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Cameron International Corporation (NYSE:CAM)

Q4 2009 Earnings Call

February 9, 2010 8:30 am ET

Executives

R. Scott Amann – Vice President Investor Relations

Jack B. Moore – President, Chief Executive Officer

Charles M. Sledge – Senior Vice President, Chief Financial Officer

Analysts

Brian Uhlmer - Pritchard Capital Partners, LLC

Jeff Tillery - Tudor, Pickering & Holt Co., LLC

William Herbert - Simmons & Company International

Geoff Kieburtz - Weeden & Co.

Daniel Boyd - Goldman Sachs

Brad Handler - Credit Suisse

Stephen Gengaro - Jefferies & Co.

Roger Read - Natixis Bleichroeder

Joseph Gibney - Capital One Southcoast, Inc.

Kurt Hallead - RBC Capital Markets

Andrea Sharkey - Gabelli & Company

Robin Shoemaker - Citigroup

Ole Slorer - Morgan Stanley

[Badula Merze – CBT U.S. Incorporated].

Alan Laws - BMO Capital Markets

Kevin Simpson - Miller Tabak & Co.

Operator

Greetings, ladies and gentlemen, and welcome to the Cameron fourth quarter earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Scott Amann, Vice President Investor Relations for Cameron. Thank you. You may begin.

R. Scott Amann

Thank you, Diego. Good morning and thanks to all of you for joining us today. This morning you’ll hear from Jack Moore, President and Chief Executive Officer of Cameron, and Chuck Sledge, Senior Vice President and Chief Financial Officer. Jack and Chuck will offer some commentary on the results for the quarter and we’ll then take time to field 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 associated news release.

With that, I’ll now turn things over to Jack Moore.

Jack B. Moore

Thank you, Scott. Let me first make a few comments on Cameron’s year and fourth quarter results and then share with you our outlook for 2010. Our results in 2009 were much better than we originally anticipated and this was primarily the result of great execution on our projects which resulted in very few surprises, the lack of any meaningful cancellations and focused cost controls by each of our operating divisions.

As for quarter four, earnings per share equal $0.54 before special items related to the restructuring and NATCO acquisition costs. Revenues grew in the quarter 20% sequentially, driven by subsea, process systems including NATCO and compression shipments. Backlog into the fourth quarter pretty much as we began at $5.2 billion. Bookings for Cameron finished Q4 at just under $1.4 billion, our largest bookings quarter for the year, up 17% versus Q4 of ’08 and sequential bookings growth came in our subsea, surface, engineered valves, measurement and distributed valves business units. The highlight of our bookings included the award of Chevron’s Jack St. Milo project in the Gulf of Mexico for subsea systems, valued at over $250 million. The first phase of this development will include 12 high pressure, high temperature subsea trees, controls, manifolds and connection systems.

The other highlight embedded in our Q4 booking numbers is the recovery we saw in our short cycle businesses. Surface systems, flow control, measurement and distributed valves all recorded their highest bookings quarter for the year. Fourth quarter orders in distributed valves, which is primarily dependent on North American activity, were up 50% sequentially. While not a big number overall, this is a good indicator that our customers have worked through a lot of inventory as rig activity rebounded.

Our engineered valve businesses had its highest booking quarter as well for 2009, up 20% versus Q4 of ’08. I’m also pleased to note that Cameron’s engineered valves was just awarded a $65 million contract to supply various sized valves for ExxonMobil’s Barzan project in the Middle East. We hope that this is a good indicator of a positive trend and the sanctioning of several stalled infrastructure projects as we go forward.

The single largest highlight for Cameron in Q4, however, and all of 2009 for that part, was the successful closing of the NATCO acquisition. Although it took a little longer to get across the line than we’d originally planned, all of NATCO businesses are now positioned within Cameron and the fit is impressive, particularly within our surface wellheads, valves, measurement compression and subsea groups. We also opened the industry’s only dedicated process systems R&D facility, which will support both industry and customer joint product and system development programs. Needless to say, we’re excited about the future of this new enterprise and yes, it will be accretive in 2010.

On that note, let me give you a few thoughts on the coming year. We’ll see a number of things influencing our businesses. I should qualify that our outlook by noting that while our customers are coming into 2010 much more confident about oil prices than this time last year, we do have the underlying threat of a worldwide oversupply of gas, coupled with the fragile economy. So 2010 in our view has the earmarks of a fragile recovery. First, deepwater. While many of the projects we track have continued to mature more slowly than many of us would like, we expect the 2010, 2011 timeframe to be better than the last couple of years with respect to project awards. We also expect to see a number of smaller awards, these are less than ten trees, across all of our markets. Our customers concerns with price, demand, project complexity and cost are still factors. The host government’s taxes and politics have not really changed. But our customers appear more confident that oil prices will stabilize in a range that makes these projects sustainable.

We also believe that those customers who had deferred projects over the last several years are concerned about the falling production in reserves and are anxious to move forward on projects. As we all know, deepwater projects will allow our customers to significantly impact the production volumes and Cameron has distinguished itself as a leader in this market for the past two years. We cannot predict the exact timing of the future awards, but with 30 new rigs coming into the market over the coming quarters, this will definitely facilitate the pace.

As for deepwater capital drilling markets, this will be led by the Brazil new bill tenders with awards possible in the second half of 2010.

Now with respect to onshore markets, North America has recovered faster than we had expected, but we are concerned with the sustainability of the recovery and we will not know that until we see gas storage levels at the end of the winter season. Virtue all of our business units with the exception of subsea have positive exposure to North America gas. I will also note that this is where the surface processing technology at NATCO create a great fit with the rest of Cameron.

As for the rest of the world, a lot of focus has shifted to Iraq with the recent awards in round two. Cameron’s install basis of equipment in Iraq dates back several decades with more than 60% of the surface wellheads and 80% of the block preventers there with Cameron brands. This is by no means a guarantee that we will participate in future awards, but we have a proven relationship with South Oil Company, the [outseas] and many of the integrated service providers that will support the rebuilding activities. On that note, Cameron booked $54 million in Iraq in 2009 and we will also continue to see opportunities for growth in our onshore markets in Europe, Russia and the former Soviet Union.

