Oceaneering International, Inc. (OII) Q1 2019 Earnings Report, Transcript and Summary

My name is Jody and I will be your conference operator. At this time, I would like to welcome everyone to Oceaneering's First Quarter 2019 Conference Call. [Operator instructions] After the speakers’ remarks, there will be a question-and-answer period. With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations. Please go ahead.

Good morning. This is Mark Peterson and welcome to Oceaneering's First Quarter 2019 Results Conference Call. Today's call is being webcast and a replay will be available on Oceaneering's website. Joining us on the call today are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments; Alan Curtis, Senior Vice President and 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 first quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Good morning and thanks for joining the call today. I'd like to start by repeating, we are very pleased that our first quarter results have exceeded expectations. Higher-than-expected activity levels and good execution within our energy-focused business segments were determining factors in achieving this performance. For the first quarter, we reported a net loss of $24.8 million or minus $0.25 per share on revenues of $494 million. Each of our operating segments generated positive earnings before interest, taxes, depreciation and amortization or EBITDA and our adjusted EBITDA of $30.4 million surpassed published consensus estimates. Based on these results and our expectations for the remainder of 2019, we are narrowing our adjusted EBITDA guidance by raising the low end of the previous range and now expect to generate between $150 million to $180 million of adjusted EBITDA for the year. By narrowing our guidance, we are moving the midpoint of our EBITDA range to $165 million from $160 million and we continue to project positive free cash flow for the year. Now, let's look at our business segments for the quarter, first quarter of 2019, by segment. Compared to the fourth quarter, ROV operating results improved on higher revenues. Average ROV revenue per day-on-hire increased largely due to reimbursement of costs associated with mobilizations and installations. ROV utilization increased to 53% and adjusted EBITDA margin increased to 29%. During the first quarter, we kept our fleet size of 275 vehicles the same as it was at year-end of 2018. Our fleet use during the quarter was 69% in drill support and 31% in vessel-based activity compared to 67% and 33% respectively for the fourth quarter of 2018. At the end of March, we had ROV contracts on 97 of the 159 floating rigs under contract, resulting in a drill support market share of 61%. Turning to Subsea Products. Compared to the fourth quarter, first quarter operating results improved on flat revenues. This improvement was largely due to higher levels of service and rental activity and improved margins achieved by good execution, including successfully closing out several projects. For the first quarter, service and rental grew to 49% of the total segment revenue from 45% in the fourth quarter. Accordingly, manufactured products represented 51% of the total segment revenues in Q1 compared to 55% in the fourth quarter. Our Subsea Products' backlog at March 31, 2019 was $464 million compared to $332 million at December 31, 2018. This backlog increase was largely attributable to increased umbilical and related hardware order intake in our manufactured products business. Our book-to-bill ratio for the trailing 12 months was 1.4. During the quarter, our order intake included two unannounced binding letters of intent associated with significant pending contract awards. This unusual step allowed us to procure long lead time items to meet customers' expected delivery dates. Sequentially, Subsea Projects' operating results improved on flat revenues, as a result of favorable project mix and good execution and an improving survey market. During the first quarter, we took delivery of the Ocean Evolution and the vessel is currently in Port Fourchon, completing final outfitting in preparation for project work. Asset Integrity operating income was near breakeven on slightly lower revenue. For our non-energy segment, Advanced Technologies, first quarter 2019 operating results declined as expected, due primarily to a lower number of job completions and contract closeouts in our commercial businesses. As anticipated, first quarter unallocated expenses were higher than that of fourth quarter 2018. During the quarter, we generated $19.1 million of net cash provided by operating activities and utilized $30 million of cash for maintenance and growth capital expenditures, resulting in a use of $10.8 million in cash during the quarter. At the end of the quarter, we had $342 million of cash and cash equivalents, $500 million available under our unsecured, undrawn revolving credit facility and no near-term loan maturities. Moving on to our second quarter outlook. Sequentially, we anticipate quarterly operating profitability and improvement in our ROV Subsea Projects and Advanced Technologies business segments and relatively flat