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Cameron International (NYSE:CAM)

Q2 2011 Earnings Call

July 28, 2011 9:30 am ET

Executives

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

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

Charles Sledge - Chief Financial Officer and Senior Vice President

Jeffrey Altamari - Vice President of Investor Relations

Analysts

Collin Gerry - Raymond James & Associates, Inc.

Kurt Hallead - RBC Capital Markets, LLC

William Herbert - Simmons & Company International

William Sanchez - Howard Weil Incorporated

Brad Handler - Crédit Suisse AG

Geoff Kieburtz - Weeden & Co., LP

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

James West - Barclays Capital

Michael LaMotte - Guggenheim Securities, LLC

Douglas Becker - BofA Merrill Lynch

Michael Urban - Deutsche Bank AG

Operator

Greetings, ladies and gentlemen, and welcome to the Cameron Second Quarter 2011 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 Altamari

Good morning, and thank you for joining us today. This morning, you'll hear from Jack Moore, Chairman and Chief Executive Officer of Cameron; and Chuck Sledge, Senior Vice President and Chief Financial Officer. We're also joined by John Carne, Executive Vice President and Chief Operating Officer. 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, Jeff. As you've seen, Cameron reported earnings of $0.66 a share in quarter 2 excluding charges related to litigation and restructuring cost. Revenues came in at $1.7 billion for the quarter, with gains being realized in all 3 of our operating segments versus Q1 of 2011 and Q2 of 2010. Net income for the quarter was $148 million, and I think more impressively, Cameron had an exceptional quarter for bookings with a total of $2.4 billion in orders, up $1 billion versus last year in our second-largest quarter ever. All 3 operating segments realized the sequential quarter and year-over-year gains in bookings. Orders for the year stand at just under $4 billion, and our backlog now exceeds $5.5 billion. Obviously, we cannot predict the timing of major project awards, but given our first half performance, 2011 is on pace to be a record bookings year for Cameron. Our bookings results reflect the breadth of our product diversity. Cameron serves 9 market segments in the oil and gas equipment services space, both onshore and offshore, as well as upstream and downstream. The ability to touch our customers across these multiple segments has created numerous opportunities to leverage our products and services to offer broader solutions than in the past.

The emergence of the shales was a perfect example. Historically, we focused on the well-hidden tree sales, but now we market a system that brings our frac, our critical service valves, our Measurement, our Process and our Compression businesses into the mix. And likewise, in Deepwater, we now put target projects for more than just traditional subsea trees, controls and manifold systems. We now have a full suite of valves, connectors, chokes and process equipment that give us multiple bites at the apple.

The Husky Liwan project is a great example of where we recently pulled through our MEG reclamation processing unit, along with a number of critical service valves to complement our award of the traditional subsea hardware. Our ability to support these solutions is a result of acquisitions such as NATCO, Eagle, and more recently, Vescon and TS-Technologies. Couple this with our own internal product development actions within each of the business units, we're now better aligned to leverage the Cameron enterprise.

Our order mix also reflects the benefits we were seeing from our geographic expansion in markets such as the Caspian, Brazil, Iraq and China, and serve both onshore and offshore markets. Plus we continue to invest in additional capacities to support the growing demand for our global aftermarket services that reached record levels of bookings in Q2.

Now let me add a little more granularity to our orders in the quarter. Our DPS operating segment had total bookings in excess of $1.4 billion, up 76% sequentially versus Q1. Our Drilling Systems business unit had a record quarter with over $780 million in total orders. We booked 9 deepwater stacks, 7 of which included our LoadKing riser system and 5 jack-up stacks. To put this quarter in perspective, our bookings totaled $750 million in all of 2010. Total Drilling Systems bookings for the year exceed $1 billion and our Drilling Systems backlog now stands at over $1 billion. These levels of orders says a lot about the confidence and trust our customers place in Cameron to build, deliver and support their future needs.

Our drilling aftermarket services bookings totaled $190 million in Q2 and have surpassed the $300 million mark year-to-date. As mentioned in our release, we have and will continue to invest heavily into CapEx to add capacity to our global drilling aftermarket support infrastructure to sustain our commitment to this business. We also saw healthy bookings from onshore customers in both the U.S. and international markets for both new equipment and upgrades to existing fleets. Overall, quote activity for both onshore and offshore equipment remains very high, including numerous inquiries for our 20,000 psi BOP system.

Bookings for our Subsea came in at $330 million for the quarter, up 30% sequentially and up 70% versus Q2 2010. While no significant projects were booked in the quarter, we continue to see significant quotation activity across a number of our markets. Our data suggests that over the next 18 months, we should see record levels of awards in Subsea projects. We do, however, see the current pricing environment for major SPS projects strained and will continue so until a few of the major projects currently in the wings are awarded.

Total bookings for Surface Systems finished Q2 at a healthy $321 million, our second-largest bookings quarter ever. U.S. was the biggest contributor as we continue to penetrate share in expanding shale markets. Our investment in frac infrastructure now exceeds $100 million. Our Europe, Africa and Middle East markets continue to see healthy project activity. And we are seeing a recovery in Latin America, which is offsetting some seasonal decline we saw in Canada in the second quarter.

Our Valve & Measurement operating segment saw record bookings in Q2 as well that total over $500 million, and backlog now surpasses $1 billion. Our Engineered and Process Valve orders got $300 million in the quarter, up 29% sequentially and 65% in Q2 of 2010. These results serve as another example where we have leveraged our diverse products across multiple market segments. A great example is $30 million of awards that we recently booked from Chevron for their Jack & St. Malo project, where Cameron has already supplied the subsea infrastructure.

We also continue to benefit from the buildout of infrastructure in the North America shales across most upstream and downstream applications. Our Distributed Valve business saw their fourth quarter sequential bookings grow in Q2, driven by our distributor network in North America, plus restocking programs in support of what is gearing up to be a very strong recovery in Canada following the spring breakup.

