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Cameron International (NYSE:CAM)

Q1 2011 Earnings Call

April 28, 2011 9:30 am ET

Executives

Jack Moore - Chief Executive Officer, President and Director

R. Amann - Vice President of Investor Relations

John Carne - Chief Operating Officer, Executive Vice President and President of Drilling & Production Systems

Charles Sledge - Chief Financial Officer and Senior Vice President

Analysts

Brian Uhlmer - Global Hunter Securities, LLC

David Anderson - Palo Alto Investors

William Herbert - Simmons

Roger Read

James West - Lehman Brothers

Brad Handler - Crédit Suisse AG

Tom Curran - Wells Fargo Securities, LLC

James Crandell - Dahlman Rose & Company, LLC

Brad Handler - Wachovia

William Conroy - Pritchard Capital Partners, LLC

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

Geoff Kieburtz - Weeden & Co., LP

Unknown Analyst -

Douglas Becker - BofA Merrill Lynch

Robin Shoemaker - Citigroup Inc

Michael Urban - Deutsche Bank AG

Operator

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

R. Amann

Good morning, and thank you for joining us today. This morning you'll hear from Jack Moore, President and Chief Executive Officer of Cameron; and Chuck Sledge, Senior Vice President and Chief Financial Officer. We're also joined this morning by John Carne, Executive Vice President and Chief Operating Officer; and Jeff Altamari, our incoming Vice President of Investor Relations. Jack and Chuck will offer some commentary on the results for the quarter and we'll then take time to field your questions.

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

Jack Moore

Thank you, Scott. Before we get started, I would like to take a moment to thank Scott Amann for his valued years of service to Cameron. As many of you know, Scott announced his retirement after 16 outstanding years. He's played an instrumental role in developing Cameron's brand with our shareholders and many of you here on this call. And I think many of you would echo our sentiments that he is truly the best in this industry. Scott, thank you for an exceptional job.

R. Amann

Thank you, Jack. I appreciate it.

Jack Moore

Now with respect to Cameron's results for quarter 1, as you've seen, we reported earnings of $0.46 a share, excluding charges of $0.30 related to litigation costs associated with the Deepwater Horizon. Our earnings also reflect the previously announced charges of $0.17 a share, related to cost overruns on the subsea project in Nigeria and uncollectible receivables in Libya. These charges reflect the risk of doing business in emerging countries that have now been incorporated into our earnings guidance for the remainder of 2011.

Revenues for the quarter finished just over $1.5 billion, up 11% versus Q1 of 2010 with gains coming in all 3 of our operating segments. Net income for Q1 came in at $140 million, including the Usan and Libya charges of $44 million, versus the $160 million reported in Q1 of 2010. We also experienced negative impacts to both revenues and margins from disruptions in our businesses in North Africa in the quarter.

As for orders, Cameron had another strong bookings quarter. Total bookings exceeded $1.5 billion, a 25% increase over last year. Bookings were up across all business units with the exception of process where several sizable projects have moved into quarter 2. Project bookings were up versus last year in subsea, drilling and engineered valves, and we also continue to see improvement in our Shorter Cycle businesses in both our new and aftermarket products and services.

Our Drilling & Production Systems orders totaled over $800 million in Q1 without the benefit of any large project awards. Surface Systems bookings totaled over $280 million, up 30% versus prior year's level and 18% sequentially. All regions contributed to the highest bookings quarters we have seen since Q1 of 2008.

North America bookings have primarily grown as a result of our sales focus in capital investments and our frac support infrastructure. Investments in both frac stack and manifold systems have been well received by our customers, as Cameron is one of the few companies that can design, build and service this equipment as a true OEM. And we will continue to ramp up these investments as these markets continue to involve.

While the challenges of the evolving frac markets in North America have been met by Cameron, we're also taking on the technical challenges of high-pressure, high-temperature wells in the North Sea where we were recently awarded the Greater Ekofisk platform project for ConocoPhillips in Norway, which will span a multiyear period with a value in excess of $200 million.

Our Drilling Systems once again set a new record for aftermarket bookings at $118 million in Q1, made up of both Onshore and Offshore businesses. As a result, we will continue to direct capital and personnel investment towards expanding our capacity to meet this growing demand. Overall, Drilling Systems and bookings were $246 million in the quarter, a threefold increase over last year and 48% sequentially. We booked 8 18 3/4% 15k stacks in the quarter for jack-up systems. While no new subsea stack orders were received in the quarter, we continue to track a very large number of new builds and quotation activity remains very high for both drillships and jack-ups including 20K psi systems.

One area of interest we are now receiving a number of inquiries on is in the retrofitting of existing stacks to accommodate secondary share ram capabilities. Depending on the complexity of these upgrades, the cost to make these additions can reach as much as $10 million per rig.

Subsea bookings came in at $250 million for the quarter, 30% above last year and as previously stated there was no major project awards in this number. We did secure the 3 award for the Petrobras profiteer projects and additional orders for Phase 2 of Shell Malampaya and for BP in the Caspian.

Our outlook continues to be strong across most all of our markets with the 1 exception being the Gulf of Mexico, where I think everyone would agree that the pace of permitting new wells are slower than the industry would like. However Australia, West Africa, the Mediterranean and Brazil continue to provide great visibility towards future Deepwater developments. And we've make 3 recent announcements in quarter 1 regarding Brazil that bears repeating. We're making significant investments in R&D in cooperation with both Petrobras and local universities. We're expanding our manufacturing and aftermarket capacity and we acquired a local well head and valve manufacturing operation in country.

We obviously have a bullish view of Brazil and these investments further confirm Cameron's role as a major player in the country. In one final point on subsea, while the charges we took related to our projects in Nigeria were disappointing, we will continue to build and grow our subsea brand. However, the risk we have identified with projects in emerging countries will have to be mitigated through more aggressive contracting terms and by increasing price.

Overall orders for Valves & Measurement were up 6% versus last year's level. Engineered Valves recorded another strong orders quarter in Q1 with over $170 million booked on the back of strong activity in North America. Project awards were also received from Chevron for the Jack & St. Malo project and Total for Papsloore [ph] in West Africa. We continue to track a number of projects that should support another strong bookings year for Engineered Valves.

