Cameron International's (CAM) CEO Jack Moore on Q2 2014 Results - Earnings Call Transcript

Jul.24.14 | About: Cameron International (CAM)

Cameron International (NYSE:CAM)

Q2 2014 Earnings Call

July 24, 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

James Knowlton Wicklund - Crédit Suisse AG, Research Division

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

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

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

Kurt Hallead - RBC Capital Markets, LLC, Research Division

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

Ole H. Slorer - Morgan Stanley, Research Division

Brad Handler - Jefferies LLC, Research Division

Jeffrey Spittel - Clarkson Capital Markets, Research Division

Operator

Greetings, ladies and gentlemen, and welcome to the Cameron Second Quarter 2014 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

Thanks, Christine. Good morning, and welcome to the Cameron Second Quarter Earnings Call. Thank you for joining us today. This morning, you'll 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 good quarter, earning $1 a share driven by margin expansion. Margins improved sequentially across all business units, but were most predominant in Drilling Systems, which grew by more than 200 basis points as a result of improved execution by a very dedicated and focused team.

Revenues in Q2 totaled $2.6 billion, up 20%, versus year-ago levels, and again driven by our Drilling and Production Systems group, which grew 33%. Orders totaled $2.4 billion, backlog closed the quarter at $11.1 billion and we had robust orders with our onshore-focused businesses, and we expect this momentum to continue. And coupled with near-term deepwater and offshore project awards, Cameron should end the year with record-level backlogs.

I want to spend a minute updating you on Drilling Systems. Revenues in the quarter totaled a record $768 million, up 38% versus year-ago levels and 15% sequentially. It wasn't that long ago that $768 million in revenue would have been a good year in drilling. And as I said on the last call, we have put a lot of focus on our Berwick operations, supply chain and organizational bandwidth to drive better performance. We have now seen a marked turnaround in our performance this quarter in both revenues and margins as a result of this focus.

Our utilization and throughput in our operations generated record levels of revenue in Q2. Supply chain efficiency has allowed us to shorten cycle times by weeks, which is driving lower spend on overtime and expediting. Our expansion in Berwick is complete, the facilities are now fully functional and utilized and we are well down the road with populating our service teams. We are seeing cycle times improve, which is driving lower cost.

As for organizational rigor, we've added 6 senior level executives to our Drilling Systems team over the past 9 months. This has allowed the organization to focus on both products and projects, which are now driving more predictable delivery performance that ensures we can improve on the momentum we have now created.

The changes we have made to improve our drilling performance are yielding tangible results. And while we are pleased to see the improvements come early, more work is being done to deliver even better results in the coming quarters.

I do want to touch on a few other highlights for Drilling Systems in Q2. Orders totaled $640 million, which included record aftermarket orders of $250 million. And while offshore newbuild activity has slowed, our onshore activity has reached new highs with significant demand coming in our U.S., South America and Middle East markets. While much of this demand is supporting higher spec newbuilds, we're seeing greater emphasis on replacement cycles as the land-rig [indiscernible] levels have grown, which is more reason we continue to invest in our drilling services infrastructure.

Moving on to Surface Systems. Revenues for Surface Systems achieved record levels in Q2, driven by the onshore U.S. markets, which are up 20% versus year-ago levels. Orders topped $560 million in the quarter. People and infrastructure investments continue to allow us to make great strides in expanding our market share for both conventional wellhead systems and, even more impressively, with our unconventional high-pressure frac systems.

When we began our investment program 3 years ago, targeting the unconventional shale markets in the U.S., our share was in the single digits. Today, we are tracking in the mid-30s. Our recently introduced horizontal frac system continues to win broad acceptance with customers that are resulting in faster and more efficient and safer operations at the well site. This technology is particularly effective where tighter spacing is evolving, which is a trend we see continuing to gain momentum.

Needless to say, we are very pleased with our investment decisions within Surface Systems, they have yielded greater results and have driven real differentiation for Cameron with our customers. And 2014 will be a record again for Surface Systems. Much of the growth coming from North America, we expect sales to top $1 billion. Our South American, Middle East and Far East operations should have record years as well.