Like our Drilling Systems business, Valves & Measurements are well on pace to have a record bookings year. Our Process & Compression operating unit have record bookings of $418 million, up 51% sequentially and 56% versus a year ago. Record orders in Process Systems were supported by 2 sizable MEG. These are methyl ethyl glycol reclamation units at over $75 million, as well as the U.S. onshore shales and Canadian oil sands. Our compression markets continue to strengthen with sequential gains versus last quarter and versus Q2 2010. And our recent compression orders continue to benefit from our market penetration internationally, with both midstream projects in North America.

Our outlook for the future continues to be very positive. Global oil and gas markets, both onshore and offshore and upstream and downstream are offering Cameron a broad portfolio of opportunities. Plus the renewed commitment by operators and contractors to utilize OEMs in their service network is allowing us greater visibility with our aftermarket possibilities. As I stated earlier, with the caveat of major project award timing, Cameron is on pace to realize record bookings in 2011. And the beauty of this is that it is not coming within just one of our market segments. Our investment strategy to buildout these opportunities is focused on expanding capacity, reducing cost and building out the product and service footprint to leverage the Cameron enterprise.

Now we'll turn it over to Chuck.

Charles Sledge

Thanks, Jack. As you saw in our release, our adjusted EPS was $0.66 per share. We also incurred $0.07 per share in other costs to get us through our reported EPS of $0.59. Revenues for the quarter were up 16% from the first quarter of 2011. Each of our 3 segments grew their revenue sequentially. V&M grew 25% sequentially, with Engineered Valves leading the way with a 45% increase, reflecting the strong order flow we had in 2010 that continues today. DPS revenues grew 16% sequentially, with Subsea registering a 34% growth rate. As we guided in our first quarter call, this growth in Subsea sales did serve to moderate our margins in this quarter. Surface also grew at 16% rate, while Drilling was relatively flat. PCS revenues increased 5% with increases in both Process and our Compression businesses.

For 2011 as a whole, we expect revenues to increase in the high single-digit range, with both V&M and PCS experiencing double-digit growth, while DPS's revenue growth should come in around 5%. As we guided in our first quarter call, our EBITDA margins decreased, ending at 15.9% from the adjusted margin in Q1 of 17.5%. As expected, DPS led the decline from 21.6% in the first quarter to 18.7%. Subsea revenue, which carry a lower margin, grew 34% sequentially as I mentioned earlier, which was the driver of this decline. The second quarter should be the low point for DPS margins for the year. We were, however, pleasantly surprised by V&M's margins, which improved sequentially to 20.1% from 19.2%. This improvement was led by our North American businesses. PCS margins also improved sequentially to 13.9% from 13.1%.

For 2011 as a whole, we expect EBITDA margins to be around 17%, with Subsea being the biggest drag on margins. As a reminder, the 17% includes the first quarter Usan charge, as well as approximately $200 million of Usan revenue in the second through the fourth quarters of this year at virtually no margin. DPS should see margin gains in the back half of the year, while V&M and PCS should stay relatively flat with the second quarter margin over the back half of the year.

Other costs of $0.07 per share included both litigation costs, as well as costs associated with severance resulting from migrating some of our capacity to lower-cost jurisdictions. Cash flow from operations was over $100 million for the quarter, although we did continue to build working capital as our business growth continues to accelerate. We should see significant cash generation over the back half of the year as our working capital growth moderates. CapEx should approximate $300 million for the year as we are making significant investments in our drilling aftermarket and unconventional resources, related businesses, as well as our Brazil subsea infrastructure and our business system upgrade.

With respect to our converts, we repurchased 202 million of the 500 million outstanding during the quarter at an average effective rate of $49.42 per share. The remaining converts should be retired by the middle of August. As a result of the retirement of these converts for cash, our share count will be reduced by 5.2 million shares from the first quarter level.

Our tax rate for the quarter was 21%. As a result of some good work by our tax department, we are now expecting a tax rate in the back half of the year of 22%. Our D&A expectation for the year is approximately $200 million. Our corporate SG&A is running higher than normal due primarily to cost we are incurring to implement our new business system.

Project Optimus as we call it. Our Process business went live on July 4 and our Compression businesses will go live in the fall. As a result, we reported approximately $3 million of cost related to this project in the corporate SG&A segment for the second quarter with the same expectation for quarters 3 and 4. Therefore, you should adjust your models for corporate SG&A to approximately $70 million over the back half of the year.

Interest expense for the back half of the year should approximate $42 million. With the retirement of the converts for cash, you should use 247 million shares in your models for the back half. We raised our earnings guidance for the full year to a range of between $2.55 and $2.65 per share and our initial guidance for the third quarter is now $0.70 to $0.75 per share. Just as a point of clarification, the $2.55 to $2.65 does include the first quarter Usan and Libya charges.

With that, let's open it up for questions. Operator, we can go ahead and open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from James West with Barclays Capital.

James West - Barclays Capital

Jack, you've said previously that a lot of the upgrade work that may happen on blowout preventers would perhaps be operator-driven. We've now seen BP come out and announced new safety standards a few weeks ago. Certainly, the U.S. government will announce some safety standards and the regulations in the following months. Has the conversation with the rig companies changed as a result of the BP announcement and the coming regulatory change?

Jack Moore

James, yes. We're seeing it globally as well. It's not just a U.S. phenomenon. The U.S. regulations will definitely change the pace in which things were done in the U.S. But the operators are driving the upgrades, and they're one in these particular features and capabilities on the rigs as they operate all over the world.

James West - Barclays Capital

And how is the backlog now for upgrading this equipment? And what are kind of the supply chain constraints? I guess, how long would it take to upgrade to these new standards for rig that maybe has 4 rams and needs to go to 5?

Jack Moore

Well, that particular example, it could take 3 to 6 months. It depends on the control systems, which adds more complexity. But the real constraint will be people. It's getting these -- finding exactly what needs to be done to the particular existing piece of equipment. Some, it's a matter of changing rams. In some, it's remodifying the entire BOP system. So it's -- and we called this out on the last call. I mean, we're seeing upgrades running anywhere from maybe $1 million to $10 million in terms of the scope and the range. And it can exceed that, I guess, if you look at some total upgrades.

