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Oceaneering International (NYSE:OII)

Q2 2011 Earnings Call

July 28, 2011 11:00 am ET

Executives

Marvin Migura - Chief Financial Officer and Executive Vice President

M. McEvoy - Chief Executive Officer, President and Director

Jack Jurkoshek - Director of Investor Relations

Analysts

Victor Marchon - RBC Capital Markets, LLC

Edward Muztafago - Societe Generale Cross Asset Research

Jonathan Donnel - Howard Weil Incorporated

Brad Handler - Crédit Suisse AG

Tom Curran - Wells Fargo Securities, LLC

James Crandell - Dahlman Rose & Company, LLC

Andrea Sharkey - Gabelli & Company, Inc.

John Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc.

Michael Urban - Deutsche Bank AG

Operator

Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2011 earnings conference call. [Operator Instructions] Mr. Jack Jurkoshek, you may begin your conference call.

Jack Jurkoshek

Thank you, Mike. Good morning, everybody. We'd like to thank you for joining us on our 2011 second quarter earnings call.

As usual, a webcast of the event is being made available through the StreetEvents network service of Thomson Reuters. Joining me today are Kevin McEvoy, our President and Chief Executive Officer, who will be leading the call; and Marvin Migura, our Executive Vice President and Chief Financial Officer. Just as a reminder, remarks we make during the course of the call regarding our earnings guidance, business strategy, plans for future operations and industry conditions are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

M. McEvoy

Good morning, everyone. It's a pleasure to be here with you today and to lead my first Oceaneering earnings conference call. Our second quarter EPS of $0.52 was above our guidance range of $0.45 to $0.50 and the street consensus estimate of $0.48. As expected, we achieved higher sequential quarterly operating results from our ROV, Subsea Products and Inspection businesses. Each of these operations achieved record quarterly operating income. We are well positioned to participate in the next growth stage of deepwater activity, and our outlook for 2011 remains positive. We now believe we will achieve record EPS for the year and are raising our 2011 EPS guidance range to $1.90 to $1.98 from our previous guidance of $1.83 to $1.95.

Relative to the first half, we anticipate our ROV, Subsea Projects, Inspection and Advanced Technologies business operations will achieve higher operating income results during the second half of 2011. Compared to 2010, for 2011, we forecast increased operating income from ROV, Subsea Products and Inspection. For 2011, we anticipate generating in excess of $450 million of EBITDA. Our liquidity and projected cash flow provide us ample resources to invest in Oceaneering's growth. Our CapEx estimate for this year is $250 million to $275 million, of which approximately $100 million is anticipated to be spent on upgrading and adding vehicles to our ROV fleet. About $55 million is for Subsea Projects, which includes the completion of the Ocean Patriot renovation and adding a third SAT system. $56 million is for the acquisition of NCA, which we completed at the end of the first quarter.

I'd now like to review our quarterly oilfield segment results starting with ROVs. We achieved record quarterly ROV operating income during the second quarter as our days on hire surpassed 18,000, an all-time high. Year-over-year, operating income increased on an increase in days on hire as we added 13 new vehicles to our fleet in the past 12 months. Establishing a new quarterly operating income record for ROVs is particularly gratifying as demand in the U.S. Gulf of Mexico was constrained by government regulations. In addition, last year's results included $3.5 million related to an insurance gain for a lost system.

Sequentially, operating income improved 23% or $10.7 million on the strength of improved worldwide demand for vessel-based construction and field maintenance services. This was led by activity increases in Norway and the Gulf of Mexico.

Our fleet utilization rate during the quarter was 76%, down from 78% in the second quarter of 2010 and up from 71% in the first quarter of 2011. The year-over-year decline was attributable to lower activity level in the Gulf of Mexico. The sequential improvement was largely due to seasonality and an improvement in permitting by the BOEMRE in the Gulf. For the balance of 2011, we expect to achieve quarterly fleet utilization in the 78% to 80% range.