The Processed Valves had a great bookings quarter as well and was up 25% versus last year. The results are benefiting from a number of project awards in the Far East and orders for Distributed Valves businesses unit topped $100 million once again as they continued to benefit from this robust market we're seeing in North America.

Overall processing and compression orders were $277 million for the quarter, essentially flat with Q1 of 2010. Compression orders were actually up 35% versus last year, driven by orders from our international markets and a strong performance for the plant air products. And Process was off 20% versus last year and the difference in that is the timing of engineered project awards moving from Q1 to Q2. We continue to track a large number of these projects in Asia, Brazil and in West Africa.

Overall our markets are very healthy. We are seeing a stronger than expected recovery in our Shorter Cycle business as a result of higher oil prices and the list of major projects we are tracking in subsea, drilling, process and valves remains impressive. Chuck, now I'll turn it over to you.

Charles Sledge

Thank you, Jack. I'd like to echo your comments on Scott's retirement. While all of us are happy for Scott and Kathy, as they've enjoyed the fruits of their labor, we will miss his council, dedication and most importantly, his friendship. I also want to welcome Jeff to his new role. He's been in the senior management ranks of Cameron ever since I've been here so I'm confident you will find him very helpful as you interface with us.

As Jack mentioned, adjusting for the subsea and Libya charges, our earnings per share for the quarter were $0.63, which was in line with our earlier guidance. Revenues for the quarter were up 11% from the first quarter of 2010. Each of our 3 segments experienced revenue growth from year ago levels. DPS revenues grew 5% with Surface showing the largest gain coming in at a 24% growth rate.

V&M sales grew 14%, driven by a 37% increase in Distributed Valves. PCS sales grew 30% where all businesses showed strong sales growth. For 2011, we've increased our overall sales growth assumptions to slightly north of 5%. As expected, our EBITDA margins adjusted for the 2 items above improved to 17.5%, up from 16.2% in the fourth quarter of 2010. DPS margins improved the most to 21.6% from 20.3%. While V&M showed a 100 basis point improvement to 19.2% and PCS margins were relatively flat. While we are expecting adjusted EBITDA margins for 2011 to be around 18%, second quarter margins may be a little soft as it is expected to include the highest level of subsea revenue for 2011.

In addition, Engineered Valves is expected to ship its highest level of revenue in the second quarter as well, which will serve to moderate V&M's margins during the second quarter. Additionally, while DPS in V&M should see margin gains for the year, PCS overall margins for the year may be a little lower than last year due to continued pricing pressure in this segment. As is normal in the first quarter, we build working capital and then consume cash. The primary uses of cash were in inventory build mostly in our DPS businesses, as well as the consumption of cash advances in our drilling and subsea businesses as we continued our work on projects and backlogs. This working capital build should moderate significantly over the next 3 quarters and thus we should return to cash generation position.

As a reminder, our converts are callable puttable beginning in June and therefore we reflected these in the current liability section of the balance sheet. We've had about $2 million of bonds tendered for conversions this quarter, and we've elected to settle these in cash. We would expect to continue this settlement mechanism for future conversions. Our tax rate for the quarter was 21.7%, a little lower than we had expected but that merely represents a shift. We recognized certain tax benefits earlier in this year than we had expected and so it's really again just a shift between quarters. We still expect a 23 1/2% rate for the year.

D&A is trending somewhat below our expectations so we're currently forecasting $210 million of D&A for the year. CapEx is still expected to run between $250 million and $300 million, as we continue to see ample opportunities in North America shale plays, the Brazil subsea arena and our Drilling Aftermarket business. Interest expense should be below last year's level of $78 million, assuming we retire the converts later this year.

Our second quarter EPS estimate is $0.60 to $0.65, while our full-year estimate, which includes the 2 charges we've talked about is $2.50 to $2.60. I will point out these estimates do not include, though, any litigation costs associated with Deepwater Horizon and everyone should use about 252 million shares in your '11 models. Now with that, let's open it up for questions.

R. Amann

Okay, Jackie, we can go to Q&A, please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Geoff Kieburtz of Weeden & Co.

Geoff Kieburtz - Weeden & Co., LP

Could you -- on the Usan project, did that impact revenue as well as margin in the quarter?

Charles Sledge

Yes, it did. The accounting basically $41 million of the charge was a reduction in revenue. It's just how the accounting works.

Geoff Kieburtz - Weeden & Co., LP

Okay. And that just flows through the EBIT line?

Charles Sledge

That is correct.

Geoff Kieburtz - Weeden & Co., LP

Okay. And more broadly, can you elaborate a little bit further on how you're seeing the subsea market unfold this year? What is going on with pricing? What's going on with project timing? Any big projects that you're particularly focused on at this point?

Jack Moore

Geoff, there's a ton of opportunities out there. The timing is one that I think we've always alluded to relative to -- we're not in control of it. If you look at the next 6 to 18 months, we see a number of opportunities in West Africa, we see them in Australia, we see them in the Mediterranean, I think the Gulf of Mexico ultimately will get back on track. Until we get a number of these projects awarded, I don't think you're going to see pricing firm up. I think all of us are going to have to be pretty disciplined around going after things that just don't make sense from a price standpoint. We've kind of gone through a period here for the last 18 months where project awards have been leaner in terms of the major projects and I don't think any of us would admit that we've all taken those projects at margins we'd love to write home about. But the discipline is going to have to be there, and I think you're going to see companies hopefully push away from the table if it doesn't make sense.

Geoff Kieburtz - Weeden & Co., LP

In general, are you seeing a slippage of project timing or is it too mixed to be able to characterize?

Jack Moore

You know it's -- we're always are disappointed when projects move to the right but they always move to the right so it's hard to say we're disappointed that -- but we're not surprised. I think there's a -- and Gene [ph] Is a good example, I think the elections have to settle down in Nigeria for that project to gain traction again, but it's going to happen. We all thought it would happen maybe second half of 2011. Now I think we're thinking it's going to happen maybe early part of 2012 but again, the elections have quick -- that gets us stabilized and the visibility to what the new -- any laws or changes in the laws are going to be relative to petroleum impact to these guys contracts. It's going to have to come to fruition.