James West - Barclays Capital

Jack, are there rigs out there that, at this point, wouldn't be able to be upgraded to presumably what will be new standards globally?

Jack Moore

I think you're seeing -- you're going to see some of that reality come into play. And it's why you're seeing a lot of interest in new builds. But you'll see some of the much older generation rigs ultimately find themselves obsolete. And that's why we're seeing a ton of inquiries for the new build opportunities. But really that's probably a better question for the rig contractors because, as you know, they do not like to get rid of any.

Operator

Our next question is from Collin Gerry with Raymond James.

Collin Gerry - Raymond James & Associates, Inc.

I just wanted to follow up kind of that line of questioning. We're seeing the operators kind of push for the -- well, I've heard, on some of the new builds having 2 BOPs on some of these ultra-deepwater rigs. How big of a push is that in the market? I guess, the upside for the contractors is the downtime associated with plenty of BOPs and they have a BOP ready on standby. But are we seeing that across the board on new builds? Is it a push that you're seeing for some of the existing rigs as well?

Jack Moore

I would say that it's catching a lot more momentum. The recent -- some of the recent new builds that -- in fact, the 9 deepwater stacks we booked this last quarter, we expect there'll be follow-on orders for additional stacks as backup systems to that. And if you put yourself in the position of the drilling contractor, it makes a lot of sense because now with the regimen that the industry's going to go through, with recertification to have a stack out of service for 2 or 3 or 4 months is a real complexity to them in terms of the timing. A lot of the research will happen every 5 years instead of now, maybe some 10 years. So yes, I think you're going to see this become more commonplace to have it back up stack on the rig to keep continuous operations going.

Collin Gerry - Raymond James & Associates, Inc.

Wow, that seems to be a pretty big change versus 6 months ago, relative to what we were thinking kind of the fallout from Macondo would be. So that's certainly...

Jack Moore

Yes. But I mean, it's a result of how I think our drilling contractors are looking at maintaining uptime and efficiency. And if you're selling that capability to an operator, the risk of being down 2 or 3 days waiting on a recertification procedure, I mean, the payback on having a backup stack is pretty easy to get to.

Collin Gerry - Raymond James & Associates, Inc.

And then just sticking with the BOP side, it seems on the Deepwater high-spec stuff, it's really only been the 3 competitors for a while now. How would you describe pricing? I mean, if demand is going up are we going to see margins go up at the same time? Or is it still a competitive market, everybody chasing their respective share?

Jack Moore

It's still a competitive market.

Collin Gerry - Raymond James & Associates, Inc.

Okay. Last one for me. It seems to me this is an outstanding quarter pretty much on all fronts, orders and revenues. I just kind of wanted to ask you guys: What was the surprise to you? I mean, was it strength of drilling orders? Was it the ability to convert revenue on the valve side? Maybe just talk about what you were surprised on the upside was.

Jack Moore

Well, it's like anything, we all knew the potential for these things to happen are always there. Our team, we've got a wonderful group of guys running these businesses and all very focused on their markets. What we're seeing and I've talk a little bit about it is really leveraging the enterprise. So we're really some strength to come from being able to touch customers across markets, and we're getting some incremental business as a result of that. So I think that it's a nice surprise to see that coming through. Drilling, you get these awards and to book 9 rigs in -- 9 deepwater stacks in 1 quarter, look, there's been a lot of work going on to make that happen. And some of all of that just hit this quarter. It could have hit a little bit last quarter, it could hit a little bit next quarter. So you get a little bit of that lumpiness that helps you. But I mean, overall, I mean, the strength of V&M, the strength of Surface, the strength of Process, even Subsea with no major projects and still have an excess of $300 million for that business unit is all very good news. And so we were pleasantly surprised across the board, but it's what our guys have been focused on doing.

Collin Gerry - Raymond James & Associates, Inc.

Well, I'll turn it over. I know you caught a little bit uncertainty after last quarter on the Usan project, but it's good to see things back on track.

Jack Moore

Well, Cameron is a great enterprise and a great brand, and I appreciate the comments.

Charles Sledge

This is certainly an easier call this quarter than last.

Operator

Our next question is from Mike Urban with Deutsche Bank.

Michael Urban - Deutsche Bank AG

I wanted to kind of stick with this line of questioning a little bit. Just to be clear, the orders that you booked on the drilling side, that was all for or primarily for new equipment, right, for new rigs?

Jack Moore

Well, almost 200 of it was aftermarket.

Michael Urban - Deutsche Bank AG

Okay. And so are you seeing this dynamic playing out yet in terms of the upgrades and/or ordering a second set of equipment for the new rigs? Or is that still something that's still to come?

Jack Moore

I think that story will continue to evolve. I think we'll get to a point on the aftermarket side where we'll reach a level of normalcy. But we don't really know where that is yet exactly. As certain operators get into different cycles of repairing and maintaining equipment and the ultimate move to OEM, we haven't seen all of that yet. But a lot of that is our ability to take it and support it. And we're ramping up as fast as we can, and I'm sure some of our competition who are in that OEM line of sight are doing the same. So it's just a behavior change that has continue to evolve, and it's a positive story for us.

Michael Urban - Deutsche Bank AG

Yes, absolutely, I would agree. And shifting gears a little bit, you talked about your pricing in the Subsea market still being pretty competitive. Presumably with the order flow, the rig count, where it is both in the U.S. and increasingly globally, could you can talk a little bit about the pricing dynamic in the Surface business?

Jack Moore

We've actually been pretty pleased with the pricing dynamics in Surface. Our margins have improved. We continue to expect continued improvement as we look out over the coming quarters. And a lot of that is both internally driven with the efficiencies we're getting, from the investments we've made in our infrastructure, a lot of manufacturing focus that we have put into that business over the last several years. And now we're gearing up what we think in a more higher-margin frac rental equipment fleet, and those investments will help leverage our performance going forward as well.