Energy infrastructure projects. Our outlook for infrastructure project business that affect primarily our valve and compression businesses is relatively balanced. There’s probably more positive direction in valves as witnessed by the recent Barzan award, but our compression markets will struggle to find upward traction. We will need to see sustained, global GDP growth to absorb the capacity put in place over the past several years.

And one final thing for 2010 for Cameron, and I will clarify this as investing in the future growth of Cameron. Our year end cash balance is $1.8 billion so our challenge is to put this money to work to yield the greatest, long term benefits to our stakeholders, which includes improving our costs, our cycles and our customer experiences. And that is the common focus of all 18,000 plus Cameron employees today. While we have spent over $1 billion in the last five years improving cost, capacity and cycle time in our factories, we are not finished. However, we will put greater emphasis on investing in our service aftermarket facilities, which touch all of our customers directly every day in their markets. In the Eastern U.S. to Brazil, Middle East to Australia, Caspian to the North Sea, returns from these investments have never disappointed us.

In addition, we will continue to work towards commercializing new technologies such as our EVO BOP systems, our exacted just the wellhead systems, our MARS technology, our DC Tree systems and our complex separation technology. Our customers recognize the value that these technologies have provided in lowering their costs and improving recovery rates. And as always, we continue to pursue acquisitions that will fit with our existing businesses and complement our diverse product and systems offerings, very similar to what we did with NATCO.

And one final comment before I turn it over to Chuck. 2009 is in our rear view mirror, but what it taught us is the benefit we derive from focusing on our markets and execution, and this will not be lost on our team in 2010. Chuck?

Charles M. Sledge

Thank you, Jack. As you saw, our operational results for the quarter were $0.54 per share. A few items worthy of mention within these results. As we have expected all year long, we have begun to see some margin weakness as we begin to ship lower margin backlog booked since 2008, particularly in our V&M segment. While DPS’s EBITDA margins were down sequentially, it was primarily due to a mix issue, as well as the dilutive effect of the late close of the NATCO acquisition.

The slight improvement in compression’s EBITDA margin was driven by leverage. We recognized the highest quarterly revenue of 2009 during the fourth quarter, which helped leverage the fixed cost component of compressions cost structure. We did incur $0.13 per share of severance and integration costs related to our ongoing restructuring activities and transaction costs related to the NATCO acquisition. While we will continue our efforts to insure our cost structure is in line with our view of the markets, we do not expect to incur the same level of severance costs in 2010 as we saw in ’09. We will, however, see integration costs throughout 2010 related to our NATCO acquisition and we will call these out separately in future quarters.

We generated a lot of cash in the fourth quarter, ending up with $373 million of free cash flow, that’s after CapEx, for 2009, which, I might add, was better than we expected going into the year. Our CapEx for this year wound up at $241 million. Our CapEx for 2010 should trend down to approximately $280 million, primarily driven by the completion of our Romanian surface facility and the Malaysian subsea expansion. As we have expressed in the past, we will continue to invest in our businesses to maintain our low cost position in the markets in which we compete.

Once we closed the NATCO transaction in November, we re-entered the market for share repurchase, buying approximately 590,000 shares during the quarter. As we have said before, share repurchases represent a viable use of cash and we intend to control our dilution over the long term. With respect to 2010’s outlook, our guidance is $2.10 to $2.20 per share, excluding any restructuring or integration costs. Overall, we expect our revenues to grow by approximately 15%, driven primarily by the NATCO acquisition, as well as deliveries related to the Usan and Block 31 subsea projects.

Approximately 70% of our backlog is expected to be converted to revenues in 2010. This is somewhat higher than our typical percentage, and reflects the slowdown in large project bookings we saw in ’09. Putting this all together, you can see that our book and bill requirements for 2010 will be higher than that of 2009.

As Jack mentioned, we are well into our integration activities related to NATCO. Although we are disappointed in the length of time it took to get the needed regulatory approvals, nothing has dampened our enthusiasm for the creation of the world’s largest separation company and the benefits that this endeavor brings to Cameron. In thinking about NATCO’s 2010 top line, it’s important to remember that almost half of NATCO’s business is driven by later cycle projects that behave a lot like our legacy separation business. And the majority of the remainder is driven by shorter cycle North American business. For 2010, we expect NATCO to add approximately $600 million of top line. We are still comfortable with our estimate of $30 to $40 million of cost synergies on an annualized basis and we expect to gradually realize those over the balance of 2010.

EBITDA margins for 2010 should look a lot like the fourth quarter of 2009, although it may be a little lumpy amongst the quarters. The biggest driver of 2010 margins is the substantial increase in subsea revenues for ‘010, and these range between 40 and 50% increase over ‘09’s level, as well as the pricing pressure we’ve seen in the remainder of our businesses during 2009.

Corporate G&A should run about $100 million for 2010. D&A should approximate $190 million and reflects the impact of our recent capital additions as well as the write up of the intangibles related to NATCO. Net interest expense for 2010 should be in line with 2009’s level and we continue to make positive progress in managing our effective tax rate. It really should approximate 25% for 2010 as a result of the various initiatives we have undertaken in the last 18 months.

With that, let’s open it up for questions, Scott.

R. Scott Amann

Okay, Diego, let’s go to the Q&A please, sir.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Brian Uhlmer - Pritchard Capital Partners, LLC.

Brian Uhlmer - Pritchard Capital Partners, LLC

I wanted to hone in a little bit on, I guess I’ll start off with NATCO and hone in on that. I’m just trying to figure out, number one, quick question is all of NATCO’s going to be in your DPS, is that correct? As far as backlog and margins?

Jack B. Moore

Not necessarily. The majority of it will be. Some of it will be in our B&M business. Let’s say 90% of it’s in DPS.

Brian Uhlmer - Pritchard Capital Partners, LLC

As I look forward based on integrating NATCO into here, are they going to help you? You know, they’ve had some lower margins in most of their segments. Is that going to hurt your margins moving forward as we look out through 2010 in DPS?

Jack B. Moore

We think, Brian, initially it will and we said all along that over time there’s no reason why the NATCO margins should not come in line with the rest of DPS margins. So early phase is the integration. Yes, there’ll probably be a drag. Over the fullness of time they should look exactly like DPS’s margins going forward.

Brian Uhlmer - Pritchard Capital Partners, LLC

On margins and DPS, I guess the press release read we’re expecting a trough in 2010. Are we expecting to come down further from this quarter’s level?