Geoff Kieburtz - Weeden & Co., LP

Okay. And lastly, on the Drilling segment, the DPS, are you -- had a bunch of rigs you ordered here, where are you in terms of realizing benefits from that surge in new build?

Jack Moore

We'll, I'll tell you what, Geoff. It is -- our guys are extremely excited, extremely busy. This could shape up to be a year that rivals most years we've ever had in drilling. It's that crazy right now. I mean there's 30-plus new builds, drillships we're tracking, there's 50-plus jack-ups. We're not going to get all of them, but we're going to get our fair share. I think when it's all said and done, Cameron is -- we've got a great brand, we've got a great product, customers love our aftermarket model, they love our service model, they love our equipment and the ease-of-use. It's going to play well to our benefit but the real upside that we've been, I think, probably most surprised with, is the aftermarket element. We continue to see people move back to the OEM model for repair and maintaining their equipment and that will play well to Cameron and the other OEMs, so I think it's a good story and that's one where we of course drive a lot of value for you guys and our shareholders.

Operator

Our next question is coming from Bill Herbert of Simmons & Company.

William Herbert - Simmons

Getting back to Usan for a second, Jack, it seems as if, I mean, for the last 10 years frankly everybody's been complaining about the competitive environment and pricing but with regard to contracting terms, walk us through exactly what the vulnerability was on Usan, the difficulty and the likelihood of recouping, the adjustments that were forthcoming in this quarter and what changes with regard to, I mean specifically risks that you were taking and risks that you are unwilling to take as a result of this episode?

Jack Moore

Yes, let me just -- real simple, Bill, it was in-country third-party local content scope. We had -- this was not our first project to execute in Nigeria, Air North [ph] , Acpo [ph] Now Usan, we gained some traction, gained confidence, gained experience with local suppliers as we ramp up the local content requirements in Nigeria, very much expected by everyone driven by the contract terms, where we did not anticipate was when you have disruptions in your local supply chain that are not caused by governmental actions or under the terms of force majeure, those costs are going to continue to ramp up. They're not going away and you've got to be protected against them, and we just did not have that built into this contract. And I will say that since then, we have a contract further south, that has those conditions built into our what we call a reimbursable contract and that is our model. So rest assured that as we look forward to contracts in countries where we have a large amount of scope that is not necessarily under our control for build and manufacture that we will mitigate those risks through more aggressive contracting terms.

William Herbert - Simmons

Okay, great. And then secondly, with regard to the BOP upgrade opportunity that you guys talked about up to $10 million per stack on the retrofitting. Has it begun to unfold or are we just in the inquiry stage at this point, which sounds favored, but at what point do we actually start translating inquiries into revenues?

Jack Moore

Well, I think I'll cull it out because we've had a lot of questions on it and we have not really seen it evolve to an inquiry mode until this last, probably the last 60 days. So yes, we're in inquiry mode, a lot of inquiries, what's going to give it traction, Bill, is when either of the BOEM comes out with firm regulations on what contractors will have to be able to do with their equipment in deepwater drilling applications. So some people are wanting to get ahead of that. They're anticipating that with the dual shear ram capability -- now I will tell you a lot of the rigs that are being sold today and I think the other guys I think Pete and others would confirm this, we're seeing 7 cavity stacks and every one of these have dual shear ram capabilities. So I think that's where the industry's going to -- think it seems to be wanting to move in that direction so the older generation are just going to have to be retrofitted in order to comply but it's not a regulation yet so you may not see a big move to get there as quickly as maybe some others would want to get ahead of it.

Charles Sledge

Bill, it's Chuck. I will add that we have in fact seen 1 order where we were getting ready to deliver a stack and at the last minute, they've elected to add another cavity. So we have seen some orders for this.

William Herbert - Simmons

Okay. Lastly, we'd just like to say we've enjoyed working with Scott, and we wish him all the best.

Operator

Our next question is coming from James West of Barclays Capital.

James West - Lehman Brothers

Jack, with respect to the commentary around pricing on subsea, recognizing that it's pretty competitive, but it seems like you and FMC are both banking on some discipline from the competition here and banking on volumes improving. Do you think that that's going to be enough or there's a need to be some consolidation, further consolidation in the industry here, because you have at least 1 competitor who doesn't seem to be showing any discipline at all?

Jack Moore

Well, I think we've been on record that consolidating in this deepwater space would be healthy. Because of the erratic nature of the orders and the unpredictability of the timing, we may go through a period here over the next 3 to 5 years where we see a rash of deepwater orders that, I mean, in our perfect world may be it inflates price to the point where customers scream for more competition but the risk in the deepwater is real. We've obviously lived it this last quarter. We just need to be paid more for the risk we're taking. And then we have a margin expectation, a return on our investment expectation. I'm not sure that others have that same level of expectation and until they get there, it's going to be a little sloppy, if these orders aren't -- if they don't get released and if these projects don't get awarded in time. So I think there's a strong call to have consolidation. Obviously, we've attempted a couple of times to consolidate and just the valuations didn't work and others bought into this space. So I think that's still a topic for discussion.

James West - Lehman Brothers

Okay, fair enough. And then just quickly, for me on the BOP, the new build side. It looks like you've ceded a little bit of market share here for new deepwater rigs, is this just a more of a timing issue or is there some change in kind of market dynamics?

Jack Moore

Well, I think we saw a shift back in the middle part of 2000 when the yards we're buying -- a lot of spec rigs were ordered and the yards were buying packages. And that plays very well to what I think I'll be created and it's done well for them. And I think they've enjoyed those benefits and we'll continue to have some around that we partnered with MH obviously to offer a competitive package but I would say that when it comes down to the performance of the block preventer [ph] which is really the scope that we're providing, the pressure control equipment with the control systems and riser. Our package is more discreet and a lot of customers are going to want to lock in on the performance side of that piece of equipment, on the ability to maintain and support it through its life and really that's where Cameron can offer a lot of differentiation and so we, as I say, in time when this cycle continues to evolve and when we look up and see how -- what our share is, it's going to look a lot the same. It's what we had going into it, we'll be fine.

