Oceaneering International Management Discusses Q4 2012 Results - Earnings Call Transcript

Oceaneering International (NYSE:OII)

Q4 2012 Earnings Call

February 14, 2013 11:00 am ET

Executives

Jack Jurkoshek - Director of Investor Relations

M. Kevin McEvoy - Chief Executive Officer, President and Director

Marvin J. Migura - Executive Vice President

W. Cardon Gerner - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Analysts

Ian Macpherson - Simmons & Company International, Research Division

Ole H. Slorer - Morgan Stanley, Research Division

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Justin Sander - RBC Capital Markets, LLC, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Brad Handler - Jefferies & Company, Inc., Research Division

Edward Muztafago - Societe Generale Cross Asset Research

Jonathan Donnel - Howard Weil Incorporated, Research Division

Thomas Curran - Wells Fargo Securities, LLC, Research Division

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Operator

Good afternoon, ladies and gentlemen. My name is Allan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Oceaneering 2012 Q4 Earnings Call. [Operator Instructions]

I'd now like to turn the call over to Mr. Jack Jurkoshek, Director of Investor Relations. Please go ahead, sir.

Jack Jurkoshek

Good morning, everybody. We'd like to thank you for joining us on our 2012 fourth quarter and year end earnings conference call. As usual, a webcast of this event is being made available through to the StreetEvents Network service by Thomson Reuters.

Joining me today are Kevin McEvoy, our President and Chief Executive Officer, who will be leading the call; Marvin Migura, our Executive Vice President; and Cardon Gerner, our Senior Vice President and Chief Financial Officer.

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.

And I'm now going to turn the call over to Kevin.

M. Kevin McEvoy

Good morning, and thanks for joining the call. Before I get into my customary review of our fourth quarter results, I would like to address 3 key points in our earnings release. First, 2012 was a record earnings year for Oceaneering. Earnings per share increased 23% over 2011. Second, we are expecting an even better 2013 and confirm our previously announced EPS guidance range for the year of $3 to $3.25. Our longer-term outlook remains very positive. And third, we are initiating first quarter 2013 EPS guidance of $0.55 to $0.60. I would like to remind the investment community of the seasonality of our business, especially in the Gulf of Mexico and the North Sea. Usually, we are in 18% or 19% of our net income in the first quarter and about 45% in the first half of the year. Our first quarter guidance is consistent with our historical quarterly earnings distribution.

Additionally, I would like to address our fourth quarter operating margins for ROVs and Asset Integrity. ROV margin of 27% was lower than it has been for several years due to unanticipated expenses we incurred during the quarter. These were largely higher than normal ROV umbilical repair and maintenance expenses and a U.K. pension plan expense adjustment based on revised actuarial assumptions. This pension adjustment also affected our Asset Integrity results. Absent these expenses, our ROV margin would have been 28% for the quarter and 30% for the year.

We continue to anticipate a 30% annual margin for ROVs in 2013. As has historically been the case, we do expect some quarterly variations. Asset Integrity margin was unusually low due to costs we incurred associated with closing an unprofitable operation in Sweden, acquired with our December 2011 acquisition and the U.K. pension plan expense adjustment. Without these expenses, our Asset Integrity margin would have been 11% for the year. We continue to anticipate our Asset Integrity operating margin in 2013 will be in the range of 11% to 12% as it has been for several years prior to 2012.

I'd now like to review our operations for the fourth quarter. Earnings per share of $0.74 for the fourth quarter 2012 was 37% above that of the fourth quarter 2011 on income improvements from all of our operating business segments led by Subsea Products and Subsea Projects. Subsea Products' operating income rose year-over-year by more than $17 million or 47% on increased demand for tooling and higher throughput at our umbilical plants. Operating margin of 22% for the quarter was 3% higher than in 2011. This was attributable to a favorable product mix, to more tooling and an improvement in umbilical margin due to increased volume and a favorable mix change to higher-margin thermoplastic hose product. Year-over-year, fourth quarter Subsea Projects' operating income increased by over $15 million or 16% due to the services contract offshore Angola, which commenced in February of 2012, and some improvement in Gulf of Mexico deepwater activity.

Year-over-year, ROV operating income increased on a 10% increase in days on hire, notably in the Gulf of Mexico. During the quarter, we put 9 vehicles into service and retired 5. Our fleet mix usage during the quarter was 75% in drill support and 25% on vessel-based work. This compares to a fleet mix usage of 79% and 21% a year ago and 73% and 27% last quarter.

Our overall fourth quarter EPS result was slightly above our guidance range on better-than-forecast results for our deepwater vessel operations and a higher margin on Subsea Products sales. Our deepwater business in the Gulf of Mexico benefited from unexpected work and lower-than-forecast drydock expenses. The unexpected work included a job for 2 vessels to provide ROV support on a drilling operation. This was required to address a problem with the connection between a lower marine riser package and the BOP. We expect to see an increase in call-out business for our vessels, ROVs and tooling, as deepwater drilling in the Gulf of Mexico continues to be closely scrutinized. Subsea Products margin was higher as our sales mix had more tooling and IWOCS services than we had forecast.

Moving onto our total year 2012 operations. Our earnings of $289 million and earnings per share of $2.66 were the highest in Oceaneering's history and were largely attributable to our global focus on deepwater and subsea completion activity. For 2012, each of our 5 operating business segments achieved higher income. We achieved record operating income from our ROV, Subsea Products, Asset Integrity and Advanced Technologies businesses.

ROV operating income rose for the ninth consecutive year, an accomplishment we are quite proud of. This was attributable to higher demand, notably off Africa and the U.S. Gulf of Mexico, to provide both drill support and vessel-based services. We increased our days on hire by more than 9,000 to over 82,000 days. Our fleet utilization rose to 80% from 77% in 2011.

