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Executives

Jack Jurkoshek - Director of Investor Relations

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

Analysts

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

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

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Jonathan Donnel - Howard Weil Incorporated, Research Division

Brad Handler - Jefferies LLC, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Waqar Syed - Goldman Sachs Group Inc., Research Division

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Oceaneering International (OII) Q3 2013 Earnings Call October 29, 2013 11:00 AM ET

Operator

Good morning. My name is Megan and I will be your conference operator today. At this time, I would like to welcome everyone to the 2013 Q3 earnings conference call. [Operator Instructions] I would now like to turn your call over to Jack Jurkoshek. You may begin your conference.

Jack Jurkoshek

Good morning, everybody. I would like to thank you for joining us on our 2013 third quarter earnings conference call. As usual, a webcast of this event is being made available through the StreetEvents Network Service at Thomson Reuters.

Joining me today are Kevin McEvoy, our President and CEO, 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 the 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. I'm very pleased to be here with you today.

We achieved record EPS for the quarter, reflecting the high level of demand we continue to experience for our subsea services and products. Our third quarter results were highlighted by all-time high operating income from our ROV segment and better-than-anticipated Subsea Products operating margin.

Overall, we remain on track to achieve record EPS for 2013, which we now believe will be up more than 25% over 2012. Given our third quarter results and an improved fourth quarter outlook for Subsea Products and Subsea Projects, we are raising our 2013 EPS guidance range to between $3.35 to $3.40, up from our previous range of $3.20 to $3.35.

We are well positioned to participate in the growth of deepwater and subsea completion activity that is currently underway, and we are initiating 2014 annual EPS guidance to the range of $3.90 to $4.10. This is up 19% at the midpoint over our forecast for 2013.

We anticipate continued global demand growth for our services and products to support deepwater drilling, field development and inspection, maintenance and repair activity. This market outlook is supported by industry observation and assessments that deepwater drilling is increasing, subsea equipment orders are growing and backlog to perform offshore construction projects is at a record high level.

For 2013 and '14, we anticipate generating at least $735 million and $845 million of EBITDA, respectively. Our balance sheet and projected cash flow provide us ample resources to invest in Oceaneering's growth, and we intend to continue doing so.

I'll talk more about our 2014 guidance later. But first, I'd like to review our operations for the third quarter. Year-over-year and sequentially, ROV operating income increased on higher demand for both drilling and vessel-based support services, notably in the Gulf of Mexico and off Africa. Our ROV days on hire for the quarter increased to a record high of nearly 23,700 and our fleet utilization rate rose to 86%. This was up from 83% last quarter and 81% year-over-year. We expect 2013 utilization to be 84%.

Sequentially, operating margin increased about 70 basis points, but not enough to round up to the 30% level we had hoped for. We continue our efforts to raise prices and control costs to achieve margin improvement.

During the quarter, we put 7 new ROVs into service and transferred 1 system to Advanced Technologies for non-oilfield use. At the end of September, we had 302 systems in our fleet, up from 285 a year ago. All of the new ROVs went into drill support. Our fleet mix during the quarter was 73% drill support and 27% on vessel-based work, the same as in the third quarter of 2012. We had a 74%-26% mix last quarter. We continue to anticipate adding about 30 new vehicles to our ROV fleet in 2013, approximately 13 during the fourth quarter.

Now turning to Subsea Projects. Year-over-year and sequentially, operating income rose due to increased demand for deepwater intervention and shallow water diving services in the U.S. Gulf of Mexico and additional vessel activity offshore Angola. Year-over-year, operating margin increased to 21% from 17%, and this was largely due to a favorable change in Gulf of Mexico deepwater job mix to include more installation work.

At $30.7 million, quarterly operating income was second only to the $31.6 million we achieved in the third quarter of 2007 at the height of the hurricane damage repair work being performed in the U.S. Gulf of Mexico. This was accomplished due to our international expansion in Angola and the Gulf of Mexico deepwater mix previously mentioned.

During the quarter, we commissioned the construction of a Jones Act-compliant subsea support vessel with an expected delivery by the end of the first quarter of 2016. This vessel will allow us to maintain our competitive position to meet what we believe will be growing demand and more rigorous technical requirements for ultra-deepwater Subsea Project services in the Gulf of Mexico. Of note, this vessel will have a 250-ton heave compensated crane, 100 tons greater capacity than any other vessels we currently operate. This will increase our capability to safely handle heavier subsea payloads for our customers in deeper water depths.

