Suzanne M. Spera - Oceaneering International, Inc. M. Kevin McEvoy - Oceaneering International, Inc. Alan R. Curtis - Oceaneering International, Inc. Marvin J. Migura - Oceaneering International, Inc..

Blake Hutchinson - Scotia Howard Weil David Christopher Smith - Heikkinen Energy Advisors LLC Joseph D. Gibney - Capital One Southcoast.

Good morning. My name is James, and I will be your conference operator today. At this time, I would like to welcome everyone to Oceaneering's 2017 First Quarter Earnings Results 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.

I would now like to turn the call over to Suzanne Spera, Director of Investor Relations. Thank you..

Thanks, James. Good morning, and welcome to the Oceaneering First Quarter 2017 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 first quarter press release. We welcome your questions after the prepared statements. I would now like to turn the call over to Kevin..

Good morning, and thanks for joining the call today. Since our guidance for the full year of 2017 has been to be marginally profitable at the consolidated operating income line, we were pleased our first quarter operating results came very close to breakeven.

For the first quarter, our reported loss per share of $0.08 included the impacts of $2.1 million discrete tax expense and $2.2 million of pre-tax foreign currency exchange losses. Excluding these items, adjusted net loss per share was $0.04 or slightly better than our expectations.

On an adjusted basis, operating results were $10.9 million lower than that of the immediately preceding quarter due to higher unallocated expenses, seasonality, and lower activity levels in Subsea Projects. The primary cause of our net discrete tax expense was the result of a new accounting standard associated with the share-based compensation.

Again, we are pleased that each of our operating segments generated positive results, and overall, maintained positive earnings before interest, taxes, depreciation and amortization, or EBITDA, and free cash flow.

These results were made possible by the continued focus of our employees to deliver cost-effective quality services and products on time and with a safety mindset. Now, let's look at our business operations for the first quarter of 2017 compared to the fourth quarter of 2016 on an adjusted basis.

ROV operating income was down $2.7 million on 13% lower revenue resulting from 10% fewer days on hire and a 4% reduction in revenue per day on hire. Our fleet utilization for the quarter was 46%.

As we have said on our past conference calls, lower operating margins can be partially attributable to depreciation becoming a higher percentage of revenue during periods of low utilization and pricing. During the first quarter, ROV depreciation and amortization equated to 31% of revenue versus 27% in the fourth quarter of 2016.

Our first quarter ROV operating margin of 6% was slightly lower than the immediately preceding quarter. However, our ROV EBITDA margin of 37% was slightly better than the 35% for that same period. During the quarter, we put two ROVs into service, both for vessel-based work, thereby ending the quarter with 282 work class vehicles.

Our fleet mix during the quarter was 69% in drill support and 31% for vessel-based activity. We believe that as of the end of March, we maintained 53% drill support market share with 87 ROVs on 80 of the 151 floating contracted rigs.

During the quarter, we run seven of the nine rigs that received contracts, and seven of the nine rigs that had contracts expire or terminate early.

Although we endeavor to maintain our drill support market share and place more ROVs on vessels, we need a sizeable increase in our customers' offshore spending levels for there to be a discernible increase in ROV fleet utilization and profitability.

Turning to Subsea Products, revenue was flat on increased umbilical throughput, offset by lower completion-related activities and reduced production enhancement work. Operating income improved due to cost reduction measures taken in prior periods.

Our Subsea Products backlog at March 31, 2017, was $407 million compared to $431 million at December 31, 2016. The backlog decline was primarily related to umbilicals. Our book-to-bill ratio for the first quarter was 0.84, and compared favorably to 0.74 for the trailing 12 months.

For Subsea Projects, revenue and operating income were down substantially, primarily the result of reduced U.S. Gulf of Mexico demand and pricing for both deepwater vessel and diving services. Asset Integrity operating income was lower due to seasonality.

For our non-oilfield segment, Advanced Technologies, operating income improved due to increased commercial activities and work for the U.S. Navy. Unallocated expenses increased as expected from higher estimated incentive plan compensation. Overall, our first quarter performance did not vary substantially from our internal expectations.

Our liquidity remained strong as we generated $50 million in EBITDA, and ended the quarter with $463 million in cash, up $13 million from the prior quarter. We also have $500 million available under our undrawn revolving credit facility, $450 million of which does not expire until October 2021.

Over $350 million of the cash on our balance sheet at March 31, 2017 was in the United States. We believe this provides us the financial flexibility to operate through the cycle, invest in Oceaneering's future, and return cash to our shareholders.

In March, Moody's announced a change in our rating outlook to negative from stable, while simultaneously affirming our Baa3 senior unsecured debt ratings, which is still considered investment grade. Capital expenditures for the quarter totaled approximately $18 million, most of which was invested in our ROV Subsea Project segment.

During the first quarter, we paid $15 million in cash dividends, and yesterday, our board maintained the current dividend rate by declaring a $0.15 per share dividend to be paid during the second quarter.

