Good morning. My name is Stephanie, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Oceaneering's Fourth Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 Investor Relations..

Thank you, Stephanie. Good morning. And welcome to the Oceaneering’s fourth quarter and full year 2018 results conference call. My name is Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations.

This is my first earnings call in my new investor relations role and I look forward to working with everyone in the investment community. Today's call is being webcast, and a replay will be available on Oceaneering's website. Joining us on the call are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments.

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 Rod..

Good morning. And welcome to the Valentine's Day installment of our call. Today I'll focus my comments on our performance for the fourth quarter and the full year of 2018.

The market outlook for 2019, business segment outlook for the full year and first quarter of 2019, and our commitment to cast capital discipline and generating positive free cash flow in 2019. Now moving to our results.

In our press release for the fourth quarter, we reported a net loss of $64 million dollars or $0.65 per share on revenue of $495 million. These results included the impact of $71 million of net adjustments primarily related to $76 million of pre-tax goodwill impairment in our subsea projects segment.

Adjusted net income was $7.3 million or $0.07 per share. Overall, our adjusted operating loss of $20.7 million and adjusted EBITDA of $31.1 million were in line with our expectations, and we were pleased to report continued growth in our advanced technology segment where we achieved record earnings.

Looking at our business operations for the fourth quarter compared to the third quarter, our adjusted operating income was $19 million lower than that of the immediately preceding quarter, due to reduced profit contributions from each of our energy segments, most notably in our subsea products, and subsea projects segments.

The decline in the financial performance our energy segments was somewhat mitigated by the strong quarterly profit contribution from Advanced Technologies. For ROVs, overseas operating income was down resulting from an approximate 8% reduction in revenue on 8% fewer days worked.

Our fleet utilization for the fourth quarter was 52% down from 56% in the third quarter. The quarterly decline and the utilization percentage of our ROV fleet was primarily attributable to seasonality associated with the global vessel market.

Our fleet used during this period with 67% in drill support and 33% for vessel based activity compared to 59% and 41% respectively the last quarter. During the fourth quarter, we added two new ROVs to our fleet and retired six, ending the year with an ROV fleet size of 275 vehicles.

At the end of December, we had ROVs on 91% or 62% of the 146 floating rigs under contract. This compares to our 61% drill support market share at the end of September. During the quarter, we were on seven of the 14 rigs whose contracts ended or terminated early and six of the 10 rigs that were awarded new contracts. Now turning to subsea products.

Our fourth quarter operating results were lower than that of the third quarter as a combined result of the Panama City manufacturing facility being offline for several weeks due to hurricane Michael and the execution of lower margin work in our service and rental business.

Just as an update, I am happy to report that our Panama City facility is fully operational, and the final repairs to the building will be finished without further interruption to our manufacturing operations. Our subsea products backlog at December 31, 2018 was $332 million compared to our September 30th 2018 backlog of $333 million.

Our book-to-bill ratio was 1.1 for the full year of 2018. Sequentially, subsea projects operating results declined during the fourth quarter. The decline was principally driven by the seasonal decrease in intervention maintenance and repair or IMR and survey activities.

Additionally, our renewables business unit experienced a lull in activity and contract awards. Looking at Asset Integrity, operating results were lower as a result of a seasonal decrease in activity. As mentioned, our non-energy segment Advanced Technologies achieved record operating income during the quarter.

We achieved a 70 plus percent sequential improvement in operating income on a 6% increase in quarterly revenue due to a combination of completing certain jobs and closing out contracts in our entertainment businesses as well as improved performance in our automated guided vehicle offerings. Unallocated expenses were in line with our expectation.

The goodwill impairment taken in our subsea project segment was largely resulted from the protracted downturn in survey and vessel activity. During the fourth quarter, our capital expenditures totaled $26 million and our cash position remained strong at $354 million.

I now like to turn my focus to our results for the full year 2018 compared with our 2017 results. The full year of 2018 unfolded largely as we expected, with increased levels of activity being more than offset by lower pricing for services and products in our energy related segments.

Overall, our 2018 revenues approximated those of 2017 with increases in ROV, subsea projects, Asset Integrity and Advanced Technologies being offset by a substantial decline in Subsea products.

Despite record results in our Advanced Technology segment for the year, consolidated adjusted operating results decreased $74 million with the largest declines in our subsea products and ROV segments.