As for our other business segments, year-over-year, Subsea Products operating income improved on higher demand for tooling and Subsea Hardware. Sequentially, operating income did not decline as we had anticipated, as our operating income margin benefited from a higher contribution from tooling. Our Subsea Products backlog at quarter end was $857 million, down 5% from $902 million at the end of June, but up 38% from $619 million a year ago. Year-over-year, the substantial backlog increase was largely attributable to umbilical awards and contracts we secured for Subsea Hardware.

The 5% sequential decline in Products backlog was primarily in umbilicals. Given the episodic nature of umbilical awards and their relatively large value compared to our other product offerings, we expect our quarterly products backlog to fluctuate depending on the timing of major umbilical contracts.

Asset Integrity operating income improved year-over-year on higher service sales in Africa. Sequentially, operating income was unchanged. Advanced Technologies operating income increased year-over-year on additional vessel maintenance work for the U.S. Navy. Sequentially, operating income declined as we had expected on a lower level of activity and operating margin on theme park projects.

In summary, our third quarter results were exceptional, and we look forward to realizing another year of record EPS performance in 2013. Our focus on providing products and services for deepwater and subsea completion positions us to participate in a major secular growth trend in the oilfield services and products industry. We were pleased with our EBITDA generation of $204 million during the quarter. Capital expenditures for the quarter totaled $105 million, of which $53 million was invested in ROVs and $33 million was invested in Subsea Products. We are raising our CapEx estimate for this year to between $400 million and $425 million. The $75 million increase over our previous guidance is to accommodate the expenditures for the new vessel we are having built and additional investments to enhance our Subsea Products capabilities.

Now let's talk about our year-end outlook. For the fourth quarter of 2013, we are projecting EPS in a range of $0.80 to $0.85. We expect our fourth quarter EPS to be up year-over-year on operating improvements from ROVs, Subsea Products and Asset Integrity. Sequentially, we anticipate a quarterly operating income increase from ROVs as we put additional new vehicles into service. We also project ROV operating margin to show some improvement in the fourth quarter.

The rest of our oilfield business segments are forecast to have operating income and margin declines due to normal seasonality of project timing. Advanced Technologies operating income is forecast to drop precipitously. This is attributable to projects having been pulled forward into earlier quarters this year and the uncertainty of U.S. government funding for the services we provide for the U.S. Navy.

Looking forward to 2014, we are initiating EPS guidance with a range of $3.90 to $4.10 based on an average of approximately 109 million diluted shares. We believe our upcoming year guidance is a bit more aggressive than in years past, as our market drivers are transitioning from ROVs to our other oilfield business operations, for which we have less annual visibility. Demand for these other operations is tied to secular growth and field development and inspection, maintenance and repair activities, which is occurring, but the exact timing of this work is more uncertain, and outside of umbilicals and our Angola project, the work is very short cycled with little visible backlog.

We have not completed our detailed planning process, but the big picture changes we envision for 2014 compared to '13 can be summarized as follows: ROV operating income is projected to grow on the strength of greater service demand to support drilling and vessel-based projects, led by increased activity off Africa. We are projecting that our fleet utilization rate will improve to 85% and anticipate adding 30 to 35 new vehicles to our fleet in 2014. We intend to retire systems when they reach the end of their useful lives and will continue to report these only after they have occurred. Given our fleet size, its average age and our strategy of operating a modern fleet, we expect to retire annually about 4% to 5% of our fleet.

We expect to improve our average revenue per day on hire somewhat, at least to cover cost increases and maintain our operating margin in the range of 29% to 30%. We remain committed to growing our fleet and securing as many new build floating rig and vessel opportunities as possible with customers that appreciate our value proposition.

Subsea Products operating income is forecast to improve on higher demand for each of our major product lines. Products operating margin is expected to be in the range of 19% to 21%. Subsea Projects operating profit is expected to be better on growth in deepwater intervention activity in the Gulf of Mexico and additional work offshore Angola. Projects operating margin is expected to show a slight improvement over 2013.

During 2014, the operating process of our Gulf of Mexico operations is expected to benefit from the addition of another chartered multiservice subsea support vessel, the Normand Flower, to our Gulf fleet. We also anticipate an increase in other vessel availability and a decrease in drydock expenses.

Our Asset Integrity segment profit contribution is forecast to be higher on increased service sales in most of the geographic areas in which we operate. Asset Integrity operating margin is expected to show a slight improvement over 2013.

Advanced Technologies performance is expected to be about the same. Unallocated expenses are estimated to increase at a rate slightly less than revenue growth.

At the midpoint of our guidance, we expect our overall operating margin in 2014 to remain approximately the same as the 17% we anticipate for 2013. During 2014, we anticipate generating at least $845 million of EBITDA. Our balance sheet and projected cash flow provide us with ample resources to invest in Oceaneering's growth. Our preliminary CapEx estimate for next year is that it will be similar to 2013 or around $400 million. Our focus in 2014, as it was this year, will be on earnings growth and investment opportunities, both organically and through acquisitions.