OneSubsea revenues finished the quarter just above $600 million. Orders totaled just shy of $500 million with no significant project awards booked in the quarter. And while timing on the number of projects has shifted, the visibility for the balance of '14 and now '15 is improving, as tendering activity remains very high across a number of deepwater basins.

One area that continues to offer us broader visibility is in subsea processing. OneSubsea has just installed its 30th boosting system, this one in the North Sea, and have now sold subsea boosting to every major operator in the world. Today, operators are very focused on lowering the cost of deepwater developments. Proven technology that enables greater and faster production will gain wider and faster acceptance. And we are witnessing high levels of engagement with both majors and independents for both greenfield and brownfield opportunities.

And as a result, we'd expect to see a number of subsea boosting awards between now and the end of 2015. And the OneSubsea team has also done an outstanding job of evolving the pace of development with the next-generation of subsea processing, dual boost and wet gas compression. We're advancing the dual boost development program with several international operators, are in the final testing regiments with wet gas compression with installation targeted in 2015. These platforms will allow us to move the OneSubsea story more than just a tree story.

V&M revenues totaled $534 million in Q2, up 9% sequentially. Orders finished at $520 million, and the majority driven by activity levels in our North America upstream markets, where I like to say we connect Cameron enterprise to the well site. We continue to lever both our drilling and surface system businesses to expand the market reach for V&M. And while the North America market upstream should remain robust, we also see a number of large project awards in the former Soviet Union and in the U.S. that are evolving in our transportation markets for the second half of 2014, that Cameron is very well positioned to participate in.

Large technical win is the recent introduction of our compact ball valve system, which will reduce the footprint on conventional ball valves by 1/3. This presents Cameron with a significant opportunity with those markets where space is at a premium, such as floating production systems, platforms and subsea infrastructures.

Process Systems revenues topped $140 million in Q2, slightly above Q1 levels. Orders totaled $165 million, up 30% sequentially with increased activities in our U.S. onshore markets, Canada and Latin America.

We also secured a very large, our largest ever, services contract for previously installed custom process systems offshore in the Far East, one of several we expect to secure in the coming year. In summary, strong revenues and much improved margins are indeed the highlights for the quarter. The results for Drilling is especially pleasing, given the amount of dedicated focus by the team to return Drilling's performance back to its historical levels. And we will see the results continue to improve in the coming quarters.

But improvements in Drilling is not the only story. We saw margin improvement across all of our business units in Q2, the result of cost controls both internally and with our supply chain and better execution in our plants. Gains we will continue to leverage upon the quarters ahead. And with the divestiture of recip behind us and the process to sell centrif well underway, Cameron is much more focused on its core oil and gas markets and to advancing the margins within them. Chuck?

Charles M. Sledge

Thanks, Jack. Before I get into the details of our Q2 results, I want to point out 3 main themes that run throughout. Drilling improved significantly in terms of throughput and margins. North America was a dominant driver of volume expansion. Our North American land-based businesses grew 14% sequentially, while our overall revenue growth was 9%. Cost control remains a key focus area within the company. Year-to-date, our revenues were up almost 20%, while our G&A is up less than 9%. EPS was $1 per share before other costs and discontinued operations. We outperformed on both the sales and margin fronts.

It's demonstrated that the programs we set in motion in late 2013 are making a difference in our capacity and efficiencies. Revenues were $2.64 billion. That's a 9% sequential increase, with DPS leading the way with a 12% increase. Drilling had record quarterly revenues.

During our last call, we indicated we were seeing leading indicators of improvement, but that our investors would not see them in the financials till the back half of the year. Well, they showed up in the financial sooner. Drilling revenues were more than $100 million higher than was embedded in our guidance. Surface had record quarterly revenues as well, led by North America, which accounted for 47% of Surface's quarterly revenue. EBITDA margins were 15.2%. That exceeded the top end of our range. All 3 segments showed margin progression with DPS leading the way.