During the year, we grew our fleet to 289 vehicles, up from 267 at the beginning of the year. We added 37 vehicles and retired 15 older systems. In 2012, 14 new floating drilling rigs were placed in service for operations other than Petrobras -- for operators other than Petrobras in Brazil, and we had ROVs on 10 of them, with 2 on 1 rig for a total of 11 vehicles. For the first time since 2008, we experienced growing demand in 2012 for ROVs to support vessel projects. In response to this demand growth, 16 of our new ROVs were placed into service onboard vessels. This equaled the total number of new ROVs we placed into service on vessels during the prior 3 years. At year end, we estimate that we continue to be the largest ROV owner with 36% of the industry's world-class vehicles, with a fleet size 75% bigger than the next largest ROV fleet. We remain the primary provider of ROV drill support service with an estimated market share of 56%, more than twice that of the second largest supplier.

Moving to Subsea Products. Operating income increased primarily on higher demand for tooling to support deepwater drilling operations and IMR, or inspection maintenance and repair projects. Tooling to support our drilling included ROV accumulator reservoir skids to perform tests on VOPs, VOP panels and well containment spill response hardware. Tooling to support IMR projects featured use of our flowline remediation system to eliminate hydrates in large diameter or long offset flow lines and our asset injection systems to perform well stimulations.

Operating margin increased to 21% from 18% in 2011 due to a change in product mix and local [ph] revenue as a percent of our total products revenue in 2012 was 28% compared to 35% in 2011.

Our year-end Subsea Products backlog was $681 million, up 78% from $382 million at the end of 2011. This backlog growth was largely attributable to 3 large umbilical contracts we secured, which in total added nearly $245 million to our backlog. One of these, the largest umbilical order in Oceaneering's history, is for Petrobras' first large pre-salt project.

Regarding Subsea Projects, operating income increased in 2012 due to recovering demand for our deepwater services in the Gulf of Mexico and commencement of the field support vessel services contract offshore Angola. Under the services contract, we supply project management, engineering and 2 chartered vessels, each equipped with 2 Oceaneering ROVs and associated tooling. This contract enabled us to achieve a meaningful international expansion of our deepwater vessel project capabilities.

Asset Integrity operating income improved on higher service sales in most of the major geographic areas we serve, markedly in Norway, due to the acquisition we completed in December of 2011. Operating margin was lower largely as a result of costs we incurred in assimilating the acquisition. Advanced Technologies profits were up on engineering and vessel maintenance work for the U.S. Navy and theme park project activity.

Our 2012 capital expenditures were about $310 million, of which $198 million was spent on expanding and upgrading our ROV fleet. We added 37 new ROVs to our fleet, the most since 2004 when we added 49 vehicles, largely, with 2 acquisitions. We invested $68 million in our Subsea Products business largely to increase the capabilities of our umbilical plants in Brazil and Scotland and to expand our suite of subsea rental tooling.

In addition to our capital expenditures, we repurchased 400,000 shares of our common stock for $19 million and paid $75 million of common stock dividends during 2012. At slightly over $600 million, our 2012 EBITDA was also a record high. At year end, our balance sheet remained conservatively capitalized with $121 million of cash, $94 million of debt and $1.8 billion of equity.

In summary, we believe our annual 2012 earnings performance and cash generation were excellent. The price of Oceaneering's stock rose by nearly 17% during 2012. We believe this was in recognition of our financial performance, actions we took to enhance shareholder value and our future business prospects. Our share price percentage increase was greater than all but one of the other companies in the Oil Service Sector Index, or OSX, which by comparison rose only about 2%.

Oceaneering is thriving. I recognize and thank our employees who made this possible. Their commitment to safely provide high-quality solutions to our customers' needs is the foundation for our continued success.

Now let's talk about our 2013 EPS outlook. Looking forward, we are reaffirming our 2013 EPS guidance with a range of $3 to $3.25 based on an average of 108.5 million diluted shares and an estimated tax rate of 31.5%. The detailed business segment outlooks that I reviewed on our last earnings call in late October 2012 are fundamentally unchanged. We continue to expect each of our operating business segments will achieve higher income in 2013.

We do have more information to offer on operating margins. At the midpoint of our guidance range, we expect our total margin in 2013 will be flat to up compared to the 15% we achieved in 2012. We are anticipating some margin improvements in 2013 from ROVs and Asset Integrity for the reasons I previously stated.

Subsea Products' margin is expected to be lower due to a change in product sales mix having more umbilical revenue. Subsea Projects' margin is also expected to be lower from a reduction in our Gulf of Mexico vessel availability due to regulatory inspections and associated expenses. Advanced Technologies' margin is forecasted to be slightly higher due to a change in contract mix.

During 2013, we anticipate generating at least $675 million of EBITDA. Our balance sheet and projected cash flow provides us with ample resources to invest in Oceaneering's growth. Our CapEx estimate for 2013, excluding acquisitions, is $300 million to $325 million. Of this amount, we expect $175 million to be spent on adding systems to our ROV fleet and vehicle upgrades. About $100 million is for enhancing our Subsea Products capabilities. Our focus in 2013, as it was in 2012, will be on earnings growth and investment opportunities, both organically and through acquisitions.

Moving onto our first quarter 2013 outlook. As I stated earlier, our EPS guidance range is $0.55 to $0.60. This is consistent with the fact that our first quarter earnings are customarily lower than the fourth quarter of the previous year. At the midpoint, this would equate to 18% of our annual guidance range, which is within our historical first quarter percentage range. Over the last 10 years, we have averaged 19% of our earnings in the first quarter with a typical band of 17% to 21% for any particular year.

Our first quarter 2013 guidance at the midpoint is up 22% compared to the first quarter of 2012, as we expect all of our business segments to achieve higher operating income led by Subsea Products. Compared to the fourth quarter 2012, our first quarter guidance is lower based on anticipated reductions in operating income from Subsea Products and AdTech due to project timing and Subsea Projects and Asset Integrity due to seasonality.

Looking beyond 2013, we remain convinced that our strategy to focus on providing services and products to facilitate deepwater exploration and production remains sound. We believe the oil and gas industry will continue to invest in deepwater as it remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates and relatively low finding and development costs. Therefore, we anticipate the demand for our deepwater services and products will continue to rise and believe our business prospects for the next several years are promising.