Moving on to our second quarter outlook, sequentially, we are anticipating seasonal operating income improvements from all of our oilfield business segments, except Subsea Products, which we are expecting to be relatively flat. For ROVs, we are projecting an increase in 7:58 vessel days on hire to drive improved results.

For Subsea Products, we are expecting higher revenue with operating income being relatively flat due to the timing of lower margin manufacturing products throughput during the quarter. For Subsea Projects, we are anticipating results to improve substantially, driven by an increase in utilization in the U.S.

Gulf of Mexico deepwater vessel and diving services. For Asset Integrity, we also expect results to be up slightly, driven by an increase in activity levels. For our non-oilfield segment, Advanced Technologies, we are projecting operating income to improve as a result of continued increased commercial activity and work for the U.S. Navy.

We expect unallocated expenses to be within our prior guidance of the mid to upper $20 million range per quarter. For our full year 2017 outlook, we continue to project that we will be marginally profitable at the operating income line on a consolidated basis.

Regarding our ROVs, much depends upon the expected number of floating rigs working during the remainder of the year, and on the level of vessel-based inspection, maintenance and repair, or IMR activity, undertaken. We expect to maintain our ROV market share for drill support.

At the end of March, there were approximately 47 floating drilling rigs that have contract terms expiring during the balance of this year, and we have 35 ROVs on 30 of them, or 64%. Of the 47 floaters, 19 are rolling to new contracts. There are 13 additional floating rigs set to begin new contracts during this same period.

Of the total 32 floaters receiving new contracts, we have 23 ROVs on 20 of them, or 63%. In addition, we anticipate that there will be some incremental contracting of rigs based on current bid activity. Further, as stated earlier, we continue to work with vessel operators to increase our ROV presence on high specification vessels.

Within our Subsea Products segment, we are expecting steady performance from our manufactured products, and an uptick in our service and rental business unit, led by an anticipated increase in well enhancement activities. We continue to project operating margins to be in the mid to high single digit range.

For Subsea Projects, we are expecting a pick-up during the summer months due to seasonality in the Gulf of Mexico, partially offset by the anticipated release of the Ocean Intervention III at the end of July. Similar to our Subsea Projects segment, we are expecting Asset Integrity to pick up during the summer months due to seasonal activity.

For our Advanced Technologies segment, we are anticipating steady activity in the government contracting business, and a marginal uptick in our commercial businesses. In addition, as mentioned in our last call, we continue to project a loss from our equity investment in the Medusa Spar as production has declined.

And lastly, our interest expense is expected to be slightly higher in 2017 than in 2016 due to higher rates and less interest being capitalized.

Turning to our CapEx and free cash flow expectations, our estimated organic capital expenditure total for this year remains between $90 million and $120 million, including approximately $55 million to $65 million of maintenance capital.

The balance will be utilized to complete the Jones Act vessel, Ocean Evolution, expected for delivery in the latter part of the year, and the well intervention equipment recently purchased as part of our Blue Ocean Technologies acquisition last year.

At an operating income breakeven level and with this level of organic growth, we should still generate free cash flow in 2017.

On a macro basis, while the spending cycle is unlikely to recover before 2018, we are encouraged the offshore industry has made considerable efforts to reduce breakeven costs through more efficient processes, standardization, and simplification.

These efforts have, in certain cases, made offshore development breakeven points competitive with onshore shale plays. Despite these continuing advancements, we are seeing no material change in outlook as the leading indicator for deepwater activity, contracted floating rigs, remains unchanged.

Most analysts and rig owners are continuing to forecast a further reduction in the contracted floating rig count by the end of this year. However, there have been a few bright spots as several projects recently cleared final investment decision, and there remains several large projects that could receive FID approval in the back half of 2017.

The combination of these may result in industry order activity increasing and material contract awards later this year or the beginning of 2018. We look forward to these encouraging prospects coming to fruition.

In conclusion, we intend to continue focusing on looking for opportunities that may emerge with more focus on our customers' operating expenditure in the production phase of the offshore oil field life cycle, engaging more directly with customers to develop value-added solutions that increase their cash flow, driving efficiencies throughout our organization, and controlling our costs and adjusting our organization to be commensurate with the existing level of business.

I'd like to take this final moment to say that this is my last conference call as I will be retiring as Oceaneering's CEO immediately following our upcoming annual meeting of shareholders on May the 5th. I have been privileged to be part of Oceaneering for the past 38 years, and to have worked with so many dedicated and talented people.

And I do plan to continue my affiliation with the company as a member of the board of directors. Rod Larson, who currently serves as Oceaneering's President, has been designated to succeed me as CEO.

I am highly confident we can count on Rod's leadership, supported by an exceptional management team, to continue to drive safety and operational excellence, provide a great place to work for our employees, and deliver value to our customers and shareholders. We appreciate everyone's continued interest in Oceaneering.