D&A was $90 million. Interest expense was $30 million, which included a $3 million benefit related to the settlement of a tax contingency. Minority interest was $0.06 per share, reflecting continued strength in our OneSubsea business. Revenues were $1.9 billion in DPS, that's a record Q2 level, up 12% sequentially, with Drilling having a 15% increase.

Surface registered an all-time quarterly record as well. Our Surface North American sales increased 21%, Q2 '13 to Q2 '14, just to give you some perspective. EBITDA margins increased 100 basis points sequentially to 16%.

Drilling led the way with a margin expansion of over 200 basis points. Our Q2 performance demonstrated we've taken the appropriate steps to address the margin performance of our Drilling project business. Surface and Subsea also had margin expansion sequentially.

V&M revenues were up to $535 million, that's 9% sequential increase. And EBITDA margins increased 70 basis points to 22.2%, and that reflects a greater mix of North American business and good expense control.

PCS revenues were just over $200 million, down 14% sequentially, driven by Centrifugal, which is in the process of being divested.

Now a word on the divestitures. As you saw, we completed the sale of recip on June 2. Our process of divesting Centrifugal is moving forward and we should begin reporting it in discontinued operations by the end of the year. But for now, it's in our estimated results.

A couple of words on liquidity. During June, we issued 3- and 10-year notes in the aggregate amount of $500 million. We redeemed our floating rate notes during the quarter, principal amount of $250 million. And in July, we also redeemed our 1.6% senior notes in the amount of $250 million. With these transactions we pushed our debt maturities out and protected ourselves against near-term rate increases. We ended the quarter with $1.5 billion of cash, almost $500 million of which was in the OneSubsea joint venture. $640 million of the remaining cash was located in the U.S. and $250 million of that was used in July to fund the redemption of our 1.6% senior notes.

Just a reminder of our capital allocation policy. Our intent is to use our balance sheet flexibility to grow the company, whether it be by growing working capital, CapEx or acquisitions. We're also targeting to return our free cash flow and other proceeds, such as those received in conjunction with OneSubsea and recip to our shareholders. We believe this is the right balance between the growth opportunities we see in front of us and the need to consistently return cash to shareholders.

Consistent with this philosophy, we repurchased 4.5 million shares during the quarter and had a remaining authorization of $456 million. While the actual cost of the shares we repurchased during the quarter were $63, you can't take the cash flow dollars because it's got the impact of when share trade settled in it and -- to compute the average.

A couple of words on guidance. We're raising our full year revenue guidance to $10.5 billion to $10.7 billion. EBITDA margin should be between 15.25% and 16%, D&A of 3 60, interest expense of 1 34, operational tax rate of 23%. The share count embedded in our Q3 and Q4 guidance is 204 million. Minority interest between $0.20 and $0.25 per share, and EPS between $4 and $4.25, and CapEx $450 million to $500 million.

DPS revenue should increase approximately 20%, Drilling is driving the increase with revenues increasing approximately 30%. Quite simply, we've made progress faster in improving the efficiency of our drilling operations. Surface revenue should increase between 15% and 20%, and North America is driving this increase with a 21% increase through the first half of the year, with further gains expected in the back half of the year.

OneSubsea revenues should increase in line with the overall DPS increase. DPS margins will increase year-on-year basis. This means not only will you see sequential improvements in margins in the back half of '14, you will also see year-on-year improvements from last year's Q3 and Q4 levels.

Our full year revenue margin guidance for V&M has not changed. Revenue increasing nominally, EBITDA margins between 21% and 22%. Same for PCS, no change to our previous guidance. Revenue is between $1 billion and $1.1 billion, EBITDA margins between 14 and 15. Our corporate SG&A is still 1 75 for the year.

A couple of words on the third quarter. Revenue should be between $2.6 billion and $2.8 billion. EBITDA margins should approximate to 16% overall. Minority interest should be between $0.04 and $0.06 per share, EPS between $1.10 and $1.20.

