Jack Jurkoshek - Director, IR Kevin McEvoy - CEO.

Kurt Hallead - RBC Capital Markets Waqar Syed - Goldman Sachs Ian Macpherson - Simmons & Company International Jim Crandell - Cowen Securities LLC Dave Wilson - Howard Weil Michael Urban - Deutsche Bank Brad Handler - Jefferies Ed Muztafago - Societe Generale.

Good morning ladies and gentlemen. My name is Ryan and I will be your conference operator today. At this time I would like to welcome everyone to the 2015 Third Quarter Earnings Review. [Operator Instructions]. I would now like to turn our call over to Jack Jurkoshek. Please go ahead..

Good morning. Thanks for joining us on our 2015 third quarter earnings conference call. As usual, the webcast of this event is being made available through the StreetEvents network service by Thomson Reuters. Joining me today are Kevin McEvoy, our Chief Executive Officer, who will be leading the call.

Marvin Migura, Executive Vice President, Alan Curtis, Senior Vice President and Chief Financial Officer and Suzanne Spera who recently joined the company as Director of Investor Relations. Suzanne will be opening our earnings calls commencing next February.

Just as a reminder, 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.

These remarks are going to include non-GAAP measures of adjusted earnings per share and free cash flow that are reconciled to the closest GAAP measure in a posting on the IR section of our website. I'm now going to turn the call over to Kevin..

Good morning. Thanks for joining the call and your interest in Oceaneering. As we reported in our press release, our EPS of $0.70 was with our guidance range, but was not achieved in a manner we initially anticipated.

Compared to our earlier expectations, we experienced demand declines for tooling and installation work-over and control system or IWALKS services as customer projects were either postponed or did not materialize. Furthermore, contract renewals for floating rigs on which we provide ROV drill support services were weaker than forecast.

The unfavorable impacts of these market developments, were more than offset by better results from Subsea Projects and lower unallocated expenses. Subsea Projects exceeded our expectations due to higher U.S. Gulf of Mexico vessel utilization which included completion of certain projects originally scheduled for the fourth quarter.

Unallocated expenses were lower, as performance-based compensation expenses were reduced based on our current projections and results relative to plan targets. In addition, during the quarter, we incurred around $9 million in foreign currency losses which our guidance does not consider.

Nearly $8 million of those losses were attributable to the devaluation of the Angolan Kwanza. Year-over-year quarterly earnings decreased on significantly lower demand and pricing for most of our oil field services and products.

This was attributable to reductions in capital and operating expenditures by our customers resulting from the steep decline in oil prices. Sequentially, quarterly earnings increased on lower unallocated expenses.

Our outlook for the fourth quarter this year is down from what we envisioned at the time of our last quarterly earnings release primarily on reduced expectations for ROVs and Subsea Products.

ROVs, on a reduction in days-on-hire for drill support work and lower average revenue per day-on-hire, subsea Products largely on lower demand for tooling and IWALKS services. Given this outlook and our year-to-date performance we're lowering our 2015 EPS guidance to a range of $2.60 to $2.66, from $2.70 to $2.90, down 6% at the midpoints.

Our guidance range is provided on a GAAP basis. Adjusting for foreign currency exchange losses incurred year-to-date and our second quarter Subsea Products inventory right now would add back EPS of $0.15 to our guidance. Compared to 2014, we continue to forecast income declines for all of our oil field operating segments in 2015.

For 2015, we anticipate generating at least $640 million of EBITDA. At the end of the quarter we had $271 million in cash and an undrawn $500 million revolver. We continue to take actions to reduce our operating expenses and organic capital expenditures.

And believe our liquidity and projected cash flow provide us ample resources to manage our business through the current low-commodity price environment. I would now like to review our third quarter segment results. Year-over-year ROV operating income declined on lower demand and a reduction in average revenue per day-on-hire.

Our ROV days-on-hire declined 16% to approximately 21,200 days, largely on reduced demand to provide drill support services. Average revenue per day-on-hire declined 17%. Due to an unfavorable change in geographic mix, as we experience disproportionately lower demand in high day rate operating areas, notably Norway and Angola.