Michael Urban - Deutsche Bank AG

Okay. So the -- I guess, the mix of business helping as well if you already had pretty healthy margins in the Service business and the businesses you're getting into are higher margin than, I guess, where you're growing faster or higher margin than the legacy businesses. Did I get that right?

Jack Moore

Yes, and we've seen some very -- we have a lot of success in booking some very high-profile projects in Surface that are really driven on the technology, focused around high-pressure, high-temperature capabilities that customers have a lot of confidence in Cameron to support. And there's less tension in the pricing when you're differentiating in that area.

Operator

Our next question comes from Douglas Becker with Bank of America Merrill Lynch.

Douglas Becker - BofA Merrill Lynch

Jack, just following up on the drilling aftermarket business. In the past, you've mentioned that getting to something around $500 million looks very achievable at this point. Are your expectations for that ratcheting up on a more sustainable basis?

Jack Moore

Well, I keep telling our drilling guys we're going to annualize the first half of the year, and they cautioned me on that. Let's see how this -- Doug, let's see that how this kind of settles out. Yes, I mean, I'm convinced if you take the opportunity Cameron has in its installed base around the world, that $500 million number is very achievable. But we have to step up and support it so that it's sustainable, and that's the investment we're making now, both in infrastructure and people, and it's around the world. Our customers are demanding that of us right now. And as we continue to evolve that, I think we'll see that number become clearly a reality, and the potential of something beyond that I think becomes realizable if you can sustain what we think is our current opportunity today.

Douglas Becker - BofA Merrill Lynch

And then Chuck, in V&M, you were expecting margins to be a little bit soft because of the high level of Engineered Valve revenue. Maybe a little more color on what happened in the quarter. And then why margins wouldn't be a little bit higher in 3Q, 4Q in the V&M segment?

Charles Sledge

Yes, a couple of things. It's really driven by the North American businesses that we have and the ability to deliver to the customers when they need it and therefore, get paid appropriately for that responsiveness. So we think that's something that's going to continue. The engineered backlog that's been a little bit of a drag on margins over the last 12 months or so, that's starting to wane out. And so hopefully, we won't have to talk about that much longer.

Douglas Becker - BofA Merrill Lynch

Now if I heard correctly, you're talking about third quarter guidance in V&M being relatively flat from a margin perspective?

Charles Sledge

Yes.

Douglas Becker - BofA Merrill Lynch

And so I guess, I'm just trying to reconcile if the Engineered Valve backlog declining a little bit and North American business doing very well.

Charles Sledge

Yes, that's some opportunity.

Douglas Becker - BofA Merrill Lynch

Okay. Fair enough. And in terms of booking Deepwater stacks, obviously, great quarter. It looks like a number of drilling packages have been won from MH, from what I would call drilling contractors with financial constraints. What's Cameron's criteria for actually doing a booking?

Charles Sledge

The booking is we have to be comfortable we're going to get paid. They have to make their initial down payments that we require them. We're always cash-ahead on these projects. So we're being very careful about that. We don't see any issues in the orders we booked.

Operator

Our next question is from Brad Handler with Credit Suisse.

Brad Handler - Crédit Suisse AG

I guess, I'll just follow-up on the order front a little bit, please. So everyone's asking about BOPs, but I guess, I will, too. On the BOP side, how would you -- does this quarter tell us anything about your ability to win BOP stacks in some designs like the Samsung designs or the GustoMSC design? In other words, is there's some broadening out of the opportunity set that's reflected by the second quarter?

Jack Moore

I don't think so, Brad. I think it's really -- customers in this space have -- where they have a lot of history with Cameron and our equipment, the operating environment that they work in and the applications that our equipment can support it for, I think that drives some of the behavior around our bookings. I wouldn't say it's spec-ed into a particular rig design or yard. It's not a result of that.

Brad Handler - Crédit Suisse AG

Okay. I think I understand. Maybe just to stick with it. Can you give us any additional color on what's happening in Brazil right now?

Jack Moore

Well, I think the 7 rigs that had been awarded to Atlântico Sul last year, our belief is that the equipment for those will get booked this year. I would -- the 21 that come behind it is going to be open season. Where in the past, Petrobras had basically said that the equipment system provider would either be NOV or MH, in the future, on those 21, I think it's kind of become a wide open field, and so it could be a free-for-all at the end of the day. Stay tuned. But our belief is that they will do it in time. I mean, Brazil is very committed to driving their local buildout of rig infrastructure, and they'll pull it off. They'll pull it off. At Cameron, we've got 1,200 employees in Brazil, and we have a long manufacturing history there. We've got a great working relationship with Petrobras in a lot of the drilling contractors down there. We'll have lots of opportunities to participate in that buildout as it occurs.

Brad Handler - Crédit Suisse AG

Okay. But it does sound like, as you say, open season. So maybe some of the -- as the design rules have become more flexible, there's lots of different ways that you all are assessing inquiries for stacks at this point.

Jack Moore

Exactly. That's the way we're going to, I think, see it play out on the 21. I think the current 7 has probably been -- that chapter's been written.

Operator

Our next question is from Jeff Tillery with Tudor, Pickering.

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

The valve business with the material step up in revenue, you had orders continue to run well ahead of that. I mean, how would you characterize your ability to get $425 million out the door? Was the system strained? Could you do $5 million a quarter with the current kind of capacity?

Charles Sledge

I think we could get there with the current capacity. I think the orders you're seeing -- some of the orders you're seeing now is setting up a very nice 2012 for Valves. I think that's how you've got to think of it.

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

Sure. I'm just curious from a capacity standpoint, there's no reason you couldn't eventually get there.

Charles Sledge

No, no, we're a prolific investor in ourselves. So we can get to where we think we need to be.

