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Oceaneering International, Inc. (NYSE:OII)

Q4 2009 Earnings Call

February 18, 2010 11:00 am ET

Executives

Jack Jurkoshek - IR

Jay Collins - President and CEO

Marvin Migura - SVP and CFO

Analysts

Neil Dingmann

Max Barrett

Chris Glaseem

Stephen Gengaro

Victor Marchon

Joe Gibney

John Donald

Andrea Sharkey

Michael Marino

Daniel Burke

Steve Helms

Eric Gordon

Philip Dodge

Operator

Good morning my name is Christi and I will be your conference operator today. At this time, I would like to welcome everyone to 2009 Fourth Quarter Annual Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Jack Jurkoshek you may begin your conference.

Jack Jurkoshek

Good morning everybody. I'd like to thank you for joining us on our fourth quarter and annual 2009 Earnings Conference Call. As usual our webcast to this event is being made available through the StreetEvents Network Services by Thomson Reuters. Joining me today are Jay Collins, our President and Chief Executive Officer, who will be leading the call and Marvin Migura, our Chief Financial Officer.

Just as a reminder, remarks we make during the course of the call regarding our business strategy, plans for future operations and industry conditions are forward-looking statements being 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 Jay.

Jay Collins

Thank you, Jack. Good morning, and thanks for joining our call. It's a pleasure for me to be here with you today to talk about Oceaneering. Our 2009 earnings were the second highest in Oceaneering's history and EPS of $3.40 was only 4% below last year's record result.

This was a remarkable accomplishment and particularly gratifying during a time of global economic recession, tight credit markets and decline in oil consumption. These conditions led to a reduction in oil industry exploration and production spending and we see substantially lower demand from many oil field services and products.

However the deepwater market we serve was less vulnerable to these E&P spending cuts. Our performance in this environment was largely attributable to increased demand for ROV drill support services and the success of our efforts to control expenses which enabled us to maintain the operating income margin we realized in 2008.

We achieved record ROV operating income performance for the sixth consecutive year. Our 2009 cash flow simply defined as net income plus depreciation and amortization of $311 million was less than 1% below our record high of $314 million for 2008. Compared to 2008, our 2009 performance declined as a result of lower operating income contributions from Subsea products, Subsea projects and inspection.

Our EPS guidance range for 2010 of $3.25 to $3.55 is unchanged from our last conference call. This reflects our assessment that some deepwater construction projects will continue to be deferred until there is a meaningful recovery in hydrocarbon demand and I believe that deepwater drilling activity will keep growing in 2010 as rigs currently under construction are added to the worldwide fleet.

The major determinant of the spread in our EPS guidance range is to the extent to which deepwater construction activity may or may not pick up over the course of 2010. This will impact demand for our ROV construction support services, Subsea products and our deepwater vessel services in the Gulf of Mexico. Our overall fourth quarter EPS results exceeded the high end of the EPS range we gave last quarter and included a $1.9 million gain we realized on the sale of the ocean producer.

EPS of $0.83 for the fourth quarter of 2009 was below that of the fourth quarter of 2008 due to declines in operating profit from Subsea projects, Subsea products and inspection. Subsea projects declined on reduction in Gulf of Mexico work associated with 2008 hurricanes and a softer market for our deepwater vessel services due to a lower demand and an increase in vessel, the industry vessel availability.

Utilization of our vessels in saturation diving systems declined year-over-year and the rates we received in the fourth quarter of 2009 were lower than those in 2008. The Subsea products decline was attributable to lower umbilical plant throughput and lower demand for our specialty Subsea products.

Inspection declined due to our lower demand for our services in several areas where we operate particularly in the Gulf of Mexico. This decline was largely related to work performed in 2008 during the aftermath of hurricanes Gustav and Ike and lower off shore pipeline insulation inspection demand.

Our ROV business had an all time high quarterly operating income performance of over $55 million as we achieved a record number of 17,700 days on hire for our fleet. During the quarter we put seven vehicles into service and retired two older systems. At year end we had 248 vehicles in our fleet. Our fleet mix utilization during December was 73% in drill support and 27% in construction and field maintenance versus a 69%-33% mix a year ago.

A 2009 annual EPS decline of 4% was attributable to lower operating income from our Subsea products, Subsea projects and inspection businesses. Year-over-year our Subsea products operating income declined due to decreased demand for specialty Subsea products lower, through put for both the manufacturing plants and unanticipated cost re-incurred on two BOP control systems.