A weakening of about 30% in the Norwegian krone exchange rate, relative to the U.S. dollar and lower pricing or customer discounts. Notably, of the total decline in revenue per day-on-hire, over half was attributable to the geographic mix change.

Sequentially, operating income decreased primarily due to reduction in average revenue per day-on-hire for the same year-over-year reasons I just reviewed. Operating margin during the quarter was 26%, compared to 28% in the second quarter and 31% in the third quarter of 2014.

Our fleet mix during the quarter was 65% in drill support and 35% on vessel based work. This compares to a 69%/31% mix last quarter. And a 71%/29% mix in the prior year quarter. Our fleet utilization during the quarter with 68%, compared to 71% last quarter and 84% in the third quarter of 2014.

Year-to-date our fleet utilization was 71% compared to 85% for the comparable time period in 2014. During the quarter we put five new ROVs into service and retired four. At the end of September, we had 337 systems available for operation, up from 332 a year ago.

At the end of the quarter, we had ROVs on 127 or 57% of the 222 floating rigs under contract. We had ROVs on 142 contracted rigs at the end of June, 2105 and on 168 rigs a year ago. Turning to Subsea Products, year-over-year third quarter operating income declined on lower demand for all of our major product lines, particularly tooling.

Sequentially, operating income was higher despite the decline in revenue as the second quarter included an inventory write-down of $9 million. Absent the right down, third quarter operating income declined mainly on lower demand for tooling and IWALKS services.

Operating margin during the quarter was 21%, compared to 18% in the second quarter and 25% in the third quarter of last year. Our Subsea Products backlog at quarter end was $736 million, compared to our June backlog of $703 million and $768 million one year ago.

Year-over-year, the backlog decline was largely attributable to tooling and BOP control systems. Sequentially, the backlog improvement was attributable to umbilicals, notably the Shell Appomattox award. Our book-to-bill ratio for the quarter was 1.15, year-to-date it was 1.07 and for the trailing 12 months it was 0.97.

Looking at Subsea Projects, segment operating income was slightly higher year-over-year, as a result of our acquisition of C&C Technologies in April of this year. The profit contribution from our U.S. Gulf of Mexico Vessel Operations was about the same.

The profit contribution from our Angola Operations was down, due to the release by BP of the Bourbon Evolution 803 during the second quarter of this year.

Sequentially, Subsea Projects operating income decreased on a declining demand and pricing for Deep-water intervention services in the Gulf of Mexico and offshore Angola and diving services in the Gulf. Operating margin during the quarter was 20%, compared to 18% in both the second quarter ended third quarter of 2014.

The year-over-year improvement was attributable to better performance by our diving operations. The sequential improvement was due to an increase in profit contribution from C&C Technologies. During the quarter, we secured a two your subsea field support vessel services agreement with an oil and gas company in India for use of the Island Pride.

This contract is expected to start next month, upon completion the vessel's mobilization from the Gulf of Mexico and acceptance by our customer. With this contract, we secured term work to expand our international Subsea Projects business while reducing our exposure to the Gulf which is primarily a spot or callout demand market.

The shorter term for the Island Pride has been amended to go back to back with this new services agreement. As for our remaining business operations for the third quarter, asset integrity operating income declined year-over-year on lower demand and increased pricing pressure for our services globally.

Sequentially, operating income improved due to a change in service mix and actions we took to lower operating costs, primarily a reduction in manning. Advanced Technologies' operating income was lower year-over-year and sequentially, due to execution issues on certain theme park projects.

We have implemented an internal reorganization to address these issues which specifically address engineering design and subcontractor selection matters. In summary, 2015 marked the beginning of a very challenging period oil field services and products industry but we believe we're well-positioned to make the most of it.

We generated $168 million of EBITDA during the quarter. Capital expenditures for the quarter totaled about $44 million of which $17 million was invested in Subsea Products and $13 million in ROVs. Moving on to our fourth quarter outlook, we're projecting EPS in the range of $0.54 to $0.60.