At the end of 2012, there were a total of 93 new floating rigs on order. 64 of these rigs are not contracted to work for Petrobras in Brazil, and we expect all of them will go to work for other operators. On these 64 rigs, 17 ROV contracts have been led, and we have won 13 of them, leaving 47 ROV contracting opportunities left to be pursued with customers other than Petrobras in Brazil.

At the end of December, 99 of the 142 existing high-spec drilling rigs, consisting of dynamically positioned fifth- and sixth-generation semis and drillships, were contracted to operators other than Petrobras in Brazil. We had ROV contracts on 73 of these for a market share of 74%. If all 64 of the non-Petrobras rigs I mentioned are placed into service, this fleet of 99 will grow 65% to 163 rigs.

So the visibility of the secular growth outlook for this market remains very promising. And looking forward, we see no reason why we will not continue to be the dominant provider of ROV services on these rigs. Each additional floating rig represents an opportunity for us to put another ROV to work in drill support service. As the use of floating rigs grows, we believe it is inevitable that discoveries will eventually drive orders for subsea hardware to levels not previously experienced and demand for ROVs to support vessel-based activities should follow.

Quest Offshore's latest subsea hardware forecast for the period 2012 to 2016 includes an increase in tree orders of about 65% over the previous 5 years. In 2012, subsea tree orders are estimated at 504, an all-time high, eclipsing the previous record of 426 trees in 2006 by 18%.

In 2013, tree orders are projected to rise over 20% to 620. While we don't make trees, orders for subsea trees drive demand for a substantial amount of the ancillary subsea production hardware that we manufacture. For example, Quest is forecasting nearly a 40% increase in umbilical orders for the 5-year period 2012 to '16 compared to the previous 5 years. Umbilical orders in 2013 are forecast to rise to about 1,900 kilometers, up 65% from the estimated 1,150-kilometer level in 2012.

Furthermore, renewed industry and regulatory emphasis on safe and reliable operations is providing additional opportunities for us to demonstrate our capabilities. With our existing assets, we are well positioned to supply a wide range of the services and products required to safely support the deepwater efforts of our customers. We believe Oceaneering's business prospects for the long term remain promising. Our commanding competitive position, technology leadership and strong balance sheet and cash flow enable us to continue to grow the company, and we intend to do so.

In conclusion, our results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well over both the short and long term. We like our position in the oil field services market and are leveraged to the growth of deepwater and subsea completion activity that is currently underway. The longer-term market for our deepwater and subsea service and product offerings remains promising. Renewed industry and regulatory emphasis on reliable deepwater equipment with redundant safety features has caused our customers to be even more focused on risk reduction. This elevates the importance of the utility and reliability of our ROV services and related product line offerings and reinforces the benefit of our value sell. We achieved another record year of EPS performance in 2012 and expect that 2013 will be even better. We believe this distinguishes Oceaneering from many other oil field service companies.

We appreciate everyone's interest in Oceaneering. I will now be happy to take any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Ian Macpherson.

Ian Macpherson - Simmons & Company International, Research Division

I was curious about your recent award for the tree control systems for Transocean and wonder if you could comment on the outlook there. If there is somewhat of an inflection with regard to those types of units, or if you see that order within the course of your expected steady growth rate for that part of the business?

M. Kevin McEvoy

I wouldn't expect any inflection there. I think that Transocean is changing some systems to conform to the API 53 standards. But at present, no one in the regulatory side or the operator side has really said that they're going to adhere to that standard, and this could vary widely between the Gulf of Mexico and other areas of the world. So it's pretty difficult to say at this point what that would mean in the future.

Ian Macpherson - Simmons & Company International, Research Division

Okay. You also commented there towards the end of your remarks on -- you have the strong volume growth for -- from umbilicals demand. It would appear that even with that, we probably stand to be significantly oversupplied for the foreseeable timeframe, at least this year. How do you see, over the next year or 2, the margins evolving for umbilicals just based on volumes and absorption even without pricing?

M. Kevin McEvoy

I think that you are absolutely correct that there still is far more capacity in the marketplace than there is demand. I would expect that margins on a per job bid basis aren't really moving very much. However, volume is contributing to absorption for us, and that is benefiting our business.

Marvin J. Migura

Yes. And I think also as -- as you mentioned, it really depends upon the mix of thermoplastic and steel tube that has substantial impact. So I think there's a lot of moving pieces. But as you implied, the greater volume allows for more efficient absorption of our fixed costs. So I mean, that is a very favorable thing in a market that is plagued with overcapacity.

Ian Macpherson - Simmons & Company International, Research Division

Yes, absolutely. Is there any way that you could take a rough stab in quantifying some of that absorption benefit?

Marvin J. Migura

No, not really. I mean, it will depend on how the years will play out, and we really do not give margin information on subsegment guidelines.

Operator

Next in queue, we have the line of Ole Slorer.

Ole H. Slorer - Morgan Stanley, Research Division

Just to clarify again. On the ROV margins that came down sequentially, you highlighted the U.K. pension. But there was -- was there anything operationally that sort of changed the trend here? Or is it something that -- or we should expect margins to normalize again as we look out a few quarters?

Marvin J. Migura

We do expect margins to normalize in 2013, yes.

Ole H. Slorer - Morgan Stanley, Research Division

Okay, great. Secondly, on the subsea equipment companies that have reported so far, subsea processing has been a big sea menace. As this kind of increases the complexity of seabed systems, how does that impact you the most? Will it be from the monitoring side on the ROVs are the biggest opportunity or is just the increased demand for umbilicals or projects? Have you thought about this at all?

M. Kevin McEvoy

Yes, we have. And I think that there will be some increased demand for umbilicals, power cables and whatnot to hook all the stuff up. And additionally, I think that requirement for ROV tooling to interface with this subsea hardware will grow as a result and ROVs with that.

Ole H. Slorer - Morgan Stanley, Research Division

So if -- does this need any new projects or any new capabilities that you're going to acquire through M&A? Or do you have everything in-house, what you need?

M. Kevin McEvoy

I don't really see anything changing dramatically in terms of what would be needed. I mean, it really is the same sort of interface hardware issues that you have with anything. And we might have to design some tooling or whatever, but that's a normal part of our business, so I don't see anything dramatically changing in that regard.