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

Okay. And then just trying to think about these new rig equipment in terms of when it turns into revenue. For the BOP stacks you booked in the first half of the year, should we expect any material 2012 revenue? Or is that really going to fall off in 2013?

Charles Sledge

Late '12, more probably in '13.

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

I mean, last question for me. As you think about margins as we step through the next 18 months or so, you're not that far away from where EBITDA margins peaked out DPS, kind of same in Valve & Measurement. Is there any reason to think that either be a mix or pricing that margins can't at least get back to where they were back in '08?

Charles Sledge

No, really not. You've got -- margins are doing okay now and you've got the Usan revenue flowing through. Got a goose egg [ph] so that certainly is not going to repeat once we get it done. So I think there's no reason why we can't get back to levels that you've seen us peak out at historically.

Operator

Our next question is from Bill Sanchez with Howard Weil.

William Sanchez - Howard Weil Incorporated

Jack, I just want to come back on the Subsea order rate and you've mentioned the strength there. And I just find it interesting, given that again, you didn't book any -- I guess, in the press release, any orders during the quarter, unlike first quarter yet you still end up booking a much higher Subsea order rate for 2Q. Did something shift here as it relates to how the market is just unfolding for you outside of the larger projects? And can you just talk to us about as we start to see some of these bigger projects come through? I mean, you have very bullish comment about the next 18 months being kind of record levels of orders. But what kind of order rates could we be looking for here for Cameron as we think past 2Q?

Jack Moore

Bill, I'll let John weigh in on that question.

John Carne

Yes, I mean, in terms of order rate, it's obviously very difficult to say exactly when these projects will hit. But we are tracking projects out over the next 18 months in excess of $8 billion. And we expect to get more of that reasonable share, but they're right across the board. They're in West Africa. They're in Asia, and still in the North Sea. So we're very bullish on our project business through 2012.

William Sanchez - Howard Weil Incorporated

$8 billion, you said, was the number.

John Carne

Our projected projects of that amount.

William Sanchez - Howard Weil Incorporated

Got you. And just a follow-up as it relates to the pricing outlook, I know there's been some handwringing as it relates to pricing as a whole for Subsea. But I'm just curious if just from a reference point, is it more a function right now that pricing is not necessarily getting worse as even though the market still going to be competitive out there for new orders, just a function more of pricing kind of staying where it is right now or what you've booked recently? Is that a fair characterization of the pricing outlook? Or do you expect pricing to get worse here before it gets better?

Jack Moore

I would say that we need to see some of the major projects that are kind of hanging in the wings right now get taken in the backlog. And I think that will help the pricing environment going forward. And that's just a general comment. I think where you have relationships with some of your existing installed base and you're adding bolt-on orders, I mean, there's really not a pricing issue in that environment. I think it's really more on the more high-profile projects, where customers are using multiple supplier potential as leverage, and that we just need to see kind of book up. And I think as John said, over the next 18 months with the number that we're tracking on projects, the potential to see pricing stabilize and actually maybe improve out there in that timeframe is more encouraging now than it probably ever has been. But we've got to see them happen.

Charles Sledge

Yes, Bill, and as we've always said, while we may make an occasional pricing mistake, we're not going to chase a bunch of low-margin stuff. And we're willing to accept bookings level where they are in order to make sure that we earn an appropriate return for the risk that these projects carry.

William Sanchez - Howard Weil Incorporated

Sure. One more if I could, Chuck, just for you. I know in the past you stated you've been conservative as it relates to share repurchases here. I'm just curious, I know you're going to get the benefit here from the convert retirement. But where does management stand right now in terms of getting more active in reinitiating the share repurchase program that you guys have historically carried?

Charles Sledge

Well, I think right now, I think we're comfortable with the share count reduction we've achieved through the convert. So it's not the forefront of our thinking right now.

William Sanchez - Howard Weil Incorporated

Okay. But a pretty sharp cash build since the end of March.

Charles Sledge

Yes, we're investing a lot in Cameron.

Operator

Our next question comes from Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC

I just had a follow-up here. In the past, I think past conference calls, you guys had referenced you're making plans to increase the share of aftermarket business, I think, from order of magnitude, whether it was 25% or 50% up to 75%. I was wondering if you might be able to give us an update as to where you stand in terms of achieving that potential target? And is that progressing faster than you may have expected?

Jack Moore

It's progressing a lot faster than we expected, but we're also finding more opportunity that we probably identified on the front end. And part of this is the conversions and the upgrades. Traditional aftermarket, where you're servicing the existing installed base, we're probably tracking somewhere north of that 50% opportunity today, just based on the discipline that we've seen in the drilling contractors confirming to operators' request. But when you look at the number of upgrades that are being looked at and acted on, that's creating a little bit of a tailwind with the numbers as well. So we're going to watch this every quarter and maybe we'll have a different view on this by the end of the year. But right now, we're very bullish on the potential.

Kurt Hallead - RBC Capital Markets, LLC

And is the increase in the aftermarket pretty much across all your product areas? Or is it concentrated in just a few?

Jack Moore

Well, we've seen obviously, we've got -- Cameron has a lot of focus on aftermarket. And it's just part of our culture. We think the service side of our business is a clear differentiator. Probably 25% of our revenue, looking forward, we feel should come from our aftermarket business, and we could push that closer to 30%. That's exactly where we want to move it to. So we have a clear focus on it, and it's in every one of our businesses. Drilling is a little more disciplined in that we're getting obviously the impact of post-Macondo where the regulations are going to be more stringent around it, and then the operators are pulling it through the contractor. So that's a plus. We don't get that in every one of our business segments. But we've seen improvement in most every one of our business segments and aftermarket because of the focus we have on it internally.

Kurt Hallead - RBC Capital Markets, LLC

Okay. You guys referenced that you thought EPS margins would be, second quarter, would be the low point on that. So as you move forward, what do you think the driver is of margin improvement within DPS in the back half of the year? I imagine Subsea -- is Subsea revenue going to decline in the back half? Or is it going to stay flat and the other businesses are going to improve? Can you give me just some sense on how you see mix evolving in the back half?

