Cameron International Management Discusses Q4 2013 Results - Earnings Call Transcript

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Cameron International (NYSE:CAM)

Q4 2013 Earnings Call

January 30, 2014 9:30 am ET

Executives

Jeffrey G. Altamari - Vice President of Investor Relations

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

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

Analysts

Kurt Hallead - RBC Capital Markets, LLC, Research Division

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

William A. Herbert - Simmons & Company International, Research Division

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Edward Muztafago - Societe Generale Cross Asset Research

Michael W. Urban - Deutsche Bank AG, Research Division

Brad Handler - Jefferies LLC, Research Division

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

Douglas L. Becker - BofA Merrill Lynch, Research Division

John David Anderson - JP Morgan Chase & Co, Research Division

Joseph D. Gibney - Capital One Securities, Inc., Research Division

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

Operator

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

Jeffrey G. Altamari

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

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

I will now turn the meeting over to Jack.

Jack B. Moore

Thank you, Jeff. Cameron had a busy and productive Q4. Revenues finished just shy of $3 billion, up 18% sequentially and 21% versus last year. For the year, revenues totaled a record $9.8 billion, exceeding 2012 levels by 16%. Record revenues were experienced in all of our business segments with the exception of V&M, with our Drilling Systems and OneSubsea segments driving the highest levels of growth.

Orders in Q4 finished at $3.3 billion. Drilling Systems saw its second highest order rate in history as demand for drilling equipment and aftermarket services remained strong.

Surface Systems had another record quarter for orders in North America, and our Process Systems business segment achieved record orders as well in Q4.

For the year, Cameron had record orders totaling $12.4 billion, up 13% from 2012. Our DPS segment experienced a record order year as well, up 18% versus 2012, again, driven by orders in Surface Systems and OneSubsea.

Our backlog ended at $11.5 billion, up 34% versus last year.

As all of you are aware, we announced the sale of our Reciprocating Compression business unit to GE last week and the intention to divest our Centrifugal Compression business as well. The decision to exit our compression business is a result of careful thought with our board to optimize our asset base and focus on our core markets. While both businesses have contributed to Cameron's growth over the years, this change focuses clearly on our global oil and gas markets with business segments that are market leaders and that complement one another's technology platforms.

We generated healthy cash flows in the quarter and for the year, helped fund the 27 million shares we repurchased in 2013. We also invested over $500 million in capital improvements back into our core business units.

Now let me update you on the operating segments, and I'm going to start with Drilling Systems. Drilling revenues topped $680 million in Q4, up 15% sequentially and 37% versus last year.

Orders for Q4 finished at $824 million, our second largest quarter ever, which included a record aftermarket quarter. For all of 2013, Drilling's orders totaled $2.8 billion, not as large as last year's record $3.6 billion, but $1 billion larger than 2011. Aftermarket orders for Drilling finished the year at over $900 million, up 25% versus 2012. Backlog for Drilling sits at $4.1 billion.

As you're all aware, we have a lot of focus on this business segment, given the record backlog growth we experienced over the last 2 years that is up 2.5x. While the rate of growth in our shipments is also a record pace, we need to do more. And current margin performance is far from acceptable as the drive to meet critical customer requirements has created unfavorable cost variances.

We've made good progress with the capacity additions in our Berwick operations, which will be critical to stabilizing and delivering improvements to our business performance in 2014 and beyond. We have expanded our teams and are targeting key areas of our operational performance to improve execution, both internally and with critical suppliers. And our leadership team knows full well how important it is to restore historical performance levels to our Drilling franchise.

The Q4 margin performance is far from acceptable, but we are confident as our capacity additions mature, we will see better results in the second half of 2014. As for 2014, we will see a drop-off in the number of new builds for both floaters and jack-ups. However, there remains a healthy market for upgrades to the aging offshore and onshore fleets and a robust aftermarket for our expanded product offering.

Surface Systems saw record revenues in Q4, totaling $520 million, up 4% sequentially and 13% versus last year.

Orders for the quarter were $540 million, up 18% sequentially and 9% versus year-ago levels. Overall Surface Systems revenues finished at $1.9 billion in 2013, up 20% versus last year, while orders for the year totaled $2.2 billion, up 23% over last year as well, both record performances.

Driving Surface Systems performance in the quarter and in 2013 was a record order rate in our North America market. Our Surface Systems team continues to leverage our investments and performance in delivering what we believe is the most efficient well site operations for frac and wellhead services in our space, which I will add has allowed us to grow share and margins in an essentially flat market.

Our Middle East operations also had record bookings, driven primarily by Saudi and Oman. We -- while we expect more opportunities for growth in North America and the Middle East in 2014, we also see our North Sea markets offering greater opportunities as more operators are targeting existing fields for enhanced recovery. Overall, we expect another record year for Surface Systems in 2014 in terms of orders, revenues and margins.

OneSubsea revenues were at a record $760 million in Q4 as well. Orders in the quarter finished at $850 million. Orders for all of 2013 were just shy of $3.7 billion, a record level, and up over $1.7 billion versus 2012.

The most significant award in the quarter was from Total for the Moho subsea processing system, the fourth contract of this type of system award to OneSubsea over the past several years.

