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Oceaneering International, Inc. (NYSE:OII)

Q4 2013 Earnings Conference Call

February 19, 2014 11:00 am ET

Executives

Jack Jurkoshek - Director, IR

Kevin McEvoy - President & CEO

Marvin Migura - EVP

Cardon Gerner - SVP & CFO

Analysts

Kurt Hallead - RBC Capital Markets

Jim Wicklund - Credit Suisse

Jeff Spittel - Clarkson Capital Market

Ian Macpherson - Simmons

Jon Donnel - Howard Weil

Operator

Good morning or afternoon. My name is Jake, and I'll be your conference operator today. At this time, I would like to welcome everyone to the 2013 Annual Q4 Earnings 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. We'd like to thank you for joining us on our 2013 fourth quarter and year-end earnings conference call. As usual, a webcast for this event is being made available through the StreetEvents Network Service by Thomson Reuters.

Joining me today are Kevin McEvoy, our President and Chief Executive Officer, who will be leading the call; Marvin Migura, our Executive Vice President; and Cardon Gerner, our Senior Vice President and Chief Financial Officer.

Just as a reminder, remarks we make during the course of the call regarding our earnings guidance, business strategy, plans for future operations and industry condition are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

And I'm now going to turn the call over to Kevin.

Kevin McEvoy

Good morning and thanks for joining the call. Before I get into my customary review of the quarterly results, I would like to address four key points in our earnings release.

First, 2013 is a record earnings year for Oceaneering. Earnings per share increased for the fourth consecutive year and 29% over 2012.

Second, we're expecting an even better 2014 and reaffirm our previously announced EPS guidance range for the year of $3.90 to $4.10.

We are aware of recent 2014 market reports raising concerns about softening demands for older and less technically capable floating drilling rigs, a slowdown in the overall rate of growth in E&P capital spending by our customers, deepwater field development project deferral and cost overruns on field development projects currently underway.

At this time, we believe our guidance range already accounts for these concerns and reflects the potential impact to our 2014 results for the deepwater services and products that we offer.

The softening of rig demand in 2014 won't to the greatest extent impact our ROV operation. During 2013, ROVs generated 41% of our operating income and approximately 75% of our days on hire were in drill support. At year-end, we had vehicles on 160 floating drilling rigs or 57% of the contracted fleet. Of the 160 rigs, 103 were higher specification rigs, which we define dynamically-positioned fifth and sixth generation semis and drill ships, and 57 were lower specification rigs. So our drill support ROVs were split 64% on high spec rigs and 36% on lower spec rigs.

Of the 57 lower spec rigs, 17 had contracts expiring during 2014 with an average contracted period of 175 days. So basically, our ROV contract exposure to this class of rigs is 8.5 rig years out of a total of 160 rig years or 5% before you consider new coming into the fleet. We still expect to add 30 to 35 new vehicles to our ROV fleet in 2014 and currently have firm contracts in hand till 2018. Consequently, within the framework of our overall company plan for 2014 our business exposure to softening demand for lower spec floating drilling rigs is significant enough to warrant to our EPS guidance range at this time.

Third, our long term outlook remains very positive as deepwater should continue to be one of the best secular growth prospects in the industry. Industry reports forecast that the largest source of future incremental oil supply by 2020 will come from subsea development and that our customers will increase their deepwater investments to make this happen.

According to a study by Douglas-Westwood released just last month, global CapEx on deepwater oil and gas projects will more than double over the next five years.

And finally, we are initiating first quarter 2014 EPS guidance of $0.75 to $0.80, which is consistent with our historical seasonal quarterly earnings pattern. At the midpoints of over 2014 guidance ranges, first quarter EPS would be 19% of our EPS for the year.

I'd now like to review our operations for the fourth quarter. EPS of $0.86 for the fourth quarter of 2013 was 16% above that of the fourth quarter of 2012 on income improvements from all of our oilfield business operations led by ROVs and subsea products. ROV operating income improved 18% on a 13% increase in days on hire primarily in the Gulf of Mexico and an improvement in operating margin. During the quarter, we have put nine vehicles into service and retired seven.