At this time, we are not providing quarterly earnings guidance for 2014. For those of you who intend to publish quarterly estimates, I'd like to remind you that historically, our first quarter is the lowest of the year due to seasonality.

On a macro basis, we remain convinced that our strategy to focus on providing services and products to facilitate deepwater exploration and production remain sound. We believe the oil and gas industry will increase its investment in deepwater, as it remains one of the best frontiers for adding large hydrocarbon reserves, with high production flow rates at relatively low finding and development costs. An early 2013 industry report by Douglas-Westwood forecast global capital expenditures spending in deepwater oil and gas projects will double over the next 5 years. We anticipate 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 September, 103 of the 150 existing high-spec drillships in 5th and 6th generation semis were contracted to operators other than Petrobras in Brazil. We had ROV contracts on 82 of these for a market share of 80%. At the end of the quarter, there were a total of 101 new floating rigs on order. 72 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 72 rigs, 26 ROV contracts have been let and we have 123 or 88% of them, leaving 46 non-Petrobras ROV contracting opportunities left to be pursued. If all 72 of the non-Petrobras rigs I mentioned are placed into the service, we believe our ROV fleet supporting the rig market should grow by at least 55 to 60 vehicles. 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.

As the use of floating rigs grow, we believe that 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. The current trend indicates that there will be approximately 2 vessel-based ROVs for every floating rig in operation. So the 101 rigs under construction should represent incremental demand for approximately 200 ROVs on vessels. We estimate Oceaneering's market share of the global vessel-based ROV fleet at about 20% and see no reason we would not at least maintain this share in the future. This incremental demand would result in our ROV fleet supporting vessel market activity growing by some 40 vehicles.

In summary, by maintaining our current market share under visible growing rig and vessel service requirements, we are forecasting we will add 95 to 100 incremental ROVs to our fleet. We anticipate the ROVs to support the rigs on order will be in service by 2017. The in-service timing for the vessel-based ROVs cannot be predicted at this time, but will most likely lag those required to support drilling.

Quest Offshore's latest Subsea Hardware forecast for the period 2013 to '17 includes an increase in tree orders of more than 60% over the previous 5 years. In 2013, subsea tree orders are projected to grow to 556, an all-time high, eclipsing the previous record of 462 trees of 2006 by 20%. In 2014, tree orders are projected to be about the same at 551. 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 a 32% increase in umbilical orders for the 5-year period 2013 through '17 compared to the previous 5 years. Umbilical orders in 2013 are forecast to rise to about 1,685 kilometers, up over 45% from 2012. In 2014, umbilical orders were projected to increase 15% to the 1,945-kilometer level.

Based under subsea tree order forecast, Quest Offshore is projecting average annual subsea tree installations over the 5-year period 2013 through '17 will increase by 140 or about 45% from the previous 5 years. The number of subsea completions in-service compared to 2012 is projected to increase by 35% by the end of 2017. We believe the projected rise in tree installations and the growing number of subsea completions in service will act as catalysts for further growth in our Subsea Products and Subsea Projects operations and profits.

Furthermore, 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 support the safe deepwater efforts of our customers. We believe Oceaneering's business prospects for the long-term remain promising. Our commanding and 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 oilfield services market and our leverage to the growth of deepwater and subsea completion activities that is currently underway.

The longer-term market outlook for our deepwater and subsea service and product offerings remains promising. Industry and regulatory emphasis on reliable equipment and redundant safety features of deepwater operations elevates the importance of the utility and reliability of our ROV services and related product offerings, and reinforces the benefit of our value sell.

For 2013, we anticipate that we will achieve another record year of EPS performance, and that 2014 will even be better. We think this distinguishes Oceaneering from many other oilfield service companies.

We appreciate everyone's interest in Oceaneering, and I will now be happy to take any questions you may have. Megan, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ryan Fitzgibbon with Global Hunter Securities.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Question on the '14 guidance. Can you maybe help us a bit as to how we should think about the 3 oilfield segments, ROV products and projects? Which would grow the fastest in your expectation, if you could kind of rank order those for us?

Unknown Executive

On a percentage basis? On a dollar basis? Which are you asking, Ryan?

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Let's go percentage year-over-year on the EBIT level.

Unknown Executive

I don't know. Jack, you got that? I would say that products and projects would be pretty close neck and neck, followed by ROVs.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Okay, okay. And then I guess, in your guidance, in the press release, you've talked about Angola actually being up year-over-year for projects. Have you guys gotten the third vessel contracted with BP? Or where do you guys stand on the scale of that project right now? What's your expectation for '14?