Our year-over-year Subsea products back log of $321 million was up 8% from $298 million at the end of 2008, primarily due to two large umbilical orders we secured in the second quarter. Based on preliminary data from Quest Offshore 2009 and umbilical market demand was 9% below that of 2008.

Our 2009 award market share was 32%, about the same as the 30% in 2008. Our Subsea projects operating profit declined due to lower demand for shallow water vessel and diving services and competitive pressure in our deepwater vessel market due to an increased industry vessel availability.

And finally our inspection results decreased due to the unfavorable currency impact of the stronger U.S. dollar relative to the British pound and lower demand for services. Our annual ROV operating income rose for the sixth consecutive year to an all time high of $207 million, $17 million or 9% over 2008 results.

This was accomplished by increasing our days on hire to over 68,700 days as we expanded our fleet improving our operating income margin to a record high of 32%. During the year we grew our fleet to 248 vehicles, up from 227 at the beginning of the year. We added 30 new vehicles and disposed of 9 older systems. 25 of the new vehicles initially went to work in drill support service and others went into construction or field maintenance service.

In 2009 17 new floating drilling replaced and serviced and we had ROVs on 16 of them with two on one rig for a total of 17 vehicles. Our cumulative win-loss record on new built floating rigs in 2007 through the end of 2009 has been 40 out of 49 or 82%.

At year end we estimate that we continue to be the largest ROV owner with 35% of the industry's world class vehicles, almost 2.5 times the size of the next largest ROV fleet. We remain the primary provider of ROV drill support service with an estimated market share of over 60%, three times that of the second largest supplier. By our count we also continue to be the largest global provider of construction and field maintenance ROV services.

In summary we believe our annual 2009 earnings performance and cash generation were excellent, given the market conditions. Our focus on providing services and products for deepwater and Subsea completions enable us to participate in the continuation of a major secular growth trend in the oil field service and products industry.

During the year we continued to invest for the company's future earnings capability. Our capital expenditures were $175 million of which a $147 million or nearly 85% was spent on growing and upgrading our ROV operations. We generated $420 million of EBITDA during the year. Our balance sheet remained in great shape. At year end we had $162 million of cash, $120 million of debt, $200 million available under our revolving credit facility and $1.2 billion of equity.

For 2010, we are forecasting EPS in the range of $3.25 to $3.55, about the same as our 2009 performance on an estimated average of 55.5 million shares. Compared to 2009, our guidance range forecast assumptions included achieving profit growth from our ROV and Subsea products businesses and experiencing declines in operating income from our Subsea projects and MOPS operations.

Explanation for the annual 2010 versus 2009 business segment changes are as follows. ROV operating income is projected to grow due to an increase in days on hire as we benefit from a full-year of operation for the vehicles we placed in service during 2009 and continue to expand our fleet.

We anticipate adding 15 to 20 vehicles to our fleet in 2010 and retiring 46. For 2010 compared to 2009, we expect our average revenue per day on hire to be about the same, our fleet utilization to be slightly higher as we benefit from upgrading older systems to improve their market building and then ROV operating margin may slightly decline primary due to a change in geographic mix.

Subsea products operating income is expected to increase as we realize a full-year's benefit of improved manufacturing processes and cost reduction implemented in 2009, avoid BOP Control System cost overruns, increase throughput at our umbilical manufacturing plants and achieve higher ROV tooling rentals and Subsea field development hardware sales. We expect our overall products revenue in 2010 to increase and the operating income margin for this business segment will improve.

Subsea projects operating profit is expected to be lower primarily due to the completion of the performance contract of West Africa and a softer market for our deep water vessels in Gulf of Mexico. We also anticipate continued decline in Hurricane related diving work and higher vessel dry dock expenses.

We anticipate our projects revenue and operating income margin will decline in 2010. Our MOPS segment profit contribution is expected to decrease due to the retirement in sale of the Ocean Producer in December 2009 and a lower day rate for the Ocean Legend. For 2010 we expect ROV products and projects to generate over 85% of our operating income as was the case in 2009.

During 2010, we anticipate generating in access of $300 million of cash flow, simply defined as net income plus depreciation or more than $400 million of EBITDA. This projected cash flow would provide ample resources to invest in Oceaneering's growth. Our 2010 capital expenditures will be dependant on the amount of investment activity we can deploy into acquisitions.

We will continue to fund additional ROV growth and upgrades and maintenance capital requirements including the vessel we are having built to replace the Ocean project. Total maintenance CapEx for the year will likely run between $30 million and $45 million.