Charles McBride

What I said was they should look a lot like the fourth quarter’s margin level, so could it vary a little bit? Of course it could, but overall we expect it to be in line with fourth quarter’s margin levels.

Jack B. Moore

It depends on the timing of shipments around some of the bigger projects.

Operator

Your next question comes from Jeff Tillery - Tudor, Pickering & Holt Co., LLC.

Jeff Tillery - Tudor, Pickering & Holt Co., LLC

For the second straight quarter you guys have had a larger engineered valve projects includes in the Eastern Hemisphere. Can you just talk about how you see the order opportunity for valves over maybe the next two to three quarters?

Jack B. Moore

Well, I think this quarter will be pretty good, given we started with Barzan, so we feel good about Q1 in terms of bookings for [bouts]. You know, we had a lot of projects last year we sort of chased towards the end and some of them came in at the end of the year. Barzan we would have expected to have booked in the early part of 2009 and it was one of those projects that was delayed but never canceled, so it’s good to see it come through. And I think Jeff we’ll continue to chase some of these big projects, Gorgan, several projects in Papua New Guinea, several in China, that we are tracking for engineered valves. They’ll happen. It’s just are they going to happen the first half of the year, back half of the year? Still don’t know.

Jeff Tillery - Tudor, Pickering & Holt Co., LLC

And then just with regards to subsea, you booked a couple of larger projects in the last couple of quarters. Do you see anything other than the Brazilian work out there as potential large project orders in the first half of 2010? Or is everything really second half weighted and 2011 weighted?

Jack B. Moore

Well, I would say that probably [Total’s] Club Project in West Africa would be the biggest project out there on the radar screen that could book in the first half of the year. Petrobras obviously with the recent tenders that were submitted for their [Larengara] pre-salt projects, they’ll most likely be awarded in the first half of the year. But you know we see a lot of things on the radar screen that are probably going to be weighted to the second half of 2010 and probably realistically may spill over in 2011. That’s why we talk about 2010, 2011 in effect to broaden the bucket of these deepwater projects because they never happen, they keep moving on us and we don’t like it, but it’s the reality of it.

Operator

Your next question comes from William Herbert - Simmons & Company International.

William Herbert - Simmons & Company International

Jack, I’m struck by the contrast if you will with regard to your opening commentary in terms of 2010 themes, waxing relatively optimistic about deepwater and project sanctioning on the one hand, yet on the other hand reminding us of the continual delays and slippage to the right. So what specifically are you hearing from your clients right now with regard to project sanctioning?

Jack B. Moore

Yes, let me just kind of characterize, you know one of our largest customers is BP. I think BP has gotten much more confident in the last three to six months relative to seeing oil prices stabilize north of $70. I think everyone of them went through a shock, Bill, in the first quarter of 2009 and it just took a little while to get comfortable that prices weren’t going to revisit those numbers anytime soon. And so I’m optimistic in the fact that our customers A, have healthy balance sheets and B, have a lot of prospects and C, have a need to get reserves and production put back on their books. And so these projects can’t sit on the sidelines forever. And I think they’re waiting for some stability in the price and they’re starting to see that and they’re getting more confident. Like Phase II of Block 31, will it happen this year? It could, but it may in all probability not happen until 2011. The conversations we’re having with customers are more positive now than they were six months ago.

William Herbert - Simmons & Company International

Do you venture a prophecy with regard to a range of likely, industry wide subsea tree awards for 2010 and how that might compare with 2009?

Jack B. Moore

Well, I think they’ll be better than 2009, but if you look at [Quest] and just take their latest numbers on base cases, you know they’re north of 400, 450 in 2010. What are we coming off? 320 in 2009? Yes, that includes big numbers coming out of Brazil, so if you kind of take Brazil out of the equation in both years, still we should see more activity in West Africa for instance in 2010 than we saw in 2009. And I think that’ll be true for the Far East and possibly the Mediterranean and the Gulf of Mexico. So I think there’s definitely the opportunity to see bigger numbers in other parts of the world other than Brazil, but I think a lot of that will happen latter part of 2010 versus early.

William Herbert - Simmons & Company International

And cranking for subsea never was under significant assault, but it came down here a bit, call it 10 to 15%. Correct me if I’m wrong, but that seems to be what you guys have consistently expressed. And I’m just curious as to pricing on a leading edge basis, as your bidding for these new projects, does it continue to fray or has it pretty much stabilized?

Jack B. Moore

Well, I’d say that it’s probably too early to say because some of these projects haven’t been awarded yet. And as we know, a lot of them are awarded on the commercial issues. So you’ve got to remember that a lot of us have focused on our cost structure, so a lot of pressure to share that with our customers, as you well know, and we all have been handicapped a little bit with that process. But we are going to continue to push to get the adequate returns we require to make these investments that we have in deepwater and to take the risks we’re taking.

William Herbert - Simmons & Company International

Chuck, with regard to your revenue prophecy of up 15% on a consolidated basis, V&M should we assume a 15% uptick in revenues as well? Or what’s the specific revenue outlook for that business segment?

Charles M. Sledge

As you know, V&M’s coming into the year with a lot less backlog so I think you should probably look at V&M being relatively flattish, maybe up a little bit.

William Herbert - Simmons & Company International

So that would imply what, up 15 to 20% for DPS?

Charles M. Sledge

Something in that order of magnitude, yes.

Operator

Your next question comes from Geoff Kieburtz - Weeden & Co.

Geoff Kieburtz - Weeden & Co.

Chuck, when you were talking about the guidance, I thought you said subsea revenue up 40 to 50%?

Charles M. Sledge

That is correct.

Geoff Kieburtz - Weeden & Co.

Okay.

Charles M. Sledge

That’s a big number.

Geoff Kieburtz - Weeden & Co.

I just wanted to make sure I understood you correctly. So, yes, that’s going to constitute the bulk of that 15 to 20% revenue growth at DPS, correct?

Charles M. Sledge

That and NATCO. Again if you think about our accounting method, we’re shipping a lot of the Usan and Block 31 this year. We don’t get to pull forward all that revenue, maybe like others, but this is what you get with our accounting methodology we use.

Geoff Kieburtz - Weeden & Co.