Another significant award that I'm pleased to announce is the signing of the 5-year frame agreement for Woodside in Australia that would allow us the opportunity to participate in their future deepwater development programs. This is a wonderful endorsement for OneSubsea as they have a large portfolio of opportunities and see the breadth of OneSubsea's capabilities, both today and in the future as a key enabler to provide the right solutions for the life cycle of their deepwater developments.

The OneSubsea team is also making great progress in evolving the targeted R&D projects, focused on delivering our mission of increasing recovery of deepwater developments. Safe to say that operators are more focused than ever on looking for ways to improve their economics. And OneSubsea has a number of platforms that customers are anxious for us to expand in a more comprehensive solution to meet this need. Subsea processing is a great example, where we will leverage our existing dominant market position to advance solutions to operate at higher flow rates and pressures and for longer time frames, both at the seabed and in the wellbore, plus incorporating multiphase compressors in the subsea processing system platform.

Well intervention is another area that allows us to leverage combined technologies that both partners bring to OneSubsea and accelerating product offerings that are targeted to reduce time and cost in our customers' workover operations.

And we're very excited about the future of OneSubsea. We have a large pipeline of opportunities to target in 2014 and beyond. And while we will be successful in our traditional offerings, we are anxious to prove the broader capabilities that this joint venture can deliver.

Total revenues for V&M totaled $520 million in Q4, up sequentially but below year-ago levels. Orders for V&M finished at Q4 at $525 million, up 6% sequentially but, again, slightly below last year's levels.

Orders for Engineered & Process Valves totaled $300 million in the quarter, lower than we anticipated, primarily due to project slippages in both Asia Pacific and the Gulf of Mexico.

Engineered valve activity onshore U.S. recovered somewhat in Q4, but not to levels we have seen in 2012. We will need to see the larger volume projects move forward to see an appreciable uptick in our engineered valve order book.

Distributed valve orders held up very well and were flat with the year -- with a record Q3. Onshore U.S. well side infrastructure buildout continues to provide a solid base for our distributed valve platform.

Overall, our outlook for our Valves & Measurement business segment remained strong. The majority of our valve markets are connected with the same market drivers as our Surface, OneSubsea and Process businesses, and we'll continue to follow those opportunities for growth as we move forward.

Our Process & Compression business, of course, as I previously discussed, the highlight for this business was that -- compression business is the sale that we made last week. However, I wouldn't want this to overshadow the results of our overall PCS segment in Q4. Revenues were a record $500 million in quarter 4, while orders totaled just over $600 million, also a record for PCS.

Our Process Systems business unit drove a record performance with the award of a large project in Malaysia, utilizing our patented CO2 separation technology valued at $250 million. And the beauty of this project is that it will generate a healthy aftermarket service opportunities for decades to come.

Compression orders were healthy in Q4 as well, totaling over $220 million. Our Process Systems business unit has a focused team on our markets, both onshore and offshore, working collaboratively with our Surface Systems teams and OneSubsea to ensure we are connected to exploit joint opportunities.

Let me summarize. As I stated earlier, it has been a busy quarter and a busy year for Cameron. The growth we have witnessed across our oil and gas-driven market segments in 2013 has been substantial. The record backlog in Drilling has challenged our abilities, both to deliver on time and at the right margin. And this team understands that, and that we have to get that back on track.

We have made changes within our leadership team that includes the addition of a number of talented leaders from outside of Cameron to strengthen our operational focus on execution and disciplined management of our cost structure.

The creation of the OneSubsea joint venture in 2013 was a transformational step change for how we will evolve as a deepwater subsea solutions provider. Our actions with compression will focus our team on what is core to Cameron's future growth, businesses that complement our market leadership, both onshore and offshore, and global oil and gas markets.

Our commitment to creating shareholder value goes beyond the repurchase of 27 million shares in 2013 and rationalizing business focus in what's called our growth. It's also sharpening our focus on capital discipline, cost controls and, of course, margin expansion. And as for 2014, the overall markets that Cameron serves will give us great opportunities to achieve another year of record growth in revenues, orders and earnings.

Now I'll turn it over to Chuck.

Charles M. Sledge

Thank you, Jack. EPS was $1 per share before other costs. These other costs were primarily $0.05 and represented restructuring and integration efforts. We continue to work on ensuring our cost structure is in line with our expected activity levels and is conducive to expanding margins.

Revenues were $2.9 billion that eclipses the previous quarterly record revenues by 18%.

EBITDA margins increased 40 basis points sequentially.

D&A increased $7 million sequentially, and this reflects our continued investment in our infrastructure to handle our record order levels.

Interest increased $2.6 million sequentially, reflecting the cost of our newly issued bonds. Minority interests are at the high end of our guidance, coming in at $0.09 per share as Subsea had a very good quarter.

A few comments on the segments. Revenues for DPS were $1.9 billion, that's a record quarter. That's up 19% sequentially, and each business within DPS recorded record levels.

EBITDA margins were 16.4%, roughly flat with the prior quarter.

Subsea and Surface margins were up. And as Jack discussed, Drilling continues to be an area of focus.

V&M revenues were $527 million. That's up 5% sequentially, and all product lines performed well.

EBITDA margins were 21.6%, roughly flat with the third quarter as we had expected.

PCS revenues were $467 million, that's up 31% sequentially, driven by our Process business.

