Cameron International Corporation (CAM) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: Cameron International (CAM)

Cameron International Corporation (NYSE:CAM)

Q2 2013 Earnings Call

July 25, 2013 9:30 am ET

Executives

Jeffrey G. Altamari - Vice President of Investor Relations

Jack B. Moore - Chairman of the Board, Chief Executive Officer and President

Charles M. Sledge - Chief Financial Officer and Senior Vice President

Analysts

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Edward Muztafago - Societe Generale Cross Asset Research

Robin E. Shoemaker - Citigroup Inc, Research Division

James C. West - Barclays Capital, Research Division

David Phillips - HSBC, Research Division

William Sanchez - Howard Weil Incorporated, Research Division

Brad Handler - Jefferies LLC, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Michael K. LaMotte - Guggenheim Securities, LLC, Research Division

Operator

Greetings, ladies and gentlemen, and welcome to the Cameron Second Quarter 2013 Earnings Conference Call [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jeff Altamari, Vice President, Investor Relations for Cameron. Thank you, sir. You may now begin.

Jeffrey G. Altamari

Good morning, and welcome to the Cameron's Second Quarter Earnings Call. Thank you for joining us today. This morning, you will hear from Jack Moore, Chairman, President and Chief Executive Officer of Cameron; and Chuck Sledge, Senior Vice President and Chief Financial Officer. Jack and Chuck will offer commentary on results for the quarter. We will then open the line for your questions.

In accordance with the Safe Harbor provisions of the securities laws, we caution you that some of the statements made on this call may be forward-looking in nature and, as such, are subject to various factors not under the control of the company. For a more complete description of these factors and the related risks and uncertainties, please refer to Cameron's annual report on Form 10-K, the company's most recent Form 10-Q and the recent earnings news release.

I will now turn the meeting over to Jack.

Jack B. Moore

Thank you, Jeff. Cameron reported earnings of $0.79 a share in Q2, excluding charges primarily related to OneSubsea. Revenues finished the quarter at $2.3 billion, up 11% versus a year ago and bookings for Q2 came in at just over $2.3 billion. Cameron's total backlog now stands at a record $10.5 billion, up $3 billion over the prior-year level. Second quarter orders did not reflect any significant subsea awards as we saw in the prior quarter. However, we are excited to announce that after the quarter closed, we were awarded Chevron's Rosebank project in the North Sea at $540 million, which consisted of 16 trees and associated manifolds and control systems, our first official project award for OneSubsea.

We actually work with Chevron in the North Sea with a partner, Statoil Heidrun, which is not a traditional market for Cameron as a full systems provider. So needless to say, we are excited to be part of this project and not only leverage the great success we have had with Chevron in the Gulf of Mexico but demonstrate to their partners our broad capabilities in the North Sea. And demonstrating the diversity of our business segments, we are also awarded a $550 million multiyear frame agreement for BHP Billiton's U.S. onshore operations in July. This contract will encompass our surface systems, valves, measurement and process systems business segments, a great win for our CAMSHALE initiative.

Now let's review our operating segments in more detail. As we announced at the end of June, our OneSubsea JV with Schlumberger is now officially launched. We have had tremendous reception from our customer community as they understand that combining the deepwater expertise of both Cameron and Schlumberger has created a uniquely capable company focused on improving reservoir recovery from subsea developments. This is a company that can literally connect our customers from the well bore to the FPSO.

And our outlook for OneSubsea is robust. While a number of opportunities presented themselves to demonstrate the full range of capabilities that this JV has to offer, the majority of our near-term bookings will consist of Cameron's and Framo's [ph] historical products and services. Just with the addition of Framo alone, we have targeted opportunities in excess of $1 billion over the next 18 months for processing systems alone. Overall, the number of projects we're tracking is impressive, and as we have stated in previous calls, this presents the need for the industry to be disciplined with what it targets. And one would expect that this translation to more acceptable margins, not only through commercial discipline but also focused execution. I may sound like a broken record, but we must get paid for the risk we are taking on this challenging deepwater environments.

And one last point on subsea before I move on. Q2 will represent our low point in subsea systems bookings in 2013, and with over $1.7 billion of bookings year-to-date and the jumpstart we had in Q3, we expect 2013 will be a record quarters year.

Our Surface Systems business unit had another impressive order story in Q2. While we did not expect to see the level of orders we saw in Q1 due to the huge impact we saw from our Middle East operations, total orders were north of $550 million in Q2, up 28% versus year-ago levels. A big driver for success again in our Surface Systems business has been the North American markets. While rig activity fell 14% sequentially in the U.S., orders grew by 7%. And total North American Surface Systems orders are up 26% year-to-date versus last year, while rig counts have fallen 8% year-over-year.

Clearly, a signal that by investing in quality people, equipment and infrastructure, customers will make a choice. And this is -- a great example of this award is from BHP Billiton to support their onshore U.S. developments. A huge investment made on their part in the U.S. several years ago and as a result, they require Surface Systems provided [ph] that will be committed to make the necessary investments to ensure safe and efficient operations to support their large portfolio of wells. Cameron was able to bring together not only our traditional wellhead and tree systems but our high-capacity frac and flow back equipment coupled with valves, measurement and processing equipment. With our ability to track our efficiency in downtown locations, we were able to demonstrate the enhanced performance they would gain with having these services integrated together. As a result, we were awarded a contract valued in excess of $550 million over several years. And with the positive success we are seeing with Surface Systems doesn't stop in North America.

Our Asia Pacific and Middle East markets have also driven us to record order levels where year-to-date, we are up 90% versus last year. This is primarily driven by operations in Indonesia, Saudi, Iraq and Oman.