During the quarter, we put 4 new ROVs into service, retired 1 and transferred 1 to Advanced Technologies for non-oilfield use. At the end of June, we had 262 systems available for operation, up from 249 a year ago. Three of the new ROVs went to work in drill support service.

Our fleet mix during June was 73% in drill support and 27% in construction and field maintenance. This compares to a 72-28 split a year ago and a 78-22 split in March of 2011.

At the time of our last earnings call, in the U.S. Gulf of Mexico, we were receiving full rates for 20 ROVs on 17 rigs, partial rates for 5 ROVs and 0 rate for 2 ROVs. As of yesterday, we were on full rate for 26 ROVs on 23 rigs, partial rates for 1 ROV and 0 rate for 1 ROV. There are presently 29 floating rigs available for use in the U.S. Gulf of Mexico, and we have ROVs on 25 of them.

We anticipate adding 15 to 20 vehicles to our ROV fleet in 2011, 7 to 12 during the last half of the year, and we currently have contracts for 6 of these for work on 5 new rigs. We continue to believe that we will achieve record ROV operating income for the eighth consecutive year in 2011 on an increase in international demand for drill support services and the expansion of our fleet. We expect our average revenue per day on hire and fleet utilization to be slightly higher than in 2010. We anticipate our ROV margin will be slightly lower due to a change in geographic mix as a result of a reduction in work in the U.S. Gulf of Mexico.

Now for Subsea Products. Year-over-year, our second quarter Subsea Products operating income improved 40% or $10.4 million on an increase in umbilical plant throughput and higher clamp valve and installation workover and control systems service sales.

Sequentially, Subsea Products' operating income rose on profit increases from all of our product lines. This was led by tooling, which included the benefit of our acquisition of Norse Cutting & Abandonment at the end of the last quarter.

Our Subsea Products backlog at quarter end was $405 million, up from our March backlog of $382 million and $347 million one year ago. The backlog increases sequentially and year-over-year were primarily attributable to umbilicals.

We continue to believe that our Subsea Products' operating income for the year 2011 will be higher than 2010 on the strength of higher umbilical plant throughput and an increase in tooling sales partially due to the NCA acquisition. We expect margins to be lower due to a change in product mix.

For Inspection, we also achieved record quarterly operating income during the second quarter. Year-over-year and sequentially, the increases in Inspection quarterly operating results were attributable to an increase in service sales in all of the areas in which we operate. A particular note was additional work to perform asset integrity management services in North Africa, higher activity on refinery and nuclear power plants in the U.K. and an increase in providing specialist inspection services in the Caspian Sea. We continue to expect our Inspection operating income for the year 2011 will be higher than in 2010 on a global increase in demand.

Switching to Subsea Projects. Year-over-year, the decline in Subsea Projects' quarterly operating income was a result of lower demand and pricing for our shallow-water diving and deepwater vessel services in the Gulf of Mexico.

Sequentially, Subsea Projects' operating income was lower on a reduction in the rental of miscellaneous equipment to perform installation work. During the second quarter, the lack of new projects and bad weather continued to result in low vessel utilization and poor job profit margins. We do expect an increase in demand for our diving and deepwater vessel services during the remaining quarters of 2011.

We continue to anticipate that Subsea Projects' revenue, operating income and margin for 2011 will be less than in 2010. This is attributable to a completion of the Macondo project work in 2010 and a reduced level of subsea activity in the Gulf of Mexico as a result of additional environmental and safety regulations that have been implemented by the BOEMRE.

In summary, our second quarter results were above our expectations, and we are looking forward to realizing another year of record EPS performance in 2011. Our focus on providing products and services for deepwater and subsea completions positions us to participate in a major secular growth trend in the oilfield services and products industry.