Our fleet mix usage during the quarter was 75% in drill support and 25% on vessel based work, the same as in the fourth quarter of 2012. It was 73%, 27% last quarter. ROV operating income margin for the quarter was 28%. It would have been higher if not for the $3.3 million charge related to our OGX receivable. In the fourth quarter of 2012, ROV operating margin was 27%.

Subsea Products operating income rose 20% to a record high on increased demand of subsea hardware and higher throughput at our umbilical plant. Operating margin of 22% for the quarter was the same as in the fourth quarter of 2012.

Subsea Projects operating income increased by 24% due to increased deepwater vessel service activity. Asset Integrity operating income improved 29% on higher service sales in most of the major geographic areas we serve particularly Africa.

Advance Technologies' operating results declined as we had anticipated. This was attributable to project that had been moved forward into earlier quarters of the year and delays the new awards in current year funding by the U.S. Government for the services we provide to the US Navy.

Our overall fourth quarter EPS results was slightly above our guidance range on better than anticipated results on our Subsea Projects and Subsea Products operations.

With regard to Subsea Projects, in Angola our customers extended their use of the Maersk Attender and various smaller support vessels. In the Gulf of Mexico, certain diving work lasted longer than we had expected. One particular job is on a PLP that involved tendons and oil piping installation, another was on a floating semi production platform to perform oil piping with (inaudible) repairs.

Subsea Products margin was higher than we had expected as our revenue mix had more tooling and less umbilicals than we had anticipated.

Moving onto review our total year 2013 operations, we achieved record earnings of $372 million and EPS of $3.42. This was largely attributable to global focus on deepwater and subsea completion activity, the business expansion strategy we have in place and our solid operational execution. Overall operating income margin was the second highest in our history.

For 2013, each of our operating segments obtained higher income. Four of five segments achieved record operating income, although not a record subsea projects' operating income increased 48%. ROV operating income rose for the 10th consecutive year, an accomplishment we are very proud of. This was attributable to higher global demand to provide both drill support and vessel based services and the expansion of our fleet. In addition to higher demand in the U.S. Gulf of Mexico and offshore Africa, we also experienced significant activity increase in offshore India, Canada and Australia.

We increased our days on hire by more than 9,000 to over 91,000 days. Our fleet utilization rose to 85% from 80% in 2012. During the year, we grew our fleet to 304 vehicles, up from 289 at the beginning of the year. We added 26 vehicles, retired 10 older systems and transferred one system to Advance Technologies for non-oilfield use. In 2013, 14 new floating drilling rigs were placed in service and we had new ROV on 10 of them.

At year-end, we estimate that we will continue to be the largest ROV owner with 35% of the industry's work class vehicles with a fleet size about 75% bigger than the next largest ROV fleet. We remain the primary provider of ROV drill support service with an estimated market share of 57%, almost three times that of the second largest supplier.

Subsea Products' operating income increased on higher demand for each of our major product line led by Subsea Hardware. The higher demand for subsea hardware included flying leads, junction plates and the umbilical termination assemblies for offshore field development and plant connector systems for processed piping notably for the construction of the new offshore gas facility. Operating margin increased slightly with 22% from 21% in 2012. Umbilical revenue as a percent of our total products revenue in 2013 due to 29% from 28%in 2012.

Our year-end subsea products backlog was an all time high of $906 million, up 33% from $681 million at the end of 2012. This backlog growth was primarily attributable to four umbilical contracts, which added about $170 million to our backlog. These umbilicals are for use in the Gulf of Mexico, West of Shetland and offshore Egypt. Product manufacturing on these contracts will ramp up during 2014 and we anticipate completions in the third quarter of 2015.

Regarding Subsea Projects, operating income grew in 2013 primarily on increased deepwater vessel activity.

Asset Integrity operating income improved on higher service sales in most of the major geographic areas we serve, particularly Africa and Australia. Advanced Technologies profits were up on higher activity and improved execution of theme park projects and vessel maintenance work for the U.S. Navy.