Europe and Russia markets have seen significant improvements from year-ago levels as well as year-to-date orders grew up 100%. Latin America will be the only area of concern as PMEX spending in the North region have significantly reduced. However, we are seeing very positive moves with our customers in Argentina to advance their activities in shales, which should support growth in -- between now and the end of the year.

Given that those orders in Surface Systems totaled $1.2 billion and we continue to see a broad list of opportunities in each of our markets globally, that will translate into another record year.

Valves & Measurement business segment had orders totaling $524 million in Q2, 5% below last year's level. Follow-up in orders is all project timing-related with our Engineered & Process Valves segment and several large projects that we were targeted to book have now moved into Q3, while this timing will also impact our second half revenues for V&M as this work will now shift in 2014.

We've also seen refiners delay nonessential plant maintenance to capitalize on the current high refinery, high margins, and this has deferred some spending for our process valves. Our distributed valve markets have held together very well in spite of the sluggish North America rig markets. Distribution bookings are up 20% year-over-year and reflects the great work our team is doing to capture new opportunities in this short-cycle market.

And our Measurement business saw healthy bookings in Q2 as well primarily driven in our U.S. markets. We see a lot of opportunities in Valves and Measurement markets around the world major projects will get booked although the timing is not always predictable.

Drilling Systems saw healthy order rates in Q2, totaling $674 million, up sequentially and 10% above last year's level. Newbuild jackup demand in aftermarket were the primary drivers for orders in quarter 2. We were awarded equipment for 6 jackups in the quarter along with 1 deepwater stack. Drilling aftermarket bookings are robust and are on a record pace for 2013. The outlook for new equipment deliveries is also healthy. While we will not see the level of newbuild drillships in 2013 we witnessed 2012, inquiries and orders for new jackups remains very, very brisk. The additions of both internal and sense equipment to the Cameron family is providing a sample opportunity to participate in a broad number of these new orders.

Drilling backlog grew again Q2, now totaling just under $4 billion and a lot of focus are being placed on execution of this backlog by drilling systems team. And while we see significant build and shipments through the year, we would not be surprised to see backlog at even higher levels by year end.

Our total orders for processing compression came in at $304 million in Q2, a drop of 14% sequentially. Expectations for high order rates with process systems have shifted as several major projects in the Gulf of Mexico and Latin America will now book in Q3 and Q4.

And we will see a number of additional large process systems orders for FPSO and offshore processing platforms internationally booked before year end. We do continue to experience reduced order activity in North America process markets, which is mostly due to competitive pricing behavior that we have not participated in.

Compression orders were essentially flat sequentially and slightly below year-ago levels. Overall, we continue to see more opportunity outside North America developing in international gas markets for these businesses.

Overall, Process & Compression should witness strong order rates in the balance of 2013.

Let me summarize a few key points before I turn it over to Chuck. The balance of this year will be the strong as ever for Cameron in terms of order rates, shipments and profitability. We have created a launch of truly transformational business called OneSubsea with a very committed and invested partner, Schlumberger. Our customers are committed to growing their resource base and our employees are committed to ensuring that Cameron is seen as a critical partner for their success. We're seeing tangible evidence where the Cameron enterprise can make this a reality, both onshore and offshore. Chuck?

Charles M. Sledge

Thank you, Jack. This morning we reported $0.57 per share in earnings on a GAAP basis. There were 3 items which affected our quarter results. First, we had $0.10 per share in noncash tax charges associated with the formation of OneSubsea. OneSubsea also was a driver of $0.11 per share in other costs. And then finally, we had $0.01 per share in FX losses that was really driven by the rapid devaluation of the Australian dollar and the Brazilian reals during the quarter. If we exclude these items, we'll get $0.79 per share.

Revenues for the quarter were up 8% sequentially. This was a little lower than our forecast of a low double-digit increase due to the timing of shipments, nothing to read into this at all. DPS was up 13.4%, the V&M was up 2.4% and PCS was down 3.8%, all on a sequential basis.

The shortfall in PCS was due to the timing of a few shipments in our turbo compressor business. EBITDA margins did expand nominally sequentially coming in at almost 15% when you exclude the FX loss. DPS margins expanded 100 basis points to 16.6, which was as forecasted. V&M came down sequentially, finishing at 22.2% and I'll point out, that was a little better than our forecast. PCS improved 80 basis points sequentially to 10.2%. However, PCS continues to be significantly impacted by the weakness in its 2 North American businesses.

Our tax rate for the quarter was 20%, once you back out at noncash charges. This was lower than our expected rate by about 300 basis points. I want to point out, this is merely a shift between quarters. We fully expect the operational tax rate to wind up at 23% for the year. So what that means is that tax rate in the back half of the year is going to be higher than we expected when we gave you guidance last time.

We repurchased 1.5 million shares for the quarter and we will remain active repurchasers of our share.

Now for full year guidance. We expect revenues to approach $10 billion. This is down from our earlier guidance due primarily to delays in project bookings, principally in our new subsea business. I want to emphasize there have been no project cancellations or losses within Framo. It's just the typical project delays we see in subsea. DPS should see an increase in the upper 20% range. V&M should see a low single-digit increase, and as Jack that's driven by -- what Jack mentioned of a few projects booking delays and PCS should see at mid-single-digit increase.

Overall, EBITDA margins for the year should be slightly below 16%. This is lower than our previous forecast due to 2 drivers. Our first and foremost, is that the new business within subsea will carry a margin over the remainder of 2013 similar to our legacy subsea business. This is well below what we originally expected. We ultimately expect in to carry our higher margin. But with the booking delays they have experienced, 2013 will be negatively impacted. I think you've seen this phenomenon before in other subsea businesses so there is nothing unusual about it. It's just booking delays.

Secondly, and to a much lesser extent, our North American PCS business will see no improvement over the remainder of '13. Thus, we will continue to see margin pressures in this segment. The project delays in the newly acquired subsea business will cause our DPS margins to be below our previous forecast, probably flat with last year's level. V&M margins for the full year is still expected to expand from 2012 level. The margin expansion should offset the impact of the project delays that Jack referred to in this segment.