Operationally, each of our operating segments contributed positively to our adjusted EBITDA of $143 million and $37 million of cash provided by operating activities. We invested $109 million in organic growth and maintenance capital expenditures resulting in a net use of $73 million in cash.

We continued to adapt to the challenges posed in our markets, as we maintained our competitive position, in a challenging offshore energy services and products market, achieve significant international expansion, in our entertainment business and maintained our impressive safety record.

We also continue to focus on identifying and driving efficiencies in cost and performance, all the while innovating to increase the value proposition of our services and products. We're pleased with the notable achievements accomplished during 2018.

We entered into our first E-ROV contract with Equinor to provide a resonant battery powered remotely operated vehicle to support subsea inspection maintenance and repair activities. We expanded our capabilities in the renewables market, through the acquisition of Ecosse subsea limited and increased associated ROV and survey activity in this market.

We secured meaningful subsea umbilical hardware contracts highlighted by Equinor’s Johan Castberg project and Shell’s Vito project, allowing us to achieve a book-to-bill ratio of 1.1 for the year.

We expanded our service offerings in Brazil by securing a contract with Petrobras to supply and operate three drill pipe riser systems for intervention and completion operations.

Our advanced technology segment achieved record annual 2018 operating income of $34 million, a 54% increase due to steady growth in our government business and a significant increase in activity in our Commercial segment specifically entertainment.

And we refinanced our $300 million term loan, providing us with an extended debt maturity profile with our [Indiscernible] maturity now in late 2024 and extended our revolver such that we now have $500 million of availability until November 2021 and $450 million of availability until January 2023. Turning to our 2019 outlook for the overall market.

Over the last four years, the offshore energy industry has undergone significant rationalization, resulting in structural cost reductions. We are encouraged that projects that were not financially viable just a few years ago, are now being sanctioned as a result of reduced break even costs.

According to REITs [ph] that break even prices for deepwater and ultra deepwater developments have declined about $20 per barrel since mid-2015. Most analysts are expecting 2019 Brent crude oil pricing to be in the $55 to $65 per barrel range, which we think is strong enough to support an increase in activity.

Other analyst data is generally supportive of increasing offshore activity levels. A few examples, CapEx spending is projected to increase by a mid-to-high single digit percentage in 2019.

The contracted floating rig count has stabilized at around 150 rigs over the last few years with many industry analysts projecting mid-to-high single digit growth over the next few years. There were 287 tree awards in 2018, and the forecast for 2019 is for a slight increase to 297.

As many as 25 projects in water depths greater than 400 meters are expected to reach FID in 2019, up from less than 10 in 2018. We agree with published reports that offshore production will continue to be a meaningful component of global supply, representing approximately 30% of total global supply for the foreseeable future.

Offshore infrastructure continues to grow and age, which will require increasing amounts of intervention, maintenance and repair services. Our data shows approximately 5,400 wells installed in on-stream in water depths of 400 meters or greater.

Approximately 20% of these wells have been installed for over 18 years, and approximately 60% of the total have been installed for over eight years. Turning to our 2019 outlook for Oceaneering. We expect to generate positive free cash flow based on increased activity across all of our segments.

Operationally, we anticipate all of our segments with the exception of Asset Integrity to generate improved results, with the largest increase in profitability occurring in Subsea products and Advanced Technologies.

For the year, we anticipate generating $140 million to $180 million of EBITDA with positive EBITDA contributions from each of our operating segments. At the midpoint of this range, our EBITDA for 2019 would represent an increase of about 12% from our 2018 adjusted EBITDA.

These increases based on the expectation of higher overall activity and stabilized pricing, within our energy segments. Modest activity improvement within our government businesses and improved performance in our commercial businesses. For 2019, we expect our organic capital expenditures to total 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, including the purchase of equipment needed to support the Brazil drill pipe riser contract awarded last year and the final payment to complete the Jones Act vessel Ocean Evolution.

We expect to place the Ocean Evolution into service, during the second quarter of 2019. Directionally in 2019, for our operations by segment. We expect within our energy segments ROVs, subsea products and subsea projects to have improved operating results with the largest increase in profitability occurring in Subsea products.

For ROVs we project increased days on higher in both drill support and vessel based activities. Slight changes in our geographic mix are expected to result in a slightly lower average revenue per day on hire.

