so that helped our fourth quarter and Q1 we’re expecting seasonality as Kevin alluded to. But I think when you look at his comments earlier, we’re only expecting Asset Integrity to be down slightly for the year.

Which is positive. And there’s a lot of people writing comments that you’re going to have to see an uptick in FIDs, you can’t just not approve projects forever. I was wondering if you can kind of give us, based on your discussions with customers or other contractors, what do you see in terms of the potential projects that could be approved or put up for – this year and how that might progress through your crystal ball if oil prices get $60 to $65 range?

I would say, we’re out talking to people all the time and so, the positive nature what we hear is largely based on more on their ability to cut their cost, to standardize, to get the project cost down so that they can move ahead. So I don’t think it’s entirely predicated on the price of oil which is good, I mean -- for the drop and these so if I take that and put it out against the predictions that we will have more FIDs in 2017, I think it correlates really well with what we’re hearing from the customers.

But how would that compare to what we were seeing a few years ago?

I still think that we would be behind 2014 level obviously.

All right. Thanks guys.

Your next question comes from the line of Chase Mulvehill from Wolfe Research. Your line is open.

Hey, good morning, I guess mid-afternoon. So quick question on the Subsea Product margins, you guided them to mid-to-high single digits for 2017. As we look to 1Q, could you talk a little bit, seems like you’ve got some cost cutting coming, so could you talk to margins as you see it kind of unfolding in 1Q for Subsea Products?

The numbers that we have, have included the lot of cost cutting that we took towards the end of the year and some of it falling in the beginning of this year. So, I think that’s pretty much taken into account when you see those mid-to-high single digits.

Okay. Are we going to be mid-single digits or are you going to hold it flat in 1Q versus 4Q or do we dip down in 1Q and then flow through higher margins as we go through?

It looks pretty flat throughout the year.

Okay, all right. That’s helpful. And then as we think about 1Q, do you think that you can have positive EBIT in 1Q? I know you -- seasonality in the first quarter so I think that your underlying assumption is that things get better after a seasonally slow 1Q, so just trying to dial-in 1Q appropriately?

Chase, let me give this a shot. This is Marvin. We’re going to be marginally profitable on a consolidated basis for the full year, and Q1 is historically always has been affected the most by seasonality and we do expect some pickup in activity here in the summer months. I would say that I think all signals kind of point to pretty weak Q1.

Okay, all right. That was pretty helpful there. Last one and I’ll turn it back over, you said two to three, so I’m going to use all three. So you’re saying that greater than 30% ROV margins for 2017, so does this reflect -- the greater than 30% margins, does that reflect leading edge margins or do you still think you have downside risk going into ‘18 as backlog potentially rolls off?

Okay, we talked about 30% EBITDA margins, just to make certain, we’re speaking the same…

Yes, yes, sorry.

And I think that includes any kind of ramp down that we may be seeing coming in pricing for the – right, I mean we’ve been running 36% in Q3, 35% in Q4, so I think we’re looking at, there’ll probably still be some pricing pressure as well as utilization and geographic mix will certainly where the rigs work and where the vessels work were impacted…

Visibility still fairly opaque for 2017, it’s pretty hard to say what’s going to happen in 2018.

And Chase, I’m going to answer your question very directly, I will not interpret this to be leading edge day rate margins. It’s still way dependent on geographic mix as Alan said and also the expected shift from -- more of a shift from rigs to vessels. So I think you’re going to have to wait and see as Kevin said, but I would not say that our projection of at least 30% is leading edge margins today.

Okay. All right. That’s very helpful. Appreciate the color. I’ll turn it back over.

Your next question comes from the line of Ian Macpherson from Simmons. Your line is open.

Hi, good morning. Thanks. I was interested in the guidance for your ROV utilization for the full year to be around 60% since that’s where you were last quarter and we know that the rig support side is still cascading lower. I infer that the vessel based activity is not only increasing in terms of your mix, but it’s increasing on an absolute basis in order to keep your utilization flat. Can you speak to that dynamic and what that tells us about activity in the market?