PCS continues to struggle with its North American businesses. As a result, we now see margins flat year-on-year in this segment. D&A is expected to be approximately $305 million for the year. But I do want to point out, we still have lots of work to do in order to finalize the writeup of the newly contributed subsea assets. Interest expense should be approximately $95 million. Corporate SG&A is still expected to be approximately $220 million. The operational tax rate for the year should be 23%. But the audience interest should be between $0.10 and $0.15 per share as a reminder, this is a net of tax number. You should use 248 million shares in your model and this results in EPS of $3.40 to $3.55 for the year.

So in summary of our annual guidance, the driver of the change is the delay in project bookings associated with our newly added subsea business. Now for third quarter guidance. Revenues are expected to increase in the low double-digit range, DPS should drive in the increase approaching 20% growth, the newly added subsea business is a big part of this increase. V&M should have nominal growth while PCS should grow just short of 10% as the shortfall in Q2 is made up in 3Q. EBITDA margin should approximate to second quarter. As I discussed earlier, the newly added subsea business is moderating DPS margins so this is having an impact on us overall. We will be able to reduce this impact in the fourth quarter as our legacy subsea business will begin shipping higher-margin projects associated with the recent awards.

As far as minority interest, you can assume that $0.10 to $0.15 per share occurs ratably over the third and fourth quarter. I do want to point out, we just closed the JV so this is subject to change as we begin the process of integration. Our third quarter guidance results in earnings per share between $0.80 and $0.85 per share. We understand this implies quite a step up in earnings for the fourth quarter. We believe this is achievable given the amount of backlog that is scheduled to be shipped in Q4, coupled with a substantially higher-margin in our legacy subsea business for Q4. These 2 factors will drive the majority of the increase from Q3 to Q4.

Jeff, with that, let's open it up for questions.

Jeffrey G. Altamari

Jesse, please open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Scott Gruber with Bernstein.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

So focusing here on the OneSubsea business and the project delays. Obviously, you're going to be having an impact second half of the year. Where do you think the Framo margin gets back up to next year? Can we get back up to where you guys were originally expecting?

Jack B. Moore

Yes, there's no reason why we can't. Now obviously, going to be impacted by wind projects booked. But long-term, as we've always said, that margin is much higher than our legacy subsea business, and is more in line with our DPS margins.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

And are you seeing any impact in terms of pricing for the new awards now that you have another competitor in the Debussy market?

Jack B. Moore

No, we haven't seen any. We hope that everyone realizes that like anything in deepwater, these are challenging projects and the technology delivers tons of value for our customers, so you should get paid for it.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

And if I could turn to the CAMSHALE initiatives here. You got another award, which is great. Do you still think you're picking up share in the onshore shale services market in the U.S.?

Jack B. Moore

Yes, yes. Definitely, when your activity is up 26% year-over-year and your rig and oil counts are down or flat in the case of well counts, you've got a definite positive indicator. And it's a result of the investment we make. As we have made a ton of investment in this business in the last few years, and that's really showing up in our ability to be not only responsive but really deliver some measurable efficiencies at the well site for our customers. They see it, they feel it.

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

Do you think that share gain can continue?

Jack B. Moore

I think it's a function of us continuing to ramp this up. Our guys are very bullish on what they are doing and we're able to expand. I mean, the BHP award that is a great example of where we can bring a number of Cameron business segments to the well site. And that's what we want to leverage. So if we can get more footprint, you don't have to increase your customer base, just increase what you do with your customers. And that's really, I think, an opportunity we're going to continue to exploit.

Operator

The next question is coming from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Chuck, I was hoping to get -- you went through a lot of things in details but pretty quickly. I don't know If I captured -- understood it all correctly.

Jack B. Moore

Kurt, you're breaking up, I'm sorry we can't hear you.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Is that any better?

Jack B. Moore

Yes.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay, great. You guys went through a lot of detail. You went through it pretty quickly. I'm not sure if I captured it all. So I was just hoping if you can just walk through one more time with us how you're looking at the progression on DPS margins? You indicated that I think the OneSubsea or the Framo business is below your legacy DPS and just want a little more color or clarity on that if you can go through that one more time?

Jack B. Moore

Yes. What I said, Kurt, was that the new subsea business is carrying a margin in '13 that is a lot like our legacy subsea business. When really, the run rate margin is more like our DPS margin. So that's -- that is the driver of the change in our guidance, a full year guidance from last time to this time. That's simply a function of order booking and win and kind of how you work that through. As far as DPS margins, what I said was I made the comment about the legacy subsea business is going to have quite a bit more margin percentage in the fourth quarter, that's our legacy business and that's the result of shipping backlog that we've taken recently just at a higher price point.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. Great. And then the other I had for you was in the context in your commentary as well, you indicated that the reduction in earnings guidance also had to do with the project delays I'm assuming those projects then clearly were related to more short order and delivery type of businesses. Because I would think if you're going to get a subsea project award in second quarter sometime, it probably would not impact 2013 all too much. I'm trying to get some additional clarity around project delays and whether or not you can give a little more color around the short order versus longer-term bookings that would impact '14 more?

Charles M. Sledge

Actually, no, no. Kurt, I think it's important to understand that Framo is on a different accounting model than our legacy subsea business. The order shortfall has been in the subsea business that we acquired through the JV. And that maturation from order to revenue is a cycle that is much more akin to some of the other competitors in that space than our legacy subsea business. So whenever a -- an order slides from January to July in Framo that has a significant impact on revenue and earnings during the year of that order. So what's happened is orders have slid from the first part of the year to the second part of the year there. And that is pushing earnings out from '13 to '14. And the businesses that are -- we're added to the JV. And then again it's because there's a different accounting policy for them than our legacy subsea business.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay, okay. I know maybe a little bit premature to talk about '14, but with the reduced guidance on '13, I'm sure a lot of people will be looking at that as a signal to potentially take down 2014. But predicated on what you see in terms of the order and backlog in progression, without commenting specifically on an earnings number per se, the outlook for '14 relative to '13 at this juncture, can you give us some color in that?