quarter-to-quarter operating results in our Subsea Products and Asset Integrity segments. On a consolidated basis, we expect our sequential quarterly results to improve substantially with EBITDA being in line with the public consensus estimates in place prior to our earnings release. For ROVs, we are projecting days on hire to increase in both drill support and vessel-based activities due to general market increases along with normal seasonal increases. Revenues in cost per day on hire are forecast to remain relatively stable as compared to the first quarter. For Subsea Projects, we anticipate our operating results to improve driven by a continued pickup in demand for our survey services and seasonal activity increases in vessel and diving work in the US Gulf of Mexico. For our non-energy segment, Advanced Technologies, we expect moderate improvement in operating results in both our commercial and government businesses on relatively flat revenues. For Subsea Products, we are expecting relatively flat operating results on higher revenue due to changing mix from increased throughput in our manufactured products business. We continue to expect good umbilical and hardware order intake during the second quarter as we believe our previously mentioned LOIs will be converted into final contract awards during this time frame. For Asset Integrity, we expect revenue and operating results to be relatively flat. Directionally, for our full year 2019 operations by segment, we expect, for ROVs, we project increased days on hire and expect to generally maintain our 2019 fleet mix in the 70% and 30% range for drill support and vessel-based services respectively. We estimate overall ROV fleet utilization to be in the upper 50% range and our ROV EBITDA margin to remain relatively flat for 2019 overall. We forecast that our market share for the drill support market will remain in the 60% range for the foreseeable future. We are encouraged by recent bidding activity indicating longer contract durations. However, until we see a number of these rig-related opportunities materialize into days on hire and become a higher percentage of the working rigs, we will continue to experience the contract churn and associated higher costs. For Subsea Products, we expect a substantial increase in activity during the second half of 2019, primarily as a result of good order intake in our manufactured products business during the first half of the year. Continued good performance in our service and rental business and better absorption of fixed costs in our manufactured products business are expected to result in mid-single-digit operating margins for the year. We forecast that Subsea Products' book-to-bill ratio will be in the range of 1.25 to 1.4 for the full year. Any change in the expected timing of these awards could impact our book-to-bill ratio for 2019. For Subsea Projects, we are still expecting a pickup during the summer months due to seasonal callout activity in the Gulf of Mexico and year-over-year improvement in our survey business. As mentioned, we took delivery of the Ocean Evolution during the first quarter and we will be putting her to work for the first time during June. Given the high-end capabilities of this vessel, we anticipate good project opportunities for her during the second half of the year. For Asset Integrity, we project a slight uptick in revenues and operating income during the second half of the year with pricing continuing to be very competitive. For the year, we expect operating margins to be in the low single-digit range. For our non-energy segment, Advanced Technologies, compared to 2018, we project improved overall results for the year with continued high activity levels in our commercial businesses and marginal overall growth in our government businesses. For the remainder of the year, we are forecasting unallocated expenses to be within our prior guidance and to average $35 million per quarter. Our estimated organic capital expenditure total for this year remains between $105 million and $125 million. This includes approximately $40 million to $50 million of maintenance capital expenditures and $65 million to $75 million of growth capital expenditures. On a macro basis, we see encouraging signs in our offshore energy markets and feel that activity levels have inflected and that pricing has stabilized for the most part. Many industry analysts project activity levels that support our belief that offshore demand is increasing. These include the expectation for increasing floating drilling rig activity and the expectation for increased offshore FIDs in 2019, particularly in deepwater. In summary, we're very pleased with our first quarter results and the fact that we feel confident enough in our market observations and forecast to raise the midpoint of our annual EBITDA range. To raise the guidance this early in the year may represent a first for Oceaneering. And to complement these expectations, our focus continues to be on generating positive free cash flow in 2019 and improving our returns. We appreciate everyone's continued interest in Oceaneering and we will now be happy to answer any questions you may have.