Charles Sledge

Well, a couple of things. No, I think Subsea revenues are going to continue to grow. You're going to flush out hopefully in the third quarter the majority of the Usan remaining revenue, at least the next biggest slug of it. So that'll obviously have a positive impact on the back half of margins. Surface we continue to grow. We've got some pricing that's going to help us there. Obviously, you get more drilling, which carries a higher margin, will be helpful as well.

Kurt Hallead - RBC Capital Markets, LLC

But just, Chuck, on the front there, you mentioned Usan. If you weren't flowing Usan through with 0 margin, if you just took that out, just what would margins look like without that Usan flowthrough at 0 margin?

Charles Sledge

I did the math. From memory, DPS would have been north of 20%.

Kurt Hallead - RBC Capital Markets, LLC

Okay. And then last thing on the margin front when you talk about Valves & Measurement and the PCS elements, you said flat back half of the year. I guess, knowing the way you guys like to run your businesses, I can't imagine that flat into 2012 is acceptable. If we look out into 2012 for those 2 businesses, what would you see the opportunity set for margin improvement? Is it purely volume? Is it volume and price? Is it some internal elements? Can you just give us some sense on how to maybe start thinking about that into next year?

Charles Sledge

Yes, some real high-level comments, and I hope our Valves and Process guys, our PCS guys are listening. When you think about Valves, really North American business continue to drive improved profitability, a combination of pricing and volume and then the fact we won't have the tailwinds of the Engineered Valve that we've had all year here. So that'll be the driver in '12 there. PCS, it's probably more internal-focused in making sure that we get them up and operating on our business systems. They're going to take a lot of cost out as a result, get a lot of leverage. And they're getting price. They booked the 2 MEG units, which is obviously going to be very helpful for their results when they get delivered. So those are the main drivers on what will shape up 2012.

Kurt Hallead - RBC Capital Markets, LLC

Now on this MEG unit thing, it's something that is new to me. So is this something where it's a growing market? Or is it kind of a one-off type of deal that you maybe will see on an episodic basis?

Jack Moore

I think what you see is it's technology that's really geared towards Deepwater production and platform installations, where hydrates are part of the production challenge, and the operators will put them into the system to reclaim that and reinject it so that -- because it's expensive.

Charles Sledge

Any project, Deepwater project that's injecting a lot of this chemical will ultimately like a MEG unit on that project. So there is a large opportunity for it going forward. The technology is very, very sophisticated and very tightly controlled. So it's a good business for us.

Kurt Hallead - RBC Capital Markets, LLC

Okay. Then in some of my conversations, I've heard on the BOP front, deliveries running, I don't know, 20 to 30 weeks or so. I have no basis to gauge whether that means that demand is so strong that delivery times are being extended. Just wondering if you might be able to give me some color. And there was no specificity in terms of whether that was a Surface stack or a Subsea stack. So just wondered if you might be able to...

Jack Moore

20 to 30 weeks may be the lead time for '14 [ph]. That would be awfully fast for a new stack, depending on whether the stack was already on a spec run. But no, I think you're seeing, as we alluded to, the delivery of these stacks we've just booked is probably at least 12 to 18 months in terms of the timing of when they would ship.

Kurt Hallead - RBC Capital Markets, LLC

I was going to listen, and I think I cut you guys off.

Charles Sledge

I was just going to say land. You maybe talking something closer to a land kind of a BOP stack in your 20 weeks.

Kurt Hallead - RBC Capital Markets, LLC

And then lastly, on BOP, just there's a lot of -- I'm getting mix read as to whether or not the BOP is really being done OEM in terms of recertifications. So I just wonder if you might be able to just help me kind of handicap that. Is most of the BOP stuff now being required to do OEM? Or is it just the stuff in the Gulf of Mexico as per NTL-05? How should I think about that?

Jack Moore

You're seeing a lot of it is driven by the operators. I can't confirm that everybody is conforming because obviously, we're not controlling what the contractors are doing. But we're seeing a lot, lot more than what we saw a year ago. Let's put it that way, a lot more. So my guess is we're seeing a lot more conformity to that OEM engagement with the recertification.

Kurt Hallead - RBC Capital Markets, LLC

Okay. And then absolute last question here. Cash, you mentioned you focus a lot internally at Cameron. Does that mean you're not really interested in doing M&A?

Charles Sledge

No, no, no. It didn't mean that at all. We continue to be very active. You guys know about the big deals we tried. We couldn't get the price right. We did a couple of small deals this quarter. The deal log is long. We're actively pursuing a number of opportunities. But at the end of the day, we still make sure we make a return for you guys. So we're very interested, always have been and always will continue to chase it.

Operator

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

William Herbert - Simmons & Company International

A couple of questions here for you, more sort of clarifying. Back to the aftermarket orders on drilling, $190 million this quarter versus something considerably less in the prior 2 quarters but so commendable. So I mean, is $190 million sort of a new baseline going forward, Jack? And trying to get a sense as to the leap from -- getting to my orders here. We did $118 million, I think, last quarter. We got to $190 million this quarter. How much of that relates to BOP upgrades, if any? And if it's just pure aftermarket and people coming home to the OEMs is $190 million to $200 million sort of the new baseline going forward?

Jack Moore

Bill, I would probably be very optimistic to see $190 million repeat this quarter. But I will tell you that it wouldn't surprise me to see a number greater than what we saw in the first quarter.

William Herbert - Simmons & Company International

Okay.

Jack Moore

So the timing of some of these -- there's some lumpiness in the upgrades to existing stacks that we can't always predict when we're going to put those bookings into the numbers. So there's a lot of inquiries out there. There's a lot of things we're working on, and the timing of that could affect that number in any given quarter going forward. But I would tell you that when we looked at the possibility for Cameron, and you heard someone else mention this number on the call, we always felt there was a number somewhere out there approaching $500 million that was kind of the entitlement based on the installed base.