Ole H. Slorer - Morgan Stanley, Research Division

Okay. Just finally, you ticked up your CapEx just a tiny bit from a normal run rate. What was the main reason for that? Where do you see -- where did your channel increase?

Marvin J. Migura

Ole, I think we said -- yes, we did kick it up a bit when we got our detailed plans, and the outline that Kevin gave was a $300 million to $325 million.

M. Kevin McEvoy

Yes.

Marvin J. Migura

Yes. So I just think it's -- we're spending probably a little more on enhancing our Subsea Products capabilities than what we had originally expected.

Operator

Next in queue, we have the line of Jim Wicklund.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Speaking of umbilicals and -- Marvin, you were talking about mix. What's the best thing you can sell? I mean, if you could have an -- and I know this is unrealistic so we're being hypothetical. But if you could sell 100% of x out of your umbilical business this year or in '14 will be, and it's the biggest home run, what would you sell? What would it be?

Marvin J. Migura

All thermoplastic. And the reason -- let's just kind of go just a little bit further down why that is -- because what you start with in raw materials of the thermoplastic umbilical is boxes full of plastic pellets and wire and Kevlar and armor -- or armoring wire. And when you start with steel tubes, you start with reels of steel tubes. So basically, a steel tube umbilical consists of bundling, and thermoplastic consists of manufacturing. You start with extruding [ph], you do the -- it is a real complex, value-added -- turning raw materials into a functioning umbilical as opposed to bundling steel tubes and adding other capabilities like fiber optics and things like that to them. But there's higher input costs with steel tube and more value-added to thermoplastic.

Ole H. Slorer - Morgan Stanley, Research Division

And realistically, what will be the mix between those 2 this year or next year?

M. Kevin McEvoy

We really don't know. I mean, it's an operator thing. I mean, I think you tend to get more thermoplastic hose in the North Sea where it's shallower. And you don't have some technical issues involved with the ultra-deepwater, although Petrobras is stuck with thermoplastic or a variance of thermoplastic for their needs down there. But otherwise, it's generally a steel tube idea.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Okay. That's very helpful. And the second question, if I could. SIPAM [ph], of course, made some announcements in the last couple of weeks and spooked everybody in terms of offshore construction. Your vessel call-out business in the Gulf of Mexico has been -- saw some issues following Macondo. Can you specifically talk about the global offshore construction market that relates to you and how it's changed in the last month or so, the outlook?

M. Kevin McEvoy

I don't really think so. I mean, we're -- I mean, as you know, we're not really involved in the construction market, but we think that the activity in the construction market is an indicator of what is to come i.e., more stuff on a seabed means more opportunity in the future for ROV tooling and ROV intervention. But apart from that, we're not engaged directly in it so...

James Knowlton Wicklund - Crédit Suisse AG, Research Division

I understand that, but your vessel call-out work in the Gulf of Mexico has been impacted by the work and then lack of work in the Gulf of Mexico. I'm just curious as to whether any of that -- and your answer is obviously no. But if any of that has any impact on your outlook for the business?

Marvin J. Migura

Jim, let me give you...

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Your non-rig vessel business?

Marvin J. Migura

Let me go ahead and give you just what -- repeat what Kevin said. For the first time since 2008, in 2012, we experienced growing demand for ROVs in vessel base. We added -- 16 of our new ROVs were placed into service onboard vessels. So I think that...

James Knowlton Wicklund - Crédit Suisse AG, Research Division

That's a positive outlook.

Marvin J. Migura

That is a positive outlook. Will it continue into '13? I mean, it is -- we see more vessel work on the horizon. We see more ROVs in the total fleet compared to the number of ROVs servicing drilling rigs.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

How many ROVs are you planning on adding this year to that business?

Marvin J. Migura

Well, we plan on adding 30 to 35 ROVs, and the mix will determine -- as the...

M. Kevin McEvoy

And typically -- the vessel opportunities are a lot more shortsighted than the rig opportunities, obviously, for first-bid [ph] visibility, though. So that's why it's hard to predict for us what's coming [ph] because we usually find out right about when they need them.

Marvin J. Migura

I think, from a construction standpoint, while we don't participate in it, the fact that the construction industry as a whole has more backlog -- I mean, more -- yes, more backlog this year than earlier years speaks well for that business. Albeit, as SIPAM [ph] noted, it might be at lower margins, but we just see an increase in activity. And if you see an increase in drilling activity and increase in construction activity, there ought to be an increase in IMR and installation hookup work that we do participate in. So we are not bearish at all on our vessel-based business and it just depends upon how bullish we want to get, depends upon how many times the phone rings that day. So as Kevin said, it is a shorter-term call-out business.

Operator

Your next question in queue comes from the line of Justin Sander.

Justin Sander - RBC Capital Markets, LLC, Research Division

I just had a -- one follow-up on the last comment there. Looking at the utilization outlook for the ROV fleet in 2013, I think where you guys are are somewhere around 82% utilization, growing from 80% in 2012. Would that -- does that occur with the mix of fleet -- the mix of vessels that -- or ROVs that are on vessels versus drill support, does that mix stay static in 2013 more it was in '12 to get you 200 basis points in utilization improvement?

M. Kevin McEvoy

It basically is a reflection of better utilization on the vessel-based ROV systems.

Justin Sander - RBC Capital Markets, LLC, Research Division

Okay. Okay. Okay, so stepping away from that, I had a question on the Subsea Product margins as well. So for the second quarter now, it was running higher than what we were expecting and you mentioned, obviously, heading back down in 2013 primarily from umbilicals increasing in the mix. But on the other hand, with higher tooling and higher IWOCS, I'm just wondering if this business could be a better margin business than the high teens margin that we've kind of looked at in the past?