DPS revenue should be up approximately mid-single digit on a percentage base sequentially, and margin should expand by 100 basis points sequentially. Drilling again will lead the way in margin expansion. Our base in aftermarket businesses continue to perform at a superb level. We've made significant progress in increasing the throughput and reducing the cost in our project business. While there is still a multiyear margin improvement opportunity in our project-based businesses, our margins did in fact turn one quarter sooner than we guided to, and we expect this progress to continue. In fact, Drilling margins become accretive to DPS in Q3.

V&M revenue should increase nominally. EBITDA margin should be approximately 22%. For PCS revenue should -- increase should be about 20% sequentially, and margins should increase nominally sequentially.

In closing, over the last 9 months, we've laid the groundwork for a multiyear margin expansion within Cameron. You saw this in our Q2 results. Our team is moving with pace in the execution of this plan. North America continues to be a large driver of growth within Cameron. As a data point, our core North American markets in Q2 grew almost 60% from the same time period in 2011. Our subsea market continues to be active, and we should see orders accelerate significantly over the next 18 months in this space.

With that, 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 Jim Wicklund with Credit Suisse.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Let me ask you, the sustainability driven by North America and that's great. North America has typically been the most hypercyclical of the margins. How do you guys view the sustainability of growth in North America?

Jack B. Moore

Well, Jim, I would characterize it as how much more of that spend we can grab through our onshore markets. So let's think of Drilling, we've got market-leading positions with pressure control with all the major drilling contractors in North America. So as they're expanding their fleet -- and one of the things we're seeing is the intensity of the equipment usage. So we are, I mean, we are cranking through the valves, we are cranking through the manifold systems that are -- that those valves go into, even the repair cycle on BOPs is starting to expand. That's incremental activity that we probably didn't think about as much 6 months ago when we were starting to see that and plan for that. So our job is to make sure we grow and expand our capability to take that on. Obviously, the intensity of services at the well site as pad drilling becomes more popular, as spacing becomes tighter, things like horizontal frac trees that I've talked about. I mean, actually, our market share in that horizontal frac systems has grown faster than our traditional wellhead systems, which is really quite impressive because I don't think anyone else has made the level of investment we have. And we are keeping the pedal to the metal on that. We think it's a real differentiator for us. So we still see opportunities to grow faster than what the activity levels are giving us. And I think that's the real story for our expansion.

James Knowlton Wicklund - Crédit Suisse AG, Research Division

Okay. My follow-up, if I could. You're going to go discontinued on Centrifugal at the end of the year. In terms of visibility and especially considering how fast you're growing aftermarket and all, are you still planning to resegment your income statement starting in '15, so we can have better visibility on individual pieces?

Jack B. Moore

Absolutely.

Operator

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

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

Jack, your profession that you expect a record backlog by year end, can you walk us through the components of that processing, please?

Jack B. Moore

Yes. Just -- so obviously, I will preface everything: some of it is always precluded on the timing of certain projects. But if you just go through our core businesses then, that are onshore focused and we talked a little bit about Drilling. When we're sitting at $1.5 billion in bookings year-to-date, last year's bookings in Drilling were on the line of about $2.8 billion. Could we be as strong as that? I think there is real potential we can be. And so while the offshore story has slowed significantly, it's not completely dead. There's still opportunities that we are highly engaged with. But the onshore story has become a much better story for us in drilling, and also the aftermarket piece of that business continues to evolve. So drilling is going to have a great year. Our Surface Systems will be a record year. Last year, we were at $2.2 billion in bookings. We'll beat that this year. The OneSubsea story, last year, what, about $3.7 billion in bookings? Could we do that again this year? Maybe not. But it won't be too disappointing when it's all said and done. And again, based on the timing of certain projects that we are engaged with. And V&M. V&M is going to have a real strong second half, just based on the timing of some major project awards that we're working on and we see their bookings potential to be -- exceed last year's levels as well. So when you kind of put it all together, Bill, I feel pretty strong about how we'll end up with 2014, and definitely feel exceeding our backlog level as we exited last year at much higher rates will be the case.