[Operator Instructions] Your first question comes from the line of Kurt Hallead of RBC. Please go ahead. Your line is open.

Hi, good morning.

Good morning, Kurt.

Hey, always good some positive things to talk about. So well done making it through the downturn.

Thanks.

No trouble. So I wanted to maybe start off just on the ROV side, right? You guys provided guidance of upper 50% utilization for 2019 in aggregate. That obviously would have to infer utilization exceeding 60% at some point in time during the second half of 2019. So, you have increased utilization, which means you have increased days on hire. We've seen day rates for the ultra-deepwater rigs start to move up on recent contracts. Those two things would tend to bode well for pricing, yet, maybe the indication of pricing seems to be kind of flat now as the year went on. So can you just give us a little more maybe insight around the pricing dynamics and then what you may -- what you think may need to have to occur for there to be better pricing power for the ROV segment?

Sure. I would just say pricing dynamics, we're still, I mean, we're kind of in a case-by-case basis, on contracts that we're letting. So, you get into places where you're differentiated, places like for us like Angola where we've got great shore facilities. We're well established there. Our spares and our replacement units and crews are coming locally. Those places are places where we feel like if activity increases there, you do see more pricing opportunity than you would say in the North Sea or Gulf of Mexico where those markets are a little more flushed with the competitors. So I think it's just going to depend on where the activity happens and what levels of our -- what levels of excitement are happening. I mean, Guyana as an example, we've got all the drilling rigs covered in Guyana. So that's a high point for us, so we like those things. I think that there's generally -- more and more of that opportunity coming. I think there'll be a little bit of stress on price as we start to see longer-term contracts let, because people will be a little more willing to give up a little bit of price to get that long-term commitment for vehicles. But overall, the trend is generally improving but not really fast.

Okay. That's good color. Thank you for that. And I think the other thing I want to follow up on, there was, looks like an announcement yesterday by Pacific Drilling that they basically have some sort of a digital agreement with them, digital service agreement with them. Could you give us some color on how that came about? And what that could translate to in terms of revenue and profitability?

Sure. So we've got a business inside the company that we operate separately and we call it global data solutions. And that group was really borne out of a lot of work we did during the [indiscernible] crisis helping support communications there. So we've been doing that kind of work for a while. But what we're finding and it's very exciting to us because it fits right in our wheelhouse is that customers are putting more and more emphasis on remote operations, down manning the rigs, these combined solutions for survey, ROV, communications, some of the project work we do and all that requires more bandwidth. It requires more accessibility, remote accessibility to the rig. And so this is one of our kind of our premier contracts to provide those kind of services that bring our work together but also enable some of this remote operations that we've invested in the new technology for.

Right. So a lot of this Kurt will roll up into our project segment when we talk about the streaming video and survey capabilities and other things like that. And then the ROV component rolls up into ROV segment at the same time.

And that's good. So this would be -- might be something that we might or I might, I can't speak for anybody else that's associated more with some of the larger integrated service companies. So, is this -- what kind of level of competition out there is this? And what's unique about what you may be providing?

I think what's unique here is that we've positioned ourselves well with the reselling bandwidth and things. So we're closer to the satellite than say some of the service companies are where they're really combining their services and maybe finding a way to get their data off the rig. We're trying to enable them and light up the whole rig and provide a more of a higher level service for that.

And then the incremental revenue on this, is it going to be -- are you going to see it in '19 or is it more of a 2020 deal?

I can't really talk too much about it, because it's a discrete contract. But it all depends on how many of these rigs go to work and win.

There's only one working right now, Kurt.

Okay. Thank you for that color.

Your next question comes from the line of Sean Meakim of JPMorgan. Please go ahead. Your line is open.

Thank you. Hey, good morning.

Good morning, Sean.