M. Kevin McEvoy

We really think that the high teens is really the best expectation to have there. And the -- I mean, you get better visibility, or we get better visibility on the umbilical side because they're longer lead time, whereas on the tooling side can be a lot shorter cycle and sometimes, that surprises and you get more volume there and that offsets the umbilicals and sometimes you don't. So our best view at the moment is what we just said. We are expecting more on the umbilicals side as a percentage of that total than we experienced in 2012. Although we didn't predict all that because it just kind of happens on a tooling side. So it is what it is.

Marvin J. Migura

We thought that we would characterize the second half of product margin in 2012 as a very pleasant surprise as opposed to a trend.

Justin Sander - RBC Capital Markets, LLC, Research Division

Okay. And do we have -- so what's the visibility like on the tooling side? Is it really limited to the next quarter out, and that's about it? Or can you see that being a higher percentage of the mix well into the first half of 2013?

M. Kevin McEvoy

No, that's a much shorter cycle, and it's more of a quarter-to-quarter thing that it is anything else.

Marvin J. Migura

And, Justin, a lot of it is call-out work depending upon how many problems an operator incurs, such as a plugged flow line that needs remediation or something like that. So the visibility really is short term.

Operator

Next in queue, we have from the line of Mike Urban.

Michael W. Urban - Deutsche Bank AG, Research Division

So you mentioned a couple of times in your comments about the ongoing and increased scrutiny and focus on safety, which is global really, but in particular, in the Gulf of Mexico. We know about the story for new builds that pertains to ROVs and that's been a great story and should continue to be. But we've been seeing a lot of these new builds have start up issues, and it seems like that will continue. Is that something that could help some of the other parts of your business, like projects? I mean, it sounds like you saw a little bit of that already. Is that part of the story that's maybe underappreciated?

M. Kevin McEvoy

I think the delays in rigs getting accepted because of shake-down issues and whatnot from the shipyard does not really help us. I mean, it just delays us going on higher in our business stream [ph], so that is not helpful and there's no other business that would come in as a result of that. I mean, the note that we made about our projects business being a little up from what we had thought it might be in the fourth quarter was a problem that a rig was having, but it had been accepted and it had been drilling and whatever, so that was just something that happens. So I wouldn't -- that's a by-incident [ph] sort of thing. I wouldn't read anything into that.

Marvin J. Migura

Yes, I don't think it's a needle mover, but I do think that we expect -- I mean, I know we expect that to be -- the reason we highlighted it was because it was vessel-based activity to support drilling rig. Usually, the drill rig support is the -- provided by the ROV that is on the rig. But in a problem situation, there was a call-out for a vessel with an ROV too to come out and help with this connection between the Lower Marine Riser package and the BOP. So I mean, I think the increased scrutiny of when there is a problem, operators will respond with extra support. And that, we don't know if that's a trend or it's just a per-incident basis. And that's what we've highlighted.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay, got you. So the traditional reason, it's more rigs, it's more ROVs, it's more subsea work, all of which is good for [indiscernible].

M. Kevin McEvoy

Right.

Marvin J. Migura

Right.

Michael W. Urban - Deutsche Bank AG, Research Division

And then you characterized the products margins as a pleasant surprise, and -- but at the same time, I mean, the -- just anecdotally -- I know you don't have a lot of visibility. But anecdotally, activity is continuing to improve. Subsea work is continuing to improve. I've got to believe demand and the ability to extract pricing has got to be improving. So I guess other than the mix issues associated with more umbilicals running [indiscernible], why wouldn't there be upward pressure on margins over time?

M. Kevin McEvoy

Well, we still -- we believe that there is twice the capacity for manufacturing as there is demand, so it's pretty hard to -- I mean, everyone else can always do another job, so you're bidding on that basis. And it's pretty hard to move margins in that kind of environment.

Marvin J. Migura

I think it is primarily the mix. I mean, the large increase in our products backlog is associated with 3 large umbilicals. So we expect that mix -- and as you know, it's -- some of it and most of it is with Petrobras. So therefore, they're not the highest margin customer that we have. And so if you're looking at a change in mix being umbilicals and a lot of it being in Brazil, I mean, that is the curveball that you address. And so I think that keeps our -- the mix is what keeps our margins at a healthy high-teens level, with some variation from quarter-to-quarter.

M. Kevin McEvoy

But on the whole products segment, I mean, as we said earlier, the non-umbilical part of the business can surprise. We don't have the visibility of that, and we expect it to continue to be good, which is why we're saying that that whole segment is going to be better in '13 than it was in '12 so...

Marvin J. Migura

Right.

Michael W. Urban - Deutsche Bank AG, Research Division

Right. And that's really what I was trying to isolate. I get the -- I get why margins, on a mix adjusted basis or on a reported basis, come down for umbilicals. But separating that out, it's -- I don't see why the improvement that you saw in the second half would necessarily be surprising. I mean, you saw a lot of work and it was clearly good margins. But everything is kind of pointing in the direction of more demand, presumably more pricing, more margin, and then we just have to adjust for that mix [ph]. Is that a reasonable way to look at it?

Marvin J. Migura

Yes, but let's go back. If it wouldn't be for the strong market that we're talking about in these other areas, with the increased mix towards umbilicals, we would be predicting margins to be going down. And so what we've got working for us is increased throughput to -- as we addressed earlier, about the cost absorption, so we're getting more efficient in our operations because we have a more steady throughput and because of increased other work that is non-umbilicals, that is helping us to sustain our margins at that high-teen level. Otherwise, we would be talking about margins going down.

Michael W. Urban - Deutsche Bank AG, Research Division

Right. So again, x umbilicals though, your margins are not going down?

M. Kevin McEvoy

No.

Marvin J. Migura

No.

M. Kevin McEvoy

Correct.

Operator

Next in queue, you have the line of Brad Handler.

Brad Handler - Jefferies & Company, Inc., Research Division

If I could focus, I guess, on the projects side of the business, maybe just, first, to clarify it for me is -- I think you've just answered it, but I'll ask it more directly. Is the inspection of H4 bolts globally that is now expected, does that have an impact on your business?

M. Kevin McEvoy

No, it does not. That's entirely with the drilling companies and their suppliers and whatnot, and it doesn't really impact us.

Brad Handler - Jefferies & Company, Inc., Research Division

So there's no ROV inspection opportunity or there's no vessel beast [ph]?