We expect to sustain our 2018 fleet mix use of 64% drill support and 36% vessel support through 2019 as we see improvements to both the number of floating rigs under contract and increased vessel utilization. Our overall ROV fleet utilization is expected to be in the mid 50% range for the year.

I want to highlight something that I talked about last year. For Oceaneering to maintain its leadership in ROV markets, it is important that we are positioned to quickly provide our customers with the value added services they need.

As a result, the vast majority of our ROV fleet has been strategically deployed on drilling rigs and vessels across the world with only about 15% of our systems being at Oceaneering facilities at any one time.

In many cases, our systems may only have partial utilization during the year, but we've decided to leave our systems onboard, as we believe these assets are the best position to return to work even on short term or call out contracts.

To illustrate this point, which we have referred to as churn in the past, approximately 85% of our ROV’s earned revenue at some point during 2018, which is a slight improvement over the 80% we estimated in 2017. We expect a similar result in 2019.

Based on our anticipated level of utilization combined with our fleet use expectations, worldwide locations for ROVs may work and cost structure, we expect our ROV EBITDA margins to be in the high 20% range for 2019 overall. We expected generally sustain our ROV market share for drill support.

At the end of 2018 there were approximately 28 Oceaneering ROVs on board 26 floating drilling rigs with contract terms expiring during the first six months of 2019. During the same period, we expect to place 30 of our ROVs on 25 floating rigs beginning new contract.

For Subsea Products we expect operating results to improve substantially as a result of securing good order intake in 2018 and early 2019. This backlog is expected to drive increased throughput within our manufactured products business unit and higher activity levels and contribution from the services and rental unit.

With increased overall activity and better absorption of our fixed costs we anticipate that our operating income margins will settle in the mid-single-digit range. Based on recent FIDs, current bid activity and anticipated award dates, we envision our book-to-bill for 2019 exceeding 1.0 again.

For Subsea Products overall we expect to generate better operating results in 2019 with improvements in our survey and renewables businesses being modestly offset by reduced international and Gulf of Mexico vessel activity.

The reduction in the Gulf of Mexico vessel activity is really due to the current absence of a large job to replace the Shell Appomattox work performed in 2018. Vessel day rates remain competitive, but appear to have stabilized. We also see some opportunities for margin improvement during peak seasonal periods.

As mentioned, we expect to place the Ocean Evolution into service during the second quarter and continue to leverage our current arrangements with third-party vessel providers which you give us the ability to react to changing market conditions with minimal charter requirements.

For Asset Integrity, we project results to be relatively flat year-over-year as contract pricing remains competitive.

For our non-energy segment, advanced technologies we anticipate continued high demand and activity levels in our entertainment business, Improvements in our automated guided vehicle operations and modest growth in our government related units.

For 2019 we anticipate unallocated expenses to increase due to the expectation for higher projected short and long-term performance-based incentives compensation expense.

As we reported in our earnings release, our unallocated expenses have been running at decrease levels over the last few years as our financial results have not achieved performance targets, primarily due to the prolonged downturn in the offshore oilfield markets we serve.

Based on expected increase in offshore activities a more stable pricing environment, realize benefits from ongoing cost and performance initiatives and continued growth in our Advanced Technology segment, we expect to achieve our performance targets for 2019 as well as longer-term.

Therefore as we reestablish accruals for short-term and long-term incentive compensation programs, unallocated expenses are expected to average $35 million per quarter.

We anticipate our 2019 net interest expense to be higher as a result of full year payments on a $300 million of senior notes issued in February 2018 and higher floating interest rates. In addition, we will not be capitalizing interest on the Ocean Evolution for the full year. We expect our 2019 income tax payments to be approximately $25 million.

This represents taxes incurred in countries that impose tax on the basis of in-country revenues and bear no relationship to profitability of such operations. At this time, we do not foresee realizing a current year tax benefit from our projected consolidated pretax loss. So, any discussion of an estimated effective tax rate would not be meaningful.

For our first quarter 2019 outlook we anticipate our operating results in EBITDA will be substantially lower than our fourth quarter due to combination of the increase in unallocated expenses I mentioned a short while ago and a lower operating income contribution from advanced technologies due to the lower number of job completions and contract closeouts in our commercial businesses.

We expect the combined results for our energy segments to be similar to fourth quarter results. And now, turning toward commitment to capital discipline and expectation to generate positive free cash flow in 2019, we are now in the fifth year of a prolonged downturn in our oilfield businesses.