William Herbert - Simmons & Company International

We're close now.

Jack Moore

We're getting closer to that number faster than we thought.

William Herbert - Simmons & Company International

Doesn't seems to be a terribly ambitious target now, we've got to raise that one, Jack.

Jack Moore

Bill, I'm going to have you come over and talk to our guys.

William Herbert - Simmons & Company International

Okay. To sort of dig a little bit more deeply here, we had a $70 million to $75 million top line delta on drilling aftermarket quarter-on-quarter. Was there anything unusual in that quarter that led to that surge?

Jack Moore

We had a couple of upgrades, Bill. A couple of large upgrades that come into the number.

William Herbert - Simmons & Company International

Okay. Got that. And in a similar vein, we've been tracking Subsea between $200 million and $250 million a Q x major projects, and then we surged to $330 million. How should we think about a normalized baseline for Subsea orders going forward x major projects on a quarterly basis?

Jack Moore

Good question. But I'd say what we had this quarter and the last quarter, that's kind of a lot of aftermarket, a lot of bolt-on one-offs, nothing as we said, nothing specific in those numbers. What could change is as Brazil ramps up and continues to ramp up, there's a healthy aftermarket that comes behind those 3 installations. So that can move that number up over time. But yes, I mean, I think if you kind of look at the first half of the year, that's probably a reflection of kind of this normalized business that Cameron kind of has.

William Herbert - Simmons & Company International

Okay. So that is a new normal then in terms of sort of a normalized run rate going forward?

Jack Moore

Kind of take the first half of the year divided by 2 to get a quarterly number.

William Herbert - Simmons & Company International

All right. Well, that's important. And then with regard to major projects, I know you guys have been realistic and right with regard to the pace of project awards. So notwithstanding that in 2012, looking very, very strong for significant uptick in major project awards, are there any that we can expect for the second half of this year? I mean, one in which you guys are rumored to figure prominently, West Nile Delta, is that sort of a realistic second half event?

Jack Moore

Well, I think we obviously are looking at that project pretty hard, but timing is never predictable, Bill. It's not going to get us to commit to what's going to happen between now and then. I think, though, that when you look at Subsea in context of Cameron's overall enterprise, it's really maybe 20% of our business. And it will always be significant, but we've got a lot of bites at the apples out there. The Gorgon project is a great example, where we pump and still selling a lot of valves into that part of the world. And we'll participate in a lot of subsea projects with other Cameron kit, just based on what we're seeing and touching right now. So when you look at the projects that are out there coming at us over the next 18 months, we may not book the subsea hardware on all of them. We won't book -- obviously, we won't book all of them, but we have a shot at selling a kit on a lot of these projects that we're chasing.

William Herbert - Simmons & Company International

Yes, and then finally, for me at least with regard to, at least, the conceptual roadmap for DPS margins, I mean, it should start with a 2 second half of this year, 3 through Q3 and Q4. But then going into 2012, with considerably less Subsea revenue as a percentage of the whole, hopefully no more Usan, should we see a pretty nice delta 2012 margins, Chuck, relative to second half 2011?

Charles Sledge

Well, I'm not going to comment on the magnitude, but clearly, the goal is to make them go up. And so we're focused on -- a little early for us to call to give you an order of magnitude, but clearly, the goal is to grow those margins. The only headwind that, if you will, is as Jack talked about, the new builds for drillships that's still competitive price. In Subsea, we need to get some people thinking rationally about what they charge for their work.

William Herbert - Simmons & Company International

Yes, but that's sort of status quo right now. And notwithstanding that, I mean, there's good news and bad news associated with the stasis on Subsea major projects. And the good news being is that Subsea is going to be a considerably smaller percentage of your overall revenue next year. And your mix is improving so -- and I get that relative to the first half, we had some extraordinary events coupled with that mix. But second half of this year, significantly improved margins relative to first half. Any reason to expect that 2012 is not better than the second half of this year? And it doesn't sound like there really is.

Charles Sledge

No, no, no. As I said earlier, yes, we clearly we expect growth in margins over the back of this year and 2012.

Operator

Our next question comes from Geoff Kieburtz with Weeden & Company.

Geoff Kieburtz - Weeden & Co., LP

Chuck, I thought you made a comment about Usan revenue may be tailing off in the fourth quarter. Did I hear you correctly?

Charles Sledge

Yes, that's correct. That's as we currently have it planned out. But again, as you guys know, we're on kind of a unit [ph] to completion. So that could be a little lumpy, but that's the plan as of today.

Geoff Kieburtz - Weeden & Co., LP

Okay. So maybe a couple hundred million again in the third quarter and then something lower than that in the fourth quarter?

Charles Sledge

No, no, actually, the couple hundred million was from the second to the fourth quarter in aggregate. But there may be $80-ish million coming in the third quarter. And that there was a like amount in the second and the balance would come out in the fourth. And then there will be a little bit next year but not a lot.

Geoff Kieburtz - Weeden & Co., LP

Okay, all right. And then we've had a lot of comments about the Subsea margins and on new orders, approximately $8 billion worth of projects tracking over the next 18 months. If you were to make a guess, how much of that $8 billion do you think needs to be booked before you're going to start seeing that pricing leverage come back?

Jack Moore

A lot of it depends on where. But let's say, let me just take a wild guess and say 20% to 25% of it. It's a little bit dependent on who gets it.

Geoff Kieburtz - Weeden & Co., LP

Right. I understand the variables. I was just trying to get a ballpark, if you needed half of that to get booked or whatever. But 20%, 25% sounds great. Shifting to the drilling side, on the aftermarket, if you kind of expand your time horizon a little bit, there is an acute event. There's been a growing response to that event. Do you see this as sort of a business that's going to experience a ramp up in revenue that's going to be followed by a decline as the upgrade work and recertification starts to be completed? Or do you see this as something where you talk about additional opportunities being discovered, that you can get up to a new level of revenue that can be sustained over the long term?