Just for information Recip had Q4 sales of $118 million. Centrifugal had Q4 sales of $112 million.

EBITDA margins were 15.6%, up 350 basis points sequentially, and all businesses showed margin expansion.

Another few words on our divestitures. The Recip transaction is expected to close in third quarter. We will evaluate our alternatives for Centrif and should conclude this process by the end of the year.

Our Recip Compression results will be reported in discontinued operations beginning in Q1. We intend to offset the impact of this divestiture on our EPS with share repurchases. These repurchases are occurring as we speak. But in Q1, there will be some dilution in our EPS from the discontinued operation accounting. This has been taken into account in our Q1 guidance.

Our compression announcement gives us a great opportunity to ensure that we report our segments in a way that is most relevant to our investors, and this process is underway. We expect to communicate our views once our compression transactions are complete.

In conjunction with our evaluation of the company segment reporting, we're also looking at our business support costs that currently reside in our corporate segment and how we allocate those out. We also want to be clear to our shareholders, we will be reducing these support costs to reflect the divestitures.

A few words on share repurchases. Obviously, a record year for Cameron. We repurchased over 10% of the shares we started with, also represents an additional 3 million shares over our mid-December update to our investors. And we have been active in repurchasing our shares under a 10b5 plan in January and now have 219 million shares outstanding, leaving 615 million in authorization.

Now for some guidance points. Revenues should be -- for total company should be between $10.2 billion and $10.6 billion. And again, that excludes Recip.

EBITDA margins should be between 15% and 16%, an improvement from 14.8% in '13.

D&A, approximately $350 million; interest, approximately $139 million; tax rate of 23%.

Again, as of Tuesday, we had 219 million shares outstanding, and we are continuing to buy shares given current market conditions.

Minority interest should be between $0.10 and $0.15 per share. That results in EPS between $3.60 and $4 per share.

A couple of comments on the segments. DPS revenue should increase from the low-double digit range. EBITDA margin should increase nominally year-on-year.

Both Surface and Subsea should increase, and that's despite Subsea having the incremental R&D in '14.

Drilling will show improvement over the course of the year.

With respect to V&M, while we expect our orders to grow approximately 10% on a year-on-year basis, this increase will occur over the back half of the year and will not have a meaningful impact on '14 revenues. As a result, V&M's revenue should increase nominally, something just out of 5%. As we indicated on our third quarter call, EBITDA margins will be between 21% and 22%.

PCS, obviously, the revenues will decline due to the Recip divestiture, probably winding up somewhere between $1 billion and $1.1 billion for '14. And EBITDA margins will grow to between 14% and 15%.

Corporate SG&A should be approximately $175 million for next year, '14. Vast majority of this relates to costs for -- support costs for our segments. As I mentioned, we will be evaluating where we report these costs in conjunction with our segment review.

A few words on CapEx. CapEx should begin to drop from our recent run rate. We expect CapEx to be between $425 million and $450 million. We will continue to focus on improving our return on invested capital by improving our margins, as well as remaining focused on capital discipline.

Just a few comments on the first quarter '14. Revenue should be between $2.2 billion and $2.5 billion. EBITDA margins between 13% and 14%. Minority interest should be a couple of cents per share, and EPS between 70% and 75% -- excuse me, $0.70 and $0.75. Don't forget discontinued operations is causing a dilutive effect, and that's probably costing us $0.02 per share. This won't have an impact going forward as we repurchased the shares that I spoke of earlier.

DPS revenue is up 25% to 30% year-on-year. All 3 businesses will see growth. EBITDA margins should be between 13.5% and 14.5%. Drilling is the only issue causing year-on-year margin contraction in DPS.

V&M revenues down nominally on a year-on-year basis. As we've communicated to you on the third quarter call, margins will drop on the same year-on-year basis, somewhere between 20- and 21-percent is a good range.

PCS revenue is around $250 million, obviously, excluding Recip, and margins will be a little north of 10%.

A couple of words in closing. We're expecting another record year for Cameron. We're focused on our core oil and gas markets. We're focused on improving Drilling margins. We continue to return cash to shareholders, and capital discipline is a priority to ensure we improve our return on invested capital.

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

Jeffrey G. Altamari

Christine, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Jack, you guys provided a very clear and concise summary here. I'm sure I'm not the only one interested in the progress that's being made on the drilling front. I know you kind of touched upon it in your prepared commentary, and just kind of curious if you can kind of share with us what's going on there and what's giving you the high degree of conviction and confidence that as year progresses, some of these issues are going to be completely resolved. And maybe just a little bit more color around it, Jack. That's all.