Operator

Our next question is coming from Jim Crandell of Dahlman Rose.

James Crandell - Dahlman Rose & Company, LLC

Scott, I'd like to also echo what Bill said in thanking you for an excellent job over the years and wishing you the very best in your retirement.

R. Amann

Thanks, Jim. I only ask that you guys treat Jeff as well as you have treated me, or maybe even better.

James Crandell - Dahlman Rose & Company, LLC

Jack, I'd like to come back again to the subsea pricing issue. I think the scenario that was laid out by one of your competitors was delay projects until the first quarter of 2012 perhaps and then very price competitive awards on those projects. And I know you theoretically like to sit out on the sidelines but as your backlog runs down I think you'll feel compelled though I would think at least to try and pick and choose the ones that are maybe the least competitive about. With that as a backdrop, if that is the scenario we're looking at, I mean, how long could your margins be under pressure in the Subsea business? Might we be looking at a more prolonged downturn in margins than what we thought was say 6 months ago?

Jack Moore

Jim, I would -- let me just say that Cameron's -- the beauty of Cameron's portfolio is we don't live by 1 product alone and we've got a great breadth of businesses that will sustain us and move us forward in spite of maybe 1 business being in a lull. And so if you look at the impact subsea has to Cameron in total, it's not as significant as it may be for other. And So it does allow us to be a little more picky in terms of what we go after and what we don't go after. Now we have relationships with customers that are going to drive some of that behavior. In terms of us working with them to take projects that may not be as attractive as we'd like but they've got a lot of legs to them. They've got other products that we can pull through to them, whether it's our Valves businesses, our Process businesses, things that we can add to it that make it much more attractive. So those in the big picture that's what we have to look at. But there's going to have to be a lot of discipline on, I think on our part and on others to send a message to the customers that the cost of doing these deepwater projects, there's a lot of risk involved and they have to go up.

James Crandell - Dahlman Rose & Company, LLC

A second topic, Jack. Could you comment on the opportunity on the repair service and maintenance side of the BOP business that's out there for Cameron to do increase business in that area as a result of the Macondo tragedy?

Jack Moore

Yes, I think we've talked about it in the past and we capture about half of the opportunity that is out there for Cameron. So 50% of the installed -- God forbid is that are operating offshore, our Cameron installed BOPs. We're servicing about half of that and this is kind of the picture we had going in. My guess is we're serving now probably 65% of that, so based on the ramp up we've seen in our Aftermarket business, So Bill there's still more room to go, I mean Jim, there's still room to go. And I'll keep calling you Bill. The thing that we have to remember is that as we grow our backlog in our Aftermarket business we have to be able to grow and sustain that with our investment in both the infrastructure and people so that's going to be somewhat the challenge we're all going to have is to capture this opportunity and keep it. And so as we ramp that up we'll be able to take on more and more of this opportunity so we haven't seen the end of it yet.

Operator

Our next question is coming from Jeff Tillery of Tudor, Pickering.

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

In the Valve & Measurement business, and I'm going back over the past 5 quarters, you've now averaged orders in excess of $400 million of revenue and obviously there's going to be a lag -- I mean $400 in order and obviously there's going to lag between that and when you can ramp it up, revenue figure but do you have capacity to do $400 million revenue in that business and if not, what are you doing to get there?

Charles Sledge

Absolutely. The investments we've made in the capital arena over the last 3 years we have been able to ramp up our capacity in V&M, both in our Process valve businesses, our Engineered Valve businesses primarily. We have a very strong outsourcing strategy that we've employed with a lot of our Distributed Valves. But even if you look at our Oklahoma City infrastructure that supports that business, we continue to evolve as efficiency through a lot of lean initiatives and machine tool optimization, so absolutely.

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

Do you think you'll cross that $400 million threshold this year in revenue in the quarter?

Jack Moore

I think we got a good chance.

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

A similar question for the Drilling Aftermarket business. Orders were up 50% year-on-year, what are your lead times doing and what is your ability to service the customer in a rapid manner and how is that expanding?

Charles Sledge

Let me tell you in the words of all of our customers, it's not fast enough. Okay, but I would tell you that it would be right when they get it back and that's what they want. So this is something that I think we've all been overwhelmed with to some degree in the last 6 to 9 months as an industry and as I've said, we've expanded our aftermarket base in our offshore support in Berwik, Louisiana, in Aberdeen, in Singapore. We've done it onshore in Oklahoma City and here in Houston. We've spent, John, I don't know close to $50 million in the last 6 to 9 months in these arenas and the other is onboarding personnel and moving them in to where they're capable of doing the repair, the necessary repair work and the proper testing that the customers expect. So we'll do it as fast as we can, but we're not going to compromise quality of the effort and the reliability of what they expect.

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

My last question, Chuck, in your prepared remarks. The guidance for the full that excludes the litigation costs for Macondo or inclusive?

Jack Moore

It excludes the litigation cost associated with Macondo.

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

And do you think we'll see the next several quarter run at same rate it was in the first quarter?

Charles Sledge

There's a good chance to that.

Operator

Our next question is coming from Robin Shoemaker of Citigroup Inc.

Robin Shoemaker - Citigroup Inc

I also wanted to thank Scott for so many great conversations over the years. I wanted to ask you about the shale plays. I think in some recent calls you've indicated you've really focused on the wealth and opportunity there and where you were initially underrepresented, could you give us an update on that?

Charles Sledge

Yes. We put together what we call our shale sales force, our Team Shale team about 2 years ago and we focused them in the heart of it actually about 3 years ago in the Barnett and we had ignored that market for some time as it evolved in the Haynesville then it evolved in the Fayetteville and then it evolved into Marcellus and now in the Eagle Ford. [indiscernible] own up into Canada, this has really become a great story for us. Because we had historically have not captured much of that share and Cameron, being a very large presence in the Well Head business in the more higher end of it, really I think had an opportunity to gain some share here that we just had ignored and that's exactly what the guys have done and really the focus has been on the high-pressure iron, the frac trees and the frac manifold system that at the customers are wanting. And that's where we put a lot of emphasis on, Robin. And it has been extremely well received and again as I said in my comments, Cameron's in a very somewhat in a very, I'd say unique position, but there's not very many of us. So it's a very rare position that we actually design, we build and we service all of this equipment. We don't outsource it. We don't turn it over to some third-party to maintain it and that is very important to these customers that are operating this very expensive and highly complex fracs so that's been well-rewarded and we're going to continue to put a lot of focus on that and continue to invest in it as we move forward.