Sequentially, we're expecting quarter operating income declines from ROV, Subsea Projects and asset integrity a similar profit contribution from Subsea Products, a profit improvement from Advanced Technologies and lower unallocated expenses.

Year-over-year, we're anticipating that all of our operating business segments will have lower fourth quarter income. In conclusion, for 2015, we're focused on cash flow generation and cost control.

We're taking actions to reduce our expenses and believe our cash flow and liquidity positioned us well to manage our business throughout the current low-commodity price environment. For the first nine months of this year, we have generated $497 million of EBITDA.

During this period we invested $369 million in CapEx and acquisitions, spent $100 million to repurchase the 2 million shares of our common stock and paid $80 million in cash dividends to our shareholders for a total of $549 million.

This was funded by our cash flow from operations, a $50 million drawn on our three-year term loan and it $160 million reduction in our beginning cash balance. Another way to look at our cash flow generating capability is in our free cash flow conversion rate of 115%.

We define this on a percentage basis as net cash provided by operating activities, less organic capital expenditures, divided by net income. Our year-to-date net cash provided by operating activities was $373 million and our organic capital expenditures were $139 million.

This derived amount of $234 million compares favorably to our net income of $204 million for the period. While we don't focus on our quarterly free cash flow conversion rate, due to the short-term fluctuations in this measure, it is noteworthy that it was 187% for the third quarter.

Looking beyond 2015, based on the current number of floating rigs working and expectations for further reductions in offshore activities due to continued spending cuts by our customers, we believe our 2016 earnings will be lower than our projection for 2015. However, we're not prepared to quantify the magnitude of the decline at this time.

We will continue to assess the market and perhaps provide a 2016 outlook when we report our 2015 year-end results in February 2016. Longer-term deep water is still expected to play a critical role in the global oil supply growth required to replace depletion in the projected demand.

Consequently, we intend to continue our strategy to expand our service and product line offerings, as evidenced by our recent investments in survey and satellite based positioning, data solutions and Subsea Asset Integrity. We appreciate everyone's interest in Oceaneering. I will now be happy to take any questions you may have..

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

The question I had here was on ROVs.

When you look at the market dynamic going into next year, do you think the risk related to ROV revenue generation is still more utilization? Or is there increasing pricing pressure?.

It's probably a little bit of both. I think as operators continue to struggle with their cash flow and whatnot, there is continuing pressure there. I think, I would maybe characterize it as saying that the maybe the worst of it is over, but I still expect that this is going to be continuing until things get better here..

And the utilization risk is higher because of drill support, rig renewals continues to fall off or be nonexistent..

And one thing, you gave a lot of great information. I don't know if I caught it all, but you mentioned that you expected the fourth quarter to be in that earnings range.

And then, I think you indicated that you expected -- was it the products business to generate a similar level of income in the fourth quarter as it did in the third quarter? Did I hear that correctly?.

Yes you did..

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

A couple of questions, number one, your investor-based ROV count increased nicely from 74 to 81 ROVs during the quarter.

Can you see at this level into the fourth quarter or do you see seasonally it may come down in the fourth?.

I think fourth quarter seasonality is certainly going to kick in. So that will affect our vessel-based operations as it always does..

I was looking at last year, we didn't see that much between third and fourth quarters. That is why -- It has been nicely going up, but okay [indiscernible] to come down..

Again, it is a callout business and customers are trying not to spend money. So we will see, but I would expect seasonality in the fourth quarter of this year..

Secondly, your CapEx for 2016, any initial guidance? And then even broadly? What would your maintenance CapEx number be?.

We have historically characterized our maintenance CapEx as around $100 million a year. Which will probably continue. And at this point, we're not really going to put out any sort of guidance as to what that might be for next year. Although, you could surmise that it might be less. I think it will be less than it is during 2015..

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

You provided helpful color on the geographic adjustments that impacted your ROV revenues.