Our 2013 capital expenditures were $394 million of which $226 million were spent on expanding and upgrading our ROV fleet. We invested $103 million in our subsea products business mainly to increase the capabilities of umbilical plans in the U.S. and Scotland and expand our rental and service tooling hardware offering. We also paid $91 million in (inaudible) stock dividend and paid our revolver down $94 million during 2013.

At $746 million our 2013 EBITDA was also a record high. At year-end our balance sheet reflected $91 million of cash, no debt and $2 billion of equity.

In summary, we believe our annual 2013 earnings performance and cash generation were excellent. We are committed to our customer success and our results reflect their recognition of our ability to provide value. The price of Oceaneering stock rose 47% during 2013. We believe this was in recognition of our financial performance and our future business prospects. Our share price percentage increase was greater than the Oil Service Sector Index or OSX, which by comparison rose 28%.

Now let's talk about our 2014 EPS outlook. We are reaffirming our 2014 EPS guidance for the range of $3.90 to $4.10 based on an average of approximately 109 million diluted shares and an estimated tax rate of 31.3%, comparable to the 31.5% of 2013. The detailed business segment outlook that I reviewed on our last earnings call in late October 2013 are fundamentally unchanged. We continue to expect each of our oilfield business segments will achieve higher income in 2014.

We are anticipating sustained global demand growth for our services and products to support deepwater drilling, field development and inspection, maintenance and repair activities. In 2014, we expect 29 new floating drilling rigs to be placed in the service. ROV contracts have been let on 19 of these and we have won 16.

During 2014, we anticipate generating at least $850 million of EBITDA. Our balance sheet and projected cash flow provide us with ample resources to invest in Oceaneering's growth.

Our organic CapEx estimate for 2014 is around $450 million. Of this amount, we expect approximately $225 million to be spent on adding systems to our ROV fleet and vehicle upgrade. About $120 million is to enhance our subsea products capabilities, particularly to expand our (inaudible) and tooling/rental and service hardware offering, and about $55 million is for subsea projects largely to fund the construction progress payment for a new subsea support vessel schedule to be delivered by the end of the first quarter of 2016. Our focus in 2014, as it was in 2013, would be on earnings growth and investment opportunity.

Moving to our first quarter 2014 outlook, as I stated earlier, our EPS guidance range is $0.75 to $0.80. This is consistent with the fact that our first quarter earnings are customarily lower than the fourth quarter of a previous year. Our first quarter 2014 guidance at the midpoint is up compared to the first quarter 2013 as we expect all of our oilfield segments to achieve higher operating income led by subsea products.

Compared to the fourth quarter of 2013 our first quarter guidance is lower based on anticipating deductions in operating income from subsea products due to project timing from subsea projects due to the release of the Maersk Attender in Angola, which occurred earlier this month, a normal seasonality in the Gulf of Mexico.

At the request of our customer, we are going to Maersk Attender in the second quarter with another vessel, The Bourbon Evolution 803 for a term through the end of August 2014 with multiple extension options.

On a macro basis, we remain convinced that our strategy to focus on providing services and products to facilitate deepwater exploration and production remain sound. We believe the oil and gas industry will increase its investment in deepwater, as it remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates at relatively low finding and development costs. Therefore, we anticipate the demand for our deepwater services and products will continue to rise and believe our business prospects for the next several years remain promising.

At the end of 2013, 109 of the 155 existing high-spec drillships in 5th and 6th generation semis were contracted to operators other than Petrobras in Brazil. We had ROV contracts on 87 of these for a market share of 80%. At year-end, they were a total of 102 new floating rigs on order, 73 of these rigs are not contracted to work for Petrobras in Brazil, and we expect all of them will go to work for other operators. Of these 73 rigs, 21 ROV contracts have been let and we have 118 of them, leaving 52 ROV contracting opportunities left to be pursued outside of Petrobras in Brazil.

So the visibility of growth for this market remains promising and, looking forward, we see no reason why we will not continue to be the dominant provider of ROV services on these rigs.