Charles M. Sledge

Well, I think, Kurt, all I'll say there is there's clearly some numbers out there in '14 that I don't understand on the high end. So where things shake out, we'll give you guys some more color on the call in Q3. But clearly, there are some people that really need to look to their models.

Operator

Our next question is coming from Ed Muztafago of Societe Generale.

Edward Muztafago - Societe Generale Cross Asset Research

I just wondered if you could talk a little bit more specifically about the order delays and I wanted to try to understand, was that related more specifically to the timing of the JV closing? Or were there more customer specific type issues like this experienced by your larger subsea peer?

Charles M. Sledge

Yes, this has nothing to do with the formation of the JV. It is typical subsea delays. This is all subsea work. And remember, subsea projects are notorious for slipping to the right. It's nothing more than that.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. And I'm just wondering if you could talk a little bit just about some of the growth opportunity as it relates to Framo. My understanding is that a large portion of the Framo business had really been driven heavily by the Eastern hemisphere. And just given Cameron's presence in the Gulf, as well as Brazil, can we sort of talk about what potential that adds to sort of cranking up growth in the Framo side of the JV?

Jack B. Moore

Yes. Let's kind of think of it in terms of subsea processing capabilities. So we put the Framo capabilities with Cameron's CAMFORCE capabilities. We've identified over $1 billion of projects over the next 18 months. I would say 1/3 of them are in the North sea, 1/3 of them are in West Africa and 1/3 of them are in the Gulf of Mexico and they've got some traction in the Gulf of Mexico but you've got a number of projects that are clearly working right now in terms of going through the tendering process in all of these 3 markets. We've got -- you also have to take into consideration what we're going to see with compact separation, wet gas separation technology that the Framo folks have introduced with Statoil. That's gaining a lot of traction in Australia. It's also gaining some traction as well in the parts of the Mediterranean. So we see from just a number of projects around the world, more opportunities than we probably were looking at the 6 months ago. What Chuck said though, it's all the timing. We are excited about the possibilities. These guys have got a tremendous track record of success, millions of hours of runtime on their equipment and a lot of technology in the Hopper. So we're excited to turn it loose.

Edward Muztafago - Societe Generale Cross Asset Research

And so I mean given all these increased opportunities, I mean is the goal of the JV strictly to garner additional market share or is this really more structural shift of becoming or going from the #2 player to really being a market leader in subsea?

Jack B. Moore

Well, I think when you have a partner with Schlumberger, you have a capability you didn't have on your own and the marketing presence and the technology pace that they bring to couple with the reservoir modeling aspects of this JV, the processing technologies that come with it, the ability to develop things around boosting and touch points and smart wells. I mean all of those is really geared around reservoir optimization for our customers. Does that translate into more market share? Does that translate into better margins? Does it translate into higher sales? I think all of those clearly become expectations that we would have for this JV. The timing of it is going to be really around how well we make it happen. The pace and the quality of execution. The expectation is clearly there. The capabilities are clearly there. So it's a great future.

Operator

Our next question is coming from the line of Robin Shoemaker with Citi.

Robin E. Shoemaker - Citigroup Inc, Research Division

Jack, I wanted to ask about the subsea of the tree 3 market. I think in the first half of the year, there were something like 400 in subsea tree awards. Quest forecast for the full year is 530, suggesting that the second half of the year is going to be pretty light on tree awards compared to the first half. Do you agree with that? Also but more importantly, just in terms of the tree market for size for 2014, will it be on a par with this year from your perspective? Or could it be larger?

Jack B. Moore

I think a lot of this is the timing of the major projects in West Africa that have substantial number of trees with it called [indiscernible]. Our guess is it's probably a '14 event so it would move that total into that year. But for the balance of this year, there's a lots of opportunities and lots of projects. I think we'll definitely see the quest numbers come to the reality for the first time in a long time just because of what's happened in the first half of the year. Obviously, LNG and more Petrobras equipment that FNC announced and I think all of those are part of everything we all track and to see them come to reality is always a positive thing because it does tells you the traction is there. We are pretty bullish over the balance of this year, we're pretty -- very bullish on over '14 and '15 based on the number of projects we're tracking. This huge elephant projects, yes, we don't see a whole lot more of those in 2013, but there is a ton of other projects that will allow those Quest numbers to come to reality.

Robin E. Shoemaker - Citigroup Inc, Research Division

Okay. On -- going back to the project delays issues, I know you can think of over the years lots of reasons why projects get pushed to the right, and including first now constraints, logistics infrastructure, particularly in those emerging market countries. But one of the things that has come up here recently is a few projects that major oil companies appear to be re-examining in the short term delaying because of costs escalation. And it doesn't seem like any of the projects you're involved in are being delayed for that reason. But do you hear from your customers concern about field development cost and how that affects their economics given their oil price outlook?

Jack B. Moore

Yes, couple of things. I just want to start off by, again, reemphasizing when I say project delays in our -- the businesses got added to our legacy subsea business. I'm talking about from Cameron's viewpoint when we gave you guidance last they moved. Okay, because remember, we had limited visibility because of regulatory issues and what information we could share. So I just want to put that one in the box and I don't want you guys to read anything into it other than the timing was different than what Cameron assumed with the limited amount of information we had at the point we gave guidance last. So now let's talk about your broader issue. Yes, we are seeing projects moving to the right. This is subsea. We always do. They always book later than you think. Yes, are there any pressing economic issues that our customers are more worried than they have in the past? No. Cost are always a concern to our customers, and they're always looking for ways to restructure field layouts, to hold the line on cost. So we're not seeing any different behavior than is typical in this lumpy business.