I wonder if this sort of two points of margin that you lost in the quarter are recoverable to any degree that those changes normalize going forward? Do you think you can defend the margins where they were previously at 28% or currently at 26% in Q3? Or should we think of further downside to margins for ROVs as the revenue line continues to be under risk going forward?.

Given that we noted Norway and Angola as two of the highest folks in that category that the caused that. I mean, there's not much evidence to suggest that Statoil is going to be doing much different than have been doing right now. That mix is probably going to continue in that vein and same with Angola at the moment..

Ian, as we also indicated, with utilization expected to continue to be under pressure in drill support, seasonality and vessel-based. And continued pricing pressure, even though we're cutting costs everywhere we can, I think that margin percentage is very difficult to defend in this environment..

In this environment..

Yes. My follow-up question, I'm sorry that I missed this when you're going over the elements of Q4 guidance.

Did you say your unallocated expenses which were low in Q3, those would tick up or tick down in Q4?.

We said they would be lower..

Your next question comes from the line of Jim Crandall with Cowan. Your line is open..

Kevin, if you eliminate the mix geographically, roughly how far down are ROV rates on your most recent contracts from the peak?.

Jim, we're not going to really characterize that..

Okay..

It is reflected in the average revenue per day. Which is complicated by mix and everything else. But to characterize it anymore finally would get into such particulars in every geographic area that it would be more unhelpful that helpful. I think from an investor standpoint. And trying to figure out what is going on..

It really is, Jim, on a case-by-case basis. And we don't want to give any general indication as to averages for customer pricing confidentiality..

Okay. Kevin, you have seen a lot of cycles. And as I recall, during some of the down cycles in the past we saw more of a leveling out of day rates.

Going all the way back to let's say the 1986 and 1987 cycle, how did the declines in ROV rates compare with the worst cycle, other than this one, that you have seen in your career?.

Jim, were there ROVs around in 1986 and 1987? I remember at least in 1986 when I was in the Morgan City Office we had a total of three ROVs working and none of them were in the Gulf of Mexico..

I don't think there is a comparability--.

I don't think it is comparable at all to compare those..

How about -- take the 2009 down cycle. I think we saw more of a flattening in rates there. This has certainly got to be measurably worse than that..

This is totally different. That was really a very minor downward blip for us as a company. Across our service lines including -- drilling didn't slow down, during that time. And so this is very different and quite more negative compared to that timeframe..

In 2009 we didn't have a record earnings year, it was still our second best year ever because it was still better than 2007. Deepwater didn't suffer. It continued to grow through it. And there was that initial shock, but then Deepwater momentum continued. Right now, that is the one thing you can't say about this market..

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

This is Josh logged on for Chase. Thanks for taking my question.

My question is kind of around Subsea Projects, did you -- help us characterize spot work during the quarter and how competitive that is?.

As we said last quarter, the situation hasn't really changed. It is a very competitive environment. More vessels in the Gulf of Mexico than there is demand. I think we're getting our fair share of utilization, maybe even more so. However, pricing is pretty competitive and margins tend to be thin..

Okay.

What percent of revenue would be from the spot work that you had in Q3?.

We have one vessel in the Gulf of Mexico that is on a term charter, everything else is spot work..

We don't break out projects by region to not give too much detail on the BP Angola contracts. This is one customer and two vessels. I would say that it is a substantial portion of the total and whatever overwhelming amount of the Gulf of Mexico vessel-based services projects segment..

Your next question comes from the line of David Wilson with Howard Weil. Your line is open..

I just got one quick follow-up. I think you might have mentioned it, but I could've missed it.

Regarding ROVs on rigs rolling off contract, did you give a number for 2016 of what your exposure there was?.

We have not..

Would you be able to? Or I can do some digging, I guess..

Why we didn't give a number, is because we don't know about the sanctity of rig contracts right now. It really is and you know this better than I do, it is a drilling rig market that is very concerned about extend and blend or cancel.

We focus on the decline and the number of rigs that we're working quarter-over quarter and how many ROVs we have on it. We didn't go there this quarter..

Your next question comes from the line of Mike Urban with Deutsche Bank. Your line is open..