Robin Shoemaker - Citigroup Inc

Okay, sounds good. Let me just turn and ask a question about the M&A landscape, as you currently see it. Clearly, you've got the ability to do a significant transaction if it came up, I think possibly a few recent deals might have been on your radar screen like the Wood Group sale to GE but seems that the pricing is very rich and is there really -- are we in a period where values have gone too high from your traditional discipline on that?

Charles Sledge

If you look at the 2 deals where you probably talking about Wood Group and the Dradsort [ph] deal, the answer is absolutely, they've gotten too rich for our blood. We don't believe we could earn an adequate return for you guys investing at those price levels. That being said, if you look at the smaller deals, the technology place, things like that, still we can do those and make good money for our shareholders and so we continue to aggressively pursue those.

Operator

Our next question is coming from David Anderson of JPMorgan.

David Anderson - Palo Alto Investors

Question on the DNV report. When it came out, did it explicitly say Cameron was at fault? But it did raise some questions on the overall design of the BOP. Just wondering, what happened since that report? Are you in discussions with the regulators? How are the operators reacting? But I guess more importantly, what do you think the results can become from this report?

Jack Moore

David, I don't -- there is -- you could probably go back and pick up this on some of the newswires but essentially, I think, when we question the validity of the DNV report, there was a lot of questions around just what was -- hypothesis of what happened, could have really happened. And while the DNV report did not call out any issues with Cameron per se, I think it did bring some question into the design of the shear rams that were used on the Deepwater Horizon as whether they could shear and seal a pipe that was pinned against or buckled against the wall and I think that if you go back and look at some of the recordings of the testimonies that are out there I think you'll see that there is a lot of questions that were raised about the validity of that claim and the accuracy of that claim because of the modeling that was done and I think that's being rereviewed right now and I think you'll just have to wait and see how that plays out.

David Anderson - Palo Alto Investors

So when you're talking about -- so these upgrades that you talked about earlier, is that a reaction to this report or is that kind of independent thing?

Jack Moore

No, not at all. I think it's customers wanting to take as much opportunity to put as many barriers of safety out there that they can. I think it's been known for quite sometime that -- and we sold BOPs for quite sometime with dual shear ram capabilities. So it's always been an option of the operator, an option of the drilling contractors to whether that was provided for and I think it may continue to be but we'll have to see what the government regulations require for operating in the Gulf of Mexico and whether that extends to other operating areas around the world would probably be driven more by the operators then maybe the drilling contractors.

David Anderson - Palo Alto Investors

That's sort of my next question. I was just kind of curious, who's driving this right now. It sounded to me like you were talking mostly about the rigs are trying to go back to work in the Gulf, haven't looked at the upgrades, but who's driving this? Is it the operators, the drilling contractors? Who's running the show in terms of forcing those changes?

Jack Moore

Well, actually, ultimately, it'll be the operator because they're the ones that are ultimately responsible for the activities offshore on these wells. But there are drilling contractors that are taking the initiative without maybe the input of an operator that -- so we want to put our rig may be in a more favorable marketing position so you could see that, we're seeing maybe some examples of that, but at the end of the day it's going to be the operator.

David Anderson - Palo Alto Investors

Okay. A solely different topic on the DPS segment, I'm just wondering, could you just, I haven't seen the breakout of how that's -- of the DPS segment looks in terms of the revenue, but can you help us kind of understand some of the other factors that kind of drilled the revenue to fall sequentially. I know you mentioned it really should be done to $41 million higher but I can't imagine the Surface business fell off. Can you kind of go through it maybe Chuck, if you don't mind, going through a couple of those business lines and then of how they did kind of sequentially?

Charles Sledge

Yes. One thing you got to remember is we always have this fourth quarter goldrush, we call it around here, as we seek to maximize kind of our year. So you always have that issue but no, Surface did not fall off in revenue, let's see here, subsea did a little bit and drilling did just negligibly.

David Anderson - Palo Alto Investors

Sequentially or year-over-year?

Charles Sledge

Sequentially, let's say, if you're question was...

David Anderson - Palo Alto Investors

Yes, sequentially, right.

Charles Sledge

Okay. Yes, sequentially Drilling was up a little bit, Surface was down sequentially and subsea was down quite a bit sequentially. Subsea was the driver.

David Anderson - Palo Alto Investors

Subsea was the driver? Okay. That's great.

Charles Sledge

And that's traditional.

Operator

Our next question is coming from Roger Read of Morgan Keegan.

Roger Read

Scott, congratulations to you. I hope everything works out well in your next adventure.

R. Amann

Thank you, Roger.

Charles Sledge

We know where to find him though.

Roger Read

He'll be hiding out in a nicer place than Houston in the summer I'm sure.

R. Amann

Yes, just a little higher altitude.

Roger Read

Just want to follow up a little bit on that surface question. When you've talked in previous conference calls, as you've mentioned the benefits of the shale plays. Can you kind of walk us through how that's playing out at this point? Or are you still seeing a ramp up in it or is it stabilized somewhat?

Jack Moore

I would say that we can't deliver this equipment fast enough. So the ramp up has been evolving over the last, let's say, 6 to 9 months in terms of the fracing equipment itself as its come out of our factories. So that in a nutshell, says we have a lot more room to go.

Roger Read

Okay, so that would turn to make sense. And what is the sort of the pricing dynamic there?

Jack Moore

We are raising pricing. We continue to push that envelope as we find that the customers are pushing demand on us. We're having to, again, incur some more costs and relative to people and getting this equipment mobilized so we intend to get to get recovery for it. So we will continue to push the price up and some of it's rented and some of it's sold so the pricing on the rental is going to be a little different, a little higher margin but you got to take utilization into some of that mix too.