Charles M. Sledge

Yes. Let me give you one -- every one of these projects that are out there, that are challenged with costs, Cameron does get impacted by it. When you think of all the products and services we can supply to it, BP is a good example. They kind of gone back to the drawing board on some of the elements of that project due to the escalated costs. And we had a big project in -- on our radar relative to our Process Systems business in providing them some separation equipment that would be on their development. So that gets put on hold and that's get recalibrated. So will it happen, yes. We just don't always know when. But when we look at our plans and we try and look at where our project's will end, we do try to handicap them based on some of the reality we've seen over the years, but it's never perfect science.

Operator

The next question is coming from the line of James West with Barclays.

James C. West - Barclays Capital, Research Division

Jack or Chuck, I know we announced in the press release and the commentary this morning the OneSubsea award for Rosebank. But presumably, those were bid separately since the JV disclosed a month ago. Are we now at a point where OneSubsea can bid? They set up enough, and the integration is there that they can bid together. And so we should see kind of true, if you will, OneSubsea awards here in near the future?

Jack B. Moore

Absolutely. I think you got to kind of keep in perspective that a lot of the projects that you read about have already been tendered, and there's lots of traction both from Cameron's legacy business and the business we acquired through the JV. So those paths are continuing to go down. That's why I said in my opening comments that the JV is up and running. We have lots of customers that want to hear the capabilities that we are now officially able to engage them in that. I think the wins for OneSubsea is an enterprise where we really want to capture -- the synergies between the 2 businesses are probably going to be smaller projects. There'll be a lot of the brownfield opportunities where you really see the capabilities of this demonstrated in a faster pace. And as far as the larger, I would call, the elephant-type projects or maybe even the deers and the antelopes as we've kind of referred to some of these project sizes. Those will be slow to evolve because some of those have already -- the process of turning have left and started the process. The one thing that I would tell you again like our valve business, our process businesses where we have the ability to touch a lot of other projects that are going on around the world, what we have picked up through some of the other businesses with both Framo, DYMO, in the surveillance businesses is the ability to touch some of these other projects that Cameron may historically not be involved in at this stage of the game. For instance, boosting [ph] and processing sometimes comes in to a project at a later stage, and those are all great opportunities for OneSubsea as the subsea markets mature.

David Phillips - HSBC, Research Division

Okay. And also just a follow-up, Jack, is the R&D budget in place now for OneSubsea and the R&D plan in place?

Jack B. Moore

It has definitely been stepped up. We have a partner that believes in R&D, and we are thrilled to be part of it. We've got a lot of horsepower, so yes, stay tuned.

Operator

Our next question is coming from the line of Bill Sanchez with Howard Weil Incorporated.

William Sanchez - Howard Weil Incorporated, Research Division

Chuck, I was hoping maybe you could just address for us. In the last call, again, maybe this will help reconcile the earnings degradation on the guidance you're expecting now. But last quarter, you'd expected, I think in the back half of 2013 about a $400 million revenue contribution from the Schlumberger assets, if you will, into the OneSubsea JV. I'm guessing, based on your comments today, with these project delays, that number is less. Are you able to kind of handicap that for us? And I guess, just from an early 2014 perspective, my thought was annualizing that would probably be a decent run rate for '14. Any help you can maybe offer there on both of those points?

Charles M. Sledge

I'll tell you what, on the first question, it's down by quarter-ish, okay? So it's closer to $300 million. On the '14 comment, we've only been closed for 25 days, so give us a little bit of time on that question.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. My follow-up would be just around the guidance on the shares outstanding. My understanding is, Chuck, you get about $400 million after-tax here contributed from Schlumberger. You've got, by my math, probably about $300 million, $315 million left in your share repurchase authorization. I'm surprised just given the favorable reaction we're seeing from the market to people that are returning cash to shareholders more aggressively that perhaps you wouldn't be out talking of a bit more of a more aggressive share repurchase program here with those proceeds, especially considering the base business is going to be free cash flow positive this year.

Charles M. Sledge

Well, we said we'd purchased 1.5 million shares during the quarter. We said we're going to be active repurchasers of the shares. We do have 386 million left on the repurchase program. We have upcoming board meetings. There's plenty of time to kind of revisit that with our board. But I mean, we've been pretty clear on what we said, and we've been pretty clear in our actions.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. So we should expect certainly that to continue here in the second half?

Charles M. Sledge

Yes. I said we would be active repurchaser of our shares, absolutely.

William Sanchez - Howard Weil Incorporated, Research Division

Okay. And can I slip one more in here real quick? Just as it relates to PCS. Jack, maybe for you, the North American side of the business, I think, continues to be disappointing for you. Just curious, I guess 2 points. One, just future capital location of this business as a whole and how you think about the PCS when it sits in the broader dynamics of Cameron, number one. And number two, curious from a NATCO perspective if the separation assets or some of the separation assets make sense at some point to move into the OneSubsea joint venture?

Jack B. Moore

Well, let me, first of all, the capital to support this business is minimal. So from how it demands or requires that piece of our balance sheet, it's a minimal expectation. The Process business has been clearly a key asset to our onshore story and our offshore story. So when you look at deepwater OneSubsea evolving and this process started 3 years ago where you start moving this separation technology where not only the NATCO but the Petreco branded tons of applications and tons of history and tons of success were performing this on FPSOs and platforms around the world. It's really a matter of how you translate this to the seabed where it's efficient and reliable. And you look at the numbers, studies we have going on, still going on, the separation market is going to be -- continue to grow and it's going to be big. It's going to be clearly a priority for OneSubsea as our markets demand that we move broadly into it. So yes, it's going to be a critical asset for our deepwater stories. And it's becoming a more critical asset for our onshore CAMSHALE story. And so those are the 2 areas where we would explore it.