I’d just like to relate that to the earlier discussion about orders. At this point, do you think your subsea backlog ends 2010 higher or lower than 2009?

Jack B. Moore

It depends on the timing of bookings. It could end higher.

Geoff Kieburtz - Weeden & Co.

So it’s a coin toss right now.

Jack B. Moore

If projects come in as we would see them today, it could be higher. But we can’t, as I also qualified, Geoff, we can’t predict when the awards will always happen.

Geoff Kieburtz - Weeden & Co.

But your sense of the market and your customer’s willingness to go ahead with projects means that it is possible you could book enough orders to end the year at a higher backlog.

Jack B. Moore

I think I’d probably say there’s a good likelihood we could end the year with a very healthy backlog in subsea.

Geoff Kieburtz - Weeden & Co.

And maybe we could expand from that and within your guidance, the $2.10 to $2.20 for the full year, what would you say the one or two biggest risks are that would drive that either below $2.10 or above $2.20?

Jack B. Moore

Project execution below, above North American activity, you know, staying where it’s at for an extended period of time throughout the year. I think it’s sitting a little higher than we all thought and our activity in our short cycle businesses reflect that somewhat. But we really won’t know the answer to that until I think we get out of this winter heating season and see where our gas numbers are.

Operator

Your next question comes from Daniel Boyd - Goldman Sachs.

Daniel Boyd - Goldman Sachs

I just had a question about the short cycle business, Jack, and I think you hit on this a little bit in terms of restocking from inventory levels. But how should we expect your results at least in North America to track relative to the rate count? Can you see stronger growth due to restocking at least early on?

Jack B. Moore

Yes. I mean I will tell you we track daily orders into our distributed valve business. It’s almost real time. And the numbers have held up pretty good through the first week of February. And a lot of that, Dan, is really restocking, you know, shelves that have been depleted over the course of the last three or four months. So is that pace of activity we’re at today going to sustain itself? Probably not, but this backlog that we’re creating will get shipped in relatively short order and I mean six to eight weeks, and then it will level off. Just where it levels off at is really the $64,000 question.

Daniel Boyd - Goldman Sachs

If I look back to 2009, how much of the backlog at year end ’08 flowed through to the revenue line?

Charles M. Sledge

Probably 60%.

Jack B. Moore

Yes, 60, 65%.

Daniel Boyd - Goldman Sachs

I was just doing some quick math here and if it is 60%, that implies, or 62%, it implies fairly flat sort of short cycle revenue growth year-over-year or no revenue growth, if I just take the implied 72% of backlog flows through currently, you have the NATCO revenues, your then short cycle is flat year-over-year. Is that correct and the way you’re thinking about it?

Charles M. Sledge

No, no, we’ve got short cycle up a little bit. Actually 59% of the backlog shipped in ’09.

Jack B. Moore

What will offset some of that is what we call our compression business is going to be off in 2010 versus ’09, so that will take some of that positive gain we get from the short cycle and pull it down somewhat. And there’s some project related movement in what we call our engineered valves or in our project surface businesses that move around that may not repeat in ‘010 that were in ’09.

Daniel Boyd - Goldman Sachs

Just on the order expectation for the first quarter and what you’re seeing so far in DPS, can you give us any indication of how that’s tracking so far and specifically maybe with BOPs, I know there were a couple that may or may not have been awarded in the fourth quarter. I’m not sure where those actually fell.

Jack B. Moore

Too early to tell, even though it’s just February. I will say our short cycle businesses are holding up pretty well.

Operator

Your next question comes from Brad Handler - Credit Suisse.

Brad Handler - Credit Suisse

Could you comment on margins troughing in 2010 in your release and I guess could you just amplify on that a little bit? A lot of discussion with some other companies about kind of when within 2010 you might trough, but I guess I’d be interested to get your feel for that. Is it mid year? Is it end of year?

Jack B. Moore

You know, Brad, it’s really hard for us to quantify that given how we account for our projects and that it really depends on what we ship in whatever quarter, so probably weighted towards the back half of the year, but again our crystal ball between quarters gets a little fuzzy because we’ve got to eat what we kill every quarter.

Brad Handler - Credit Suisse

But presumably that also implies a lot of subsea gets delivered late in the year so you have mix as well as potential pricing influence?

Jack B. Moore

Yes. There’s two big drivers of the ‘010 margin. The biggest one is mix and really with subsea and with NATCO. Because again I mentioned it’s going to take us a little time to get those margins up to DPS levels. So those are really the two major drivers of the overall Cameron margin story for next year.

Brad Handler - Credit Suisse

I think we’ve gotten the impression that again that subsea revenue’s up 40 to 50% is a bigger number than I think I had heard previously. I’m just curious if something has been facilitated or enabled to be an accelerator or if customers were driving that, some acceleration there?

Charles M. Sledge

Most of these deliveries are driven by customers. You know we have contractual dates and firm agreements relative to these delivery schedules. And you’ve got to remember where it’s going. Into West Africa you really have to allow three or four months just transit in clearing customs and getting equipment to a place. And we do a lot of SIT and a lot of things on the ground in country. So before these things are actually installed, you could be in the process of logistics and handling and setting these systems up in an SIT area nine months in advance of installation.

Jack B. Moore

Brad and also I’ll add you’re probably version one of the budget versus the final budget, which is probably number 15. So we continue to refine what we’re thinking about.

Operator

Your next question comes from Stephen Gengaro - Jefferies & Co.

Stephen Gengaro - Jefferies & Co.

I guess two quick follow ups, the first is could you share with us your rig count expectations in North America this year?

Jack B. Moore

Probably somewhere around 1,100 on average for the year. We’re a little north of that right now, Stephen. You know when we looked at rig activity ’09 versus 2010, we probably said we’d be up about 5% on average. And so we’re a little better than that right now and so the question is if this activity stays where it is, you know, we’ll see better results in our short cycle businesses related to North America.

Stephen Gengaro - Jefferies & Co.

On the other side, when you look at the DPS margin and I know I’m back to this, but when you account for the NATCO margins hopefully improving throughout the year and then you build in the mix from subsea, and then to the extent you guys have more details than we do obviously on the timing of some of these deliveries, how should it mesh out quarterly? Is there something that should dip a little bit from where we were in the fourth quarter? Can you give us a little more granularity on how margins should progress based on the delivery schedule and what you see out of NATCO?