We were pleased with our cash flow generation capability as demonstrated by $121 million of EBITDA during the quarter. Capital expenditures for the quarter totaled about $58 million, of which $23 million was invested in ROVs and $20 million was spent in Subsea Projects, primarily on the Ocean Project -- sorry, Ocean Patriot renovation in a third saturation diving system. At the end of the quarter, we had $151 million of cash and no debt.

For the third quarter of 2011, we are projecting EPS in a range of $0.54 to $0.58. Sequentially, we anticipate quarterly operating income improvements from ROVs due to an increase in fleet days on hire as we expect the benefit from higher demand for international drill support work; Subsea Products, on the strength of higher field development hardware and valve sales and a higher profit contribution from tooling due to a change in product mix; Subsea Projects, on increased demand for our diving and deepwater vessel services and increased contribution from the Ocean Legend due to revenue associated with its demobilization; and Advanced Technologies due to increased maintenance and installation work on U.S. Navy submarines. We expect Inspection operating income to be about the same.

While our second quarter earnings exceeded our expectations and international demand for our services and products continues to improve, there is still a risk in our forecast for the last half of 2011 related to the U.S. Gulf of Mexico. There are differing industry views regarding the level of activity in the Gulf of Mexico during the rest of the year. We are not anticipating a slowdown from the current level but have no visibility of any meaningful increase in activity either.

Looking forward to 2012 and beyond, we are convinced that our strategy to focus on providing services and products that facilitate deepwater exploration and production remains sound. We believe the oil and gas industry will continue to invest in deepwater as it remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates. Others must share this belief. At the end of the quarter, there were 72 new floating rigs on order. 52 of these are planned to be available by the end of 2013, 35 have been contracted long term for an average of over 7 years. Four more floaters have been ordered since the end of the quarter, but 2014 should be our delivery dates. Two are contracted long term to Statoil. If all the rigs on order are placed into service, the global floating rig fleet size will grow 28% to 346 rigs. The high-spec fleet consisting of fifth- and sixth-generation semis and dynamically positioned drill ships, which currently totals 97 rigs, will grow over 75%. We historically have had a high market share on the high-spec rigs and are currently on 78% of them. Looking forward, we see no reason why we will not continue to be the dominant provider of ROV services on these rigs.

As the use of floating rigs grow, so will demand for ROVs to support drilling. We believe it is inevitable that demand for ROVs to support vessel-related construction work and field maintenance activities will follow. We also believe the use of these additional floating rigs will eventually drive orders for subsea hardware to levels not previously experienced.

Quest Offshore's latest subsea hardware forecast for the period 2011 to '15 includes a 33% increase in tree orders over the previous 5 years. In 2012, subsea tree orders are projected to be 538, an all-time high, eclipsing the previous record of 462 trees in 2006.

While we don't make trees, orders for subsea trees do drive demand for a substantial amount of ancillary subsea production hardware we manufacture. For example, Quest is forecasting a 55% increase in umbilical orders for the 2011 to 2015 period. Umbilical demand in 2012 is forecast to be about 1,835 kilometers, which would be the second-best year behind 2005 for umbilical orders.

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

In summary, our results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well over both the short term and long term. We like our competitive position in the 2011 oilfield services market. Our technology gives us the ability to prosper in challenging times. We are leveraged to what we believe will be an inevitable resumption in the growth of deepwater and subsea completion activity. The longer-term market outlook for our deepwater and subsea service and product offerings remains favorable. The renewed industry and regulatory emphasis on reliable equipment and redundant safety features of deepwater operations have caused our customers to be even more focused on risk reduction. This elevates the importance of the utility and reliability of our ROV services and related product lines and reinforces the benefit of our value sell. For 2011, we are anticipating that we will achieve another record year of EPS performance. We think this distinguishes Oceaneering from many other oilfield service companies.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jim Crandell from Dahlman Rose.

James Crandell - Dahlman Rose & Company, LLC

Kevin, any sense as to how many of the 74 ultra-deepwater rigs under construction have ordered ROVs?