Jack B. Moore

Okay, Kurt, yes. I -- we spend a lot of time focusing on this. It's a daily ritual for us. What we -- as I've said, our backlog is sitting at over $4 billion. When you look at the growth we've gone through in the last 2 years in Drilling Systems, we've woken up and said, "Oh my gosh, we have loaded up the wagon." And in our space, our Drilling customers have high expectations on wanting their equipment when they need it. And so we have started down this journey a few years ago to ramp up capacity to get there, both in infrastructure and people. And we just didn't get there fast enough. We talked about this last quarter. We have made great progress and are continuing to make great progress. A lot of our challenges kind of reside where all of this stuff plans, which is over at our Berwick operations infrastructure. We have had a fairly large capital project there that has been underway for over a year, and it is coming quickly to a conclusion. So I'm very confident that, that is going to help us a lot in terms of just getting our arms around the infrastructure to support the increased demand on the capacity there. And once that starts to normalize and once we are able to actually get a drumbeat through that facility in a way that we have historically when we had some lower volumes, we'll see a significant change in terms of the performance. And these guys know what to do. They're focused on it. They're relentlessly focused on it. We've got a lot of talented folks that are engaged in getting their arms around these challenges. It's not happening fast enough for anybody, but we see the progress we're making every day, both in the planning, in the organization around it, the shipments. We're at record levels of shipments. Unfortunately, we're spending a lot of money to get those shipments out the door.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay, great. And then for Chuck, as we move forward through the process of the divestiture dynamic, right, and the things you're looking at with Centrif at this point, how do we think about the revenue and margin and earnings contribution from that business once we get out of 2014? Or if you maybe even think about 2014, if we could just have a basis point to consider as to what may come out of earnings and revenues for a full year basis. Can you help us out of that a little bit?

Charles M. Sledge

Yes, look, Recip did $326 million for 2013 in revenue, and that's kind of a mid-teens EBITDA business for us. Centrifugal did $397 million for 2013, and that's north of a 20% EBITDA business. So that gives you context of what those businesses look like.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

And Chuck, would it be kind of safe to use kind of first quarter run rates as the proxy for 2014 for Centrif?

Charles M. Sledge

Yes, that's always back-ended. So I think probably they're lower. I'm actually -- Kurt, what you can do is go to our summary that we published and look at that what percentage of the year. I just don't know it well right off hand. I think you can get it from there.

Operator

Our next question comes from the line of Jeff Tillery with Tudor, Pickering.

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

I guess with the big CO2 separation order out of Malaysia, can you just give us some color around the opportunity set there? Is that kind of a once-a-year-type project that comes down the pipe? Or I mean, help us understand what the opportunity set is there.

Jack B. Moore

Yes, Jeff, it is a little bit episodic, given the size of it. We sell a lot of CO2 separation units, especially on FPSOs and -- like in Brazil, where there's a high CO2 content there, but those packages are a lot, lot smaller, maybe 10% to 20% of that number. This is a very, very large onshore development, and it is -- it's something we've been working on for quite some time. And I will tell you it is -- it's got a great aftermarket story to it because this project is probably going to be going -- it's got about a 30-year life. And the beauty of the CO2 market is that the cartridges and the filters and the things that are very, very, very unique to this project and very unique to our technology are things that will need constant care.

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

Right. And then my follow-up question is just generally around the order feel and customer feel as we step through the year. It sounds like other than the Drilling business, your belief is the order outlook is pretty solid across the board. If you could just provide some context for how you're thinking about this year's progress.

Jack B. Moore

Well, it is. I mean, you look at -- again, our -- how we -- where we touch our customers, both onshore and offshore and upstream, downstream. To some extent, we're going to continue to see healthy opportunities. Obviously, I always put the proviso in is that some of this is subject to some of the timing of when projects that we are tracking get awarded. But I would tell you the pipeline is pretty -- is very optimistic in terms of where we have some great opportunities. Our Surface platform, North America has been a great story for us. And we continue to see upside, not as big in '14 as it was in '13, but we see bigger opportunities in markets like the North Sea continue to see in the Middle East and some of the former Soviet Union. Our Valve business has been -- it really hasn't seen some of the projects we've been tracking come to fruition in '13, and we're seeing a little more traction on that. That should help us in '14, albeit it would be later in '14 than we'd like to see an impact to revenue. The Process businesses, our outlook there is, again, we got a lot of opportunities onshore, offshore that we can touch. And then Subsea, with OneSubsea, when you look at the Subsea space for 2014, definitely going to be lower orders and could be significantly lower, given that you're not going to see Petrobras repeat 200 trees in 2014 like they did in '13. They'll buy a few, but it won't be anywhere near that level. But there's a lot and lot of opportunities in the deepwater space that our OneSubsea guys are tracking. Some may not be real headlines in terms of size, but a lot of them add up to be meaningful at the end of the year.

Operator

Our next question comes from the line of Bill Herbert with Simmons & Company.

William A. Herbert - Simmons & Company International, Research Division

Chuck, if we could just kind of delve in a little bit with regard to the DPS margin roadmap. I think you said flat to -- or up nominally year-over-year. Was that correct for FY '14?

Charles M. Sledge

Yes, that's correct.

William A. Herbert - Simmons & Company International, Research Division

Okay, got it. And obviously, we're going to be considerably lower year-over-year in the first quarter. And so that then implies that we are going to be exiting the year kind of high teens in Q4, and second half should be up nicely over the first half of 2013. Do you still -- do you guys still subscribe to a targeted DPS margin? At least, you've mentioned that informally in the past, up 20%. And if so, would we expect to hopefully hit that sometime in 2015, not necessarily average, but at least hit that?

Charles M. Sledge

The answer is yes, we still subscribe to that, and the answer is yes, we would expect to hit that in 2015. Again, not saying we're going to average it for 2015. It's way too early to say that. But assuming that Subsea does what we think it's going to do, we -- Drilling gets to where it's going to get to and Surface continues to do what it's doing, there's no reason why we should not be at that level.