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

So notwithstanding the adjustments in the offshore arena for the Drilling business, onshore plus aftermarket either makes you flat year-over-year or a flat to down. And on OneSubsea, we had a tough comp last year in the form of the Petrobras orders, Rosebank and Erha, but you have enough visibility where if it's not flat, it's not going to be too far from flat?

Jack B. Moore

Well, let's see, there's a couple of projects that we have to get across the finish line. And I always will tell you with those project awards and the timing, I will tell you between the end of this year and 2015, OneSubsea is going to be a great story.

Charles M. Sledge

But, Bill, let me be clear, backlog should grow in OneSubsea year-on-year. So when we exit the year, backlog should be higher.

Jack B. Moore

And Bill, one other point, and the quality of these bookings, better than we've seen in the past.

Operator

Our next question comes from the line of Marshall Adkins with Raymond James.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

I want to drill down, so to speak, on the cost control and manufacturing improvement efforts that you started 1 year, 18 months ago. Obviously, those are starting to reap benefits. How far along are we in terms of implementing what you -- I recognize it's a never-ending process, but versus where you were a year ago, how far along are you in terms of where you ultimately want to get?

Jack B. Moore

Marshall, baseball terms: early innings. We've got -- the momentum is, I mean, we just saw really the first quarter where some of these -- we knew they were coming, it's just when can you show them and demonstrate them. But the things we've done with supply chain alone are meaningful, and we're just starting to see the early stages of that. The cost controls internally, I mean we got sloppy in some areas and we're fixing that, we're cleaning that up. And it's not just in Drilling, it's in a lot of our businesses. So the margin improvements, while they might not be as great in certain businesses that are much more mature, like Surface and V&M, we have much more room to go, obviously, with Drilling, but we're going to see the ability to advance these margins. Because as an enterprise, we get the ability to leverage some of these things that we're benefiting Drilling and OneSubsea with.

J. Marshall Adkins - Raymond James & Associates, Inc., Research Division

That's what I wanted to hear. Unrelated follow-up, FMC made a big deal about standardization and a new coalition they have. Where do you stand on that? How do you compete with that? Talk about standardization and what you're doing in that area.

Jack B. Moore

Yes. Well, in the context of high pressure, high temperature, and obviously, standardization is going to be -- it's what everyone's focused on with trying to rein in cost and be more predictable with being able to deliver projects in a reasonable scope and time frame. On the topic of high pressure, high temperature, it is coming. I think their announcement around the 20K systems is clearly, I think, confirmation of what we've been working on. We've already built to 2 20K BOP systems. We've already 2 25K BOP systems. We've delivered half a dozen 25K, 350F wellhead systems for offshore platforms. We booked about $200 million in the 20K-plus arena with both Drilling and Surface Systems. All of this evolves to the deepwater. And OneSubsea has been leveraging all of this work with partners. And so I think you'll see -- as this industry evolves over the next 4 or 5 years, where high pressure, high temperature will become even bigger, we'll all have a stake in this game. And we'll all be very, very effective at being able to execute on it.

Operator

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

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

Chuck, as you think about the DPS segment and maybe even Drilling specifically, where we exit 2014, will that be better than you thought before or in line? Or just -- I guess I'm trying to figure out: are you just getting to where you'd thought you'd get faster? Or is the target moved up?

Charles M. Sledge

The targets moved up nominally. But again, the Q4 exit rate's pretty doggone good when you work through the guidance. And that really hasn't changed as far as margins. What's changed is we're getting more units out the door. So it -- through the back half of the year, the story, as margins and DPS improving about 100 basis points each quarter sequentially, but you're getting more volume through it. And so that's really what's driving the top end of the earnings guidance raise. But again, the fourth quarter at 18%, plus or minus, that's a great starting point for next year. And [indiscernible] starting point.

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

And the second question I had is just around the North American land opportunity and what ongoing migration hiring completions intensity does for your frac stack business, for example? I mean is -- I guess, mechanically, I'm trying to think through how are you -- how does that get leveraged in your P&L? Are you charging by the stage or just out there longer for a given set of equipment? I'm just trying to think through the implications for you guys, as completions intensity ramps.