Given the magnitude of the downturn one of our primary focus is to maintain a conservative financial position. Early last year we took proactive steps to extend our revolver and to defer debt maturities. As a result we have $500 million available under our revolving credit until October of 2021 and thereafter $450 million until January 2023.

With the refinancing of our $300 million term loan early last year our nearest debt maturity is now in November 2024. At the 2018 we have $354 million of cash. Although we are encouraged by improving market dynamics will also realize that returning to mid-cycle activity and pricing may still take some time.

It is key that we preserve and improve our financial position so that we are well-positioned to support increased activity as the time comes.

Although our planned capital expenditures are somewhat flat with 2018, a significant portion of our growth capital is committed to prior to 2019, which includes equipment to support our Drill Pipe Riser contract in Brazil and the final completion payment related to the Ocean Evolution.

We will be closely scrutinizing incremental maintenance and growth capital expenditures focusing on opportunities will provide near-term revenues, cash flows and returns.

So to do the quick map for expected positive free cash flow, starting at $160 million of EBITDA, the midpoint of our guidance, subtracting $115 million of capital expenditures, $38 million of interest, $25 million in cash taxes and then adding back $28 million in non-cash accruals and unallocated expenses brings us to $10 million of positive free cash flow for the year.

By generating free cash flow in this market environment and maintaining our current strong liquidity we have ample resources to address future opportunities to improve our returns.

In closing, our focus continues to be generating positive free cash flow in 2019, maintaining our strong liquidity position and improving our returns by driving efficiencies and cost and performance throughout our organization, engaging with our customers to develop value-added solutions that increase their cash flow and defending or growing our market share in each of the markets in which we participate.

Finally, I want to thank our employees and management teams for their continued hard work in transforming our business to succeed in the foreseeable market. We appreciate everyone’s continued interest in Oceaneering and will now be happy to take any questions you may have..

[Operator Instructions] Your first question comes from Kurt Hallead with RBC Capital Markets. Please go ahead..

Good morning, Kurt..

Hey, good morning everybody. Thanks for all the details, really helpful. As usual if you don’t mind though I may want to address one particular thing looking at your first quarter 2019 guidance if I may; in your commentary you reference a substantial decline in profitability.

That’s pretty clear question then becomes that they might assets on some other conference calls.

How do you guys – what’s your definition of substantially if I were to think about that in percentage terms?.

I think the easiest way look as, we probably not going to get percentages, Kurt, at this point in time, but I think the area where the largest increases is quarter over quarter is going to unallocated.

I think I would look at that area and I think we would discuss the Advanced Technology segment that would down quite a bit from the quarter – fourth quarter results as well. I think all of the – the sum of the total of the energy segments we see relatively in line with what we had in fourth quarter..

Got you..

I think the math kind of falls out..

Okay. Appreciate the additional color. Now, just in terms of the – let’s say, if you take a look at the ROV business, there is obviously been a – I think we count sort of like 2o, 25 floating rigs that are effectively on the way back into the market after being featured a couple of years.

I know in the last conference call you mentioned some challenges relating to having to go from short-term work.

Any additional color beyond what was provided maybe in your press release? Are you seeing maybe more extended durations or if not, can you talk us through how you are kind of managing those short-term switches to maximize your profitability?.

I think, one of things is its – well, it’s a not a huge change. We are seeing slightly longer commitments and it is -- it's going the right direction. And then from a management standpoint, one of the things that we’re doing is, we really our position. We really like having units on rigs because it gives us preferential opportunity to have.

We’re already the cheapest option if we're already, there's -- that's where you, and when we talk about having some of these small opportunities to increase price that's probably where they’re going to happen is we’re already forward position.

But on the ones where we switch; one of the things that we’re -- just like everything else's, we will make sure that we got a great ROV, something that's ready to go and fully operational.

But if we start to see need for people asking for upgrades or additional capabilities or other things that's where we’re going to have to be very diligent about passing those costs on who are customers because if we do that more often and every time you move somebody ask for something extra, we have make sure we collect from that.

And one of the best ways to mitigate some of that switching cost..

Yes. And Kurt, just from a margin perspective, our guidance is in the upper 20% range for EBITDA margin which is consistent with kind of what you saw us report in Q3 and Q4. So we do see that it’s not dropping any further in our guidance, but we don't see a significant appreciation at this point in time..