Charles Sledge

Roger, it's Chuck. I'd like to add, I know there's a lot of questions earlier in the call about subsea and pricing but remember, that's 22% of our business where it's competitive. The other 68% of our business, the pricing outlook is pretty good. So just to keep that in perspective when you think about what portfolio of businesses that you get when you invest within Cameron.

Roger Read

Thanks. I appreciate that clarity. And I guess kind of segwaying off then to the Valve and Measurement segment. I believe Jeff asked earlier about your ability to get to $400 million in revenue based off of, obviously, orders 2 quarters in a row and above that. What is the sort of normal turn time or maybe just looking at these recent orders in terms of the orders coming in and when they are expected to shift, just kind of try to help us peg when that $400 million revenue barrier could be burst?

Jack Moore

The short cycle is, like Distributed Valves, could be days. So it's not a -- but it really -- what's going to drive it is the Engineered Valve business. Roger, that is what drives the timing of the shipments. Not unlike subsea, you could have a huge shipment quarter. It's just a bunch of stuff burping out at the same time because again, like many of our other businesses, we don't get to ship it and declare it revenue until the product's built and depending on a major project shipment and the timing of when it leaves the factory will probably drive when we -- if and when we hit those -- that magical number that has been reported.

Charles Sledge

I'll add that we should be pretty close to that each quarter for the remaining part of the year, pretty close.

Operator

Our next question is coming from Brian Uhlmer of Global Hunter.

Brian Uhlmer - Global Hunter Securities, LLC

I've got a couple of quick easy questions for you. I just want to go to real quick now that we're seeing a lot of those package type coming out of the yards for drill ship packages and quarter packages. Now we've been in with Hawker or with MIS for your packages. When the yard gets an award to build a new vessel, does that get awarded to you individually? I'm really just trying to figure out timing of awards to run that sort of model or does it go through Hawker and then get awarded to you after the fact or is there a delay in that award?

Jack Moore

Brian, it could be both ways. It just depends.

Brian Uhlmer - Global Hunter Securities, LLC

I'm trying to figure out on process Compression Systems, was there a geographic area that was a little bit weaker in terms of orders? And the decline on orders, was it some seasonality or was there something specific that led to have a decline in orders in the quarter?

Jack Moore

It was the timing of some large project awards in the custom engineered piece of that business, which is lumpy.

Brian Uhlmer - Global Hunter Securities, LLC

So [indiscernible] in some of the bigger -- as I look at it, kind of between the Valve and Compression systems for a large scale LNG projects, what is the timing look like for those as we move out through some of these feed studies, is that a back half 2011 or more into 2012 for some of the much larger orders to come in between those 2 segments?

Charles Sledge

I would say the 6 to 12 months kind of timeframe. We have a lot of -- you got Brazil, which is a huge driver, which is always not easy to predict. You've got West Africa, which is -- there's a huge number of FPSOs being quoted for West Africa projects as well as Australia as well as China. So there's a ton of them out there but we don't see anything really significant until the latter half of this year and next year, so the timing is going to be somewhat further out.

Brian Uhlmer - Global Hunter Securities, LLC

So the general rule is maybe 6 to 12 months from completion of the feed?

Jack Moore

More like 1 to 2 years, it's quite actually longer but from feed[ph] -- before the orders get placed.

Operator

Our next question is coming from Douglas Becker of Bank of America-Merrill Lynch.

Douglas Becker - BofA Merrill Lynch

Jack, you mentioned being more aggressive on contracting terms and increasing pricing response to the cost overruns in Nigeria. Do you think this changes the probability of winning some of those projects where Cameron seems to be favored, like Air High [ph] Phase 2 or Aginoh? [ph]

Jack Moore

We hope not, but that's where we're going to go. We hope that everyone recognizes that doing business in certain parts of the world is going to cost more than maybe they thought and their thinking as they look at these projects.

Douglas Becker - BofA Merrill Lynch

You're at least thought would be, everyone starts bidding a little bit higher given that risks that are much more obvious now.

Jack Moore

I can't speak for them I just hope that everyone recognizes the risk and takes them into consideration in both their contract terms and pricing.

Douglas Becker - BofA Merrill Lynch

Fair enough. And then it sounds like on the Surface business was down a little bit sequentially. Just given where the rig count is going, it would seem like that business should be trending higher. I guess a competitor mentioned there was shipment delays. Are you seeing anything along those lines?

Jack Moore

You mean down sequentially in revenues or in orders?

Douglas Becker - BofA Merrill Lynch

In revenues.

Charles Sledge

Yes. That's just the seasonality. Orders were actually up quite a bit sequentially so the decline in revenue was nothing more than seasonality.

Douglas Becker - BofA Merrill Lynch

Perfect. And then just a quick one. Any quantification on the Libya impact? I know it was grouped in that $0.17?

Jack Moore

Well, right now no one is doing anything in Libya. So our view is that it's gone until we see something change with the government's take to removing those sanctions.

Douglas Becker - BofA Merrill Lynch

Understood...

Jack Moore

It was a $0.02 charge in the first quarter.

Charles Sledge

In our going forward guidance, we dialed out about $20 million of revenue.

Operator

Our next question is coming from Jack Moore Of Harpswell Capital.

Unknown Analyst -

Can you talk just a bit about the competitive landscape and where do you see the orders being, one, that are -- is there any product differentiation development in the last few months or is it purely on price, what are your thoughts there?

Jack Moore

Jack, which product line would you be talking to?

Unknown Analyst -

I guess just, I'll broaden it across your whole range but specifically, I was thinking subsea, but I'm happy to expand it.