William A. Herbert - Simmons & Company International, Research Division

Got it. And then secondly, Jack, I appreciate the candor with regard to the Subsea order outlook. I'm just curious with regard to -- I mean, there a couple of narratives unfolding with regard to Subsea, if not more than a couple. One, branding deepwater project development backlog; but two, more capital restraint and discipline on the part of IOCs and deepwater NOCs; and then three, a pretty significant contraction with regard to inbound on the part of Petrobras. Given the combination of those 3, the competitive bidding environment for Subsea in general and what pricing portends going forward, how would you describe that in terms of as a narrative which unfolds over the course of this year?

Jack B. Moore

Bill, I would be -- I would tell you that, yes, I'm cautiously optimistic that everyone behaves. We've all lived through -- I mean, if you look at our margins over the last several years, no one is doing back flips. The risk we take in deepwater is significant, and the outcome of our actual performance has not been what we all would want to see. Now I would tell you this: we have a partner that thinks exactly like we do. We're going to do things that make sense. We're going to take on projects that will reward us for the risk and the challenges that we take on. And we're not going to be focused on winning everything. We're going to be focused on winning the right things. And right now, the projects that we're targeting, the things we're working on, the things that the OneSubsea team are looking at seem to make sense. And hopefully, there'll be rational behavior, given whatever the market kind of throws at us over this next 12 to 24 months.

William A. Herbert - Simmons & Company International, Research Division

And last one for me, Chuck, capital spending as a percentage of revenues looks to be kind of migrating down to 4% what -- from what had been kind of a normalized 5% to 6% ratio the past 3 years. Is that what you guys are targeting as the capital spending intensity of your business model going forward?

Charles M. Sledge

No, Bill, it's somewhere between 4% and 5%. I don't see it's going over 5% absent some dramatic increase in the order rate. But I would think about a 4% to 5% number.

Operator

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

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Jack, you talked about your partner and OneSubsea and discipline and all. I'm just curious, you guys have never done much work for Total before, but obviously, your partner is crosstown from them. Does this give you the opportunity to do more work with Total? And of course, where I'm going is does Block 32 get reopened for other people to bid on? I mean, might you now a have a chance at Block 32?

Jack B. Moore

Well, Jim, I would say that fortunately, my partner is right down the road from us now. We actually have more frequent conversations in the great city of Houston. But we both look at this market globally. And I think eyes wide open is that when we look at these projects now together, it's really, can we make the margin expectations? Can we deliver at the end of the day the return that represents the risk and -- with the opportunity? And whether it's Total or any other international operator or national oil company, that's the way we're going to approach it. I will say that the projects that we've taken on and have looked at it, it's going to be a challenge from what we end up with at the end of the day. And we -- and we've said this before, and I'll say it right now, we are going to be -- we will not take on those opportunities unless they meet our criteria of giving us the necessary returns. And I would say that one project you're talking about is probably going to be a challenge from where we look at it in terms of meeting our criteria.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Okay. Well-answered, and I'm glad you didn't win Ipcus [ph] as well. So GE is going to be sorry about that. My next question is about aftermarket. There is a school of thought that the aftermarket business of Cameron is really undervalued and if that's going to be a real stalwart going forward. How fast can you grow your aftermarket business, and about what percentage? I assume it's in the 20%, 22% aggregate now. How fast can you grow that business?

Jack B. Moore

Well, Jim, when you look at just the Drilling segment, it's almost tripled on us in the last 3 years in terms of the intake of orders. Getting it out the door is something we're running hard to keep up with, and we'll get there. It is -- it's a key focus point for us. It is absolutely core to our -- every one of my businesses has individuals that are focused, all 100% on aftermarket. So when you look at our Valve business there are segments of it that offers great opportunities -- there's segments like Distributed Valves that have no real aftermarket associated with it. That's much more of a different business model. And it's more of a replacement model than it is an aftermarket model. But clearly, our Surface business, our Subsea business, our Drilling business, our Process business is becoming more and more and more -- giving us more opportunities as the installed base gets older. Obviously, Subsea, as the installed base gets older, we will continue to see that piece of our business grow appreciably. Is it going to be 15% to 20% a year? I think it could be episodic in certain years and -- than others, but it is something we wake up every day in each one of our businesses and say, "How can we go get more of this?" We look at our installed base as our birthright. And if we're not touching it, then shame on us. And not every business we serve is -- has the amount of regulatory robustness and customer robustness around being disciplined on OEM. So it's our job to make sure that those markets and customers see the value and the benefit of having OEM touch it. And while we have 300-plus locations around the world, while we invest $400 million, $500 million of CapEx in our business, a lot of it is targeted in that market.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Okay. Last, if I could, we put out a quick report on Brazil this week and Mexico. The shifting in spending in Brazil, the fact that they're trying to boost production as fast as they can and not worrying as much about drilling and other things, how does the shift in activity by Petrobras affect Cameron?