Charles M. Sledge

Well, Jeff, it's pretty interesting. We have customers that will have us go out and preset all the equipment because we're not the long pole in the tent or the most expensive piece of the puzzle, so to speak, when they are doing their completions. So we charge by the service we provide. But the number of days we're out there and the amount we're getting are going up quite simply.

Operator

Our next question comes from the line of Kurt Hallead with RBC.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I just wanted to follow up on the OneSubsea. Jack, and I think in prior meetings or conversations, there is some discussion as to potentially getting some of these integrated OneSubsea projects booked potentially before the end of 2014. I was looking for an update on that dynamic. And in addition to that, while you're commenting on that, you replied to an earlier question that the quality of the bookings for OneSubsea is better. And I was wondering if you can provide some color on what you mean by the quality being better?

Jack B. Moore

Yes, Kurt, first off, as I've said, I would be disappointed if we didn't have a good story with OneSubsea in terms of bps. The results of what we've created to talk about between now and the end of the year. And I'm still very confident that's what we're going to be able to do. So stay tuned is what I would tell you on that. On the second point, the quality of the margins in backlog and the quality of opportunities ahead of us, with what we are booking in 2014, is across all of our businesses. It's not just OneSubsea. So it is -- you will -- again, OneSubsea is a little longer in the cycle to realize, as we're seeing some of that projects that we've booked in '12 are now coming through that, the P&L at much better margins. We're going to see this evolve, continue with not only OneSubsea but Drilling as well and -- which is a big, I think, going to be a big game changer for us in terms of where those results start to demonstrate themselves, not only in '15 but '16 and beyond.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Great. And then if I may, on a follow-up on the aftermarket dynamic. If you mentioned a revenue number, I didn't pick up on it. So I was wondering if you can provide the drilling revenue aftermarket in that context. You referenced that the repair cycle on BOP was expanding. So I was wondering if you might be able to provide a little bit more color on what you mean by the BOP expanding and what that -- and how that plays into your views of the aftermarket?

Jack B. Moore

Well, the drilling aftermarket numbers that I mentioned were our bookings, which -- that's a pretty faster in-and-out business. So it's got much shorter cycle time, obviously, than the capital equipment side of it. Not all of it, but with a good piece of it. The intensity on the repair cycles is really being seen onshore. The offshore, that's fairly consistent, 5-, 10-year cycles. But onshore, we're seeing just the intensity of how this equipment is being used. I mean, the wells are being drilled faster. I mean, the more you use it, the more you wear things out. So it's like driving your car 100,000 miles in a year versus 10,000. And there's a lot of wear and tear that we are able to touch and repair for our customers in this cycle.

Charles M. Sledge

And Kurt, the aftermarket revenues for drilling were north of $25 billion.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I appreciate that. Just real quick, the repair cycle, you're talking about everything, right? Not just BOPs, right?

Jack B. Moore

I would -- yes. I would say that any one supplying the rig equipment onshore, especially in the U.S. where we're seeing a lot of the horizontal activity is obviously in the same level of intensity occurring.

Operator

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

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

As we think about DPS, and just sort of looking back historically, you I think had gotten to around 23% margins in the first half of '09. Is that a reasonable goal based on what you see over the next, say, 2 years?

Jack B. Moore

I would say, for sure north of 20%. 23%, you had kind of the intersection of deep pricing and a very large drop in steel prices. But absolutely north of 20% is where we're going to get to over a period of time. And we feel very comfortable on that.

Charles M. Sledge

And it always, Steve -- it will -- Stephen, it will matter about mix.

Jack B. Moore

You can get to very high margins in DPS if you eliminate a lot of the flow-through things that carry very little margin, but we don't always have that luxury.

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

Okay. And then as a quick follow-up, when you look at the OneSubsea JV and the things going on there, are you -- when would you expect to see, I guess, I should say, are you seeing sort of the benefits, at least commercially, of the relationship you had? Or do you still think any awards that you have secured have all really been sort of because of legacy CAM on the CAM side?