We will endeavor to invest all of our cash flow and more if the right opportunities project themselves. I believe we are well prepared for the challenges we face in 2010. We are focused on cash flow generation, cost control. We are intensifying efforts to improve business process and the effectiveness of how we work. We are well capitalized. We have a seasoned management team in place and are confident in our ability to quickly adjust our business plan and take advantage of opportunities.

Looking forward we see specific signs of a healthy deepwater in Subsea market that will drive demand growth to our services and products. As of the end of December 90% of the existing 235 floating rigs in the world are under contract. 70%of these are contracted for 2010.

74 floating rigs were on order and scheduled to be delivered for 2012 and 45 of these have been contracted long term for an average term of nearly 7 years. During 2010 we estimate that 30 to 35 rigs will likely be placed in service during the year. We have all the contacts on 17 of these rigs and will perform four of these with existing ROVs.

Competitors have the ROV contracts on 6 leaving 7 to 12 contract opportunity this year and we are pursuing all of them. When all of the floating rigs on order are built the global fleet size will grow by almost 30% to over 300 rigs. In addition to the current rigs being built various industry sources indicate a number of Subsea support vessels that we require ROVs under construction with an anticipated delivery date by the end of 2012.

We also particularly like the future prospect of our Subsea products business segment, Quest's latest forecast for Subsea trees, an annual demand increase of 25% in 2010 versus 2009 and a five year demand increase of 40% in the 2010 to 2014 period compared with the previous 5 years.

Pre orders are the primary demand driver for our Subsea product line offerings. With our existing assets we are well positioned to supply a wider range of the services and products required to support the deepwater exploration, development and production efforts of our customers.

We believe launching new business prospects for the longer term remain promising by commanding competitive position, technology leadership and a strong balance sheet position, position us to continue to grow the company and we intend to do so.

Our first quarter 2010 EPS guidance range is $0.55 to $0.75. This is consistent with our historical seasonal quarterly earnings percentage distribution and the fact that our first quarter earnings are usually lower than the fourth quarter of the previous year.

Our first quarter 2010 guidance is down from the first quarter of last year as we expect declines in operating income from our Subsea projects, inspection in MOPS operations and higher profit contribution from our ROV and Subsea product segments. Compared to the fourth quarter of 2009, our first quarter guidance reflects seasonality in our ROV business and lower MOPS operating income due to the sale of the ocean producer.

In summary, our 2009 results continue to demonstrate our ability to generate excellent earnings and cash flow even in tough markets. We believe our business strategy is working well over both the short-term and the long-term. We like our competitive position in the 2010 oilfield service market. Our technology gives us the ability to prosper in what we believe would be another challenging year.

We are leveraged to what we believe will be an inevitable resumption in the growth of deepwater and Subsea completion activity. The longer-term market outlook for our deepwater and Subsea service and product offerings remain promising. We continue to believe we are in one of the sweet spots of this secular up cycle. 2009 was our second best year ever and we're well positioned to have another year of substantial earnings performance in 2010.

We appreciate your interest in Oceaneering, and we'll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions). And your first question comes from line of Neil Dingmann.

Neil Dingmann

Jay, I was wondering what degree are you seeing on the Subsea product side with umbilicals etcetera. You're still seeing some deferrals and how do see those playing out?

Jay Collins

I think not too much has changed on that Neil. We're still seeing some deferrals. I will say that we've seen there is more bid activity in smaller jobs in the Gulf of Mexico. So the Gulf seems to be coming back a little bit. I say we see no real change in West Africa, North Sea, so far but we are hopeful.

Neil Dingmann

And then my for my second question. I was wondering ROVs look like. I think net you had 21. Two questions around that. Just sort of retirements as you look in 2010 will it be nine or so or you (inaudible) about where you like and just the last part to that question, just sort pricing obviously as day rates and such go up for these entire jobs. Could we assume that a lot of the price increased ROVs will kind of mitigate and work along with that?

Jay Collins

Well first let me deal with the number. We plan to build 15 to 20 systems for the year and we think retirements will be lower somewhere maybe in the 4 to 6 range although certainly effected by economic conditions and particular jobs. So that's on the numbers of unit. And on the revenue per day I think we would be happy with a flat world. I mean see a lot of pressure to reduce prices. You're right. Some new jobs coming in at higher prices. Hopefully that all offset and we still need to get some increases from customers to offset increasing cost but I think flat revenue per day would be where you should put you model.

Operator

Your next question comes from Max Barrett.