Jack B. Moore

Well, I would tell you that it's nice to get a little breather down there. We've been ramping up at such a rapid pace. We -- I think all of us have probably gotten inefficient. We've got -- we've spent a lot of money chasing a lot of things down there. And our Brazil operation I know is doing pretty well. We've got a great team down there leading it. We've got a healthy backlog. We're supplying things that Petrobras needs to produce product through, which is good. And so that's -- and a healthy aftermarket business to support it. So that's kind of our outlook on it. It -- yes, it's going to slow. You're not going to see the order intake at the pace we saw the last couple of years. But quite honestly, we all struggle with -- and able to digest all of that. So it's -- I think it's going to be -- if we're talking about this 3 years from now, then I think it could be a different story.

Operator

Our next question comes from the line of Edward Muztafago with Societe Generale.

Edward Muztafago - Societe Generale Cross Asset Research

I want to follow up perhaps a little bit on Drilling. And maybe just kind of from a, call it order rate perspective in 2014, get your feel as to maybe how you think things may play out. Clearly, aftermarket is doing extremely well. You obviously highlighted the lower level of floater and jack-up orders for next year, but we're also hearing a lot of talk, obviously, about lower utilization for conventional rigs. And I think what that may ultimately lead to is higher level of maintenance as those rigs are kind of put into the shipyard in between jobs, et cetera. So can you maybe just sort of qualitatively talk about -- do you think from an order rate perspective that you see a dramatic falloff in Drilling? Or do you think you have a pretty good shot in '14 of having, maybe not quite a year like we had this year, but something that comes reasonably close?

Jack B. Moore

Yes. I would say that no, it will not be dramatic. I would tell you that we've got such a broad -- again, a broad touch point across all of the markets around the world. We've got a great installed base to support. We have a broader product offering now with the expanded topside equipment. So our market's broader and bigger in terms of what we've historically looked at. So it gives us more bandwidth to participate in the market that's going to be out there. But really, as we focus on the new build construction, both floaters and jack-ups, that's really where we see the contraction. How big it is and how fast it is, I think that can probably be debated to some degree. There's still jack-ups, for instance, out there that are being constructed that haven't made decisions around pressure-controlled equipment or some of the topsides, so those are opportunities that need to be completed. But I would say there's always a flight to quality. And that's where a lot of our customers are focused, to make sure they have the most competitive equipment in the market. And that's -- I think that would be a healthy environment for the equipment providers to support.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. And maybe I can shift gears a little bit and jump over to V&M. And I think going back to the last conference call, you all mentioned specifically that one of the issues that impacted V&M margins was just simply your -- I don't want to say inability, but not being able to anticipate project slippage to the degree that it occurred. As we kind of think about how you changed internally your process, is the margin expectation for 2014 that you've given out, is there an embedded expectation that there is better management of slippage, less slippage? Can you kind of walk us through that piece of the equation?

Jack B. Moore

Yes, no. What we said on the third quarter call is the market has moved, and there were project delays of which we have no control over. And the margin slippage, as we've said, the first half of 2013 was phenomenally strong due to mix and pricing leverage and other things. And so we were just telling people on 2013, "Look, 2 things are happening: number one is customers are not ordering when we thought they would; and we're getting some price pressure." So that was really the message. And we've got that baked into our guidance for 2014.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. I obviously remembered the commentary a little incorrectly.

Jack B. Moore

Yes, sorry about that.

Operator

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

Michael W. Urban - Deutsche Bank AG, Research Division

You've had some success here recently in kind of evaluating the business, obviously, with part of the compression business agreeing to be sold, you're going to look at the rest of it. Is there -- is the extent of the review of the business and the business model really limited to PCS? Or is this an opportunity to kind of take a look at the overall scope of Cameron? And there are certainly some views out there that we hear that you get even more focused and we've seen some success in other parts of the energy industry, other parts of the oil service sector. And just -- have you thought about kind of the rationale for what remains and potentially even getting more focused, in other words, becoming essentially a pure upstream company, or essentially just the DPS business. And just kind of walk through where your thoughts are on that right now.

Jack B. Moore

Yes, I think -- sure. Obviously, our decisions with compression didn't happen overnight. I think our -- with our board, we've looked a lot at the businesses we have across all of our markets and our segments and have been rational in the process in looking at it. And I'd say that process is a continuous process. I would never say you're ever finished. It's just like we identified gaps as well that we think are important to add. I will say though that our story is more succinct after the divestiture compression. When you look at our Surface, Drilling and OneSubsea businesses, they touch each other in a number of ways. The challenges we have with pressure and temperature, the metallurgy, the manufacturing processes, the ceiling challenges, supply chain, manufacturing engineering, the list is long, even our end users to some extent have a lot of commonality in terms of how we touch them. So now you take our Valve and our Process businesses. And you look at our Valve businesses, and it's -- we have -- we build a lot of valves that support our deepwater platform, our subsea infrastructure, not just for Cameron but for others that are in that space, that support manifold systems and production pipelines in deepwater. Distributed works very closely with our Surface Systems business in terms of the well side infrastructure and build out. And our Process Valves works pretty close with our Process Systems in terms of the floating production systems. All of that, which is kind of geared to support what we produce in subsea. So when you think of what Cameron looks like today, the story is very succinct in terms of how it touches oil and gas, how it touches our customers onshore and offshore. And we like kind of where we're at. Now we're going to continue to look at this. I think that is something we're always committed to do and look at how we can create the best value for all of our stakeholders.