M. Kevin McEvoy

No, no. And this is a top side event when they get everything back on deck again. And if they need to change them out, they change them out, assuming they get a spare set available.

Marvin J. Migura

If there is an issue with the connection while at subsea, then your answer would be yes. But that is a rare occurrence, and we don't expect that. We expect all of it, as Kevin said, to be done topside.

Brad Handler - Jefferies & Company, Inc., Research Division

Right, pulling in. Okay, fair enough. Okay. More broadly, I think I'm not sure I followed the guidance you mentioned, but I think you mentioned lower projects margin because of a little less Gulf of Mexico availability. Is that simply by -- is that simply year-on-year because you've moved vessels to West Africa?

M. Kevin McEvoy

No, I mean, it really is -- I mean, what we're trying to characterize is that we do see as a market, the Gulf of Mexico in that segment should be better in '13 than it was in '12. However, offsetting that for us is the unavailability of several vessels as they go through regulatory inspections and associated expenses.

Brad Handler - Jefferies & Company, Inc., Research Division

Oh, I'm sorry. I only half-caught that. I understand. Okay, got it. If -- aside from the regulatory inspection, is there a way for you to characterize kind of capacity utilization in the Gulf in '12 of the vessels? Is there a way for us to think about how much more work you could have done on a call-out basis?

Marvin J. Migura

We don't really give -- and there's just very little visibility on a call-out basis. I mean, it really is how much IMR there's going to be. And one other thing, in addition to the drydock, we've got the first quarter availability of a chartered vessel, the -- to be renamed the Ocean...

M. Kevin McEvoy

Alliance.

Marvin J. Migura

Alliance that is going to be out for the first quarter as we're going through some upgrade. The vessel is going through some upgrade, so that -- before it starts a long-term charter with us. So it really is vessel availability and drydocking, as Kevin said, and it's really too hard to predict what the call-out market is going to be because that has the least visible aspect of our segment lines.

Brad Handler - Jefferies & Company, Inc., Research Division

Okay. If I may still, just one more in the same area. Maybe what would it take for you to -- what kind of contract or commitment or opportunity would it take for you to consider adding a vessel, whether it's in the U.S. or Virgin West Africa or somewhere else?

M. Kevin McEvoy

A long-term contract.

Brad Handler - Jefferies & Company, Inc., Research Division

Fair enough. If it were to be in Angola, for example, would it need to be 5 years, 10 years, I mean, a very significant duration?

M. Kevin McEvoy

No, I mean, I think we -- I mean, what we're -- for a long-term contract, somebody would need to commit to the vessel for at least a year, which would be practical in the Gulf of Mexico. If it was going to be an international deal, you would expect it would be more like a 3-year contract with maybe some options.

Marvin J. Migura

And, Brad, when we're talking about adding a vessel, we're not necessarily talking about building one and buying one and owning one. We're talking about -- I mean, we would look at the economics at the time. But every time that we have recently looked at the economics of lease versus buy, we have chartered. So we're talking about it would take a long-term contract for us to enter into a matching charter arrangement. What it would take for us to build a boat would have to be a specific need that we would want to see longer-term type of visibility on.

Operator

Next in queue, you have the line of Ed Muztafago.

Edward Muztafago - Societe Generale Cross Asset Research

I just wanted to follow up on the BOP control system question a little bit, and I just want to make sure I heard you guys right. Are you seeing any increased inquiries from customers on control systems due to the constraints among some of the other OEM manufacturers?

M. Kevin McEvoy

We are not.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. How should we think -- maybe these are the only orders you get or maybe you get some more, but how should we think about the margins on these? I mean, are these better than sort of average segment margins? I mean, they're probably $10 million to $15 million each, so they do move the bottom line.

Marvin J. Migura

It's really hard to get -- I mean, with 1 customer and 1 contract, it would be inappropriate for us to talk about how profitable that contract is. So we don't think it's going to move the needle of our -- and we've given that indication that that's what we expect for our goal for our products segment. And so we really do refrain from talking about profitability of specific contracts.

Edward Muztafago - Societe Generale Cross Asset Research

Okay, that's fair. And I guess secondly, this is also sort of a follow-up on umbilicals, maybe just to try to help us understand a little bit better. You've got volume-based margin improvement. You have what were admittedly Petrobras awards but thermoplastics, which carry, I think, a higher margin due to the manufacturing component. So are we getting closer to the point where umbilicals are non-dilutive, or can we get there with more volume and a better mix of thermoplastic, or do we have to have pricing improvement?

M. Kevin McEvoy

I'd say we have to have pricing improvement.

Marvin J. Migura

And there's easy reason for that: because umbilicals doesn't have a service component. And the other ones that have higher margins have a service component associated with it. And so when you're sending out a piece of kit with the technician and you get a higher margin for providing that service. If you're delivering something to the dock that gets picked up, that's usually going to be -- you got to have pricing improvement to help move that margin.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. So I guess generally speaking, as we sort of think about products, we can think about anything that carries the service components as being higher up in the margin tier?

Marvin J. Migura

Absolutely.

Operator

Next in queue, we have Jon Donnel.

Jonathan Donnel - Howard Weil Incorporated, Research Division

I have another follow-up question on the projects side of the business. Really the significant sequential increase from 3Q to 4Q, clearly, you mentioned some increased demand year-over-year in the Gulf of Mexico. So I'm wondering if you could just kind of help us with how much of that was just a continual ramp-up of the BP project. And as you've gotten about 1 year into that contract here, are there additional revenue opportunities from the projects side that you're seeing? Or is there going to be some variability around that quarter-to-quarter as we go through the year? I'm just trying to think of how we work of modeling that through 2013. I suspect there's going to less seasonality overall in the business there. But I was wondering if you could just kind of help us out with kind of breaking up those pieces for us a little bit.