Max Barrett

Just sticking with ROVs. You discussed 2010 operating margin percentage down geographic mix. Presumably this is Brazil. Could you kind walk us through the regions may be where you might be seeing pricing improvements?

Jay Collins

Well pricing improvements, I think were not really expecting much in the way of pricing improvement. As I just referred to previously, we still have customers that want discounts. We do have some new systems that have been booked that are coming out. They're bigger and newer units that may be at a little higher prices but again overall I would say we look for flat revenue per day of service in total. On a geographic mix your right. Brazil is a lower cost area and so that

Max Barrett

Lower price area.

Jay Collins

Lower price area. So that may drag us down a little bit but we have a lot of new systems coming in other places. So on the margin side when we say down we just had a fantastic year being up from 30% to 32% margin. We had great results, great cost control and execution. So I would just say hey maybe 31 is a better model than 32. So it's not a big change. We're just saying we're not sure if we can repeat such an extraordinarily good performance.

Max Barrett

And then moving to Subsea projects how much visibility do you have for upcoming work and is the increase in Gulf of Mexico drilling driving any incremental work?

Jay Collins

I don't think so. This looks like a damn year overall, more commission, no big giant projects out there, less big projects than we had last year. Last year we had some sale of the hurricane work and some larger off coming project. Both will be reduced this year. So I think we're out there fighting it out for a lot of smaller jobs and there are smaller jobs and we have a great position in this market but in visibility a few months ahead is all we ever really have.

Marvin Migura

This is a call out market. We don't even track backlog.

Jay Collins

It is a call out market. So we fight everyday.

Operator

Your next question comes from Chris Glaseem.

Chris Glaseem

Quickly on the rigs to be delivered in 2010, the 30 to 35, did I hear correctly you have contracts now on 17 of those?

Marvin Migura

Yes. That's correct.

Chris Glaseem

And competitors have contracts on six of those?

Marvin Migura

Yes.

Chris Glaseem

Last call, you guys had quoted that competitors had contracts on eight of those. Did they lose or were two of those delivered in 2009 rather than '10?

Jay Collins

Actually, in the fourth quarter Petrobras cancelled four contracts that they had previously awarded and they had been awarded to our competitors. So four competitor contracts did go away. Very perceptive on your part.

Chris Glaseem

Second question is thinking about the industry in general, you're planning to add 15 to 20 units this year. What's your sense as to what your competitors are planning to add with regard to ROV vehicles in 2010?

Jay Collins

We really don't have good information on that. It's just difficult to come by. We think we're the only people that publicly disclose all that information. So our competitors as you know, our three major competitors are construction companies and survey companies and they have vehicles probably more working for their own account than they do the third party world. So they are serving two markets, the third party market and their own market. So even if we knew what they were doing, we wouldn't necessarily know which market they were planning to put their equipment into.

Marvin Migura

And just on the global fleet, the 35% is best we can estimate our fleet count, is the same as it was last year. So you can summarize from last year's activity, everybody expanded at about the same rate. But as Jay said it doesn't necessarily mean increased competition. A lot of that gets used elsewhere.

Operator

Our next question comes from Stephen Gengaro.

Stephen Gengaro

I guess the first thing I had was when you look at 2010 and you look at your ROVs which are on rigs which potentially could have contracts which are rolling. Can you give us a sense for what that number looks like?

Jay Collins

We are on 18 rigs that will have contract term explorations in 2010. Of these eight are fourth and fifth generation semis or DP drill shifts. We really think those are highly likely to keep working with little or no down time. The other 10 older rigs, we are watching each one individually talking to the drilling company and while some of those may go idle, we're really not sure we factored obviously something in to our planning with regard to those rigs. In total if all those 10 rigs went down that's only 4% of our fleet. But we don't really think that's what going to happen but anyway those are the numbers, 18 in total, eight fourth and fifth generation and 10 older rigs.

Stephen Gengaro

And then just second question. I know this is probably a little granular but when you look at the ROV business and the margin in the fourth quarter, it's pretty healthy given particularly utilization slid a little bit sequentially. I know they are both small moves but I was just kind of interested in is that efficiencies and if it is what's there that makes you think maybe these margins are not sustainable?

Jay Collins

Our people did a great job this year. We're pushing very hard in Oceaneering for what we call continuous improvement, process improvement, find a waste and get rid of it and I think they just were very successful at reducing their cost and getting rid of some waste in their operation and I think obviously some of that will continue but there are other areas where costs continuing to press up. We operate in some very high costs places like Nigeria and Angola and Ghana.