M. Kevin McEvoy

We have a temporary third vessel, if you will, that's been there for probably close to 5 months now that is going to go away eventually. BP is still extending it weekly, but we do anticipate a third permanent vessel will be in place at some point during 2014.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Okay. So they have exercised the 245-day options at this point?

Unknown Executive

Yes, they did. And we expect to stay on until kind of the middle or end of December -- end of December.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Okay, that's helpful. Second question for me is also on the project side of the business. Can you talk about what the contracting environment is like for the Gulf of Mexico on the deepwater intervention side? I know specifically, it's generally been a spot market kind of business. But for the Normand Flower, are you seeing any contracts and opportunities to date? And the same thing for the new build. I know that's coming out quite a bit, but just trying to get your sense as to whether that market's changing at all.

M. Kevin McEvoy

Well, I think that market is strengthening. There is more activity on the horizon for 2014 and I think in 2015 in particular. And so we do see opportunities for the Normand Flower prior to its arrival here. And as far as the new build vessel , we do -- we will have the flexibility, if needed, to get rid of one of the charter boats if the market dictates that, but we're, at this moment in time, expecting that, that will just add to the fleet and continue the expansion there.

Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division

Okay. And then on the new vessel, can you disclose what the CapEx requirement is there, and what are your expectations for a return?

Unknown Executive

No, not at this time.

Operator

Your next question comes from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I just -- I think we're all pretty much aware of the secular growth dynamics that play as you guys outlined. Looks like some of the growth rates percentages are in excess of potentially what you guys may be expecting to achieve, just on the back of the envelope process, right? So let me ask you this, when you look out over the next 3, 4, 5-year periods and you take some of these top line kind of growth rate dynamics, how do you think that translates to an earnings per share growth rate for Oceaneering over time?

Unknown Executive

Kurt, we're the first ones out with '14, and you're asking us beyond that? Hey...

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I'm just trying to get a -- I'm just actually trying to get a long -- longer-term dynamics. We're not going to -- I'm not asking for specifics, but I'm just generally speaking when you look at the market dynamic...

Unknown Executive

If you look and just kind of correlate the secular growth with our track record, I would think that we would continue to participate in the way that we have and the way that we project for '14. I mean, I think our whole Investor Relations presentation is based on that 5-year look of continuing growth in drilling, in development, in IMR. And I think what we're saying is, it gets a little bit more difficult to project the future as you transition from something that is so exploration based as our ROV field support has been with really great visibility to more inspection, maintenance and repair-type production support activity as we see the next 5 years becoming. So it's really hard for us to have that crystal ball with a lot of visibility right now, but we see it as being all good.

M. Kevin McEvoy

I mean, really, it's the short cycle time related to those other businesses that make it hard to go too far out on the limb and say, "What's going to happen?"

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. That's fair enough. I mean, when you look at the Subsea Products elements, vis-à-vis the ROV element, if you compare and contrast the 2, which one of those do you think would experience a higher growth rate from here?

Unknown Executive

I mean, I think where we're headed is the more production bays you go to, you have pull through of some ROV work. But as we said, our vessel base were -- is kind of mid-20s number, 23%, 24%, 26-kind-of percent of our vessel use -- I mean, of our ROV utilization. But I think what you see is great opportunities for tooling and deepwater work systems for our flow remediation, that type of stuff, production support, and also integrating with our products with our vessel-based operations.

M. Kevin McEvoy

I mean, if you've got 300 ROVs in your fleet and we said roughly, and we said we'd hope to add another 100, right?

Unknown Executive

Over time.

M. Kevin McEvoy

Over time, I mean, you can do the math. I mean, that isn't going to get you 25% annual compounded rate of growth.

Unknown Executive

But if we add 30 or 35 next year and we retire some, you can see that it's not keeping up with our projected growth rate of operating income growth overall.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

So tooling -- by definition, products and tooling hardware become a higher growth dynamic than ROVs over time?

Unknown Executive

We think so from here.

Operator

Your next question comes from the line of Stephen Gengaro with Sterne Agee.

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

So when I think about the margin profile going forward, obviously, ROV has been an easier -- a little bit easier business to think about on a forward basis. The margins in Products and Projects, specifically, can you just give us some sense for the primary drivers of them, both in general terms and also seasonally, so we could -- just to help us better understand what the drivers are of those margins so we can begin to have a little bit better shot at giving the model more accurate going forward.