I guess kind of a broader organizational or maybe even a strategic kind of question or questions. We saw over the last several months, a number of releases for you on management changes, people coming and going, changing roles within the Company.

Outside of exiting DOP control systems I haven't necessarily seen or maybe I just missed it, is there some kind of broader organizational change going? Is there anything you are doing structurally or anything you're trying to accomplish there? I would be interested in your thoughts on that..

I think what you have seen in terms of announcements is normal succession and organization planning and whatnot. In terms of structural changes I would say no, apart from our continuing look at how we can better streamline the Company to reduce overall cost..

I think there is a considerable amount of effort and cost reductions going on within the segments. But I think if you look at the personnel changes we're blessed with bench strength and Alan Curtis became the new CFO, with my pending exit. And he has been with us for as long as I have. Clyde Hewlett became our Chief Operating Officer.

And Clyde has been here almost as long as Kevin has and longer than I have. And Rod, who was promoted to President, he has been here now for three years. All of this is a very orderly transition. And we recruited Steve Barrett for -- to run our Subsea Products Group.

I would say that organizationally, there have been a few press releases, but there has been very little change in pace or direction within Oceaneering. And other than exiting the BOP controls new systems, we have not changed anything in our business strategy. We bolted on C&C and we continue to look for growth opportunities..

That may answer my second question, so no change in direction broadly speaking right now? But given some of the structural challenges that are out there in the industry, are you re-valuating your position or investments in certain markets? Other places where you might want to add or exit? And just the overall strategic direction of the Company?.

We're not really looking to change the offshore subsea focus of the Company. I think we're going to continue to go down the path that we have been going down. If there are opportunities to make an acquisition we will certainly look at those. We have the capability of making some deals, but otherwise we're staying with our knitting here, so to speak..

Right now, Mike, we continue to look for growth opportunities. We don't think there's going to be any distressed subsea asset sales, other than vessels and we're not interested in that at this time. But, we're continuing to look for opportunities to add assets, to do geographic expansion rather than any type of contraction.

We know that may suffer our margins as we keep a store-based network functioning with reduced activity everywhere. But I think it will help us considerably if we're able to expand -- specifically subsea work systems to do well stimulation or hydrate remediation and IWOCS. We're looking to grow rather than to contract..

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

Maybe just a couple of follow-ups that you have spoken to a little bit already.

Can you give us visibility on BP Angola specifically? Do you expect to retain two vessels that works through 2016?.

We're not going to comment on that. Right now we're pretty clear on what our contract coverage is, but you know and I know that those things are subject to change today..

Maybe speaking to just your last answer a little bit.

Are there stair steps in demand that might have you think a little bit differently about cost savings opportunities? Or maybe just a different way to answer it is can you quantify the aggregate impact? Do you think of the cost savings steps you have taken and ones that are underway?.

No. So much is related to utilization and it is -- our ROV business is very variable. So is our vessel cost, all of our offshore crews get paid when they work.

When you go to plants, a step change would be should we choose to close down an umbilical plant? And yet when we look at the three that we have, one in Scotland, one in Florida and one in outside of Rio, we see a reason to keep all three of those operating at this time.

If you're going to go lower for longer and not have backlog we will revisit that when appropriate. Right now we don't see a step change. We just see less activity, less demand and lower prices and we're focused in cash flow. I think we're doing a pretty good job..

Your next question comes from the line of Ed Muztafago with Societe Generale. Your line is open..

I just really had one question here. I wanted to focus maybe on asset integrity a little bit. I know this is the business that really has fallen off a lot more then you probably all expected. And you kind of commented that you can't go on like this forever.

If we have a muted year, another year down next year, do you think this business can bump along at this level for another four quarters without really risking safety in the industry? Maybe you can just talk to how you're thinking about that..

That really is a question for the operators and what their risk tolerances in that regard. I think our observation would be that there are a lot of regulatory requirements around this, so they can't just ignore it for too long. Our hope and expectation is that this will start picking up again in the first quarter to second quarter of next year.