We’re actually counting probably more on the vessels we’re going on to than overall activity increasing. So we announced the Heerema activity that we’re participating in now, we also told you that there’s another agreement that we just reached. And so it’s really more based on our participation and overall activity on the vessels.

Okay, so it’s a market share story more than anything?

It would be in this case, correct.

Right. And these are staged over the course of the year, it doesn’t happen all at once, and so this is something that will be kind of gradual through the year at least on those two specific contracts that we mentioned there. But we are certainly hoping that there will be some increase in the vessel demand to help offset the continued decline in rigs operating.

Okay. That’s helpful. Thanks. Another question I had was whether you might be able to provide a little more specificity or just a frame around the equity income loss that’s expected to unfold from lower Medusa Spar volumes?

Yeah, we look at the -- we get a kind of a tariff rate coming through the Medusa Spar and as part of the equity investment there’s still depreciation associated with the asset and there’s just not going to be enough production going through the asset to cover the depreciation.

I was just curious how much of an equity loss that could be for the year?

I don’t think so we’re disclosing that.

Okay. That’s it. Thank you.

Your next question comes from the line of David Smith with Heikkinen Energy Advisors. Your line is open.

Hi, and thank you for taking my question. Wanted to ask regarding the new agreement to put eight ROVs on high-spec vessels, if I heard that correctly, was that entered into last quarter or more recently this year?

It was entered into more recently but as I alluded to earlier, this is not an immediate thing. These are actually vessels that are going to be delivered during the year and so, this will be a staged process through the year and there might be one or two actually they go into 2018.

Okay. Is this a vessel operator you’ve worked with extensively before or is this agreement really incremental to the normal based activity?

We work with them but this would be incremental.

It is incremental, but also I would hasten to add that all these vessels typically are in either a project world like Heerema most of them are not getting utilization constantly or they’re on the spot market, call out market, which again is not term contract. So utilization is going to fluctuate with whatever project load they have.

Sure. Makes sense. And follow up was just, you have the Asset Integrity margins were quite impressive given the revenue drop but also the start seasonality. It looks like the highest fourth quarter margins of the past several years. But just given the strength of asset integrity margins in the second half of ‘16, was wondering if may be -- are you being conservative on the ‘17 outlook for this segment or were there specific things in the second half that you don’t see repeating through ‘17?

I think we’re very confident in our ability to execute. Our concern is that we still don’t see a huge increase in spending. So, I think to deliver when projects come through, we’re in good shape, but we’ll have to see we could spend next year -- this year.

Thank you.

[Operator Instructions]. Your next question comes from the line of Cole Sullivan from Wells Fargo. Your line is open.

Hi, good morning. On the -- you had mentioned on the day rate, kind of commentary for ROVs that they’re expected to see some pressure over ‘17 if I heard that correctly. And…

Cole, I’m sorry to interpret. Can you speak up just a little bit?

Hi, can you hear me now?

That’s better. Okay.

Alright. So when you talked about in the prepared comments that the revenue per day could be under some pressure this year obviously on the pricing pressures and the comments that you made on the EBITDA margins for 2017 to about 30%, is there -- how much of the ability to maintain 30% margins is coming from cost cuts in the ROVs?

I think most of those cuts have been made, so that takes into account things that we’ve already done. Obviously if we see more drop in activity, then we’ve already seen that would require some additional actions. But this is a pretty solid based on what the actions that already have been taken.

Okay.

And particularly, with rigs we’re contracting, the ones that are contracting, the majority are on pretty short term contracts. And so, the competition in pricing is going to be -- continue to be intense with so much of the capacity in the marketplace. So that’s just the world that we’re living in right now.