Unknown Attendee

Well, Stephen, my quick answer is just going to be very helpful. I think it's mix and geography. It really is. I mean, that's almost an impossible question to ask. But I mean, when you look at Products, it really has a lot to do with mix. And the more IWOCS and tooling that we can sell, the better our margin is going to be. And the more umbilicals we can sell, the more money we're going to make, but it should tend to bring down the percentage of our operating income, our margin. And on Projects, that's really the hardest one, because the difference between any IMR or if we got seasonality and we have location in between Angola and the Gulf of Mexico, it's just...

M. Kevin McEvoy

And the mix of work within that Gulf of Mexico vessel-based work it varies dramatically between whether you're doing an installation of something or just an IMR project. So it really is all over the board.

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

Okay. That's about what I thought you would tell me, but when you think of Products right now, how does the backlog look on the umbilical side versus other work relative to where you were a year ago?

M. Kevin McEvoy

Well, we've got much higher umbilical backlog than we ever had, and it's way more than any other Projects. I mean, the key thing here, I think, is that the other Product work is much shorter cycle time from order to delivery. Sometimes, it doesn't even show up. I mean, it's cleared out within a quarter. You get the award, you finish the job, it's in a quarter and it makes it hard to, really, to predict relative to maybe the heavier backlog businesses like the big 3 companies and whatnot. And so that's why, quarter-to-quarter, sometimes we get a better result than we were expecting from the tooling and IWOCS sales that we didn't see when we gave the last guidance.

Unknown Executive

And I do want to remind you that we gave pretty specific guidance in Kevin's opening remarks about our operating margins. And what we said was that Products would come in between 19% and 21% next year. So we've got 23% year-to-date. So we expect to come down a little bit in Q4, as we said, and then next year to be a lot like this year, but a little bit different mix.

Operator

Your next question comes from the line of Bryan Pope (sic) [Byron Pope] with Tudor, Pickering, Holt.

Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Just one quick question for me relating to the ROV segment. With regard to the 2014 guidance and thinking about the margin profile, I think you've got more of your ROVs in the Gulf of Mexico and Africa than any of the other regions. And I think of those 2 geographic regions as being accretive to the overall ROV fleet average margin. And so even if you weren't able to pass through and get increased revenues per day, is it fair to think that if those 2 geographic regions drive the growth next year, that you can get to that, let's say, close to 30% of margin range, even without increasing your average revenue per day on hire?

M. Kevin McEvoy

That is a hard thing to do. I mean, you could maybe imagine that for the Gulf of Mexico where operations are pretty concentrated. But when we say Africa, we're not just talking about Angola or Ghana. We're talking about north, east, west, south, the whole continent. And so we are spread out all over the place. And there is cost involved in trying to support those activities and whatnot, particularly in 1 or 2 ROV operations like we have in the east coast of Africa in Mozambique and Tanzania and such. And so Africa is just a whole new different deal when you got units spread out all over the place very remotely, and your opportunity to lower cost is just really limited.

Unknown Executive

I think what we're trying to do is trying to frame that we should be within 29% to 30% for next year, which isn't a bad place to be.

Operator

Your next question comes from the line of Jon Donnel with Howard Weil.

Jonathan Donnel - Howard Weil Incorporated, Research Division

I had a question for you on the Subsea Products, and with the discussion here about the ROV tooling and IWOCS potentially driving that growth here as we think about longer-term. I know from the umbilicals side, we always think about there being a lot of extra capacity there. Would this growth on the tooling side create any labor or supply chain issues for you going forward here, or is that something that's on your radar screen?

M. Kevin McEvoy

We believe we've got plenty of capacity in all of our product line businesses to match up to the growth that we hope is coming.

Unknown Executive

I mean, competition for labor, and engineers and technicians is intense, but it always -- it has been for -- so we don't see any new challenge there.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay, that's helpful. And then In terms of the Angola work for next year, is the third vessel already in place, or is that one that you could use the existing one that's under the options right now to do that work? Or is there the potential that you might need to bring in a different vessel and maybe some incremental capital cost come along with that?

M. Kevin McEvoy

It really is, we're working with BP on that, and they're working towards a solution. I mean, it's a mutual agreement, maybe more driven by their side on the vessel that they want to have for the third vessel all around, both cost and utility for what they want it to be doing. But -- so I don't -- I would not say -- I would not expect that we would move another one of our vessels from the Gulf of Mexico to Angola, if that was part of your question.

Unknown Executive

And I think one of the things that we need to keep in mind is that we're not going from 2 to 3 vessels. We've have the Maersk Attender there for quite a bit of time this year, so maybe we're going from 2.5 to 3, depending upon the timing of when the third one gets there. So it may be -- I mean, all these things kind of factored in to what we try to pick a range. But there's a lot of unknowns.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay. But it may need to be a separate vessel from the Maersk Attender to do the work in 2014 [indiscernible]?