Jack Moore

Well, I think that when you look at the subsea arena, the technology shift there is really your ability to operate in deepwater, local content capability, capacity for engineering resources. Those are the things that customers weigh in on and as we've been talking a lot of projects that are out there, the view of the customers, there's a multitude of suppliers that can support that. I think local content does differentiate you to some degree, which is the investments we made in Angola, the investments we've made in Brazil are critical to sustaining that as well as countries like Nigeria. And then you look at your aftermarket teams, your field service people, your service support infrastructure, like we have done in Louisiana to support the offshore markets in the Gulf of Mexico, what we have in Aberdeen, what we're developing in the South China Sea, Australia. Those are all very critical differentiators so those are the things you hope to leverage as you go forward in the deepwater market. Technology, obviously, will move as well with high-pressure, high-temperature processing things of that nature so the control systems and their flexibility. So all of those things weigh into it and -- but I think all of us have a very clear competitive package in the technology arena. Some of the differentiation gets down to your ability to be commercially competitive and also to service the work and deliver on the engineering scope.

Unknown Analyst -

Finally, can you comment on just raw materials and labor and what you're seeing there and what your expectations are over the next 12 to 18 months?

Jack Moore

John, do you want to take that?

John Carne

Yes, I'll that. We're seeing certain pressures on steel pricing. But I actually think it's kind of peaked to where we're at today. But we've taken actions to preserve our cost base on a go-forward basis. From a people point of view, we've been very successful I think in acquiring people, bringing people on board and getting them trained. So at this point in time, we don't see any real challenges for us on a go-forward basis.

Operator

Our next question is coming from William Conroy of Pritchard Capital Partners.

William Conroy - Pritchard Capital Partners, LLC

Thanks for taking my call. I'll just pass along and give them to Scott. Just a couple of quick ones. Can you, maybe for Jack, just lay out the competitive landscape for CAM shale?

Jack Moore

Well, I think you've got -- it's quite broad because sometimes the barriers to entry is the checkbook and the pickup truck if you've got access to well head equipment being built in other parts of the world. So for some operators where they don't put the emphasis on who's designing, building, servicing their equipment, that opens up a whole broad envelope of competition. But where we've been very successful is in with the customers that put a high premium on the performance on the well side and you look at what they're paying for these frac services today to improve efficiency by hours or even days is huge. So they see the performance of this equipment, the fact they know when it shows up it's going to be right, those are important drivers for them. So that's where we're really making a lot of inroads in being successful.

William Conroy - Pritchard Capital Partners, LLC

That's helpful. And just to change gears a little bit, on the BOP Repair business, have you seen a change in the tone or the tenor coming from the customers, not just the change in who they're sourcing the service from but actually just in their propensity to get these things inspected, repaired, et cetera?

Jack Moore

Well, I think everyone has a whole new, not everyone but there's a new group that's become much more aware of the need to go OEM and we've had a historic -- history of pretty pure OEM folks out there that have a history of only using the OEMs to repair their equipment. I think now everyone's gotten onboard with that. It just took awhile and unfortunately, it took an event that I think kind of crystallized in everyone's mind how important it is to make sure that whoever's maintaining, repairing or modifying that equipment is the folks who originally designed and built it.

William Conroy - Pritchard Capital Partners, LLC

Great. And last one and quick one for Chuck. Chuck, over what time period did Cameron recognize revenue in quarterstone[ph]? on?

Charles Sledge

We normally would have started in '09.

Jack Moore

And it runs through 2012?

Charles Sledge

It runs through 2012.

Operator

Our next question is coming from Tom Curran of Wells Fargo.

Tom Curran - Wells Fargo Securities, LLC

Scott, you realize we're all just going to shift from critiquing your management of expectations and communications to critiquing your golf game, right?

R. Amann

And those critiques are welcome and any advice is also welcomed.

Tom Curran - Wells Fargo Securities, LLC

It certainly won't be coming from me. I can guarantee you that. Chuck, I'm curious, what percentage of Surface is the frac 3 manifold Rentals business at this point?

Charles Sledge

Oh gosh, John, of Srface? I don't have that number but we can follow up on that.

Tom Curran - Wells Fargo Securities, LLC

And then Jack or Chuck, could you give us an update on the FPSO market. Have you had any notable awards since the one from Petrobras for its Tupi vessel and what's the outlook there for the balance of the year?

Jack Moore

We didn't have any of significance in the first quarter. We've got a lot of tendering activity going on with both in Brazil and as I've said in West Africa and the far East. And as I think John pointed out, some of these are in early parts of feeds, some has been going on. So our expectation is we'll see more movement on this within the back half of this year and on into 2012.

Tom Curran - Wells Fargo Securities, LLC

And when you talk about your total accessible market there of I believe it's $100 million to $175 million revenues, how does that break down by division?

Jack Moore

The majority of it, I'd say 60% of it would be process on a total award basis, actually could be maybe as much as 75% and then valves would be a huge part of the balance, you get into some measurement equipment. You get into some compressions capability but the big piece of it would be process.

Tom Curran - Wells Fargo Securities, LLC

Okay. And then, looking to the ramp you implied with your updated guidance over the second half of 2011, how much of that sequential growth do you already have in hand, let's say, in the form of an LOI or even in contract or at least very confident visibility on?

Jack Moore

In the overall business?

Tom Curran - Wells Fargo Securities, LLC

Yes, I mean, if you want to share some color by division that would be great but even just companywide.

Jack Moore

Yes, companywide, we probably got the majority of the growth in hand or very close to in hand. By the end of the second quarter, you use that percentage even increases part of it.

Jack Moore

There's some businesses that like Distributed Valves, that is very much in and out. But if you even look at our backlog in that business, it's pretty healthy relative to the balance of the year. So we've got pretty good visibility to it.

Charles Sledge

Yes, I don't think the guidance is exposed much, it's a little bit to market, but not a lot. It's really exposed to do we execute well and that's going to drive the performance.

Tom Curran - Wells Fargo Securities, LLC

So confident the topline's going to be there it's mainly a question of execution when it comes to your guidance?

Jack Moore

Yes.

Operator

Our next question is coming from Mike Urban of Deutsche Bank.

Michael Urban - Deutsche Bank AG

I wanted to extend my best wishes to Scott as well. Follow-up and maybe ask a previous question a little more broadly on the whole shale and unconventional initiative. Maybe you don't track it this way, but do you have a sense for, even if it's on a companywide basis, what shales or unconventionals makeup as a percent of your business or even as a function of the U.S. business?