But I think the point we need to make to differentiate ourselves a little bit from all the recent comments is cost reductions made in ROV have been structural and based on volume. We are not deferring maintenance or we do not have any hidden ramp ups charges that Rod mentioned a lot of our fleets are well maintained and ready to go to work. So unlike reactivation cost of vessels or rigs that made the news lately about how cost cutting is coming to an end, what we believe we’ve done the structural realignment and that is very sticky. What’s not sticky is hopefully we’ll put more ROVs to work and need more crew but I think it’s -- if that was your inference of that in your question, we can remove that.

Okay, thanks for that. On the products business, you mentioned we’ll see the service and rentals piece in the 10-K when that comes out. But can you talk about the, how you think the revenue from that piece of the business will trend over 2017, whether it’s materially up or down versus 2016 levels?

I think we’re looking for that to be more flat than anything. There’s nothing to give the indication that this moment in time that there’s going to be any ramp-up in that business. I think I would may be characterize it as and this is particularly Gulf of Mexico for us when something breaks and affects production, then it gets fixed, they spend the money on it. If it’s not broken, then nothing happens.

Okay. That’s it for me. Thanks.

The next question comes from the line of Kurt Hallead from RBC. Your line is open.

Hey, good morning.

Good morning.

So question -- if you guys, again we look out into 2017, what kind of shift in the ROV mix are you expecting for the vessels, how high do you think you can you get that, may be 40%, you think it will may be get over 40% in 2017?

Kurt, I think actually that’s going to be so dependent on the other side of the equation about what happens with drill support. So I would say I hope it doesn’t get that high, because I think if we start to see that, it’s going to be pressure on the drill side rather than improvements on the vessels.

Okay, I gotcha. And then, as you look out into ‘17, are we at a point now where ROV rates on vessels are now higher than ROV rates on rigs, on a leading edge basis?

So Kurt, just to clarify, because of the nature of that work, crewing and the amount of time they actually spend working that requires that crew, that’s when rates typically are higher than drill rate even what we consider as normal times. So we would expect that to continue.

Okay. Got you. And then last thing, as we get additional FIDs in 2017, what’s a typical kind of lead like relationship for when you guys are going to start to generate some meaningful revenue from those FIDs?

It really depends on the nature of the project. I’ll use a recent example, Mad Dog 2 that’s a huge project, and we would not expect to have an opportunity to do something there till further down the line. The big orders gets placed and umbilicals in our case, would come later. In the case of one well tie back to an existing production unit, it would be a lot quicker and typically you would see something happening within four to six months probably of an FID of that nature. So it really just depends on the project.

Got it, got it. Then on last thing on cash use, you indicated organic growth and acquisition dynamics, when you look at organic growth, is that leaning more -- is there one particular subgroup that that’s leaning for like products or projects for example?

I think probably one of our better opportunities right now is well stimulation and remediation. So, I think that’s one of the places, it’s an OPEC’s related, it’s brown field focus, so that’s one of the places where we see building upon our Blue Ocean and our work there, that’s one of the better places for us to…

Services and rentals is…

In the product segment, yeah.

Okay, that’s great. Thank you for that color. Appreciate it.

And this is Alan, I’d like to jump back in, I know Ian had asked a question regarding Medusa Spar and what we were thinking about on that. And depending on the production profile, we’re kind of estimating somewhere between $1 million and $1.5 million per quarter reduction or loss.

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

Thanks. Good morning guys. Could we spend a couple of minutes on the project side please, maybe I’ll start with a very specific question, just to see if you can share it with us and then we’ll pull back up. Can you update us on what happened with the Ocean Alliance if your contract was up at the end of ‘16 with a major I think your charter was up as well. So did you retain that vessel perhaps I missed something along the way, but did you retain that vessel and what’s your outlook for that?

We did retain the vessel.

And to your point, what happened there is I think based largely on the availability of vessels in the Gulf of Mexico, the customer decided that they weren’t going to fully retain that vessel, so we continued to do the work, but they just decided not to put it on full --

So we’re on the stock market with that, but we do expect to do a reasonable amount of business or utilization with the customer that that has been on term contract with.