Marvin Migura

And Brazil

Jay Collins

In Brazil. So there are places where costs are not going down. Costs are going up everyday. Our customers, we certainly can give some cost increases but in other places we have to give some discounts. So you factor all that together and we just had an extraordinary good result and I'm just cautioning that we might not be able to quite repeat that but we're only talking maybe 1% for your model.

Operator

Your next question comes from Victor Marchon.

Victor Marchon

First question is on utilization. You guys are talking about a slight improvement this year versus '09 and just want to get a sense of, is that looking at slightly higher drill support with construction flat? Is that the thinking in total?

Jay Collins

We think construction will be better and that's my primary reason utilization has been down and we do think construction will be a little bit better through the course of 2010. As I mentioned earlier that's sort of the biggest uncertainty as to how much better it gets to be. But we do think it will be better and we see more activity in the Gulf of Mexico particularly than we did last year.

Victor Marchon

And the second one, just as it relates to your pricing comments earlier, if I understood correctly that your revenue per day on hire being flat year-to-year, some offsetting factors, some higher priced new units coming in offsetting some spot weakness in some regions. Is that a fair assessment of it?

Jay Collins

That's correct and obviously we do get moved around by currency issues as well. So that's also a factor that's in there but I am not in the business of predicting currencies though. There are a lot of moving parts in that figure.

Operator

Your next question comes from Joe Gibney.

Joe Gibney

Hitting most of the highlights. Marvin here is a question for you. Were there any other incremental BOP control system cost creep in the quarter? And could you just update us on delivery expectations. I think in the last call, you indicated one system is expected to be up in the fourth quarter and the other in 1Q. Just curious what the status was there.

Marvin Migura

I think Joe, what we're expecting now is to deliver both of the systems later this year and we believe that we scrubbed our cost and have properly accrued all other cost and we do not expect cost overruns in 2010.

Joe Gibney

Okay. That's helpful. And Jay just wanted to get your perspective on the projects business. I understand, it's quite a lot of work and visibility is as always fairly limited. Just curious in your perspective. Some of your diving competition in the Gulf of Mexico certainly alluded to the fact that weather has been more challenged here than it was in the fourth quarter continues to be in 1Q. Curious if you can comment on weather seasonally this year versus say last? And as you stand here this quarter versus last quarter, admittedly with limited visibility. But are you seeing any up tick in bid activity, increased activity for the back half of the year. Just curious what some of the pulse is from some of your customers in the Gulf of Mexico there appreciate it.

Jay Collins

I think it had been a tough start for the year on with regard to whether. I think that's certainly true. Bid wise, I think it's kind of a declining from last year sort of normal activity nothing extraordinary pretty much what we anticipated. I don't see any real change from what we were thinking.

Marvin Migura

I don't know the weather was really worse or not, but I know that when demand was higher because of hurricane related work, the customer took a lot of that weather risk and right now the market doesn't allow that, so some of the diving companies are using that as a reason when may be its just a software market.

Operator

Your next question comes from John Donald your line is now open.

John Donald

A quick question on the projects segment. Specifically, what is your visibility for the performer now in Angola? Presuming if that doesn't have any near term work, are there going to be some incremental dry dock in cost potentially for that here in the first half of the year?

Jay Collins

Dry dock what either will be dry dock in the second half of the year and is finishing up this contract in Angola right now and next month will be on the way later this month may be on the way home and we will plan to work in spot market in the Gulf of Mexico and dry dock it later in the second half of the year and that is one of dry dock cost that what we referred to earlier as have an increased dry dock cost in 2010.

Marvin Migura

And the performer is a big swing going from a term contract through all of 2009 we continue to look for international work but we haven't found any so it will it will be coming back to a tougher market and it is an older boat.

John Donald

Okay, thanks. That's helpful. And then in the product segment. Embedded in the current backlog, are there anymore of these similar serial number one projects like this BOP control systems that caused the cost to over runs in 2009 that may be looming out there in the near term?

Jay Collins

No, glad to announce that's not the case.

Operator

Your next question comes from Andrea Sharkey your line is now open.

Andrea Sharkey

I had a question ton sub C products business. There was an umbilical order that was awarded I believe in February to one of your competitors, to Repsol. And I was just wondering if you were involved in bidding on that? If you had any thoughts on what that came down to it. Was that just price or what maybe that award was based on?

Jay Collins

Could you tell us a little bit more about the Repsol order it doesn't come to mind right off the top?

Andrea Sharkey

I think it went, it was announced in February and it went to Auker, I think it was 12 kilometers maybe of umbilical and it was for Repsol to be used in the Mediterranean.