And Kurt, this is Marvin. While rig contracts have been a short duration. Let us remember that most short duration rig contracts last longer than the vessels churn that we really see the activation and deactivation of short-term work for the vessel callout market.

So, even if rigs stabilize we still got that extra cost that we’re trying to cover in the margins, as Alan alluded to what they're going to be. But until we see a more sustained level of offshore activity, we've got starts and stops on a lot of boats around the world..

All right. Thanks. Appreciate that..

Your next question comes from Scott Gruber with Citigroup. Please go ahead..

Yes. Good morning..

Good morning, Scott..

Thanks for all the color and the cash items, one follow-up there.

With the top line growing in 2019 can you talk to your ability to limit working capital expansion to ensure positive free cash generation?.

Yes. I think what we’re looking at is we’re going to have some performance improvement plans in place looking at our receivables that we feel very confident about. We also look at a lot of the larger contracts that we’re looking at have a progress payments associated with them as well that won't require funding of those.

So we feel pretty confident that we can grow the top line without having to grow receivables..

And as we mentioned, Scott, so much of the revenue growth is coming from products which is a big contracts and that's what Alan just discussed that we’re being very diligent in our contracting terms to make sure we're not going out of pocket or trying to go out of pocket as little as possible for a big ticket items..

And then, Rod, I want to ask about a few of your non-oilfield technologies which are very interesting. You noted performance within your automated guided vehicles business improved during the quarter.

Can you provide some color on roughly what percentage of your Advanced Technology segment? Did the AGVs represent today? Where they stand from a margin standpoint relative to segment margins?.

So, its still, we don’t break it out. But it still a little brother to Ocean -- or to the Entertainment group.

But let me give you a little bit of color, Scott, one of the things that we’ve done so well in the entertainment business that you've seen -- you really see us take advantage of the last year or two is that we've gone us from really great standard product that then were able to make very small changes to the platform to capture some of these large contracts.

And in doing so we just got the deliverability much higher than it was in the past. And so learning that same and we’re – when we’re working that into the same sort methodology in the AGV business as well.

And that's part of that improvement that we're already starting to see is this this standard products that we can deliver quickly with very low risk and very low uncertainly and that's what's really driving that performance. And I would just say more to come. That's what we're talking about in 2019 as well..

Yes, sure. If I can just sneak in another one.

Could you just talk about where you think kind of the growth potential for the AGVs as well as the people-mover, the REVO-GT?.

I mean the activity is or the application obviously is very broad. Right now a lot of our AGV business is pretty focused on the automotive industry, automotive manufacturing industry but between that and people-mover's expanding more into warehousing actually taking a look at some projects where we're operating outdoors doing similar kind of work.

That is almost unimaginable how big that opportunity can be but it's just a matter of how quick bid auction rates are..

Would you offer gas in terms of kind of revenue size or with the over three to five years?.

I don’t think I can get the time here right, Scott. But I just like I said I think we're encouraged by the breadth of the market and we're just going to have to try to drive that rate of change as quickly as possible..

Got you. Will continue to watch, thank you..

Thanks..

Your next question comes from Edward Muztafago with Societe Generale. Please go ahead..

Hi, guys..

Hi, Edward..

Thanks for taking the question here. I wanted to maybe think a little bit about pricing in the ROV market and if we look at what's being going on with the jack of market, in floaters, I hate to drop parallels between different businesses here.

But it seems like pricing is moving at a little bit better rate than I think what a lot of us would have thought given the excess supply.

Would you have sort of guess as to whether you think maybe there is the potential for a similar dynamic in the ROV market and are you guys at least seen any evidence now that maybe it's a little bit easier to move pricing up than you would have thought?.

I don’t see any huge opportunities there. What I would say is we look for places where the value is differentiated. Just like heavy weather rigs for example, where we saw some great movement on heavy weather rigs to use one of those analogies.

And I think where we start to see whether it's a remote operation where you were or uniquely positioned to have the closest back up the closest parts available or we can really help them maximize sort of a value proposition where we've got ROV and survey and tooling and communications on the rig.

Those opportunities which obviously stand out in remote places, I think those are some of the unique niches that we talk about that we try to put pressure on, we try to make those pricing moves. But again, as a percentage of the whole, they're not huge. So, we'll just have to look for those who expand into other places..

Okay, that's helpful. I mean, there seems to be a bit of well timing rather rig wise that there is a recognition, everybody's got to earn their cost to capital and that's sort of behind it but time will tell I guess.