As the use of floating rigs grow, we believe that it is inevitable that discoveries will eventually drive orders for Subsea Hardware to levels not previously experienced, and demand for ROVs to support vessel-based activities should follow.

Quest Offshore's latest Subsea Hardware forecast for the period 2013 to '17 includes an increase in tree orders of about 65% over the previous five years. For 2013, they were 553 subsea tree orders, an all-time high, eclipsing the previous record of 426 trees in 2006 by 20%.

In 2014, tree orders are projected to be decline somewhat due to lower orders by Petrobras, the tree installations are forecasted to continue increasing to an all-time high for about 410, 25% over 2013. Tree installations drive demand for a substantial amount of the ancillary subsea production hardware that we manufacture. For example, umbilical orders in 2014 are forecast to rise to about 1750 kilometers, up 35% from the estimated 1300 kilometers level in 2013. Quest is forecasting a 37% increase in umbilical orders for the five-year period 2013 to 2017 compared to the previous five years.

Based under subsea tree order forecast, Quest Offshore is projecting average annual subsea tree installations over the five-year period 2013 through 2017 will increase by 150 or about 50% from the previous five years. The number of subsea completions in-service compared to 2012 is projected to increase by 35% by the end of 2017. We believe the projected rise in tree installations and the growing number of subsea completions in service will act as catalysts for further growth in our subsea products and subsea projects operations and profits.

Furthermore, industry and regulatory emphasis on safe and reliable operations is providing additional opportunities for us to demonstrate our capabilities. With our existing assets, we are well-positioned to supply a wide range of the services and products required to safely support the safe deepwater efforts of our customers. We believe Oceaneering's business prospects for the long-term remain promising. Our commanding competitive position, technology leadership and strong balance sheet and cash flow enable us to continue to grow the company, and we intend to do so.

In conclusion, our results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well over both the short and long term. We like our position in the oilfield services market and are leveraged to the growth of deepwater and subsea completion activities that is currently underway.

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

We achieved another record year of EPS performance in 2013 and expect that 2014 will be even better. We believe this distinguishes Oceaneering from many other oilfield service companies.

Oceaneering is flourishing. I recognize and thank our over 12,000 employees who are making this happen through their commitment to safety, quality and creativity, all within the framework of our core value.

We appreciate everyone's interest in Oceaneering. I'll now be happy to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Kurt Hallead from RBC Capital Markets. Your line is open.

Kurt Hallead - RBC Capital Markets

It was a great opening commentary and summary to addressing all the issues that have been dogging Oceaneering stock here recently, so kudos I guess for dressing an upfront. In that context, you guys referenced factoring in a lot of these issues into the guide points for 2014. The number of questions that I've been getting over the last few weeks is what is the exposure in terms of rig for Oceaneering, rig downtime, and if you can may be just give some indication to maybe how many rates you expect to go down, you mentioned 17 for contract renewal kind of in the lower spec dynamic, if you give some parameters around how you're risk assessing 2014, I think that'll probably be helpful as well.

Kevin McEvoy

Well, I think our comments that we're looking at 8.5 rig years out of a total of 160 puts us into perspective. I don’t think we necessarily know anymore than anyone else as to whether these 17 will continue on or not, but we believe that the uncertainty that might exist here is within a limit what we'll opt for our guidance.

Kurt Hallead - RBC Capital Markets

I would surmise predicated on the commentary about subsea tree installations going into next year, another primary concern that some investors have voice was the revenue mix shift go into products, projects and is "being much visible", but predicted on the data set that you provided, it doesn't look like there is any really less visibility in product and project opportunities than there is for ROV. Can comment on that?

Cardon Gerner

I think the visibility is that the analyst community doesn't follow and there is not a well publicized source of tree installation. So like there is rig contracts. So I mean, we feel the same way as you indicated that with a growing subsea installation base and the increase in the rate of installation, it plays well to one of our strengths in products and projects and we don't see that much softening, I mean no one is talking about a decrease ion the number of drilling rates, they're only talking about perhaps temporarily slow down in the growth rate. So I think it may not be as visible, but we feel it still as real.