Charles M. Sledge

Jack, I'll add on the question of subsea separation. That is within the scope of the JV, so all of the technology, all of the resources within the separation business is available to OneSubsea. That's where that technology will be developed. That's where it will be housed, and that's where some of the R&D is going to go. So yes, we've got a pretty clear vision where we want to go with subsea separation. It's different than where the very few projects that have been led so far in that -- is at. And you will see us ultimately be very active when that market comes to pass.

Operator

Our next question is coming from the line of Brad Handler with Jefferies.

Brad Handler - Jefferies LLC, Research Division

Maybe just a quick housekeeping question before we get to something more interesting. Can you share your D&A outlook for the third quarter?

Charles M. Sledge

Let's see here. Hold on one second. Yes, I'll tell you what, I don't have it here in front of me, but Jeff can get you that. We got it, I'm sorry. I just don't have it in front of me.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. That's fine. Maybe keying off of just the last conversation and then coming back to the U.S. a couple of things. First, maybe I've missed something. But Jack, you just mentioned that NATCO or that separation business could be, should be, part of the CAMSHALE effort, and I guess I thought it had been, so I'm trying to reconcile some of the weakness you're describing with some of the success you're having with CAMSHALE? And then I oppose more broadly I'm also trying to understand your outlook for the U.S. in this flat rig count accelerating drilling efficiency kind of opportunity set? And how those 2 -- I mean I would think that opportunities are being created given the shift to oil as well efficiency gains and your relationship with some of the larger customers, et cetera it sounds like that's not quite happening basically. So. . .

Jack B. Moore

It's not happening as broadly as we would like it to in CAMSHALE basis. Keep in mind CAMSHALE is -- we probably have about a dozen of these initiatives going on in some or more broader than others. I will also tell you that the process business also touches the midstream section of our businesses and we're seeing a lot of pricing competition in that area. But CAMSHALE does not touch the midstream part. CAMSHALE is going to be more in the wellhead and the production -- where the production wells side is. So those are 2 really different markets that are driving some of the performance in our onshore process business. So that's -- and if you kind of look at where one is moving going forward on the onshore wellhead piece, we're definitely seeing traction and opportunities there to build that and see growth probably exceeding maybe what we're seeing in activity. But in the midstream piece, we're seeing a lot of pricing competition and that's an area where we're just not going to chase it down.

Jeffrey G. Altamari

Brad, the answer to D&A is low to mid-80s for the third quarter.

Brad Handler - Jefferies LLC, Research Division

Okay. Jack, I'll just come back to you. That makes sense. Can you put your arms around this, but in terms of pad drilling specifically, presumably that creates opportunities upsized processing or separation systems and the like. You're telling me there's pricing competition there or no that's the ball [ph] pricing competition in the midstream?

Charles M. Sledge

Yes. There is a traditional -- in the traditional sense and it's very regional. What our goal is is to capture the efficiencies we can bring by building it into a system instead of as a standalone product or product sale. And that's where the CAMSHALE initiative is really going to drive some value for us, and we're getting some traction there. I think, it's going to be a better story as we evolve not only through this year but in future years.

Brad Handler - Jefferies LLC, Research Division

Okay. Just last one for me, but I guess still within PCS, if you don't mind. Is there another cost opportunity? Is there a rationalizing kind of opportunity within PCS that you might be approaching given what sounds like a bit more of a sustained sluggish outlook?

Charles M. Sledge

We are analyzing that, yes. And I think as we have these teams work closer with our surface wellhead teams, you'll see some cost opportunities come through that -- to that initiative as well. But we don't have to duplicate certain resources.

Operator

Our next question is coming from the line of Jeff Tillery with Tudor, Pickering, and Holt.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

On the guidance for this year I'm just trying to gauge from thinking about this the right way, roughly $0.15 reduction, about 2/3 of that being the acquired sum [ph] of the businesses and 1/3 kind of the rest process at compression of D&A. Is that about the right attribution?

Charles M. Sledge

Well, the low side of the range went a bit down by $0.10 and virtually all that's -- be coming from the newly acquired assets into the JV. On the top side, yes, the difference is just PCS and a few other things here and there.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. And then Jack, I wanted to touch -- you're still optimistic on the Valves & Measurement on order prospects and mentioned some big projects that have slipped. When I think about -- as I look back at the past 5 or so quarters, it's basically kind of shredded water with the 1x book-to-bill. I guess, what do you see changing going forward? And if that's going to -- or I guess, what hits or hasn't hit or has things continually been slipping? I just wanted to get some color around the order outlook and V&M?

Charles M. Sledge

Well, I think, Jeff, the first thing you've got to remember is, when we had extraordinary bookings on the Gorgon project, okay? So you're seeing that increasing revenue, but that was $300 million of bookings. And so you're not just seeing that large of a PVM project come through again. So I think you're going to see a different story going forward. You have to keep that in context when you come up with booking bill rates.

Operator

Our next question is coming from the line of Stephen Gengaro with Sterne Agee.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Two things. One, can you give us a little more color on the sequential rise into the fourth quarter and sort of what the key components are? That seems to be a big area of question that we're getting because it seems to be a pretty big ramp that you're counting on to get to the sort of guidance range for the year.

Charles M. Sledge

Absolutely, yes. We said in our prepared remarks, it is a big increase. There's a substantial amount of volume that has to go out in Q4. We have been building capacity for the last 2 years to prepare ourselves for it. It's not a surprise to us. It's primarily in the subsea and drilling and surface businesses. So it's in the DPS segment. And then you're seeing the better new and improved backlog coming through the back part of the year as well, so it's do those 2 things that are driving it.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

All right. So most of that is coming from the DPS?