And then, maybe as a follow-up, I just wanted to think about how the mutual liability Ocean Evolution and of course the riser contract in Brazil sort of play into the growth outlook for 2019 and I think you said that Ocean Evolution starts in 2Q and I think the riser contracts starts in 2Q but not really clear how they're lowered if they're early in the quarters or at the later quarters?.

Sure. So, let me talk about, I'll start with the riser contract. The riser contract really is going to more than anything is going to affect our CapEx this year. Because the work doesn't start until late 2019, so fourth quarter.

So, that's more of it we'll be talking about CapEx but we'll also be talking about building our relationship with Petrobras on the services side. So, that's an -- it's a late year impact on the revenue side.

For the Ocean Evolution, it again it's more of a cost shift, it's more of when you talk about the interest and everything else, it's coming in there.

But when we talk about revenue gains, we've been doing I think very good with the help of our third party vessel suppliers in capturing whatever work we have available to us in the Gulf of Mexico through 2018 and before.

So, what we're talking about is actually doing more of that work in our vessel and then using those third party vessels to go out and capture any upside to that. So, it doesn't I don’t think it creates a huge topline opportunity but it's going to definitely give us some capability improvement and some other things as we put on both to use..

Okay, that's helpful.

And does it then provide a little bit better cost absorption potential?.

I think what you see a difference in is it will be showing depreciation versus the cash cost associated with that vessel..

Okay, that's helpful. Thanks then..

We replace it..

With replacing, replacing one over releasing..

Well yes, per size..

Your next question comes from David Smith with Heikkinen Energy. Please go ahead..

Hi good morning and thank you..

Good morning, David..

Good morning..

So, for the ROV segment, the numbers you provided I think implied drill support days that were up almost 5% in Q4 versus Q3, which is really impressive as the contract floating rigs in the contract, looks like it was down about 7% I think in time period. Just trying to reconcile that divergence.

I assume market share is a factor but I wanted to ask if there was anything enormous in the quarter any shift in the number of rigs using two ROVs or anything else that might stick out?.

No, there is nothing materialistic like that, David. I think a lot of it was the seasonality associated with vessels in Q4 that work in Q3 and we did expect to see the uptick and more drill rig days in Q4 based on the ones if we were placed on going to work..

Yes, so there is a moment in time when we do see that that market share starts to shift, I think you nailed that. That's going to be the most meaningful change in the quarter..

That's great. And just wanted to confirm that I heard the answer to Kurt's first question correctly.

Did you say an allocated expenses should be the biggest sequential impact in Q1 versus Q4?.

Between advanced technologies and unallocated are the two largest components..

Okay. You didn’t say that that one was larger than the other..

If I did, I did not mean to, non-intentional..

Okay.

And the firm think about advanced technology as a result more in line with kind of Q2, Q3 levels from last year or should we be looking at something closer to Q1 levels from last year?.

No, not as -- closer to Q2, yes being more but not going back to operating income contribution with Q1, David..

Correct. That helps a lot, thank you..

[Operator Instructions] Your next question comes from Sean Meakim with J.P. Morgan. Please go ahead..

Hi, good morning..

Good morning, Sean..

Good morning..

So, on the free cash flow target that you laid out there, just how much flex would you say is in the CapEx budget and do you think you'll be able to stay free cash flow positive if you end up with the lower end of the EBITDA range? I think you mentioned this -- I was hoping also is part of that maybe you can just reaffirm the expected use of cash for working capital at the midpoint of the range and as we think about the lower end, could working capital be a source of cash if you're in towards the lower end of that range.

Just trying to think about how some of flex points help us think about or you bottom down on EBITDA relative to the free cash?.

I mean, I would, Sean I would just say you got all the leverage and I think directionally it'd be hard to sell them all up.

We've kind of spoken to we've got a good amount of flexibility in the CapEx taking away the payments on the Evolution, taking away the what we have committed to the drill pipe riser and a couple of other contracts where we've been placed. But we do have some flexibility there.

And obviously we would expect working capital if you get to the low end of the range to your point, that you free up some working capital, so but I couldn’t get you this. I don’t think I had venture the sums because it's hard to know if it goes down where it comes from. And sometimes that makes it more difficult.

Alan?.