So on Subsea Projects, maybe can you give us a little bit more of what drove the favorable mix in the quarter? And I think the overall comments for 2019 were certainly constructive with the Evolution coming in. I think you talked about maybe a slight uptick in the second half versus the first half as far as profitability. Just how do we think about, could you give a little more color in terms of what you're seeing in the market, still pretty competitive out there? In terms of -- what does the competition look like? How broad are the different types of customer opportunities that are out there? Just I would like to get a little more detail of that improved outlook on projects because I think that's pretty important.

Sure, Sean. Let me start with -- you asked a question about mix and we talked about sort of a favorable project mix in Q1. We had a couple of kind of highlight projects in Q1 and they stood out, especially because they were against that lower time of activity for us. So while they will continue into 2Q, they'll become a smaller part of the mix as the seasonal activity picks up. So we've got a little bit of a wind to our back going into Q2. That's good. We do expect it to be a strong season, particularly in the Gulf of Mexico for IMR activity. Good IMR activity in Q2 and Q3 creates sort of a seasonal uplift in price. So we do see pricing improve during Q2 and Q3 as the boats go to work and they're busy. So that's kind of what we see. Ocean Evolution will come on. While that doesn't create a big change in margin for us, just like we've said before, it's better for us from a cash perspective because we're on depreciation versus paying somebody else for their boat. So, there's a cash effect. But aside from that, I think we're also bringing out or trying to mention more often now that as a leading indicator, survey is picking up and survey is inside of that project business too. So that's showing up really will for us in that part of the year as well. So that should increase over the year and also be a good indicator of what productivity is going to be going forward.

Thank you. I think that's helpful. On the Products business, I think you talked about an expectation that service will pick up here into the second quarter and just higher activity should help the cost absorption. But as you're talking about, as you're seeing orders come in, book-to-bill was nice in the quarter, you're expecting a really nice solid build in the backlog this year. How competitively bid are these umbilical tenders today compared to maybe where they were in the back half of last year? I mean, is there a longer lead time for some of these. How do we think about that progression in terms of what backlog looks like among your competitors? And how that compared dynamic is shifting maybe from last year as we go through '19?

Sure. So what I would tell you Sean is we've been working on some -- what's the nice way for me to say it, less attractive backlog for a while, so you've already seen that in the mix. So that's already there. So when you compare first half of '19, back half of '18, there's not going to be a big difference in those two. Going forward, I mean, if we still -- if we see FIDs come at a fairly steady rate, that should lower sort of the availability for manufacturing slots. It should create upward pressure on price, I'm not saying it's going to go crazy. But directionally, we should see more pressure that way, especially as people fight over slots to try to get projects done when they want to get them done.

I think that start to be more of a back end of 2020, I'll say, the second half of 2020 when you'd start to see more of that flow through on the income statement. I think when you start looking at the backlog today and most of that's going to be flowing through, the better part of the end of this year is going into the first half of next year.

Got it. That make sense. And one more on that piece if I could. Just to think about how the competitive dynamics have shifted quite a bit in that space and you've had such a push toward integrated projects. Can you maybe just talk about how that influences your ability to bid on these projects? And how that can change as different folks sort of fill up their capacity a bit?

Well, one thing, we get more chances to win because we are bidding with multiple people that are bidding on the epic project. So we're bidding to more than one epic provider. And so in some ways, that gives us more access to market. So that so far has borne out pretty well and you can kind of tell by the book-to-bill ratio. So, I think it's OK for us now. The only thing I can see, if there's further consolidation that may put a squeeze on us, but right now, it doesn't seem to be too much pressure.

Very interesting. Okay, great. Thank you.

Your next question comes from the line of Vebs Vaishnav of Howard Weil. Please go ahead. Your line is open.

Hey, good morning.

Good morning, Vebs.