We will now be happy to take any questions you may have..

James, we're ready for our questions..

And your first question comes from the line of Blake Hutchinson from Howard Weil. Go ahead, please. Your line is open..

Good morning..

Morning. Hi, Blake..

Morning..

I guess, just the first question, a fairly positive 2Q guide and maintenance of the full year guide, but wanted to circle back to kind of earlier, your thoughts around perhaps attaining a 50% utilization level within the ROV segment itself, again, trying to assess the power of kind of the vessel-based seasonal recovery in 2Q, 3Q.

Is that still an attainable goal for the year or should we think about that more as an attainable goal around these more positive seasonal quarters?.

I think it would certainly be very plausible for the seasonal quarters two and three to achieve that. There still is lack of visibility of spending levels at this time from major operators, but I think it is possible to achieve that for the year.

But certainly, we feel a lot more comfortable saying that for quarters two and three than for the entire year at this point..

Got it. Thanks.

And then as we consider the attendant margins during the seasonally stronger period in the ROV segment, is there any frictional costs we should consider? Or should there be fairly strong flowthrough, we're just kind of reactivating units that are more or less, for lack of a better term, already on location?.

I would not expect any increased costs in order to put ROVs to work that are not currently working. I wouldn't see that. However, I also certainly don't see any uptick in margins or whatever during that period. It's just going to be utilization..

Got it. Thanks. And then just a quick follow-on to that.

Was the Anadarko umbilical award counted in 1Q order and backlog or that will flow through Q2?.

That actually was included in our first quarter..

Okay. Thanks for that. I'll turn it back. Appreciate the time..

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

Hi. Good morning. And just wanted to make sure I caught the answer on that last question.

The full value of the umbilical award with Anadarko was included in first quarter backlog?.

Yes, that's correct. We had it in Subsea Products manufactured backlog..

Appreciate it. Wanted to ask about ROV cost. If we back out depreciation, it looks like OpEx on a per ROV day basis actually declined over 7% sequentially. Just wonder if you could talk about what steps you've taken that delivered that cost improvement, and what kind of room you think might be left for further reductions..

I think when we look at the EBITDA margins, we were pleased to see the increase this last quarter going largely up from 35% to 37% on EBITDA basis. A lot of that's due to the cost reduction activities that we took in the back half of last year, predominantly in the fourth quarter.

So I don't envision that we'll be having a lot more of that good juice coming through in the next few quarters..

I mean, now....

We look to maintain that margin going forward..

It's all about execution and recurring maintenance costs, and maximizing use of spares and whatnot that we already have..

Okay..

And the spot day rate for the vessel work that's going to be on callout's is going to affect our margins..

Yeah..

Appreciate that color. And just real fast, sorry, I missed it if you gave it. I didn't catch the ROV mix between drill support and vessel-based..

It was 69%, 31%..

Thank you very much..

Your next question comes from the line of Joe Gibney from Capital One. Go ahead, please. Your line is open..

Thanks. Good morning. Just a question on Products. You referenced an uptick in service and rental business. Just curious sort of what you were alluding to there. I know signs of life in that business, IWOCS side, kind of require a little bit more stabilization, Gulf of Mexico contracted floater count.

Was just kind of curious what you were alluding to there. Is there some other geo mix that's beginning to pick up and you're seeing a pick-up in the rental business somewhere else? Just curious if you could give a little more color on that comment..

Yes. When you look at our Subsea Products, there's two different areas in the service and rental that we're going to participate with – in Q2 and Q3, more from the seasonal activity. A lot of the tooling is also associated with the uptick in the ROV utilization that we're anticipating in those quarters.

So we should see some benefit there, as well as with our large work package systems where we do hydrate remediation, well stimulation-type work, we're expecting to see an uptick in that business as well..

Okay. Helpful. And then just a couple vessel-based questions on Projects. So just wanted to confirm, you did reference the OI III likely being released at the end of July. Just want to confirm that was the case. And then you referenced the new build, the Evolution coming in the latter part of the year.

Just wondering if you could get a little bit more granular about that.

Is it going to be able to participate in better seasonal work months in the Gulf of Mexico in 3Q or are we looking at more year-end kind of timeframe for that?.

First of all, on the Ocean Intervention III, that is the current release date as contracted. So the end of July, that will come off contract with BP and more than likely will be released, but we'll provide more information on that when we get to that point. As far as the Ocean Evolution, it is still in the final stages of completion at the shipyard.

We are expecting, hoping, but this is kind of a week-by-week thing at this point, there's no big issues with it. It's just taking much longer than either we or the shipyard would like at this point, but we're looking for delivery in the latter half of the year, and remains to be seen whether it will be out in time to take advantage of seasonal work..

Okay. Appreciate it. Kevin, kind regards to you. Thanks..

Thank you..

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

Okay. Since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. This concludes our first quarter 2017 conference call. Thanks..

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