Michael W. Urban - Deutsche Bank AG, Research Division

Great. Really, really helpful. And then kind of unrelated follow-up, as I look at the backlog and kind of the guidance that's out there, even adjusting for the divestiture, this would be one of, if not the lowest, backlog realizations as you have backlog going into revenue on a following-year basis or 1-year forward basis. Is that just the need to be conservative given, obviously, you've not lived up to your expectations over the last few quarters and just trying to bake that in? Is that just the nature of the projects and the timing of the projects, a little of both? If you could give us a little color on that, please.

Jack B. Moore

Yes, it's a little of both. Obviously, we want to make sure that we set realistic expectations for everyone. But the business has shifted over the last few years to longer cycle. And even in our Surface business that used to be, 10 years ago, a very short-cycle business. It has become more and more of a long-cycle business. So it is a combination of both. We took a good, hard look at our capacity [indiscernible] we have in Drilling and feel like the revenue guidance we've given provides a range that reflects what we can actually get out the door.

Operator

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

Brad Handler - Jefferies LLC, Research Division

Can I come back to Drilling as well, please? I guess we all keep sort of beating it up in a way. But on the Drilling side, can you comment on margins, fourth quarter versus third quarter, in Drilling? And then in your guidance for Q1, I guess what I'm trying to get at is are the challenges stabilized, or the expediting costs and other costs weighing down even more kind of in the near term? If you can carve out the path, again, 4Q, 1Q, that would be helpful.

Jack B. Moore

Yes, they did drop third quarter to fourth quarter. And we think we're-- if we're not at the trough, we're pretty doggone close. We -- there is a chance of a little contraction in the first quarter that's baked into our guidance, into our margin guidance for DPS, and -- but we see thereafter, just improvement every quarter thereafter.

Brad Handler - Jefferies LLC, Research Division

Right. Is it a function of delivering that many more stacks, for example, presumably? Is that kind of what's driving it so that the expediting costs are what they are? But it's just a question of the volume, is it that much harder to keep up with, 4Q and then, again, in 1Q?

Jack B. Moore

No, it's a combination of things. We obviously are bringing on more people, so you have nonproductive time. We're still bringing on people. We're still adding capacity, so you have under absorption there. But again, those things moderate as we get out of the first quarter. And we feel confident that as we move through the year, you'll see that margin just every quarter tick up.

Brad Handler - Jefferies LLC, Research Division

Okay, makes sense. And unrelated follow-up, if I may. Could you just give us a little bit of -- in terms of the $3.60 to $4, where's the vulnerability in your mind? What takes it closer to $3.60? Is it executing on Drilling? Is it more of a macro upstream spending comments or some combination or some other factors?

Jack B. Moore

Yes, I think if you think about the $3.60, it's obviously would -- has some thinking around Drilling in that. You also have some thinking around North America in that number. So I think those are really probably the 2 big drivers of where we wind up in the range other than the normal things that are in the range. Those are really the 2 big drivers. It's number one, where we ultimately get Drilling to this year; and number 2, it's got some thoughts around North America. We've had record orders there for quite some time, lot of capacity being added by us to meet that demand. And so it's got some thinking around that too as well.

Brad Handler - Jefferies LLC, Research Division

Some risks that I guess it doesn't grow through the course of the year that you might have factored. Is it the sort of flat North American outlook to see the $3.60? Is it that clear-cut?

Jack B. Moore

It's not that clear-cut because even in a flat environment, we should still be able to take share. So it's really not that clear-cut.

Operator

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

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

I just wanted to go back to this one more time on Drilling, but more specifically, can you give us a sense for the margins between new equipment and aftermarket in the sense that are they both being impacted by this? Or is this just more on the new equipment delivery side?

Jack B. Moore

Yes, let me be real clear about this. It's not only just new equipment; it's the subsea stacks within new equipment. We obviously have jack-up stacks and land stacks that those margins are just fine. So just to be very, very transparent and clear, it's the deepwater stacks that are the issue.

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

Are you willing to say what percent of backlog that is of Drilling?

Jack B. Moore

I don't have that number handy, but the revenue for 2014 is about $0.5 billion in those subsea stacks.

Operator

Your next question comes from the line of Doug Becker with Bank of America Merrill Lynch.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Chuck, yet another question, just trying to engage the progress on Drilling. Heading in the fourth quarter, you're looking for about 100 basis points of margin improvement in DPS. Margins declined modestly. Can we get just a little bit of a reconciliation of what didn't meet expectations in the fourth quarter?

Charles M. Sledge

Drilling margins.

Douglas L. Becker - BofA Merrill Lynch, Research Division

So entirely Drilling. How do you reconcile that with the comments that you're making significant progress?

Jack B. Moore

Well, what we talked about is adding capacity and significant progress and look at the volume we got out. Drilling at a record volume period. So I think that's how you reconcile them is number one, you physically are putting in the capacity. It does take time for that capacity to be productive, but we see the building. We see the machine tools. And then secondly, we got out a tremendous amount of drilling work in the fourth quarter, and that is sign of progress.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Okay. And then just a quick one. What's the share count embedded in guidance?