Okay. All right. That seems like a pretty stable outcome. That’s helpful. I guess more broadly, and may be if we wrap in the diving support vessel side here as well, but how can you -- what steps do you have at your disposal to manage cost in that business? You’re obviously trying to maintain certain amount of readiness, you have the Ocean Evolution coming in mid-year still with a questionable level of work, right? So I’m just trying to understand how do you manage the profitability in the business? What levers do you have, may be I’ll stop there see if you can offer some thoughts.

I mean in terms of trying to manage the profitability I mean we’re subject to the market rates, so that’s mark to market every phone call if you will. We have certainly reduced our exposure to charters in the Gulf of Mexico and that is certainly one way. After that, you’re down to doing what lots of other folks are doing which is warm stack vessels and what we typically do with our smaller diving shallow water vessels during the winter, that’s something that we routinely do, but I mean those really are your options. We believe that we’ve got the right size, the right number of vessels in your fleet for the market I mean I think we expect to see similar levels of activity in 2017 albeit at very highly pressured rates in the market.

And I think you saw or heard in the notes that we have worked our way through several of our charters. So we have reduced a lot of that ongoing expense which is great. And then we’ve also made some great agreement with some of the vessel owners who are very cooperative, they understand the markets, so we’ve got some great call out rates on vessels as well. So it doesn’t really limit our ability to go serve the market either.

Right, it sounds like that, it’s actually a great combination for example the Normand Flower, that sounds very cooperative. I guess I’ll just tie it together with one last question on it and then I’ll turn it back. Is it in your outlook that you can maintain positive EBIT margins in the business then in ‘17? Does the pricing pressure make that just too difficult so you’re bumping into negative territory perhaps?

That’s kind of hard to call, since it is a mark-to-market business and really is going to depend entirely on what the demand stream is, I mean if it’s similar to 2016, I think we’ll do okay. If it’s not as much activity, then it’s just pretty hard to tell if it’s all call out.

We’re going to need some work in Gulf of Mexico to --

Understand. Thanks for all that color and by the way, thanks for the color on the other questions as well, been very helpful this morning.

Your next question comes from the line of David Smith from Heikkinen Energy Advisors. Your line is open.

Hey, thanks for letting me back in. Wanted to say congratulations on the contact with Statoil for the E-ROV concept, and I recognized that this is fairly nascent but with the, I think the first test deployment being here in May, I wanted to ask how you could do this potentially evolving at the high end of the year, your view of the concept plays out.

I mean I think there is more interest in electric ROVs and that sort of thing but I think this is going to be a slow evolution. And so I wouldn’t expect us to be a rapid market changing idea. I think it is a illustration of the direction that technology is going and we’re at the forefront of that and so, I think that’s good for us but I think this is going to be something that evolves kind of slowly over time.

I’ll exploit the opportunity a little bit since you gave us a chance to talk about it, but it is a stepping stone. I mean to Kevin’s point, this is where you start with the resonant ROVs things that stay down, that don’t need to be launched from a boat or what have you. So it’s probably as a step forward something it’s coming in the future, remote operations and things like that. It’s the first step in probably a more interesting direction overall.

Appreciate that and a quick follow up. I think in the past couple of years, unallocated expenses have been coming in below the initial guidance and just wanted to ask if you have more confidence on the guide this time or if that’s really subject to same uncertainties as the prior years?

There’s always some uncertainty when you’re trying to estimate what your incentive plans are going to cost whether or not you hit your target. The unfortunate part of the last couple of years, the favorable variance in unallocated is because we were not achieving our targets and the incentive plans are not paying out, exacerbated by the fact that you start out with those approvals and then for some of these are three year cumulative targets and so you start out with a crewing form and then in this year, we were in fact more than favorably affected by not paying much in bonuses or incentive plans, but we also have the reversal of prior year approvals, which Kevin mentioned in his call or notes.

All right. Appreciate it.

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

Thank you. Since there are no more questions, I’d like to wrap up by thanking everyone for joining the call. This concludes our fourth quarter and full year 2016 conference call. Have a great day.

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