M. Kevin McEvoy

Well, on the Angola side, I mean, we've been experiencing the run rate of that for the last 2 quarters, and so we don't really see that changing dramatically into this year, unless BP should decide to exercise an option to add another boat, which we don't see on the horizon at the minute. So basically, that is at the run rate that it has been for the last 2 quarters. So the variability that you would be seeing is the Gulf of Mexico, and it is still very difficult to predict how that's going to go. I think that we did have this one-off 2-vessel utilization in the fourth quarter that normally -- we wouldn't have expected that to happen. It's usually a lot quieter in the fourth quarter. But if there's a problem, then you get out there. So that was kind of a one-off event. But I think we do expect the Gulf to keep picking up in terms of demand for vessel services for the deepwater side. But -- and diving was very weak last year. And we believe that there was still a lot of difficulty in operators getting permits to do the things that they wanted to do, and that had an effect on the business. And we are hoping that that will be picking up this year as well.

Marvin J. Migura

And, Jon, it's the most difficult segment to model internally and externally because of the variability of the Gulf of Mexico vessel utilization. And as Kevin pointed out, there's 2 pieces of it. It's the deepwater and the diving, and we need strengthening in that area and more activity for us to become more predictable in our run rate.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay. But there won't be any of that seasonality impact coming from Angola than it sounds like. So that's helpful. And then in terms of just the drydocking schedule on those vessels for the Gulf of Mexico, is that going to be concentrated more in 1Q? Is that a big driver of the sequential declines there?

M. Kevin McEvoy

They are actually being spread out throughout the year for a variety of reasons, and we're not going to preannounce when they're going to happen or how long or how much we're spending on it.

Marvin J. Migura

But the answer is no, it's not. They're spread out -- more spread out than I actually would've thought because it is dictated by the time that your certificate expires. So it is more spread out than concentrated.

Operator

Next in queue, we have the line of Tom Curran.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

So I'm sorry if I missed this. You've always provided it in the past. What was Multiflex as a percentage of Subsea Products total revenues for the full year 2012?

W. Cardon Gerner

28%.

M. Kevin McEvoy

28%.

Marvin J. Migura

28%.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

28%. Terrific. And then I doubt I'm going to win the Sherlock Holmes award for this, but I'm going to go out on a limb and assume that the capability enhancements you made there in Scotland and Brazil, based on your exchange with Jim, were entirely on the thermoplastic side?

Marvin J. Migura

No.

M. Kevin McEvoy

No.

Marvin J. Migura

No.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

No? Okay. So could you share some color then, given how much you've continued to pound the table on the remaining overhang of capacity out there? What was the nature of the investment you made?

Marvin J. Migura

Well, let's start within Brazil, when Petrobras said we need to be able to handle larger diameter umbilicals and we need to put them on different size reels. We had to reequip the plant to handle larger diameter. We had to increase the size of the reels and increase the material handling capability, which included reinforcing the dock and a lot of things associated with handling larger reels. They went to a standard -- they changed the standard of how they want to accept materials, umbilicals to be the same as...

M. Kevin McEvoy

Flexible pipe.

Marvin J. Migura

Flexible pipe. And so that required modification to be able to meet that demand. And in Rosyth, we added capabilities to introduce an integrated umbilical, which would include a MEG injection line down the middle of it, welding capability and carousel capability, storage capability.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And so within Subsea Products across your other lines, on a geographic basis -- it seems like we all struggle with Subsea Products, that you occasionally get these one-off spikes in demand that are sort of opportunistic or project specific. But you also have these ongoing secular uptrends in demand just based on the expanding amount of infrastructure out there. So when it comes to your other Subsea Products businesses, geographically, in 2012, what surprised you to the upside the most, that you expect to be sustainable, and what disappointed you the most?

Marvin J. Migura

Oh, that is a hard question.

M. Kevin McEvoy

That's a hard question.

Marvin J. Migura

What surprised us the most to the good was IWOCS work in West Africa. And whether it's sustainable or not is what makes it a difficult question.

M. Kevin McEvoy

And flow line remediation jobs.

Marvin J. Migura

And the flow line remediation jobs in the Gulf were the other things. What has been sustainable is the -- on the tooling side, the BOP reservoir skids that have been -- we've grown that size of the fleet, and that is sustainable.

M. Kevin McEvoy

The well-containment part of it.

Marvin J. Migura

And the well-containment support. So it is a mixed bag, but it is really hard to pick a couple of things that we say move the needle and will continue to keep it. And what disappointed...

M. Kevin McEvoy

We don't talk about disappointing [ph].

Thomas Curran - Wells Fargo Securities, LLC, Research Division

Nothing is disappointing is the answer.

M. Kevin McEvoy

If it was too predictable, it would just really be boring. I don't know what else we could say.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

You're not going to tell us which one. Just trying to model Subsea Projects.

Marvin J. Migura

Yes, well, I guess what was disappointing is -- what was predictably disappointing I guess is the lack of umbilical orders for the Gulf of Mexico. But we saw that kind of coming, and so that's been kind of -- we wait for the day when -- and we see it coming with all this exploration activity in the Gulf, we actually see a day when the Panama City plant is going to have increasing backlog to support Gulf of Mexico, and we'll stop chasing international projects to add throughput there.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

Okay. Thank you for such a thorough, candid answer there. I -- last one for me. On the Subsea Products again, how much of the 2013 CapEx range is going to be allocated to Subsea Products? And then what's the rough percentage of that that's strictly going to be for rental tooling inventory maintenance?

M. Kevin McEvoy

Well, first off, the guidance is around $100 million on products, and we're not going to give a breakout.

Thomas Curran - Wells Fargo Securities, LLC, Research Division

But is it -- would it be fair to assume that the maintenance spending for the inventory or rental tooling assets is going to see the strongest growth rate?

Marvin J. Migura

Some. I mean, the maintenance for inventory as tooling is expensed. You're talking about the growth of how...

Thomas Curran - Wells Fargo Securities, LLC, Research Division

I guess just replenishing the asset inventory given the growth you're seeing there.

M. Kevin McEvoy

Okay, so growth.

Marvin J. Migura

Okay, so we're talking about the growth, and we're really not giving out subsegment allocation of CapEx.

M. Kevin McEvoy

I mean, we spent, what did we say, $68 million on products in 2012 and...