Charles M. Sledge

It's probably -- again, that factors into our thinking of $3.60 to $4. But somewhat in the midpoint, it's another 4 million, 5 million shares out from where we are today.

Operator

Our next question comes from the line of David Anderson with JPMorgan.

John David Anderson - JP Morgan Chase & Co, Research Division

In checking the release, you have touched upon adding industry experts to your leadership team. If you can just expand upon that a little bit more. Is that from -- is that operational? Is that strategic? Is there a specific segment that you're targeting? If you can just expand a little bit on that, please.

Jack B. Moore

It's all operational focus. These are positions that we targeted for a couple of my team, specifically, a couple of them embedded in the business units. We've added a good number of folks into our leadership infrastructure in Drilling. We've added some into OneSubsea. We've added a few into Process Systems. So I think a pretty broad -- a broad brush of talent that we targeted to strengthen and give us some, I think, broader perspectives on operational excellence and managing some of the cost challenges that we've seen in parts of our business.

John David Anderson - JP Morgan Chase & Co, Research Division

So this is beyond just the Berwick expansion? This is kind of a whole operation?

Jack B. Moore

It's beyond. It's beyond just Berwick, yes. It's beyond just Drilling as well.

John David Anderson - JP Morgan Chase & Co, Research Division

Now I kind of have a different question about offshore development delays. You see a whole bunch of them pick up over the last 12 months. You seem to be more or less discrete projects maybe with the exception of Brazil. I was wondering if you can just kind of comment on how you see that playing out. You made a commentary about the subsea market probably become flattish x Brazil, maybe down a little bit this year. Can you see these offshore development delays kind of coming through? I know you're involved with the Rosebank, that was one of them. Maybe you can tell about that one more specifically. But do you expect offshore development delays to come through and, therefore, we should be thinking about 2015 as kind of a recovery market for subsea?

Jack B. Moore

Well, I think we look at the deepwater developments on a -- you got to look at it over a longer time frame than just 12 months. And we always talk in terms of 18 months, 24 months. There is a large pipeline of opportunities. Some are not going to happen because they're going to be constrained with cost, and they're going to continue to refine that, and some will move forward. I think the biggest challenge that our customers all have is trying to improve their reserve portfolios, at the same time, manage these escalating costs that they've seen. And Rosebank is a good example. When they put it all together, the cost number didn't -- it didn't make sense to them. So we're all working on that. It didn't go away, but the challenge for all of us is to find more economies of scale we can bring to these deepwater projects. I think it's a great opportunity for OneSubsea when you look at the things that our team is focused on in terms of reservoir recovery, enhanced recovery at the seabed, lowering the cost of intervention, improving production through boosting in subsea processing. Customers are really, really keen on listening to that and engaging our guys in that conversation because this challenge won't go away. Every one of our operators around the world are challenged with the issue of how to get costs out of these developments. And so is that going to affect more projects in '14 versus '15? I think we have to see how the year plays out and -- but over the long term, these projects still are going to have to -- a good number of them will move forward because it's how our customers are going to continue to replace reserves that are critical to the future.

John David Anderson - JP Morgan Chase & Co, Research Division

So it sounded like from your comments on Rosebank, you expect it to continue to go through. So that order's staying in backlog for the foreseeable future?

Jack B. Moore

It is in our backlog, yes.

John David Anderson - JP Morgan Chase & Co, Research Division

I'm just wondering if it comes out. That was all -- that's all I was wondering. But it sounds like no. Okay.

Jack B. Moore

No reason at this time to do that.

Operator

Our next question comes from the line of Joe Gibney with Capital One.

Joseph D. Gibney - Capital One Securities, Inc., Research Division

Just one quick follow-up in terms of your Drilling inbounds in the quarter. I was wondering if you could provide, I apologize if you already did, the number of deepwater stacks and jack-ups that you actually inbounded here in the fourth quarter?

Charles M. Sledge

Let's see here. Hold on 1 second. Okay. We did no floaters, and we did 11 jack-ups if I'm reading this correctly.

Jeffrey G. Altamari

Christine, we'll take one more question.

Operator

Our final question comes from the line of Scott Gruber with Bernstein Research.

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

Just a final one here on DPS, one thing we didn't touch on this morning. Can you just provide an update on the restructuring of the LTI business and the integration of TTS? Has that been complete? Are the margins for these businesses still weighing on DPS?

Jack B. Moore

Look, we've got -- again, we've made a lot of progress in the integration. We've got some good things going on. I'm impressed with the aftermarket pace that we are now picking up and the margins that we're seeing or getting where we -- our expectations. The number of projects we've been able to book on the packages, on the jack-ups, is above our expectations in that pace. We have more work to do on the cost structure. The margins aren't where we need to be. But as Chuck said, the biggest issue we have in Drilling margins right now is in the deepwater stacks.

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

Got it. But there is room for improvement within the rig equipment business outside the deepwater stack?

Jack B. Moore

Oh, yes. Now there is. I mean, we're still maturing some of the things that we took on with that acquisition. We still have work to do to get it where it needs to perform better.

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

And the majority of that can be realized over the course of the year, so by '15 it looks more normal?

Jack B. Moore

That's the game plan. That is our game plan. Absolutely.

Operator

Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to Mr. Altamari for closing comments.

Jeffrey G. Altamari

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

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

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