Jack B. Moore

Yes, we’ve got 11 different businesses and they all move around during the quarter, so it’s something we’ve typically shied away from because it’s not something that’s an exact science within Cameron. But I think you’ll see probably a little softer margins in the first half, but again overall I think for the year you’re looking a lot like we were for the fourth quarter. Just hard for us to pin it down quarter by quarter.

Operator

Your next question comes from Roger Read - Natixis Bleichroeder.

Roger Read - Natixis Bleichroeder

I guess kind of back on the subsea order trend, you’ve mentioned a lot of smaller projects. I believe it was kind of less than 12 trees or less than 10 trees. Where are those projects on a geographic basis?

Jack B. Moore

Well, the Gulf of Mexico, the North Sea, Mediterranean, Asia Pacific, Australia. There’s even a few off the west coast of Africa although West Africa tends to be bigger projects but some of the projects we’ve been involved with we’ll see some add on orders and some things that we’ve been involved in in the past. But you know primarily we see pockets of demand for these smaller orders across all of our markets.

Roger Read - Natixis Bleichroeder

And so if we were looking at that Quest offshore forecast, the difference between that 320 and say 400 to 450 range, that’s mostly these smaller orders coming in you would say?

Jack B. Moore

I would say really that a big chunk of that’s Brazil. If you look at their numbers, I think they’re up quite a bit in Brazil. And that’s really Lot 2 and Lot 3 and those two of the original frame agreement orders that they launched last year, where we won Lot 1, the balance of Lot 1 you know is probably baked into their thinking. So that’s a big driver, but I also think there’s a few projects in West Africa that we’re going to see awarded in 2010 that will drive that number up relative to 2009.

Roger Read - Natixis Bleichroeder

Are there any issues with you being able to bid on Lot 2 and Lot 3 in Brazil?

Jack B. Moore

No, those have already been predetermined, FMC won Lot 2 and I believe [Ocker] won Lot 3. I don’t know that that’s been confirmed yet, but that’s the way the bidding results came out. But FMC announced Lot 2 I believe last week.

Roger Read - Natixis Bleichroeder

So as we look at your order potential for 2010 subsea trees, it’s very much dependent on anything but Brazil.

Jack B. Moore

Well, I think Brazil still has a lot of potential for all of us. There’s going to be a lot of activity in Brazil, both in the pre-salt and on the additional work going on in the traditional basin. So I’d say every one of us have a pretty healthy outlook for what’s going to happen in Brazil over the course of 2010 and beyond. You know we had a very good track record of success the last two years with subsea awards and we feel we’ve established ourselves pretty well and we’re going to continue to work to keep that effort going over the course of the next several years as well.

Operator

Your next question comes from Joseph Gibney - Capital One Southcoast, Inc.

Joseph Gibney - Capital One Southcoast, Inc.

Jack, I just wanted to follow up more on the drilling side in particular. Were there any deepwater stacks in that DPS inbound figure? And Chuck, I appreciate the color on NATCO. I’m just curious what the contribution to backlog build that NATCO contributed in 4Q.

Jack B. Moore

Let me address the question on the rigs. We did book four floaters and a couple of stacks or really back up stacks for existing deepwater rigs that were already existing in the fleet, but no new drill ships per se that were booked in the fourth quarter for Cameron. But we did have some new equipment that was booked relative to deepwater.

Charles M. Sledge

Hi, Joe, and on the backlog side I think it was $150 millionish that it added.

Joseph Gibney - Capital One Southcoast, Inc.

And just circling back around on the shorter cycle side, I appreciate the margin commentary for where we’re headed out of 4Q and kind of flat lining a little bit with some lumpiness. Where are we in terms of pricing on the shorter cycle surface and kind of in North America? Are you still seeing mom and pop pressure on pricing or has that abated at this point and has it sort of troughed out for now with minimal movement upward?

Jack B. Moore

You know, I would say that in North America it’s probably a little bit safe to say that pricing overall has troughed. And part of that is that we are just not seeing anymore price compression on the supply chain side. You know we kind of all rode that down a little bit in 2009 and that kind of went away in the back half of the year, primarily fourth quarter. So we haven’t seen as much price compression in the last, let’s say, four or five months as we were seeing in the first half of ’09. The balance of ‘010 is really going to depend on what happens to rig activity in the second half or in the next nine months.

Joseph Gibney - Capital One Southcoast, Inc.

Chuck, just a couple of modeling related questions. On that $180 million CapEx you referenced, you know, the remaining incremental spend that’s there in Romania and Malaysia, how much of that $180 is allocated to that and sort of is it safe to say the rest is your [utilances] on machine tooled efficiency initiatives?

Charles M. Sledge

Yes, Joe, virtually none of the $180 relates to Romania and Malaysia. We’re pretty much done with that. We have $5 million overhang there. The rest of it is as Jack mentioned following our customers in putting aftermarket investment in aftermarket businesses. And the typical machine tool efficiencies and white collar productivity tools.

Joseph Gibney - Capital One Southcoast, Inc.

And share count expectation for the full year run rate within your guidance?

Charles M. Sledge

246.

Joseph Gibney - Capital One Southcoast, Inc.

And Jack just one last one, higher level, kind of your stance on drilling and your presence and adequately positioned from a local content perspective in Brazil as you look to the potential for some back half, deepwater stack awards? Just curious on your thoughts there.

Jack B. Moore

Yes. You know, we’ve got 1,000 employees in Brazil. We have a huge manufacturing operation, a huge aftermarket commitment. Half the stacks operating in Brazil today are Cameron. We’ve got a huge dedicated team of people supporting that on the ground. So to meet the requirements for local content that Brazil’s going to drive all the drilling contractors or all the drilling equipment suppliers to over the next several years through these bit phases is not something that we see any problem with.

Operator

Your next question comes from Kurt Hallead - RBC Capital Markets.

Kurt Hallead - RBC Capital Markets

So on the pricing front I think your reference to stabilization on North America, but can you give us some order of magnitude of what the pricing pressures continue to be on subsea equipment? Are they still being forced lower with the bulk of that pricing pressure occurring in 2009? So what do we expect here on subsea equipment and pricing in 2010?