Marvin J. Migura

Maybe you think it's going to be $100 million.

M. Kevin McEvoy

$130 [ph] million this year.

Marvin J. Migura

Right. And that includes a wide range of product lines within the segment.

M. Kevin McEvoy

The segment. Right.

Operator

Next in queue, we have the line of Darren Garcias (sic) [Gacicia].

Darren Gacicia - Guggenheim Securities, LLC, Research Division

I'm trying to triangulate on a few things here. It seems to me when you're talking about ROV adds this year, the balance of what's going towards the vessels is increasing versus what's maybe going towards rigs. So if I think about that, you've had a lower kind of market share on the vessels side of that. But if I understand it correctly, you split that with the remainder or the vast majority being kind of more the E&C companies. If volumes are going to increase on -- in terms of the amount of work needed, do you find yourself gaining share on the vessels side and maybe being co-opted more by the E&C companies in order to meet their own demand? How does that business look from that perspective?

M. Kevin McEvoy

I don't -- we don't really see market share growth there. I mean, that segment of the market is growing. And if we continue to pick up vessels there, I don't think that really changes our overall market share very much. There are a lot of boats out there that are available. There's a lot more under construction, kind of like the drilling business, only many more. And so there is really no constraint for the construction companies or the survey companies to pick up a boat, put an ROV on it and go to work. So we don't really see any tightening there or anything that would increase our market share as a whole for that segment.

Marvin J. Migura

We're not taking any work away from them, and they are not giving us any work.

M. Kevin McEvoy

Yes.

Marvin J. Migura

Yes, so it is the fleet. The ROV vessel fleet is growing on independent fleet ownership basis, and we're getting vessels and ROVs on those vessels.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Got it. And does that have a geographic concentration within that kind of independent grouping?

M. Kevin McEvoy

Well, on the construction side, I mean, those vessels are mobile and go wherever the jobs are, so that really doesn't matter. I think that the 2 biggest areas still are the Gulf of Mexico and the North Sea and the call-out markets. And so...

Marvin J. Migura

I mean, we -- on our website, on vessel-based -- we do disclose the distribution of our vessel-based ROVs, and as you will see what -- it'll support exactly what Kevin said. The Gulf of Mexico, Norway, with the North Sea, and now you've got West Africa because of the 4 [ph] that we have on Angola and other boats in field maintenance-type contracts. So I mean, those are the 3 main areas. And every now and then, we'll pick up an odd job from -- on a boat. And we've got a couple ROVs on a boat in Australia in a long-term contract, and we'll get some in Southeast Asia on periodic basis but...

M. Kevin McEvoy

We have a couple in Brazil.

Marvin J. Migura

And we have some in Brazil. But I mean, the geographic concentration is the 3 that we mentioned: the North Sea, Gulf of Mexico and West Africa.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Got you. And I know everybody's kind of picked around the products side. But it would strike me that you usually get a pretty good pull-through on products when they're working on these vessels. Is there -- can you kind of outline maybe the top 3 that we should think about that are kind of contributing to the guidance possibly in terms of what you may pull-through when you're doing vessel work on the tooling side?

Marvin J. Migura

I'm sorry, I think you maybe answered your own question. The only thing that we really get pull-through on from vessel-based ROV is tooling.

M. Kevin McEvoy

ROV tooling.

Marvin J. Migura

ROV tooling. And I mean, it's really hard to predict which tools they're going to want for which specific IMR job or installation job. So I would just leave it generically with tooling.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

And one last, just a follow-up. Is it -- so would you say that the CapEx that you're spending on kind of the tooling side is more in the traditional markets or expanding into new markets, and maybe some of the ones that seem to be kind of more on the growth path?

M. Kevin McEvoy

I wouldn't go there.

Marvin J. Migura

No, I -- we don't have -- I mean, let me just kind of give a little bit more color. When we come up with a CapEx plan for -- that we announced, and we gave guidance and it is not so specific as for us to be able to categorize and characterize everything that we're going to spend during 2013. A lot of the tooling stuff particularly is short cycle. It doesn't have a long lead time, so it really is dependent upon perceived or real need, and that's where we're going to be putting it. We are trying to expand our tooling geographically, and we've added tools in various locations. But it is impossible for me to answer that question any better because I don't know.

Operator

[Operator Instructions] Your next question comes from the line of Brian Uhlmer.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

I'll ask a real quick one on the ROVs. If -- I was just kind of curious how we quantify ROV strike when your guidance is that we're going to add less ROVs this year than we did in 2012, and kind of what are the cause of that. I apologize if you already discussed that because I hopped on a couple of minutes late.

Marvin J. Migura

No, we didn't discuss that. But when you talk about characterizing the difference between 30 to 35 and 37, you're getting pretty particular there, right? So I'm going to say that I don't -- I mean, it looks like we're going to [indiscernible] much like the other one so --

M. Kevin McEvoy

I mean we add based on the demand, so we're not manufacturing it in advance and having them sitting around. So I mean, there are a lot of opportunities, particularly on the vessel side that come up in the short term that we don't see in the beginning of the year. So this is our best estimate of kind of a run rate, and this could go up, could go down a couple. We just don't know [ph].

Marvin J. Migura

Yes, I mean, we just think it's really early to tell whether it's going to be 30 to 35 or 29 to 36. I mean...

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

I was hoping for point estimate at the beginning of the year so...

Marvin J. Migura

We were too.

Operator

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

M. Kevin McEvoy

Thank you. Okay, great. Since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. We're very pleased with our record results for 2012, including our ninth consecutive year of record ROV operating income and anticipate producing another record year of EPS for 2013. We are anticipating a strong first quarter start in 2013, with EPS between $0.55 and $0.60, which at the midpoint will be at 22% over the first quarter of 2012. This concludes our fourth quarter and year-end 2012 conference call. Thanks, and have a great day.

Operator

And ladies and gentlemen, thank you for your participation on today's conference call. You may now disconnect.

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Oceaneering (OII): Q4 EPS of $0.74 beats by $0.02. Revenue of $780.9M beats by $44.09M. (PR)