So I guess just on the products, first quarter Subsea Product margins were negative, second quarter, you are talking about flattish. And then to get to call it mid-single digits, we almost have to assume that by exit 2019, it's like high single digits. Can you help me just think about what gives the confidence, what's driving, I understand that you are getting good orders, but just if you can help us think about what's driving that much improvement?

Yes. It's really going to be the throughput that we're able to achieve through the plants, Vebs. When -- you heard us talk last year, a lot of the times, we talked about absorption and lack of absorption that really pushed us on our cost structure, because on a plant-by-plant basis, we just didn't have enough throughput at each of the respective facilities and one of the things we're encouraged with the backlog we're seeing now is a better distribution throughout our manufacturing facilities. So that's really helping us make certain that we have the appropriate levels of absorption to really help with our cost profile in 2019. So going into the back half this year, with what we've booked and what we expect to book in the remaining part of this first half of 2019, we really feel that's going to help propel our margins up into that single-digit, upper single-digit range in the back half of the year. I think it would be a little bit frothy to get beyond that.

Okay. And as we think about the business, what kind of capital intensity, how should we think about the capital intensity of the business? So, I think you spoke about $40 million to $50 million maintenance CapEx. If you think about and I'm not trying to pin you down for a number, but let's say, $40 million to $50 million of maintenance plus some other, is that like -- is that a fair way of thinking about capital intensity of the business?

Yes. Yes. I think what we've talked about in the past, Vebs, and I think our guidance this year, we've got a midpoint of $115 million on our CapEx needs with $40 million to $50 million of that being maintenance capital. The remainder of it being growth. And we've talked the majority of that has been related to the drill pipe riser contract that we'll be supplying equipment on and personnel on the latter part of this year and going forward for four years in Brazil. And then the remaining CapEx that was required associated with bringing the Ocean Evolution out. So that was most of the growth CapEx. It was defined for this year was the remaining commitment on the Evolution as well as for a specific contract that we have.

Okay. And maybe last one for me. Just on your guidance for positive free cash flow. Can you help us think about how you are thinking working capital, about working capital, if it's a source of cash or use of a cash or pretty neutral?

Yes. Great question. We're looking at is, it should be a source for us. However, the timing awards and associated progress payments related to some of these significant umbilical awards will be a big influence on this outcome. So it will be timing related.

Your next question will come from the line of Mike Urban of Seaport Global. Please go ahead. Your line is open.

Thanks. Good morning, guys.

Good morning, Mike.

I wanted to follow up a little bit on the data solutions group. A nice contract win for you. And recognizing it's early days, what do you think the opportunity set could be here? I mean, in theory, it's all floating rigs but realistically what are you targeting? Is it you customers? Does it have to be your customers? And what kind of, I guess, I was just kind of looking a scope for addressable market or what you're thinking about here?

Yes. It doesn't have to be our customers. But obviously, the value proposition helps a lot when we're already on the rig whether that's through survey or particularly ROV. So, the first target is, especially where we've got great contracts with those people because we're there that's good. Which you got to remember is these contracts are largely with the drillers and our contracts for services are often with the operators. So while you're there, it isn't necessarily your existing customer, it's just more somebody you've already got a relationship with because you're on the rig.

Got you. And so is this something that you can -- you are just using to drive differentiation and say, OK, we're going to use with these Oceaneering as opposed to competitor fee or do you think over time there is a net positive here? So I mean you might be able to capture some cost savings from reduced manning, higher -- better revenue from higher efficiency, those kind of things. Is this a net kind of source of revenue and margin for your over time do you think?

I think the pull-through and the differentiation for us was the biggest part. I think that's why I try to mention this earlier is that I think above and beyond it's a great contract and we're excited to have it. But above and beyond that it's really about we get very differentiated when we say how much remote operation can we do? How many of these operations can we combine and deman the rig. We have a competitive advantage in delivering a service like that. And I believe that the more of this we see, the better we are positioned to take advantage of a -- if you want to say that a well-connected offshore drilling rig.