Jack B. Moore

I would say that yes, you know, our margins that we took on new orders in 2009 are going to be reflected and some of the commentary Chuck’s given you in terms of our margin performance in 2010 in terms of troughing. As far as projects being quoted and being bid today, as I’ve said you know we’ve got an expectation in terms of where we expect our returns to be on these deepwater projects, given investment and given the risk profile. And we’re going to continue to stick with that strategy. You know it means we’re going to win some and lose some, but I think at the end of the day as Chuck says we’ve got to live with what we kill. And these things do come back to roost if you get a little too crazy on the pricing side. So we’re that’s our approach to the market.

Kurt Hallead - RBC Capital Markets

If you look at the last three years, you’ve had very impressive share gains in terms of the subsea awards and I just wondered if you’d give us some understanding on was the bulk of that share gain a result of customer relationships, providing equipment on existing fields? Was it some element of a new push you’ve had on the sales front or on technology? You know, an impression of Cameron’s type of work and do you think that those share gains, you know, how sustainable could they be as we move forward?

Jack B. Moore

Can I have the last option, which is all of the above? Check that box. I think it’s a little bit of all of what you just said. You know as I’ve said before over the last few years, Cameron’s come a long way in establishing ourselves as a legitimate subsea systems provider from a subsea product provider. And our customers have got a lot more confident. When you get a project like Jack St. Malo in the Gulf of Mexico for Chevron who’s very focused on execution, very focused on the quality of the product and the technology that they’re going to put in one of the most difficult fields in the world, and you get an award of that nature, it’s very complimenting to our team of people who have really focused on the technology development and the execution that we’ve had with these guys. So I mean yes, it’s a lot of effort in a lot of areas that has paid off. So we’re happy with where we’re at and we’re going to have to continue to work and build on it.

Kurt Hallead - RBC Capital Markets

Do you think the shares kind of revert back to the mean that we’ve seen prior to these three years? Or do you think you’ve got enough momentum and running room now to kind of keep pace?

Jack B. Moore

Well, I think what you’ll see is shares over time are going to move around, but I don’t think any one person is going to own this market, given the breadth and the scope and where the business is located. But Cameron is a significant part of this deepwater story and is going to continue to be a significant part of this deepwater story. I don’t know that we could have said that four or five years ago, but we are definitely, I think, in that position today.

Kurt Hallead - RBC Capital Markets

What’s the update then on the electric trees?

Jack B. Moore

Well, we’re 18 months into our run cycle now with [Total] in the southern North Sea and it is going extremely well. And Total’s looking at some additional applications for the technology as we speak. So give it time. New technology doesn’t take off as good as stacks as we’d like it to sometimes with our customers. They are very strong believers in show me how it works and we’ll consider it.

Operator

Your next question comes from Andrea Sharkey - Gabelli & Company.

Andrea Sharkey - Gabelli & Company

Just a question on your North American natural gas business. I’m curious how much of that is being driven by shale gas, you know how you’re benefiting from that? And are there opportunities for you to further penetrate those markets?

Jack B. Moore

Well, a lot of it is the shale gas. When you look at where a lot of our recent bookings have been in the last six to nine months, both Haynesville, eastern U.S., up in the Balkan, which is kind of oil driven and in other I think traditional shale basins in the mid-continent have all benefited from our customers being more focused with their budgets in those areas. Again Cameron’s got a very strong presence so geographically across North America and with a lot of the customers that are spending more of their dollars in these arenas. And so we feel very comfortable where we’re at. It’s a competitive market. We have made a lot of investment in some regional areas in the last six months to put ourselves solidly where we need to be with supporting our customers business on the short notice.

We’re also I think doing a better job internally at Cameron in terms of leveraging our enterprise. And with the addition of NATCO embedded in that mix, it’s really going to be a positive story for us as we go on.

Andrea Sharkey - Gabelli & Company

On NATCO, if I recall correctly part of the benefit is maybe moving into putting separation, either subsea separation, when you think about that how do you look at the timing of how you might be able to push forward into that market?

Jack B. Moore

Well, when we made the acquisition I think our comments originally was that NATCO would advance Cameron’s efforts by probably a couple of years in terms of the pace. We’re far along down that road. I think more than anything it’s going to be, you know, a lot of our customers embracing the opportunities to apply this technology. And we’re working with Petrobras, we’re working with Total, we’re working with BP. There’s a ton of benefit that they will get with providing subsea separation as we all I think have discussed in terms of getting more production out of these existing fields. It’s just proving that the technology is reliable and it’s cost effective. That’s really the challenge we’re all going to have as an industry, but we’ll get there.

Operator

Your next question comes from Robin Shoemaker – Citigroup.

Robin Shoemaker - Citigroup

I wanted to ask you about Iraq. You highlighted that and the level of sales there looks like it could grow substantially and have all the sales so far been to the Southern Iraq Oil Company? And are you now talking to the international oil companies who will be soon taking over some and reviving some major oil fields there?

Jack B. Moore

Yes to both. Southern Oil Company has been a customer as they ramped up their internal requirements, but we’ve also worked with not only the international companies that are in there, the BPs and the CNOCs, but also some of the integrated service providers, the Weatherfords, the [Slumberchase], the Haliburtons, folks that are actively pursuing the turnkey contracts where some of our equipment will be sold through them as well. So you’ve really got to take a broad approach in terms of how we’re going to look at Iraq going forward. The pace is going to be pretty fast. They’re all under, I think, pretty short fuse in terms of ramping up production within the next two years in order to start recouping their investments. So I think you’ll see a lot of activity in Iraq over the course of this year and next.

But you know there’s issues there that we all have to be very conscious of and the big one is security of your people. So we’ll all be focused on that.

Robin Shoemaker – Citigroup

And I would assume the timing of your Romanian plant expansion is pretty nice in terms of this opportunity.

Jack B. Moore

Well, we do like the fact that we’ve got a very cost effective facility that can support some of these new demands.

Robin Shoemaker – Citigroup

On the deepwater rigs that Petrobras intends to order, the 28 rigs that we keep hearing about, are you being asked to bid BOP stacks on those rigs now? Or are we looking at something later on in the year?

Jack B. Moore

Well, there’s nine inquiries that are out today. And yes, we are providing quotes on those nine inquiries. As again we’ve mentioned before, we have worked very closely with Maritime Hydraulics, which is part of Ocker, over the last several years through the build cycles. And I think we’ve established a very good working relationship and have offered a very comprehensive package to these prospective builders. And we’re going to see how it comes out in probably the second half of the year.