M. Kevin McEvoy

It may. Most likely, will be a different vessel.

Operator

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

Brad Handler - Jefferies LLC, Research Division

I guess a couple of Projects-related questions for me, too, maybe starting with Angola, just picking up where you left off. You're obviously more -- you're speaking more confidently about having the work in 2014 with BP, or at least it sounds more confident. Has a renewal contract beyond February been signed?

M. Kevin McEvoy

An extension has not been signed. It was a 3-year contract, so we're about 1.5 years plus into that.

Unknown Executive

We'll be going into year 3.

Brad Handler - Jefferies LLC, Research Division

Oh, I misunderstood. I'm sorry. I thought it was actually coming up, so I didn't realize -- got you.

Unknown Executive

February 15. So we have -- I'm glad we're coming [ph] [indiscernible] so...

Brad Handler - Jefferies LLC, Research Division

Makes sense.

Unknown Executive

It's February 15.

M. Kevin McEvoy

Yes.

Brad Handler - Jefferies LLC, Research Division

Okay. So this discussion is purely around the use of the third vessel for '14 and settling in on what vessel and all that.

Unknown Executive

Correct, yes.

M. Kevin McEvoy

Correct.

Brad Handler - Jefferies LLC, Research Division

Presumably, that would be sort of -- that would link in or integrate with the current contract. So perhaps, you'd set a third vessel up through February 15 and then you have a full rollover potential, is that logical?

Unknown Executive

I think there's a lot of different options. But yes, that would be the intent.

Brad Handler - Jefferies LLC, Research Division

Okay. If I try to overthink the Gulf of Mexico commentary a little, too, you mentioned less drydock time in '14. Can you calibrate for us how much drydock time there was in '13 or there will be overall in '13?

M. Kevin McEvoy

Well, we could, but we're not going to get into all that detail. I mean, that's just really a year-to-year timing issue on when regulatory inspections are required, and we just happen to have less next year than we have had this year. How material that is, I wouldn't -- I mean, that's nothing I would tweak your model over, that's for sure. We compare that in the guidance.

Brad Handler - Jefferies LLC, Research Division

Okay. Let me just -- I understand. I think that makes sense. Just a question around that, though. Have you been limited in your ability to catch work in '13 because of the drydock time?

Unknown Executive

Well, obviously, when a boat is in drydock, if you have an opportunity, you have to forgo it.

Brad Handler - Jefferies LLC, Research Division

Sure. But I don't know how much idle time you've had that -- so that there hasn't necessarily been an opportunity cost.

Unknown Executive

Brad, I mean, let me comment at it in a different way. We think we have additional demand in the Gulf of Mexico, otherwise, we wouldn't be bringing in the Normand Flower.

Brad Handler - Jefferies LLC, Research Division

Of course.

Unknown Executive

So I mean...

M. Kevin McEvoy

That's not really a drydock issue as much as a market issue.

Unknown Executive

We think the market for deepwater, IMR and installation is improving, and we want to be here to -- with available boats to capture that work.

Operator

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

Michael W. Urban - Deutsche Bank AG, Research Division

The only question I had left was on the decision to build a new vessel, and I apologize if this was answered earlier. But you've had a mix of both leased and owned vessels, but had a preference for leasing in the past. The decision to go ahead with a presumably owned new build here, is that a function of a tighter market that you see coming or just the specialized capabilities this vessel has are limited, or might you do a sale and leaseback at some point? Just interested in your thinking there.

Unknown Executive

Well, I think, first, and I want to talk about our preference, it's basically been on economics. And what lease versus buy has always been a preference to what's being offered on the lease market versus the capital cost of buying. So most of the time, when we've done that analysis, it's come out with -- it's more economic to lease the vessel as opposed to buy it. And now, I'll let Kevin talk about the other aspects.

M. Kevin McEvoy

There are limited Jones Act-qualified vessels in the Gulf of Mexico at the size and capabilities that we are really interested in here, and so the lease versus buy didn't work under that scenario. There's just very few to choose from. And in fact, our view was that there were none to choose from that were really the type of vessel that we really wanted. So that drove us to the buy side on this time, this evaluation. And we do think that having a Jones Act versus a foreign flag vessel will be more valuable in the far offshore ultra-deepwater work that's being done. There are occasions when if you have a foreign vessel, you've got to have a U.S. flag carried out to you, whatever it is you're going to install, if it's a jumper or something like that. And so this alleviates that concern and reduces operational risks, and we think that this will be something that operators will want to take advantage of.

Unknown Executive

And let's remind everybody that, that boat doesn't come available until 2016.

M. Kevin McEvoy

Right.