Charles Sledge

Broad perspective, the North American Surface business, if you will, from trough to the peak or trough to what we see in 2011, probably that business is going to double. It could be north of $400 million, just to put it into some broad term. Some of that's traditional wellhead and some of that's shale. I don't have that break out though.

Michael Urban - Deutsche Bank AG

But it's quite safe to assume that good chunk of that business [ph] Is not the best -- a significant majority of it is probably coming from the shales and unconventionals just given where the growth in rig count has been?

Jack Moore

Yes, and a lot of it is going to depend on how fast we ramp up some of our frac support services and get that equipment in the market between now and the end of this year and it could impact that differently as it rolls out. But you got to remember we're selling valves into this space, Engineered Valves that go into the pipeline and midstream infrastructure, the Distributed Valve business, our Measurement businesses. The beauty of, again, Cameron's portfolio, is touching -- a lot of it's touching what we're seeing going on in the shale plays. Not only from a completion standpoint on the wellhead but all the way through the compression piece and the transmission piece.

Michael Urban - Deutsche Bank AG

That makes sense. And a separate question. On the retrofit opportunity, do you have an estimate as to how many rigs or what the market opportunity might be there. I mean we can obviously figure out if the number of rigs -- that they'll have a second launch here but not, I think, not all of those and maybe a good number of those won't be upgraded. Have you thought about kind of what that opportunity set might be?

Charles Sledge

You've got about 40% of the fleet that is -- that's fourth-generation or older kind of -- you got to look at that as either: a, an option or b, did the contractors replace some of that overall, with new Drilling Systems if the rigs can withstand the weight and the dimensional issues that go with it. So it's hard for me to tell you what the drilling contractor's going to do with their rig. I think I heard 1 drilling contractor comment that they'd rather cut their toes off with a spoon than get rid of some of this equipment. So I think it's indicative of the fact that if they can modify it and keep it competitive in the market, I think you're going to see a lot of retrofits being done on some of the older generation equipment.

Operator

Our next question is coming from Brad Handler of Crédit Suisse.

R. Amann

Jackie, this is Scott, we'll probably have to cut it off after this one due to time.

Brad Handler - Wachovia

Thanks for sneaking me in Scott, appreciate it. A couple of different things. Trying to clarify something. In your opening remarks, Jack, I think you mentioned something about 2Q awards very specifically in PCS but then follow-up questions it sounded like no way there was actually more of a back half of the year, are we talking about [indiscernible] awards or...

Jack Moore

Actually what we are talking about on the back half is related more to FPSOs. You've got to remember our Process business, especially on the custom engineered piece. And they've got a lot of quotation activity going on with equipment that will go on platforms and even onshore infrastructure. So that's where I think we were talking about a lot of what is moving to the right. In Q1 to Q2 is really more related to some of that.

Charles Sledge

I think what Jack was trying to say is that the first quarter order flow in PCS should be the low water mark for the year.

Brad Handler - Wachovia

Got you. Right. So there's some other non-FBS related things coming that will pop-up. Turning to something related to the guidance ultimately, but I just want to walk through it a little with you, Chuck, please. Depreciation, I know we talked about this a little bit before in some calls, I think you anticipated it could be as high as $55 million in Q1, it came in at $45 million. Can you help us understand that a little bit?

Charles Sledge

We were anticipating D&A of our previous guidance was $220 million for the year and now we're saying $210 million, some of that has to do with the kind of relooking at when we're going to spend the capital, some of it has to do with the final purchase price allocation for NATCO in the recognition of intangibles.

Brad Handler - Wachovia

If I look at the $45 million, is all of that stuff set, all the intangibles and the purchase price allocation? Is all that finally set? Because I think we -- okay, so that's our starting point. It's still $180 million run rate. So there's going to be pretty dramatic expansion here as you layer in some of the capital spending. I mean it just seems like it's a high number for the year basically but okay. Okay, fair enough. In the guidance, can I ask you what rig count are you now kind of using? Is that hardly...

Jack Moore

I got in trouble for making a rig count projection a few years ago. I will -- as the U.S. rig count would improve probably maybe 5% year-over-year. And what's really improving though is where those rigs are moving to and I think it's the quality of the rig and as they move from maybe a traditional gas well in the Haynesville to a resource unconventional shale play in the Eagle Ford, our opportunity to improve revenue streams on those wells goes up and as I've said, a traditional well for us onshore in West Texas may yield at a $20,000 to $30,000 opportunities so well head and trees. Now if you've got a 20-stage frac, it could be $150,000 to $200,000 per well, based on the frac valves, frac trees, frac manifolds that are consumed in that process. So it's more of the where the rigs are going then maybe just overall increase but we're definitely not seeing any slowdown in the number of rigs that are going to work and that's reflected in our activity for demand in quotation activity we're seeing from new rigs builds onshore. It continue to be pretty robust.

Brad Handler - Wachovia

Okay. That makes sense and that's helpful. A couple of hundred basis points of increase in revenue guidance presumably that's where it's coming from, right? The sort of North American Surface?

Jack Moore

It's the Short Cycle business driving some of this if you kind of look at our guidance going forward, you dial back the impact we're seeing from in Libya. We're scootching it up a bit and it's really because of what we're seeing in the Short Cycle business and we're very positive about it.

Brad Handler - Wachovia

With some modest offsets coming from PCS, it sounds like mostly on the margin side.

Charles Sledge

Yes, that is correct.

Brad Handler - Wachovia

Okay. So it's a little bit of over earning on the Short Cycle business, offset by PCS. The revenue side on PCS though, is that more or less in line with the growth you have been thinking previously?

Jack Moore

I think it's relatively close. They should be about where we thought they would be for revenue for the year.

Brad Handler - Crédit Suisse AG

Got it. It's more of the competitive pressures on the margin.

Jack Moore

Yes.

Operator

Thank you. That concludes the question-and-answer session today. I'd like to hand the floor back over to management for any closing comments.

R. Amann

Okay. That will do it for us, Jackie, and thanks to all of you for joining us today.

Operator

Thank you. This concludes the teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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