Robin Shoemaker – Citigroup

So just to clarify, those are the nine rigs that Petrobras intends to own and operate itself?

Jack B. Moore

Yes. And you know there’s a little mixed bag in that. Some of them yes, and some of them they’re going to obviously encourage some of the contractors to take and own and operate as well.

Operator

Your next question comes from Ole Slorer - Morgan Stanley.

Ole Slorer - Morgan Stanley

I just want to clarify a couple of things. You mentioned that your estimates of your guidance is based 1,100 North American rigs. Can you just explain 1,100 North American rigs? Are you talking about U.S. land rigs?

Jack B. Moore

Yes.

Ole Slorer - Morgan Stanley

So U.S. land rates are at 1280 at the moment so probably build a strong momentum for another few weeks. You then sort of expect some kind of a significant roll off into the summer months? Would that be the right way of describing it?

Jack B. Moore

Well, our outlook was really based on our expectation that natural gas prices would not be probably where they’re at today at this time. And so you have to look back to when we put together some of our outlooks 60 days ago, 90 days ago. It was a little more muted in terms of where we thought activity would be. And we continue to see rig counts improve week after week and I think it’s surprising a little bit of every one of us. So you know are we going to hit a wall in March when winter goes away or are we going to see our storage rates depleted such that the rig activity is going to continue to click along? If that happens, we’re going to look a lot better than we thought we would.

Ole Slorer - Morgan Stanley

So if we end at 1.5 kcf or something like that, which I think is what most people are expecting given the latest turn in the weather, then these numbers will have to be revisited.

Jack B. Moore

You’ll hear us talk about it on the next call for sure.

Ole Slorer - Morgan Stanley

You gave a guidance in the first quarter that was down quite significantly. Could you tell us what’s first quarter rig count guidance are you using?

Jack B. Moore

Well our current guidance does reflect some of I think the optimism we’re seeing in the short cycle business in North America. But keep in mind that that doesn’t turn into revenue overnight. Probably more in distributed valves it does, but we still have to see the well completions come together to affect our surface business, our valve businesses. And those are probably a little later cycle.

Ole Slorer - Morgan Stanley

When it comes to the deepwater market on the BOP [riser] stacks, if you look away from Brazil how active are you currently in quoting on projects compared to let’s say six, nine months ago?

Jack B. Moore

On deepwater riser stacks other than for Brazil?

Ole Slorer - Morgan Stanley

Non-Brazil, yes.

Jack B. Moore

You know Ole, probably there’s just a half a dozen or so that are out there that we’re circling. Some Arctic rigs and a few specific build rigs for some NOCs.

Ole Slorer - Morgan Stanley

So you’re not seeing any signs that any established or new drilling contracts are contemplating any meaningful expansion?

Jack B. Moore

Not yet.

Operator

Your next question comes from [Badula Merze – CBT U.S. Incorporated].

[Badula Merze – CBT U.S. Incorporated].

Can you give us a sense as to based on your ’10 outlook kind of where you think you’ll end up in terms of cash balances and in terms of leverage and in that context what you feel like that that will provide you in terms of ability to do incremental acquisitions over the course of 2010?

Charles M. Sledge

A couple of observations to your questions. First of all, I think our ending cash balance at the end of ‘010 will be driven by the level of project awards because as you know we get cash advances on those projects. I think it’s safe to say that our cash balance will improve over the year, so we will generate positive free cash flow. Cameron’s balance sheet is in great shape. I think we could manage any acquisition that we put our mind to here in 2010. There is still a difference between buyers and sellers as far as valuation. We continue to look for creative ways to solve that problem. We did that with NATCO by issuing stock. We had a couple of smaller acquisitions. One here closed in the quarter where we’ve done a JV to try to bridge that difference. So we’re pretty flexible in how we solve that problem because without some solving of that differential, we’re not going to get anything done. So we have to continue to be creative.

[Badula Merze – CBT U.S. Incorporated].

At this point can you give us a sense as to which areas of business you would most like to perhaps enhance or if there is a line of business where you currently are not active in that you would like to establish presence in? And also can you give us a sense as to whether you think at this point people’s desires are more for cash or for some stock or that kind of thing?

Charles M. Sledge

Well Jack and I were joking the other day that we treat all of our children equally, so we’re very positive on all of our businesses and if opportunities came along that fit with those businesses, we would not be hesitant to act upon them. If you’re probably looking at large, public company deals, probably stock is what they’re going to want as opposed to cash. Family oriented business typically like the good old dollar. So it just runs the gamut. It’s hard to put a framework around exactly what we may see happen in 2010.

Operator

Your next question comes from Geoff Kieburtz - Weeden & Co.

Geoff Kieburtz - Weeden & Co.

Jack, in your prepared comments you were talking about the investment deal mix for 2010 and it seemed like you were wanting to make a point about increased investment in the service and aftermarket business.

Jack B. Moore

I did.

Geoff Kieburtz - Weeden & Co.

Can you kind of elaborate a little bit on that? I mean is this a new initiative? If so, kind of what ramifications might that have on the income statement?

Jack B. Moore

I wouldn’t call it a new initiative. I would say that Cameron has a pretty broad aftermarket infrastructure brush across all the markets we serve across the world. I think our emphasis in the last several years has really been growing our capacity and improving our manufacturing processes and cost infrastructure in our factories. What we’re saying is we’re probably not going to be building anymore capacity in our factories over the next few years. We’re going to be focused on improving our turnaround and our aftermarket facilities, our ability to serve customers in their markets more broadly. And when you look at where our markets are evolving, Mediterranean, West Africa, still expanding our Brazil aftermarket facilities, we’re in the process of doing that now; expanding our footprint in some of the shale play areas in North America; we’ve done some of that and are going to continue to do that; and upgrading and improving our aftermarket infrastructure in areas like the North Sea and the Gulf of Mexico, those always prove to be great returns on investment for us.

And because it does one thing, it braces that customer. And when I talk about the things we’re focused on as Cameron, it’s really focusing on our cost, focusing on our cycle times and focusing on our customers. I kind of call it the 3 C’s and that third C with the customer is something that really helps us differentiate ourselves when we focus on the service side.