Jay Collins

I am sorry I still don't have any detailed information on that. We fight for a lot of orders and there's no I don't know anything particular about that one.

Andrea Sharkey

Sure, thanks. And then, I don't know if I am correct on this or not but I think I have in my notes that the Ocean Intervention III is chartered until May of this year. And if that's correct, I was wondering if that's something that maybe you are going to let that charter lapse and if that would have any impact on your projects business?

Jay Collins

No we have the option. We have some of the options for continuing to use that vessel on share of one year options and at this point we will in discussions about extending that for another year.

Andrea Sharkey

What maybe your priorities are for using your cash aside from the new ROV bills? If you could comment on that?

Jay Collins

Well we are continuing we will certainly fund any of the ROV business that needs funding that will not consume all of our cash. We are looking around for other places we don't need it in our products business right now. We have plenty of capacity in that business in general. So we are looking around for acquisitions and other investment opportunities. Historically we have bought stock back. We have no authorization present at the moment but our board has authorizations in place to buy back stock so that certainly is a longer term possibility but we are very focused on trying to find a way to invest this money. We like to stake fully invested and we are very focused on trying to grow the company.

Operator

Our next question comes from Michael Marino.

Michael Marino

Question on kind of bigger picture. You guys have been pretty consistent talking about your customers showing no real sense of urgency to get going again in the deep water on the construction side of things. Have you seen anything that makes you more optimistic over the last three months or maybe even as the kind of the calendar rolled to 2010, that your customers kind of getting a little more active in at least the planning stages? Maybe give you a little more confidence in the back half of 2010 at least?

Jay Collins

We're getting more reports of more bidding activity. It's really Gulf of Mexico related from various parts of our business. Some construction projects umbilical in Gulf of Mexico related to. We do get a sense out there. The projects are starting to come back upon the table when people started to get close out. That's a little bit encouraging but I wouldn't overdo that.

Marvin Migura

I think the OEMs and construction companies are starting to sound more optimistic about that second half activity, but it has not translated down to our segments yet.

Jay Collins

We feel very helpful.

Michael Marino

And that's really the variance in the guidance. If you see it middle of the year, you are on the high end of the range. If you see it late in the year you are on the low end of the range. Is that the way to think about it?

Jay Collins

And it depends upon the pace, at which it picks up.

Michael Marino

Okay. And one other question, too. In the ROV space, you all will add fewer units in 2010 than you added in 2009. Yet you talk about the incremental rigs coming in the market. It is a bigger number. Are you more focused on pushing pricing as opposed on adding units in 2010?

Jay Collins

We are trying to win every job as you saw utilization of our fleet was down little bit in 2009 so we think we can a make little more use of our existing fleet as you noticed all those 17 systems 3 or 4 were been used by existing ROVs so we are going to really take our hard look at our existing fleet we are taking a look and doing some upgrades and think we can show some of these jobs with some of our system with little some upgrade done to them so hopefully we can increase our utilization of our existing fleet a little bit but we are trying to win all the jobs we can at good pricing.

Michael Marino

So is it fair to say that your mixed between construction support and drill support maybe, it's not the 2/3, 1/3 like it used to be and it is more 70%, 30% or 75%, 25%.

Jay Collins

I think we were 71.

Michael Marino

Historically you have been 2/3, 1/3; right?

Jay Collins

That's right and that's a very good indicator Michael about how the construction market has just kind of really come to a stall and so we have always said we can come back to a 2/3, 1/3 mix because we grow each of them at the same time and we said that the primary the number of utilization drop of from 8 to 9 was construction activity.

Marvin Migura

We very much will like to see a come back a down a little bit more toward this side of the construction and regarding your 30 to 35 rigs being more than last year remember the 7 to 12 of those rigs depending on 30 to 35 do not have contracts yet.

Michael Marino

So, it's foreseeable that you actually add more than 15 to 20.

Jay Collins

I think its 15 to 20 plus try to meet some of the demand with the upgraded existing systems is our expectation for the year.

Marvin Migura

And keep in mind we are also pushing very hard in the vessel side and we see increasing demand in the vessel side of the market so that's another area and that's really a construction side of the market. So depending on how that comes back could make a difference of how many systems we put to work and how many we need.

Michael Marino

It sounds like utilization could go higher. So focus more on utilization opposed to just the?

Jay Collins

We will be disappointed if we don't get an increase in utilization in 2010.

Operator

Your next question comes from Daniel Burke. Your line is now open.