Jack B. Moore

Well, I think -- I don't -- yes, I mean, we are seeing some great leverage with our partner, and not just commercially with opportunities that we're looking at, but also with the people. I mean, it is amazing, the talent that we've been able to put together and the things they're able to do. And we look at -- we talk about subsea processing in a totally different way now because we have visibility to the reservoir. And then when you combine that capability with the hardware side of it, you start -- you can sit down with customers and start looking at opportunities that -- and identifying opportunities that they may not even have discovered. And that's the kind of conversations that we get excited about and that's where the future can lead us. When we talk about expanding the opportunities around subsea boosting, this is a great story that's evolving. It never happens fast enough, but we love the traction we're getting. And with Schlumberger, there is a great door opened to a lot of opportunities that are continuing to evolve. And working with them in parts of the world that, quite honestly, Cameron would find more difficult to get to.

Charles M. Sledge

Yes, and I'll just add, I mean, OneSubsea is being paid by customers today to take a holistic look at different reservoirs they have and how to produce them. So this is -- it involves the reservoir side, from the Schlumberger side and the OneSubsea. So while we haven't seen any large equipment orders, customers are paying us today for that work, and it will ultimately lead to orders.

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

Is that accretive to margin, that sort of service-oriented work?

Jack B. Moore

Yes.

Operator

Our next question comes from the line of Ole Slorer with Morgan Stanley.

Ole H. Slorer - Morgan Stanley, Research Division

I wanted to ask a quick question about dual boosting and wet gas compression that you mentioned. Could you give us some sense of the timing, particularly in the Gulf of Mexico, lower tertiary dual boosting and when we should see that come through for you? And also on the Framo wet gas effort?

Jack B. Moore

Well, let me -- and, Ole, you've had, I think you've had the privilege to see what's going on in Bergen, personally. So I think you've seen the -- physically, you've been able to touch and see some of this and talk to the teams that are driving it. A lot of excitement around wet gas boosting, we're in the final stages of going through qualifications and testing. That will be commercial next year. It'll be first applied in the North Sea, but we are getting a lot of discussion around that opportunity in other basins around the world. So we wouldn't be surprised within the next several years to see more of this application expanded. But let's get it out there, let's put it through its paces. And -- but again, it's a practical solution to the opportunities we see. And it really leverages that Framo platform that has got a lot, a lot of traction out there in the field, over 200 man-years of operations. So there's a lot of proven experience around it. As far as dual boosting, a little longer legs. We've got a lot of engagement with a couple of customers that see this as obviously the next step change in how they can effectively drain their reservoirs, especially as they get older and through their productive life. A lot of work going on, obviously, with our partner on the artificial lift side of that equation, and so just a lot of good work there. But we've advanced it to the next stages. We've got, as I said, we've got a lot of engagement with 2, I think, pretty impressive international operators that clearly see the applications for this, not only in their portfolios in the Gulf but in other parts of the world.

Ole H. Slorer - Morgan Stanley, Research Division

So on dual boosting, some of the operators you've spoken to have highlighted that the control systems is kind of one of the bottlenecks and -- in that they're more complex, monitoring [ph] systems rather than just turning valves on and off. And how ready do you think this product is at the moment, including control [indiscernible]?

Jack B. Moore

Well, it's -- we're not going to go deploy one tomorrow, but I will tell you that the unitized control platform is front and center with the other technologies that go with it. Obviously, the pumps at the seabed or where we got -- where we are leveraging, we've got more work to do on the artificial lift side. But it's progressing quite well. But the unitized control system is -- we launched that quite early because as you said, it's been identified as a key enabler and as a key blocker if it doesn't get done right.

Operator

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

Brad Handler - Jefferies LLC, Research Division

Could you please -- I was writing fast and I was trying to keep up, but I'm just not so sure I did. For your '14 DPS revenue guidance, could you just please run through the segment information you gave to us, again?

Charles M. Sledge

Sure. DPS up 20%, approximately. Drilling, approximately 30%. Surface, between 15% and 20%. And OneSubsea, in line with the overall DPS increase.