And then if I could just a couple of housekeeping questions, I apologize if I missed it. Do you have an update on the D&A guidance given that you took delivery of the Evolution?

I'm sorry I missed the…

Depreciation. I don't think you gave an update on that, just given that the delivery of the vessel?

We have not given out any specific expectations on increases or decreases in D&A at this point.

Okay. And then your expectation for cash taxes?

To remain about $25 million for the year.

Okay. That's all for me. Thank you.

[Operator instructions] Your next question comes from the line of George O'Leary of TPH and Company. Please go ahead. Your line is open.

The ROV kind of utilization guidance is certainly encouraging. We are seeing signs of emerging offshore recovery. I was just curious if you can provide some color on geographically which regions are maybe going to drive the lines here that escalation in utilization as we progress through the year. And then secondarily, any regions that are maybe surprising you guys on the activity front? It seems like North Sea is doing pretty well. But anything that pops out that we might not be aware of where you're expecting utilization increases as we progress through the year?

I think we're seeing an increase in interest and bid activity all over, I mean, probably less so in Gulf of Mexico and Angola. But really it's widespread. So that to your point, that's particularly encouraging.

Okay. Great. And then following on to one of Sean's questions earlier and just digging into the mix improvement and volume improvement, I realize both are drivers on the Subsea Products side, but historically, I think the tooling -- ROV tooling in particular has carried fairly high margins for you guys, are you seeing -- as you're seeing an the increase in utilization bureau on ROVs, is there an uptick on the tooling side or could you just provide any color there?

There is. I mean, there is always an uptick with the associated ROV tooling, but make a small correction the basic tooling that goes with ROVs is not as good a margin as some of the Subsea work packages we put out with the service and rental business. So what we're really looking for and especially now that we've got some of these bigger jobs like well Intervention, that really will move the needle for us on the service and rental business. And so on the heels of some success with that package in particular, we are looking for hopefully more activity in the back half of this year.

Yes, so as you see more well intervention and IWOCS type work, well stimulation, hydrate remediation, that's where you get the higher IMR type activities.

Very helpful color. Thanks, guys.

Your next question comes from the line of Cole Sullivan of Wells Fargo. Please go ahead. Your line is open.

Hi, good morning. You guys reported really strong quarters in the first quarter in products and it sounded like you guys had some LOIs that happened in 1Q that are likely to convert in 2Q, did I hear that correctly?

That's correct.

Okay. And from your comments and some of your peers, it sounds like the first half is going to be pretty strong order wise across the industry and obviously for you guys. What sort of pipeline do you see for the rest of the year in products orders?

I think you're going to still see more things coming in, but we have some elephants. I mean, there are some really big projects that were coming through in the first half of this year. So, when you look at the horizon, there won't be as many of these really big ones, but I think there will be activity.

Yeah. We gave the guidance in Rod's prepared comments. We expect our book-to-bill for the year to be 1.25 to 1.4 range. So that should help a little bit on the back half of the year.

All right. And then quickly on ROVs, I believe the guidance on the average revenue per day on the last call was kind of lower year-over-year in '19 and the first quarter, it sounded like there were some moves that have impacted that, basically increased it in the first quarter and guidance was flattish for 2Q. How do we think about kind of the rest of the year? Is it just, is the 2Q more of a mix issue? How do we think about that?

We are seeing it flatten out for the year right now. I mean, so I don't see any major changes. So again when we just said bid activity looks like it's going to be pretty well distributed around the world. So shouldn't see any of these big, we've talked about regional mix shift and things like that, but we don't see a lot of that coming. So, I think we can say that barring any other kind of changes, we should see it be fairly leveled.

All right. Thank you. That's all I have.

There are no further questions in the queue. I will turn the call back over to Rod Larson for final remarks.

All right. Well since we have no more questions, I'll just wrap up by thanking everybody for joining the call and this concludes our first quarter 2019 conference call. Thanks everybody.

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