Kurt Hallead - RBC Capital Markets

You guys referenced 30 to 35 ROVs is that a gross number or a net number for the year?

Kevin McEvoy

That's the gross number. As we've stated previously we are just going to report on requirement as they occur quarterly. And we also said about 4% to 5% per year of the fleet so that somewhere between 12% and 15% would be kind of a normal year, but we will just see how it goes.

Kurt Hallead - RBC Capital Markets

Okay. And then use of cash for free cash flow thought process between share repurchase, dividend increases, what's the mind set there?

Kevin McEvoy

No, we haven't really changed our position there. Our first priority is organic growth, second is acquisitions and we stated many times that those are more difficult to come up with. Of course dividend payments are there and we have not -- we do have an authorization for continued share repurchase, but we do that on an episodic basis. And we address our dividend increased annually basically in the spring.

Operator

Your next question comes from Jim Wicklund from Credit Suisse. Your line is open.

Jim Wicklund - Credit Suisse

You beat me, good job. The question I want to talk about Quest tree orders and installations and according to Quest 40% of the trees that are going to be installed over the next several years are all in Brazil. I know you guys don't do much rig work in Brazil, but can you talk about how much tree installation business you have in Brazil?

Kevin McEvoy

We don't have any tree installation in Brazil. We don't do that there. I mean that really is more a indication of umbilical orders in our Brazilian market as far as trees there.

Jim Wicklund - Credit Suisse

Okay. Can you talk about -- you talked about mix in umbilical revenues, margins went up, which is good congratulations. As the umbilical orders go through and finish in sometimes second half of '15, can you kind of walk us through what the mix should do to products margins this year, just so we kind of on the progression?

Cardon Gerner

Jim, we have given the answer, we said that the margin for products is going to be between 19% and 21%.

Jim Wicklund - Credit Suisse

Okay.

Cardon Gerner

And that excludes that the mix that we foresee and so that's kind of the answer.

Jim Wicklund - Credit Suisse

Okay. And last question if I could, you guys said on the third quarter conference call, you are going to try and raise prices to offset inflationary pressures to try and keep 30% operating margins. Do you still think you can get pricing?

Kevin McEvoy

Well, that relates to the ROV business obviously and that is it was not a new thing that we said at the third quarter; we've been saying that forever and that's something that we were constantly trying to do across are continually going up and we are doing our best to try and raise revenue in order to maintain the margin. And it is not a easy thing to do but that's our strategy, that's our objective.

Jim Wicklund - Credit Suisse

Okay. Let me put it this way. Do you think the market with a net addition of rigs is strong enough to be able to prices in ROVs over the next year or two?

Kevin McEvoy

Well, we're really pretty decoupled from the rig pricing with our ROVs since we work directly for the operators but --

Jim Wicklund - Credit Suisse

I'm just talking about the net rig additions.

Kevin McEvoy

Sorry?

Jim Wicklund - Credit Suisse

Land apart?

Kevin McEvoy

Sorry, say that again, Jim.

Jim Wicklund - Credit Suisse

Well, I'm just saying that you are talking about the net addition of the rigs, I'm just thinking the demand for ROV is going to go up and I'm just wondering how much pricing potentially you might have over the next two years as demand for ROVs and more rigs go out and demand which you have increased.

Kevin McEvoy

Well; I mean we could see it on every one of the contracts visibility is so good on these that there is no supply demand imbalance that everybody knows these are coming. So it is a contract by contract negotiation to try and maintain levels and of course operators on the other side are trying to hold the line, if not decrease. And so that's a dynamic that we live with every day. While we are decoupled from rig pricing per se, it would be a tougher environment, we trying to get increases with rig rates are going down there's no question about that.

Operator

Your next question comes from Jeff Spittel from Clarkson Capital Market. Your line is open.

Jeff Spittel - Clarkson Capital Market

May be if we think about the products business, if I heard you correctly I think you said your revenue mix in terms of umbilicals in 2013 was relatively stable year-on-year yet the margins were up 200 basis points. That would lead me to infer that the margins were moving higher and I watch tooling. If that is inaccurate assessment can you help us kind of understand a) if that is sustainable, and b) how that plays into the guidance with the mix shift going on in the products business in '14?