Geoff Kieburtz - Weeden & Co.

Do you expect that that increased investment is going to result in there being a meaningful shift in the mix of business? Is the aftermarket going to be a bigger part of your revenue base over the next couple of years?

Jack B. Moore

I’d hope so, because it’s more profitable to us. But when you look at the rig markets as we deliver more and more of these rigs in the coming years, it turns into an aftermarket story. You know as the emphasis shifts to service and support of those rigs, where they are, and those rig fleets are going to be growing in parts of the world and we need to be in those markets. Otherwise we run the risk of losing the ability to service that business. And we love to service our own equipment. As an OEM provider, a lot of our customers value and appreciate that. So that’s really where we’ll spend a lot of our time and energy here in this year and probably next in terms of kind of refocusing around that aftermarket support infrastructure.

Geoff Kieburtz - Weeden & Co.

Chuck, goodwill on the balance sheet increased about $720 million from the end of the third quarter to the end of the fourth quarter. Is that all related to NATCO?

Charles M. Sledge

Yes.

Operator

Your next question comes from Stephen Gengaro - Jefferies & Co.

Stephen Gengaro - Jefferies & Co.

When you were discussing the pricing environment a bit on the subsea side, can you just talk a little bit about what you’re seeing from our competitors? Namely is anybody acting more aggressively on price and kind of what’s the current run down on what’s going on with the old GE business?

Jack B. Moore

I wouldn’t call anyone out on that, Stephen. No, I would just tell you that I think you’re going to see in this market, depending on how protracted some of these big projects get drug out, you may see people do some things that you’ll scratch your head and wonder about. But I think overall everyone in this deepwater space are facing the same challenges. You make big investments that you need to drive a return against and you take a lot of risks that you need to be compensated for. But on any given one project you could see somebody do something irrationally on price, if they convince themselves it’s a strategic project. But I think overall hopefully everyone uses the same kind of philosophy about the return needs as Cameron does.

Charles M. Sledge

And Stephen I’ll add that the subsea business has always been finely priced if you will. So we haven’t seen anything, you’re always going to get an [outlier], someone prices a project we don’t understand how they got there. That’s the same way they’re talking about 2010, 2009, 2007. That’s just the nature of this business. It’s lumpy and people convince themselves, they rationalize as Jack said a way to bring their price down.

Operator

Your next question comes from Alan Laws - BMO Capital Markets.

Alan Laws - BMO Capital Markets

I’ve just got a few short follow up ones here, follow up first on Brazil. Is there any advantage to having one tranch one of the standard tree or in getting say the nod for the pre-salt 10K trees? Or is this just another wide open competition situation?

Jack B. Moore

I think it’s probably, from Petrobras’s view they want it to be pretty wide open. You know Tranch One as we discussed in the last call, you know we’re happy with winning that. We obviously targeted that as a project we would like to win. And we did. And the low bid wins with Petrobras but you’ve got a lot of volume of the same thing and we feel very, very good about our cost structure there and the ability to drive the returns that we talk about that are important to us in these markets.

We’ll continue with that same philosophy on all the projects going forward in Brazil and we’re going to win some and we’re not going to win some. But we’ll see how it comes, but I think Petrobras for the most part will want everyone to participate and be competitive. And I think deliveries and capacity will have to work their way out going forward. I think you’ll see capacities come up a bit in Brazil as a result of the volume of business it’s going to involve. So I think we’ll all be in a position to participate.

Alan Laws - BMO Capital Markets

So the capacity side of things, you’re well positioned that way as far as local content and everything?

Jack B. Moore

Oh, absolutely.

Alan Laws - BMO Capital Markets

Does anyone have any better advantage there then?

Jack B. Moore

If you do it’s not for long. I mean, you know, I would like to say could we create something there that no one could replicate and the answer to that is not really. But I think Cameron has been very willing to make investment and we have spent over the last five years over $1 billion and really focused on our factories and improving our processes and upgrading our machine technology to take our costs down. So that’s the commitment we’re going to continue to move forward with.

Alan Laws - BMO Capital Markets

Again on the subsea side here, you mentioned your systems evolution. You are a solid alternative into boosting and separation, although not often recognized as such. I just want to know, I think NATCO can actually help that. Can you update us on your thoughts on the emerging subsea processing business? Maybe when you think you might see an award or what you’re targeting?

Jack B. Moore

Well, as I said earlier in the call, we’ve got several projects going on with the Petrobras’s and the BPs and the Totals around this whole area of subsea processing. Some boosting, some separation. You know the market is evolving. It’s not huge. It’s not going to move the needle in terms of results and returns anytime soon, but it will evolve and we love our position with the acquisition of NATCO. They’ve got content separation technology and we’ve got marinization technology, that it’s a great marriage and a great story. We’ve got our Mars technology that we’ve had some recent success with in the whole area of subsea processing and intervention. So it’s a good story as it’s going to evolve, it just isn’t going to be a huge market tomorrow, but you’ll look up five years from now and I think you’ll be happy with where Cameron is and I think the market is going to be a lot more receptive to the technology.

Alan Laws - BMO Capital Markets

Any thoughts given your cash balance and liquidity on adding a regular dividend?

Charles M. Sledge

Gets a lot of discussion, but it’s something we haven’t done.

Alan Laws - BMO Capital Markets

So you’re going to opt for the share repo instead?

Jack B. Moore

Yes. We’ve always said we continue to look at all the uses of the cash and it’s just something we haven’t done yet.

Operator

Your next question comes from Kevin Simpson - Miller Tabak & Co.

Kevin Simpson - Miller Tabak & Co.

Just a quick modeling question on subsea. Will that 40 to 50% year to year comp, will we see that throughout the year or are you going to be more back end loaded with stronger growth near the latter part of the year?

Jack B. Moore

You’ll probably see the real height of the growth in the second, third and fourth quarters. You won’t see a lot of it in the first quarter.

Operator

Ladies and gentlemen, there are no further questions at this time. I’ll turn the conference back over to management for closing remarks. Thank you.

R. Scott Amann

Okay. Thank you, Diego, and thanks to all of you for joining us today.

Operator

This concludes today’s conference. All parties may disconnect now. Thank you.

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Source: Cameron International Corporation Q4 2009 Earnings Call Transcript
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