Daniel Burke

I wanted to stay on the topic of upgrading some of your older ROVs. Can you address that opportunity a little more specifically just in terms of maybe the number of ROVs you are targeting? And what type of CapEx commitment that represents, if it is more than nominal?

Jay Collins

I am going to stay away from that. I think that's competitive information really but some of these ROVs that we started building in late 95,6,7 these systems are now 12 to 13 years old. So the horsepower requirements are have increased but you know the part of this that you frame the wench are still great pieces of hardware and may be some technologies moved there we need a better camera and different manipulator arms but the CapEx to bring that up to really current standards is relatively small compared to the 570 ROV.

So I think we can we have opportunity I think to increase the effectiveness of that ROV by upgrading it and perhaps using it on some of these new jobs.

Marvin Migura

And we have done that historically throughout our last decade or more or on the least 15 years, 20 years, but we're just saying that right now our focus is we think we could get better utilization if we upgrade in the market availability of some of the systems and as Jay said were really, primarily talking about upgrading the underwater fish piece as opposed to and the cost is significantly less than the cost of the new ROV.

Daniel Burke

That's helpful Marvin. And then, the last question again going towards building out the CapEx profile for 2010 and onwards, you made the decision to invest in the shallow water dive support vessel. But I presume you are not interested or considering any other incremental investments in the vessel market this year.

Jay Collins

On the diving side, you were basically just replacing an existing dive support vessel that was really 30 year old vessel, so we were really just continuing to focus on that same market, on the diving business. On the deepwater side, we're always looking around to see what's in the market.

Marvin Migura

The last couple of times, we wanted to add a boat we ran our lease by economics and we decided to lease, and that's how we got the Ocean intervention III and the Olympic intervention IV. If the lease by the economics because of the additional vessel availability switched then our economics will switch, so we're not going to go ahead and say we have no intention or we have an intention of acquiring vessels. It truly depends upon the opportunities to become available and the economics in our views to the market at that time.

Operator

Your next question comes from Steve Helms. Your line is now open.

Steve Helms

Thank you. The umbilical business just really never got on fire in the last cycle. One of these days it is going to have to, I guess the customers out there are going to have to order the umbilical. Are you seeing any sign that they are ready to do that? Or any idea on when the dam might break on that?

Jay Collins

I wish I did unfortunately. I think pretty much in status quo except for the comments I made earlier about some smaller bids and so forth that we see in the Gulf of Mexico right now. So, while it's a little encouraging in the Gulf of Mexico, I think the big picture remains pretty steady and the industry needs a lot more work.

Steve Helms

What kind of capacity utilization are you running at now in the umbilical business?

Jay Collins

I would I think the whole industry is at relatively low capacity. The Brazil probably being the exception where there is probably adequate business in Brazil. Petrobras has lots of needs. And so, I think the plants there are probably operating at reasonable capacity but South side of Brazil, I think might be ideal. We certainly are the low capacity and I think other have been as well.

Marvin Migura

Yeah. I think what we said is we captured about the same amount of our market share in 2009 as we did in 2008. But it seems like every time a new bid does come to order either us or a competitor has a empty factory and you have no pricing leverage as when that industry conditions are that way. So we don't need the damn to break. We just need to see a trickle a lot more.

Steve Helms

What's the normal time frame between say one of these big discoveries on the west coast of Africa and ordering umbilical, six seven, five years?

Jay Collins

Maybe, I'd picture seven but certainly, five years is probably not unreasonable. Three to five years sometimes.

Marvin Migura

What we're just going to say is with the number of increased drilling rigs that have occurred over the last five years as lot more discoveries being made and our position is nobody gets paid, all companies don't get paid for finding. So they've got to go through that construction phase and until there's a sense of urgency it can be just a long time. But when somebody starts talking about getting production to the market and replacing completion and growing reserves or proven producing reserves then we will see the construction activity pick up. But there is just no period of time that we can point to as kind of quote average or normal, just that we're not now in average or normal times.

Jay Collins

I will say with regard to discoveries we look at Quest information and there are quite a few discoveries that have been made that are not being developed at this point in time and projections looking ahead to '11 and '12 are that the world needs a lot more umbilicals than we're producing today. So we hope that turns out to be the case.

Steve Helms

What's the cost of building new ROV today?

Jay Collins

$3.5 million to $4 million.

Operator

Your next question comes from Stephen Gengaro.

Stephen Gengaro

Two questions. We haven't talked about this for a long time but advanced technologies, anything we should think about, a flattish 2010 versus 2009, is that reasonable?