Kevin McEvoy

Well obviously, how this stuff plays in how we figure out what our guidance is going to be. And I think within the non-umbilical part of our products business, we have some pieces that are more profitable than others and I think we just enjoy a mix of the more profitable elements of that and that explains that. But it is short visibility to a large extent and so it just makes it more challenging to try and predict, but we have taken all of this in our judgment into account and given the guidance range that we have for that segment.

Jeff Spittel - Clarkson Capital Market

All right.

Kevin McEvoy

And I think it is very satisfying to have 100 basis point improvement in our product margins because we always used to guide to the high teen and two years in a row we came in at the low 20s. And so as we get more umbilical input and you got your cost covered, you do get a slight up tick in contribution there and so -- as you also indicated with higher margins growing almost propositionally with umbilical group at least through '13. I mean that is what gave us the confidence to set as a high teens. Last quarter we did 19 to 21.

Jeff Spittel - Clarkson Capital Market

That makes sense. I appreciate it. And then may be if we think about if some of the operators might be inclined to defer some capital spending on development projects, would you foresee them shifting some of their spending maybe a little bit more to less capital intensive stuff i.e., deepwater intervention work this year?

Kevin McEvoy

I do not think that's the way it goes. I mean, deepwater intervention work happens as it occurs, a need be done. So it is not something they necessarily plan from that context, but your guess is as good as mine on what they are going to do with their money. I think that maybe they would be more particular about what they pull the trigger on to go forward with perhaps and they are having up to now I do not know. But I still believe with all of the drilling and the prospects that are there there could be plenty of opportunity for development that we can participate in.

Jeff Spittel - Clarkson Capital Market

I think its too early tell how the Capex is going to come down.

Cardon Gerner

But that Douglas-Westwood report that we cited, I thought very interesting because it was just issued in January and they had an earlier report out but they increased their deepwater CapEx in beginning of 2014 for this five-year look. When they had an opportunity they hold it flat or take it down, with everybody with a speculation, we understand that the IOCs and NOCs are going to cut back, they reportedly going to cut back on CapEx but it does not seem to be occurring or projected to occur in deepwater and that is encouraging.

Operator

Your next question comes from Ian Macpherson from Simmons. Your line is open.

Ian Macpherson - Simmons

Hey, thanks. The one thing that stood out a little bit was the -- in the fourth quarter your ROV fleet size and your revenues were flat sequentially. I wonder how -- if that has had any bearing on the growth trajectory that you envision for ROVs in '14 or if you expect some -- may be if you can just remind us of the cadences that expansion that you are thinking about for this year?

Kevin McEvoy

I will start, I think we indicated we are going to add 30 to 35 ROVs gross and retire a few. And we added how many, Jack, 20 --

Jack Jurkoshek

For the year?

Kevin McEvoy

For the year, 26. So I think that those trajectory for '14 is really timing of when rigs go to work, when project start, but we added 26 gross in '13 and we are saying in light of all the market conditions 30 to 35 in '14.

Jack Jurkoshek

Yes, and just reiterate we have firm contracts in hand for 28 of those.

Kevin McEvoy

Right, yes.

Jack Jurkoshek

That is pretty solid outlook I'd say.

Kevin McEvoy

So the flat revenue between third and fourth quarter didn't go in and affect as much or does not affect our growth trajectory.

Ian Macpherson - Simmons

Okay. The build up in the fleet this year while its dependent on the timing of rigs, is it more smooth or do you think it might be more lumpy from quarter-to-quarter?

Kevin McEvoy

I do not know.

Jack Jurkoshek

Takes a while --

Kevin McEvoy

Just I mean --

Jack Jurkoshek

You'll find out on a quarter to quarter --

Kevin McEvoy

You will know when we -- just shortly after we do, I think directionally it is more smooth.

Ian Macpherson - Simmons

Okay. Would you be willing yet to share more of your CapEx plans for your new installation vessel beyond the $65 million that you are planning to spend this year?