Operator

Your next question comes from Darren Gacicia with Guggenheim Securities.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

I wanted to ask -- when I was thinking about ROV guidance, the 85% utilization for next year is definitely kind of higher than the recent run rate. I'm imagining that's because the mix is mainly geared towards drilling-centric versus vessel-centric work. But there's also some conversation about maybe gaining a little of the share in the vessel market and having that kind of be a bigger growth component at some point going forward. Can you help balance that out and help me think about kind of what's normalized utilization, and how I should think about that going forward?

M. Kevin McEvoy

Well, normalized utilization would be around 85% mark with stops and starts in Projects and whatnot. That's probably a reasonable top end for sustained operating. With regard to what really is driving that, I mean, the drilling rig part of that equation really is -- helps to drive the top end. But I guess on the vessel side, it is a function of how hot is the market, how much utilization are your vessels getting because we have very few that are on long-term contract. It is all call out. So that percentage really is an indication of market activity, primarily between the Gulf of Mexico and the North Sea.

Unknown Executive

And we're really projecting -- I 'm sorry. We're not projecting a major shift. I mean, we -- last quarter, we're at 73% drill support, 27%, and the second quarter was 74%-26%. I don't expect a significant shift. I would say at the end of the year, drill support will be in the 70%s and vessel-based work will be in the 20%s. But...

M. Kevin McEvoy

Until they stop delivering all these new floating drilling rigs, I think maybe within a few percentage points, it may change. But it's going to be plus or minus what it historically has been.

Unknown Executive

Right.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Well, it sounds like though if you're 2:1 on vessel-driven ROVs relative to rigs, and I imagine the vessel type -- the vessel ROVs come afterward, then the mix shifts back at some point in the game. I don't know whether that happens when -- from a numeric standpoint, it's a matter of math. Does it happen in '15 or '16? But I'm also imagining that, that may change the normalized utilization as well, no?

M. Kevin McEvoy

It could, and it is a longer-term deal. I mean, it follows. As we say, we can't really predict when those will get added. But certainly, we expect it'll happen sometime, but it's not within 1 or 2 years of the rig fleet growth, I don't think. Really, you're looking at when is the subsea field, the hardware all installed and operating, that's going to drive the number of vessels that are going to be required, and I think that's still happening in '15, '16, '17.

Unknown Executive

But when you do your math and you take 70-plus percent of drill support of 1, and you use 20% of 2 on vessel basis on market share, you don't see a significant shift occurring. But directionally, I agree with you that we always say that after these fields are discovered and put into production, there will be more vessel-based activity going on.

M. Kevin McEvoy

Right. I mean, from a historical perspective, I mean, our fleet utilization rate peaked in 2007 at 87%, and then dropped to 75% and now we're back, up to mid 84% level. The rebound -- the major things that's caused the rebound from 75% back to 84% has been the uptick in demand for ROVs on boats.

Unknown Executive

Which is the Gulf of Mexico and the North Sea.

Operator

Your next question will come from the line of Wyad Syed (sic) [Waqar Syed] with Goldman Sachs.

Waqar Syed - Goldman Sachs Group Inc., Research Division

I guess, it's me, Waqar. So couple of, on ROVs, I think we discussed that, but if you not provided, can you provide us with the split between drill support and construction support in the third quarter?

Unknown Executive

We said 73%-27%. Let me double check that. 73% drill support, 27% vessel-based.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay. And then just question on Brazil. It's been -- Petrobras has changed some of its plans, and I just wanted to see what you see over the next -- in '14 and '15 for your Products side in terms of sales and new awards?

M. Kevin McEvoy

I think every day is a new day with Petrobras in terms of what their plan is. I don't -- I'm not sure I can really answer that question definitively.

Unknown Executive

I think what we can say is that '14 is substantially secured by backlog in Brazil. And that, what new orders get awarded and how is the timing is a question for '15.

M. Kevin McEvoy

For '15, right.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay. You had expanded your capacity at the plant in Rio. So is that now running at full capacity, or there's still availability there?

M. Kevin McEvoy

Well, we really didn't expand our capacity. We expanded our capability in order to be able to handle the much larger, heavier umbilical cross-section that Petrobras is using for their pre-salt projects. And so it really wasn't a capacity issue so much as a capability issue. And we are, I think, pretty well sold out of capacity for this year into '14, and the real question mark is, what is Petrobras going to do that would fill a plan for '15 at this point. We don't have any visibility on that.

Waqar Syed - Goldman Sachs Group Inc., Research Division

And in terms of the capability enhancements, are you building pre-salt umbilicals there, or is that from more for the traditional right now?

M. Kevin McEvoy

We are building the pre-salt umbilicals for Petrobras in our Niteroi plant.