Because it has been, as you said, lower than we would have anticipated given the regulatory nature of that. Every operator -- that is their decision and stuff. And I think I would leave that with them..

Maybe just a related follow-up there, obviously, you are scaling all of the businesses down to meet the current environment. I don't know to what extent that you have fully scaled down in asset integrity.

But is that a business where if it picks up unexpectedly quite quickly that you can have ample resources in place to meet that demand?.

I would say yes. This is probably fairly true for the industry in general. But you go through a downturn like this, a lot of people lose their jobs. And they're not going to get a job in the same industry until things improve. But once it does everybody is going to come back to work.

We should be able to attract the necessary personnel to attack the market when it does come back..

Your next question comes from the line of Jim Crandall with Cowen. Your line is open..

I wanted to come back and try to ask the pricing question on ROVs a couple of different ways. As I understand it, Kevin, it's highly unusual to be replaced as an ROV company once you are on a rig.

Have you been replaced as an existing ROV supplier on a drilling rig by another company? Secondly, how does your overall drill support market share compare with levels pre-downturn?.

I think the overall percentage of market share is pretty close, within a percentage point or so. That really has not changed as far as -- you are correct in saying that it is not routine for ROVs to be replaced on rigs, but it does happen. It even happens to us occasionally.

I couldn't tell you whether it has happened to us in the last quarter or not, I just don't know. Off the top of my head, but, as you said, it is very non routine. However, I would say that in the current market, where rigs are getting warm stacked and whatnot and or going into yards or whatnot, it does make it easier for that to happen.

Operators are bidding everything to get the absolute lowest price. So we could see it happen. But I would not expect this to be a major shift in the industry by any stretch..

To say this is slightly different way, we're not losing market share. During full utilization times, you don't bother to switch out an ROV operator because of the cost associated with it..

And time, primarily because the rig is going from well to well. And so they're not going to take a rig out of service essentially for a couple of days even to make a switch..

But with a lot of downtime between contracts and a lot of warm stacked rigs, there is ample opportunity should you choose and they are choosing to re-bid, but we're matching the market and continuing to work to the extent the rigs are continuing to work..

Our strategy is we have always said, is to leave our systems on board. Warm stacked rigs, in order to have some cost advantage of not having to mobilize to go there. That does help us in our bidding strategy..

Isn't it fair to say that historically, that you have been able to command a meaningful premium on price because of the quality of your people and all the things that make Oceaneering what it is? Is the pressure on pricing coming from the competitive aspect and that they're willing to go even deeper below Oceaneering? Or is it just the oil companies are demanding price concessions across-the-board and literally everything that is been done out there?.

I think in all of these cycles, at least this is the way we would characterize it. In all of these cycles, where money gets to be very, very tight the procurement departments in oil companies have a lot more sway over decision-making. I think historically, what you said is very true. And I think that is reflected in the market share that we've had.

Everybody is bidding lower now because they have to if they want utilization. And I think utilization is the name of the game. Or staying market share is in name of the game and we're doing everything we can to maintain our market share..

I think the pressure is more, Jim, from the customer than it is from the competitors..

Absolutely from the customer..

Okay..

Everybody is trying to match up to whatever they think they want to take..

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

You guys have been very successful with umbilical awards over the last year.

I wonder if you'd help us think about 2015, what that's going to look like? As a percent of products and then how that transitions into 2016?.

Chase, we do that annually. And we're not going to do it at nine months. I haven't even calculated it myself. We have had a, as you said, a very good run in umbilical awards and execution. So, a good backlog, great book-to-bill stats that we gave out and long may it continue..

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

I wonder, could you say whether the Island Pride contract in India would be of a similar magnitude of the revenue or profit contribution that you lost in Angola going down from 3 to 2 vessels? Or are they very dissimilar?.

It will not be the same. Market conditions are significantly different today than they were when we did the Angola contract. No, it is very different..

We have no further questions in queue..

Since there are no more questions, I would like to wrap up by thanking everyone for joining the call. And this concludes our third quarter 2015 conference call. Have a great day..

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