Yes. I think on the CapEx side, most of the 40 to 50 is obviously maintenance CapEx and pretty hardwired but we will be looking at everything as Rod said in the call that everything is going to be looking at for return in near term cash flows and even in that sector of spin.

Looking at the drill pipe riser and the work associated with the Evolution, we had a -- we gave you all a pretty wide range last time on the Q3 call on CapEx for 2018, as it a $100 million to $140 million because we didn’t know the exact timing of when some of the payments on the Evolution and on the drill pipe riser along lead items would be made.

So, we saw that it could have been up to $140 million at that point in time, they came in at a $109 million. So, I think that kind of speaks to those $31 million that and we've heard other people pulled money and '18 so they could show year-over-year decrease, we did not do that. We let the chips fall where they may.

And so, there was $31 million, could have probably been pulled in to '18 that rolled over into '19 and is part of our guidance range..

Got it. Thank you for that details, that was really helpful. If I could maybe just talk about subsea projects a little bit. I was curious as how you see the spread of potential outcomes for that business across '19 maybe between revenue and EBITDA just giving the moving pieces that could impact utilization in mix.

I think you said earlier that some pricing improvement during the peak seasonal periods could be a benefit.

Just maybe could you expand on that a little bit and I'm trying to think about those the moving parts in that segment and how wide the range could look in '19?.

I mean Sean, you're on -- and I know you asked the question because you're on to, that's a big part of our upside always. This projects a good season more IMR or more intervention that drives projects up particularly in the Gulf of Mexico.

And if it happens during the season and a lot of these boats get used up, that's our kind of that's our upside; a big part of it. So, I think if we can see higher than seasonal expected seasonal activity, it gives us a chance and not just draw the topline but also get those things at a better price. So, it is a big part of it.

How much, trying to quantify that swing, it's just really hard to do because it's activity and weather dependent..

Yes. I think when you look at projects, so much of it is call out type nature this year compared to last year as Rod alluded to, we don’t have the larger project in backlog going into the year. So, this is one that if activity levels pick up in the IMR space, it could be good but if the phone doesn't ring, it also has that impact as well..

And let's remember that we have survey and renewables in our project business as well and we alluded to a lot in the contracting activity in the renewables business unit. So, take away from that is what Rod said.

This is the one which kind of end -- and Alan about that term call out where all of this is let me say in another way a higher percentage of projects revenue is speculative as in not fix or book going into the beginning of the year.

So, your crystal ball is pretty good and we just go our numbers and we got job-by-job decided which ones we think will win and that's how we come up with our guidance. But a lot of activity can happen that we don’t know about yet..

Yes..

That's really helpful.

I guess there's one more clarifying piece, then as you think about the midpoint versus the upside of the overall guidance, would you care to maybe force rank across the segments which has the most the biggest contribution versus the smallest to that potential upside or we put projects at the top of that list?.

Yes. Sean, yes, our business pretty well. So, you look at the things that are like look at the service and rental side of products, that can surprise the upside. We start getting some of this work that we projects or IMR work. That hits high there. So, really those two are really the strongest ones to give us that positive upsides price, so..

Yes, makes sense. Thank you, very much..

Your next question comes from David Smith with Heikkinen Energy. Please go ahead..

Hey, thanks for letting me back in..

Yes, welcome back Dave..

Thanks.

On subsea products, do you have the revenue split handy between the manufactured products versus service and rentals or do we just need to wait for the 10k?.

All the way for the 10k..

Alright, I appreciate it. And last is the, you had a nice trio of umbilical awards announced last month, think about over 80 million of which 70% was expected to be booked in Q4.

Just wanted to double check if that was included? Because I guess, the implication is, other product orders were begin on the low side of where they been? So wanted to check that and then also ask if there was big that you’re looking to book in Q4 that may have slipped into 2019?.

Yes. I mean I think you got it. With those ones that you asked about we’re already booked. But as far as big things coming up and we alluded to it here when we talked about strong activity in early 2019 we were named in the recent Anadarko announcement for the Mozambique development as the preferred bidder.

So that's a very large contract for us and that's a big part of what we've been talking about thinking it might have fallen into fourth quarter, but now it’s dropped into first quarter 2019 getting us off to a good start, at least as an announcement..

That’s great. Thank you..

There are no further questions at this time..

Well, since we don’t have any more questions, I’d like to wrap up by thanking everybody for joining the call. And this concludes our fourth quarter and full-year 2018 conference call. Have a great Valentine's Day..

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