Brad Handler - Jefferies LLC, Research Division

Okay, all right, good. All right, shifting gears to the order side, maybe just as a follow-up, within V&M, so you make some references to pipelines. I guess, I'm just curious what has shifted from your relatively flattish outlook? I don't know if it's just a project or 2 that's popped up, if will, but some color on that would be helpful. And if you can wrap into your comments some indications as to the petrochem outlook, which I know is something that feels like it's sort of waiting in the wings and how that's progressing? That would be very helpful.

Jack B. Moore

Yes, real quick on our order outlook for V&M. It really hasn't changed from last quarter, and that's up year-on-year double digit order growth. So that really hasn't changed. It's going to be project dependent. There's some large projects that we think are going to book, should book this year. As far as petrochem, we don't have a lot of exposure to that. We're kind of core oil and gas, if you will. But our orbit valve clearly does. And yes, it's one of the stories that -- it is growing. But the huge growth that everybody has been waiting for is not yet here yet. But again, we're probably less exposed to that than some others.

Brad Handler - Jefferies LLC, Research Division

Fair enough. I guess, just a quickie, as the -- those projects -- I'll stick with the topic, those projects are drifting into '15 awards as it looks like, which is not probable, but...

Jack B. Moore

Not really, no. I mean, they kind of drifted out of '14 -- out of '13 into '14, to be honest with you. We talked about last year about some of these major projects for V&M and they're just slow to come. But we've got some good traction with a few of them, and I'm pretty confident that we'll see them come through. But I think as Chuck said, some of these could slide into '15. But we expect to see when it's all over in '14, that we'll have -- we'll see some decent growth with the V&M backlog.

Operator

Our next question comes from the line of Jeff Spittel with Clarkson Capital.

Jeffrey Spittel - Clarkson Capital Markets, Research Division

Maybe if we could follow up on the completion intensity tailwinds from a basin perspective. Obviously, extended-reach horizontal completions are a little more pervasive in some of the more established basins. How about something like the Permian where they've really started to transition to horizontal campaigns, maybe using that baseball analogy, what inning are we in, in terms of you guys starting to see growth there?

Jack B. Moore

It's crazy. And that's a difficult -- the Permian is big. There's -- every service company that you could find in a yellow pages phone book in the U.S. is probably there. So it's very intense in terms of the competitive landscape. So you really have to differentiate yourself. And this is where our guys have really targeted specific customers with specific technologies like the horizontal frac systems, as I've said. And as -- there is a lot more conventional vertical wells being drilled in those -- in that area right now. But it is moving rapidly to the horizontal, more extended reach in multiple-stage horizontals, which is going to help us in terms of being able to prove the differentiation adds value because our equipment is, whilst it's very efficient and fast and safe, it's not the lowest-cost solution for certain applications. It is for others and that's where it's proven its merit. As we see that Permian evolve to look more like what we've seen in the Bakken and Niobrara and Eagle Ford, you'll see the opportunity for Cameron continue to intensify.

Jeffrey Spittel - Clarkson Capital Markets, Research Division

Great, appreciate it. And then maybe switching gears. Things have been pretty quiet on the FPSO front, maybe just an update on how that business has been tracking this year. And I know the subsea strength is partially related to onesies and twosies, and aftermarket and the FPSO market is certainly different. But there's still pretty big queue of projects out there, so maybe just some color on how that's...

Jack B. Moore

Absolutely. So our process guys are probably tracking about 11 FPSOs right now. We booked a couple of systems on projects in the last quarter, nothing huge to ring the bell. We've got a number of MEG units out there that are going to book. One we didn't win and -- but we don't win them all, unfortunately, as we'd like to think we would. But still pretty good visibility to the pipeline. Brazil is still the key to some of this in terms of the expansion of it. And there are -- they're still cranking along, just not at the intensity that we've seen in the past.

Operator

Mr. Altamari, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Jeffrey G. Altamari

Well, thank you, Christine. This concludes our Second 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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Cameron (NYSE:CAM): Q2 EPS of $1.00 beats by $0.13. Revenue of $2.64B (+19.5% Y/Y) beats by $80M.