Operator

Your next question comes from the line of Jim Wicklund with Crédit Suisse.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

From an ROV perspective, I understand you carving out Brazil, and I don't blame you, but it is one of the biggest markets. Is Brazil, from an ROV perspective, ever really going to be a market for you guys, and why not?

M. Kevin McEvoy

Well, I mean, first of all, it is a market for us. We continue to operate there. We have -- how many, Jack? 40? We'll tell you how many vehicles. We have a number of vehicles there, and there are a few others that are more -- that are non-Petrobras as well.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Yes, but if you wouldn't be carving it out if it was your best business.

M. Kevin McEvoy

So no. I mean, there's 2 things, Jim. Number one, Petrobras, it's always been a lower margin business than almost anywhere else in the world. And number two, when Petrobras went to their procurement strategy 2.5 years ago to order ROVs in lots of 20 and 30 over time, and to get the lowest possible pricing that they could get, those awards were going for single-digit return and operating income margins, and we just weren't disposed to going after that business under those circumstances. So there were 2 orders that went under that scenario. The first one was awarded, Subsea 7 won that order, and it was 30 ROVs. The second one was awarded, I don't know, 6 months ago, give or take. That was for 20 to 24 ROVs or somewhere in that neighborhood. And ultimately, the company that won that was disqualified -- the contract never got sign. They were not capable of performing the contract. We suspect it's because they -- before they bid, they'd never owned an ROV before, never operated one. That could be the reason. We're not sure. But anyway, so Petrobras has not come out with another procurement at this point, and we don't know whether they're going to try and change their strategy as a result of this last go around or not. But in the meantime, we have been able to extend a couple of our systems down there that were due to be replaced by this new order that hasn't happened. So it's a total question mark as to where they go in the future here with that.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

And the Subsea 7 said that they've gotten killed in that market and aren't going to be as aggressive anymore. I mean, could we -- I don't want to put this in the numbers or anything, but should we get more optimistic about them changing that in the future with one player disqualified, the other saying they're aren't going to do it anymore? Just theoretically.

Unknown Executive

No, no.

M. Kevin McEvoy

No. I don't know that Subsea 7 -- I'm not sure that that's what Subsea 7 have said. I think that they have said really on the construction side of the business that they're not going to take contracts where they have a lot of risks at the time that they did by not knowing not knowing all the details of the contract. I think that is what has hurt them. They're not taking those contracts anymore. So I think that there will still be competition for the drill rig support part of the Petrobras business there.

Unknown Executive

[indiscernible]

James Knowlton Wicklund - Crédit Suisse AG, Research Division

And my follow-up, you had commented before on revenues out of backlog for Products in '13, 75% of the backlog. Do you have a projection for 2014, just for modeling purposes, on what revenue out of backlog for Products might be?

Unknown Executive

No.

M. Kevin McEvoy

Jim, let me just end that with, we have 35 ROVs in Brazil and we have 32% market share, 21 out of 66 Petrobras rigs. And of the 21 that we're on, 16 of those are their high-spec rigs. So if you look at that -- and then we've got 7 on non -- or 9 on non-Petrobras rigs, and then we've got 7 on vessels in FPSO. So I mean, if you have a third market share somewhere, you're not exactly out of that business. But I don't see the dynamics changing if somebody else goes -- if somebody says, "We're not going to do that anymore." They've still got a long-term commitment there to be there to operate those that they bid. And I don't think Petrobras is ever going to pay the kind of margins that we're looking for on brand-new equipment.

Operator

[Operator Instructions] Your next question comes from the line of Darren Gacicia with Guggenheim Securities.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

I think I already managed to get into the queue. But if I could with one follow-up, just in the ROV forecast, do you have any equation for any rig retirements over the few years, because I know that that's something that seems to be an emerging issue with maybe some of the older rigs getting cold stacked in the rest.

Unknown Executive

Yes. We think in consideration of that. Jack did a whole detailed analysis here. You can finally go ahead.

Jack Jurkoshek

Here is the status. We have a definition of high-spec and low-spec rigs. At the end of September, we had ROVs on 63 low-spec rigs, and 22 of those have contract end dates by the end of '14. And we scrubbed that list down, and based on conversations we've had with the operators and rig owners, we're expecting 4 of these to be idle and possibly retired by the end of next year. And we've taken that in account into our financial forecast for ROVs.

Operator

There are no further questions at this time.

Jack Jurkoshek

Very good. 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 best-ever quarterly results and anticipate producing record EPS for both 2013 and 2014.

This concludes the third quarter 2013 conference call. Thanks, everyone, and have a great day and holiday season.

Unknown Executive

Bye-bye.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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