Kevin McEvoy

No. We think we can. We do not want to for market reason, I mean it is -- we talked about the progress statements just so you will have a sense of what our CapEx is going to be but I mean, when you looked in the grand scheme of things $3 billion balance sheet and $450 million of projected CapEx, no one particular boat is going to cost -- it's not going to change economics that much.

Ian Macpherson - Simmons

I know. I'm just curious if this is a $160 million asset or $400 million asset.

Kevin McEvoy

Okay. Let me answer that. Without any other comic, it is not $400 million asset. We're not building a construction boat here.

Operator

(Operator Instructions). Your first question comes from the line of Jon Donnel from Howard Weil. Your line is now open.

Jon Donnel - Howard Weil

I have a question regarding the products backlog. You've mentioned the four large bulk awards but I think this happened during the first half of the year. Can you give us a little more color on the orders you saw during the second half of the year and specifically Q4 which I think came in well over $300 million, and whether or not there were any umbilical awards in there or this order of $250 million plus per quarter base level orders are sustainable here in your mind, absolutely umbilical awards?

Kevin McEvoy

We just have one large umbilical order in Q4. (inaudible). I think that because umbilical awards tend to be large and they're pretty episodic you can't really plan on a run rate on that part of our product business, it just happens when it happens.

Jon Donnel - Howard Weil

Sure. That's why I was wondering if that kind of $250 million range per quarter is kind of the base level we should expect from more of just the hardware and (inaudible) and the tooling kind of operating that segment.

Kevin McEvoy

I think you might remember -- you are well aware that most of our other product offerings are of much more short cycle than umbilicals. And now that we've got umbilical backlog, it would be very normal when we talked about being episodic or lumpy, it would be not alarming to see borrowing some of this backlog and we're not going to be so focused on the book to bill because it is episodic. So I wouldn’t get too much involved in the book to bill or order rate. I think we're going to look for is can we deliver that 19% to 21% and products continue to be our fastest growing segment.

Jon Donnel - Howard Weil

Okay. And then on the project side, I was just wondering if you could maybe give us little more details around the kind of margins during fourth quarter revenues, it sounds like you have a couple of expansions on projects in Gulf of Mexico and some installation deepwater work, but outside the cost picked up and even in excess of that I wonder if you could kind of describe what were some of the drivers of that and projecting similar occurrences here as you have some of the vessel turnover in Angola through the first half of the year.

Kevin McEvoy

I think what we said in the last quarter is that we expect to show a slight improvement in operating margin for the year, and it comes from a range of things. It is additional (inaudible) in the Gulf of Mexico and decrease in dry docking expenses, all for '14. And project is really large to look at on a quarter by quarter basis especially after you go through the two summer quarters, we do expect a lower margin in Q4 and again a lower one in Q1. On an annual basis, I mean, we've talked about the 100 basis improvement in products we have 100 basis improvement in projects and asset integrity and got it all the down the line. We did pretty good. And I think projects is now has to produce steady run rate, but a lot depends on the timing of the projects and the follow up in with a project market and particularly the seasonality aspect of (inaudible) in the fourth and the first quarters.

Jon Donnel - Howard Weil

Okay. I was just wondering I mean, we didn't really see the top line seasonality in 4Q, so I was just wondering if there were specific costs at one end, there is more maybe one-time in nature or how we should think about is we have the transfer of the vessels. I understand have a larger perspective in the year.

Kevin McEvoy

No, I just -- I don’t have a clear answer on why revenues went up and operating income, margin came down. It really had to do probably more with mix within the projects segment of the jobs and the shifting of the vessels. So it wasn’t enough for me to do an analysis on that.

Operator

There are no more telephone questions at this time.

Kevin McEvoy

Okay. Since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. We're very pleased with our results for 2013 including our 10th consecutive record of the operating income performance. 2014 marks our 50th year in business and I look forward to leading Oceaneering to another record performance. We're anticipating a good first quarter start for 2014 with EPS between $0.75 and $0.80.

This concludes our fourth quarter year-end 2013 conference call. Have a great day.

Operator

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

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