Charles M. Sledge

Yes.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Okay. And then just as a follow-up. When you look at OneSubsea, and you touched a little bit on this earlier as far as the bidding process, do you -- when do you see sort of the impact of sort of the joint bidding? And not just sort of in winning an award, but when do -- do you think that customers seeing the synergies -- and I'm not saying market share specifically. But when do you think that starts to really, really result in a strong order flow for you relative to where maybe it could have been previously?

Jack B. Moore

I would expect it to be within 12 months that you'll start seeing a meaningful change in where we are influencing customers' perceptions of the capabilities of OneSubsea. I think the marketing team has got a clear story and a clear focus. Those in synergies we can always -- we can already put together when we were talking to customers about. Now winning, as I said, winning elephant, large elephant projects that ain't going to happen in the next 12 months. But you will see us start to influence, I think some of the bidding and some how they would looked at OneSubsea's ability to deliver a different performance level in the next 12 months and how that can influence where those awards may go in the next 18, 24, 36 months. So Steven, it's not a let's wait until there's -- until everything is newly developed and in the box. A lot of the things that we are looking at now in terms of the targets -- the guys clearly have key targets of technology areas that we are a, going to develop and a, going to push together from the capabilities we currently have. And all these is going to influence our ability to bid and influence how those bids may come together.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Great. And then just one final -- and this is following up on a previous question about share repurchase. Is there any change -- and Chuck I know you responded to the question -- but is there any change in your historical approach to buying back stock where it seems historically it was kind of gradual, opportunistic? And some of your answer, I couldn't really tell if there is a change in that approach as we go forward here with all the cash.

Charles M. Sledge

Well, yes, I'm not going to speak to the past. But going forward, what we have said is, we've got a number of shares we buy during the quarter irrespective of price. We just weight average into it, we're not picking high points or low points because we're not very good stock pickers, we just manufacture stock. And so -- but there are certain prices triggers within our program that will accelerate the buying activity and that's what you saw in the second quarter, as we reached some of those price triggers and we wound up buying 1.5 million shares during the quarter.

Operator

Our next question is coming from the line of Mike Urban with Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

So I just wanted to see if I could tie together a lot of what you said in some of the questions on OneSubsea I know it's been a focus of the call here but it's pretty, pretty important here going forward. Jack, as you said, obviously, we are early days here and so you're basically executing on and have been booking stuff, that would have been bid separately, you now are able to go out and bid together. But presumably gets more just 1-plus 1 equals 2 for right now just given that you would not been able to coordinate for very long. If you could walk through timeline how you see this evolving and at what point do you think you've got something where having been together having the R&D, having that expertise in-house you're able to develop something that I guess at least initially for the customer presumably ultimately for the JV is significantly additive and accretive to what the individual piece could have done to 1 plus 1 equals 2.5 or 3 or 4. Just trying to get a sense how that would play out just given the long lead times of this business.

Jack B. Moore

Well, Michael, that story evolves. You look at subsea processing today, and I think we have clear opportunities to put things together now with what Cameron had in its portfolio and what Schlumberger had in its portfolio that will give us fairly quick opportunities. So there isn't an R&D element in there per se, it's more of let's -- and we've already started that process obviously where we see the synergies between the 2 businesses. Adding the reservoir modeling resources; adding the surveillance resources; DYMO, which is a key subsea connector provider for electronic connections; building that synergy back into the Cameron requirements. Those things are fairly day 1 kind of opportunities that are already kind of built-in into our marketing strategy. So those are going to yield us some benefits, obviously, fairly quickly. But then as you talk about evolving the control systems and the tree systems, the separations technologies, things of that nature, that will evolve over time. And some of it will happen at the pace in which customers are going to accept it. But those clearly will give us year 1, year 2, year 3 kind of targets of where we will be at across those stages, so that the projects we target and the customers we work with will clearly see the benefit and the commitment that comes from that.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. So you do feel like there were some things that each company is working on individually and in-house that's combine and in immediately get something that's...

Jack B. Moore

Absolutely. I mean, our large technology and the [indiscernible] technology is a marriage -- that's a match made in heaven. I mean, there are some things that are clearly winners day 1?

Operator

Our next question is coming from Will Gabrielski with Lazard Capital Markets.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Dig into the drilling side and let me 2 questions. One, in terms of your progress on bringing on aftermarket capacity in the second half of the year and how that's going. And then two, what your overall order outlook for the rest of the year looks like today, maybe what you're expecting 6 months ago, what's the visibility is.

Charles M. Sledge

All right, first of all, aftermarket, will have a record year in aftermarket, record pace. We spend a lot of money in capacity in the last 2 years. We talked about that. I think we're getting to a pretty comfortable capacity pace, let's put it that way. I think we're going to continue to see investments in specific areas, specifically people side to continue to evolve the pace of those -- of our aftermarket support. And I think we will continue to see aftermarket services expand as more and more operators and contractors move to OEM supports. The -- on the order outlook, I'd say, our expectations around the floater markets, the drillships side of the businesses has not really changed. It's not as healthy as it was in 2012 but it is still pretty decent. The real surprise has been in the jackup markets where we see a little healthier business there than we had probably originally forecast. So that is going to give us a lot of opportunities, it's just a matter of how much of that actually gets awarded and booked in 2013. But as I said, on my comments, that I do believe that you could see Cameron end up this year with higher backlog in drilling than we went in with. And that's a pretty significant order rate and not like we had in '12, but it would be clearly the second highest we've ever had in history. So we expect it to be pretty healthy.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay. And on the drilling aftermarket side, do you think you can sustain double-digit growth rates there going into next year?