Jack Moore

I think it's the latter. I think that we don't really realize yet what the potential is. And the new normal may be every drilling contractor recertifying equipment every 5 years instead of 10 years. Or in some cases, never. So until we get to that point, Geoff, I don't know that we really know the answer to that. But it's clearly, every quarter, we get a little more visibility to what the potential is, and we keep ramping up our capacity. We opened a new drilling aftermarket facility in Oklahoma City last spring, and we're already looking at expanding it. The guys have come to us and need to expand it yet again, and this is onshore. This is onshore, not offshore. We're expanding kind of all over the world. And so we're at a point right now we're kind of chasing this opportunity. So it's really one that we haven't seen clearly what the roadmap is going to give us.

Geoff Kieburtz - Weeden & Co., LP

And if you were to realize that target of, say, 20% to 25% of overall revenue coming from aftermarket, would drilling have a higher mix in that scenario?

Jack Moore

Yes, it would. But keep in mind, so does our Compression business has a very high mix of aftermarket. Our Surface business had very high mix of aftermarket. Our Process business is getting there. Our Valve business, especially on the engineered side and on the process side, on the Process Valves side, very high mix of it. So we're touching this across all of our segments. And the more regulatory oversight that kind of comes around this, we will benefit from that relative to the discipline we can bring to the aftermarket support.

Geoff Kieburtz - Weeden & Co., LP

And as we see these aftermarket, particularly in drilling, as those orders climb, what kind of turn time should we be thinking about between order and revenue recognition?

Jack Moore

In some business segments, it's 30 days. In the drilling side obviously, a little longer because we really -- once you get a piece of equipment, you don't know really what you have to do to it until you've torn it down and assessed it. So it can take 90 to 120 days. Customers would like it sooner, so we're working with them on how to get ahead of that with stocking programs and spares and things of that nature. So we're working through all of those much better at today than we were 6 months ago. So you probably will see those lead times improve. And that's our goal, to make it much more paced than where we're at today.

Geoff Kieburtz - Weeden & Co., LP

And given the sizable orders that you booked on the original equipment in the quarter, but also the large number of new builds that have been ordered over the last couple of quarters, do you have an idea of how much -- how many of these new builds have not yet ordered equipment that you could supply?

Jack Moore

There's a host of them out there, Bill. Yes, I mean, as our guys here say, it's probably in excess of 20 at this stage of the game.

Geoff Kieburtz - Weeden & Co., LP

Okay, and one last sort of conceptual question. You've seen a lot of oil companies moving to split their upstream and downstream businesses here. Do you see that as potentially having any significant impact on your business, either positively or negatively?

Jack Moore

Well, we hope it's positive. I think as you get more focused on the downstream, especially on the refinery and chemical side, as these specific businesses, take Marathon and ConocoPhillips, for instance. As they upgrade and expand and make their facilities more efficient, it gives us a lot of opportunity to sell critical service valves and process equipment into those applications. So we're watching that. And the crack spreads right now are giving these guys a lot of opportunity to spend money on upgrades. So it's a good thing for us.

Geoff Kieburtz - Weeden & Co., LP

Okay. So you see it as a positive?

Jack Moore

Positive.

Operator

Our last question comes from Michael LaMotte with Guggenheim Securities.

Michael LaMotte - Guggenheim Securities, LLC

Jack, most of the questions have been answered, but LNG, you have helped outline sort of your market opportunities and rig packages and more recently FPSOs, and now in sort of frac and frac services in terms of what your total available wallet is on a particular project. As I think about LNG, particularly sort of the new LNG projects in Asia, the fact that some of them combined subsea with a lot of engineered valves, a lot of process again, you have an opportunity to sell a kit. Can you give us a sense as to what that marketing effort looks like and what the sort of total available wallet looks like to you on some of these projects?

Jack Moore

Well, actually, Mike, honestly, I don't have the specific numbers in front of me on the LNG side. But I will tell you in terms of the total valves that we have sold, just the valves into the LNG infrastructure market over the last few years was probably been in excess of $300 million to $400 million. So it's not a small number. And I think as you see the continued buildout in Australia, for instance, not just Gorgon but Wheatstone and Shell's infrastructure, it's going to continue to evolve. I mean, Gorgon alone was $300 million and still growing. You've got the obvious infrastructure on the receiving side that gives us opportunities, too, in terms of the LNG conversion infrastructure. So that's more critical service valves from our Process Systems side. So net-net, it's a big number for us. A good question in terms of what the potential market for LNG is and in total for us. But it's probably, at the end of the day, going to continue to grow from the baseline we're at today, which is probably $200 million to $300 million a year in opportunities. And that's not including the infrastructure for Subsea.

Michael LaMotte - Guggenheim Securities, LLC

I was going to say that's just the Engineered Valve piece.

Jack Moore

Yes, and some of the Process piece, too, as well. And then you add Compression opportunities and the story continues to evolve and evolve and evolve. And some of that, as we buildout the product design and product portfolio to support it, we're seeing more applications that we can take advantage of.

Michael LaMotte - Guggenheim Securities, LLC

And a lot of that gas has good bit of CO2 of it, and you guys have one of the most unique CO2 separations in terms of large-scale separation systems on the market.

Jack Moore

We've got some great technology that customers are looking at all over the world to employ.

Michael LaMotte - Guggenheim Securities, LLC

And any sense -- can you give us a sense as to the timing on when we might see some of that technology ramping up in terms of...

Jack Moore

Well, I would say I'd love to use the 18-month timeframe because everything we're looking at is kind of tied to a lot of decision-makers, and we're not always in control of that. And a lot of it is going to be in, obviously, Brazil and a lot of it is going to be in Asia, where we have a lot of CO2 embedded in this gas that needs to be treated and separated.

Operator

Mr. Altamari, we have reached the end of the Q&A session. I would now like to turn the floor back over to you for closing comments.

Jeffrey Altamari

Well, thank you, Christine, and thanks to all of you 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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