Marvin Migura

We have some really great little businesses in there but they're relatively smaller compared to Oceaneering as a whole. The most topical thing really is our group in Clear Lake that works for NASA that Oceaneering has a lead in the constellation space suit and Obama plan right now is to terminate the Constellation Program. We've heard from a NASA administrator that they're going through and look at every piece of that Constellation program and decide what piece is try to go forward and what piece is to stop and that we should continue doing what we're doing and giving him several months to figure out what's going to be needed in the future. It seems to us they're going to need space suits, no matter what they do even to go through earth orbit program to the space station. Anyway from a financial point of view it's a very small piece but it's kind of an interesting piece that's going on as topical in the market today.

Stephen Gengaro

Is there any changes for your long-term attitude towards that business? I know that you don't need cash, but I'm just sort of thinking about the structure of the organization, if any change is possible there?

Jay Collins

Now we like that business. It's got a lot of interesting technology and occasionally, there are some interesting technology transferred back and forth and people can help each other out, and they've got some fantastic engineers and sometimes we call upon them to help us in the oilfield.

Operator

(Operator Instructions). And your next question comes from Eric Gordon.

Eric Gordon

I wanted to just drill a little bit deeper into use of cash. You have $160 million in cash on the balance sheet today. If I'm doing the math right the $300 million in cash flow from operations and CapEx just based on the ROVs of roughly a $100 million or less, that's a tremendous amount of cash flow that can be generated and could be on your balance sheet by year end 2010. I wanted to gauge your thoughts on M&A discipline in terms of what you're looking for specifically in a transaction versus buying back stock or paying the dividend with that cash flow today?

Jay Collins

Well, we would certainly much prefer to find a god acquisition opportunity. I think we want something that fits with our Subsea world. If you look at our previous acquisitions, you've seen we found those in the product. I think we are continuing to look in that part of our business and things are of course related and really will have some impact on our future in the Subsea world. So I think that will be our focus, continuing to look for things that fit in our fixed Subsea and that there's some technology that will be or can be used in to fit with our other products. But we're not in a hurry. In a way, we hope we're going to patient. I think we will be. I think we're very disciplined and looking at acquisitions we're very focused on the long term cash flow and we're hopeful in expecting that we will find some good investments. Money is not going to burrow over our pockets.

Marvin Migura

Right. We are not going to go ahead and change our economic outlook because we have cash on our balance sheet versus credit availability. And as Jay mentioned, we always have historically gone to the next best alternative. When we can't buy investments, we buy back Oceaneering stock. And that is a topic our Board's consideration and it will be discussed.

Eric Gordon

The only follow-up is how much cash would you be comfortable holding? I believe you have more cash today that you ever have on your balance sheet and with the free cash flow that can be generated this year based on your capital program for ROV spending at least, is there a point at which a decision would need to be made on use of cash rather than focusing on M&A opportunity?

Marvin Migura

Eric, that gets a lot of discussion right now. And I think here, underestimating our CapEx if at a $100 million I think, remember, last year we spent $175, the year before that, $250. So we think we'll be more successful in investing our cash than the $100 million number you through out and we said maintenance CapEx including that vessel will be $30 million to $45 million. But your point is extremely well taken and noted and we look at and we're talking about that often, really often about our cash flows. We had a phenomenal year in 2009 where we did not expect given the market that we would be within 1% of our record high cash flow as it shows how much cash our operations can generate and we do expect to put that cash to good use.

Operator

And your last question comes from Philip Dodge.

Philip Dodge

Two questions on Brazil. First and I think I would just say that there were some ROV orders canceled. Were those canceled cancelled or could those come around again that you might have a shot at?

Jay Collins

That was just a specific contract that Petrobras had awarded and they never got formalized, never got finally awarded and they canceled that. So those are still out there and those are still potentially available.

Philip Dodge

And other one more general. Would you expect more orders from Petrobras and Brazil in 2010 than you had in 2009?

Jay Collins

I doubt it. We won nine jobs in a row in 2009 timeframe and I would doubt that. We have seven new systems coming to work in Brazil and the rest of this year. Our business is already growing up about 40% in Brazil through 2010 and 2009 versus 2010.

Marvin Migura

It would be hard to imagine.

Jay Collins

Hard to imagine that we will see many more orders for just short and in the near term, newer orders in the near term.

Operator

There are no further questions at this time.

Jay Collins

Thank you very much.

Marvin Migura

Take care guys.

Operator

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

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Source: Oceaneering International, Inc. Q4 2009 Earnings Call Transcript
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