Charles M. Sledge

I think it's a function of how much more discipline we get on the offshore markets and land markets to move back to OEM. We've made a huge inroads there, especially in the deepwater space globally. So I still think there's still some more room to grow. We continue to see that need. But we've -- to have annual double-digit growth in that market is going to continue to require some discipline in our operators' and contractors' part.

Will Gabrielski - Lazard Capital Markets LLC, Research Division

Okay and and real quickly, on the refinery side, you called out maintenance and delayed maintenance and deferred maintenance, I guess, as having an effect on the V&M segment. Are you now spreads narrowing in the refineries reporting less robust operating results so far through this quarter? Seeing any signs of second half maybe that does come in?

Charles M. Sledge

It is. And I think we'll see -- maintenance on these refineries are always required, and when they're making money, they hate to shut it down and when they have windows to get it done, they'll hopefully pull the trigger. So we are -- our expectation is will see some of that come through here over the course of the year.

Jeffrey G. Altamari

And Jesse, we have time for one more question, please.

Operator

Our final question of the day is coming from the line of Michael LaMotte with Guggenheim Partners.

Michael K. LaMotte - Guggenheim Securities, LLC, Research Division

If -- could you also just quickly give us the trees ordered and delivered in the quarter?

Charles M. Sledge

Michael, let me get -- I don't have the trees delivered during the quarter. I'm sorry, I just don't have any information here.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. I can can get it from Jeff. You mentioned in the prepared comments about the international gas market and picking up. I was thinking about the model that you've developed U.S. CAMSHALE, and so the scale that can be created with a lot of different operators in the U.S. As you take that model overseas, does it look the same? Can you get the same margin and delivering the same types of services...

Charles M. Sledge

We have -- the good thing Michael is our footprint -- is this business is driven by surface systems. So we've got a great foundation all over the world, and these guys are our most -- we have most touch points around the world through surface systems. So they are the delivery vehicles. So that's a good story. I would say watch this space in Argentina, that's where you're going to see, I think, the next big opportunity. And we'll hopefully see similar, similar options. Because you've also got some major operators down there that will see the value in doing this. Could it happen in Eastern Europe, could it happen in China, could it happen in other markets as they evolve over time, yes. And let me tell you another part of the world we're seeing it is in Iraq. Because of the investment we made in our base there, given us some real opportunities to pull together more of a CAMSHALE look with our major operators there that we are working for. So excited about it. It's done.

Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

That's good color. Also require [ph] CAMSHALE comment on growing sort of penetration rate within the [indiscernible] because the market share gain is not just expanding the customer base. It's actually doing more within the customer base is I think about these frame [indiscernible] set up. How much scope do they cover in terms of [indiscernible] services or capabilities that Cameron has in the portfolio?

Jack B. Moore

It's a little different. I would say it's a little bit of a mixed bag. A lot of them are just covering our, I would say, the Surface Systems' scope, which would include surface trees, wellheads, frac trees, frac manifolds and maybe flow back capabilities and maybe some limited processing and maybe some limited valve infrastructure. But the opportunity is once you get theas tell our guys, the opportunity is when you're on location, look around, what fits, what complements what we do. And that's really what's driven that CAMSHALE initiative. It's pulling it together and start showing the customer how this interrelates and communicates and the efficiency you can bring by making sure that you drive phenomenal uptime performance. We can measure our performance on location and it is amazing when we show the guys the statistics compared to what they are seeing with other service providers. I mean we are 30% to 40% differentials in terms of the efficiency and on a -- on these unconventional resource plays where you got a lot of horsepower on location, spending lots of money with other equipment, saving hours is a big deal.

Michael K. LaMotte - Guggenheim Securities, LLC, Research Division

Yes, yes. So that productivity uplift is really the value sale as opposed to the work.

Jack B. Moore

Absolutely. And the reliability of equipment and people on location it takes a lot of investment to make that happen and that's what we have stepped up and done.

Michael K. LaMotte - Guggenheim Securities, LLC, Research Division

Okay. Last one, I'm going to cheat and throw one more in there. On the OneSubsea side, if I think about the growth in the marketplace overall and the sort of legacy issues in terms of the delays and slippage that this industry is known for. What can you do as Cameron debottleneck [ph] the system as operators are trying to do more. I don't think they've invested the same amounts in people and resources as the services industry have? So how do we prevent growth rates overall from not materializing or from slower than currently expected?

Jack B. Moore

I think, Michael, one of the areas -- there's 2 areas there. One OneSubsea, with Schlumberger as a partner is going to have a lot of broad capabilities in the area of reservoir, in the area of wellbore completion. So you think of operators having opportunities in brownfield environments, and they may not have all the resources that they would put to it because they're preoccupied with something else. This could be a great option. So leveraging some incremental -- an organization that has more to offer than just equipment. And then you'd look at some of the delays in projects over the years have really been driven, I think a lot of people talk about that, it's just the cost and the economics. There's a lot of time and a lot of grinding over making sure the cost all come into the scope of what the operators are expecting and the partners are expecting. OneSubsea, if you think of where we're going with this in terms of reservoir optimization and reservoir productivity, really demonstrating that you can get more out of these deepwater assets, the economics change and it could really make projects that may have the been on the margin become much more attractive. And that will create, for us, I think, an upside opportunity that projects you may have more of them in the pace at which they get done is sooner versus later. Those are, I think, 2 real, clear opportunities that we're going to drive to take advantage of with OneSubsea.

All right. Thank you, guys.

Operator

Thank you. We have reached the end our question-and-answer session. I would now like to turn the floor back over to Mr. Altamari for any concluding remarks.

Jeffrey G. Altamari

Thank you, Jesse. This concludes our second quarter earnings call and thank you all for joining us this morning.

Operator

Thank you, ladies and gentlemen. This does conclude today's teleconference. You many disconnect your lines at this time, and thank you for your participation.

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