M. McEvoy

Yes, I can say that. We've got that information here and we're just kind of making sure we get it right here. Here we go. 15 have ROV contracts let on it. So they're all -- and we were looking at the 72 on order at the end of June, and 15 had contracts, and we've won 6 of those. Therefore, there are 57 ROV contracting opportunities for new rigs left to pursue.

James Crandell - Dahlman Rose & Company, LLC

Okay. Kevin, do you see -- except for Brazil, are there any signs that Subsea 7 is becoming a more aggressive competitor globally in trying to win drill support ROV contracts?

M. McEvoy

Not at this time, Jim. Really, outside of Brazil, as you say there, we are continuing to maintain that high percentage of wins in the other markets on the ultra-deepwater rig.

James Crandell - Dahlman Rose & Company, LLC

And the fact that you've won just 6 out of 15 that have been let so far, is that a function that a lot of them came from Brazil?

M. McEvoy

That is correct.

James Crandell - Dahlman Rose & Company, LLC

Okay. Where are we in the process in Brazil, Kevin, of Subsea 7 replacing OII, Oceaneering, on expiring contracts?

M. McEvoy

Jim, our total exposure there was 4, and we had replaced last year on one. And the other exposure was 3 this year, and I don't happen to know exactly where we're at.

James Crandell - Dahlman Rose & Company, LLC

But are there still going to be contracts ending from here that you will be replaced on?

M. McEvoy

At some time during this year, we were on 3 rigs that we would potentially be replaced on. That's true. But whether all those have occurred already or not, I'm not quite sure.

James Crandell - Dahlman Rose & Company, LLC

Okay. Kevin, could you also talk a little bit to the subsea umbilical market? I think we've seen results steadily improved in recent quarters. Where are we now in terms of capacity utilization and bidding? And can we look to, with confidence that at this point, to the business improving through 2012?

M. McEvoy

We still believe that although there's no really good accurate data on this, our belief is that the capacity that exists is only being roughly 50% utilized, so there's still significant capacity remaining in this business. As far as going forward, I mean, all the data suggests that if orders are let as projected, that 2012 should be a big order year, although 2011 is down compared to last year. So this remains a very challenging market to be able to predict in spite of whatever data is put out there by the likes of Quest and others. It's just been challenging to have a good handle on how operators are actually going to give out these orders. But generally speaking, we believe that starting in 2012, order intake should pick up, and that should look very good through the 2015 time frame.

James Crandell - Dahlman Rose & Company, LLC

Has there been any improvement yet, Kevin, in pricing in subsea umbilicals?

M. McEvoy

Not really, no.

James Crandell - Dahlman Rose & Company, LLC

Okay. Would you expect some in 2012 if demand picks up, as you project?

M. McEvoy

Well, we would certainly like to hope so. I mean, as that picks up and the factory starts to fill a little bit more, you would certainly expect some increased pricing to result from that.

James Crandell - Dahlman Rose & Company, LLC

Okay, my last question, Kevin is, could you talk a little bit about the pricing outlook here in ROVs? And as your contracts end and you're putting the ROVs back to work, are you getting improved prices? And if so, maybe characterize the nature of the price improvement.

M. McEvoy

Well, we really can't characterize that. I mean, we put out that metric to give people some idea of what's going on, and that metric is also affected by geography and by mix of what work is going on. I'd say you could look at the trend or how that number has been going and continue to expect similar in the future.

Operator

[Operator Instructions] Your next question comes from the line of Brad Handler from Crédit Suisse.

Brad Handler - Crédit Suisse AG

A couple of questions related to your Products orders in the quarter, which looked -- hopefully my math is okay, it looked like it did strengthen sequentially and maybe was as strong as it's been for the last several quarters, or I should say stronger. Have I got that right? And then maybe can you talk to some of how that -- I mean, what contributed to that?

Marvin Migura

Yes, your math is right. And I think, as Kevin said in the opening remarks, most of it was related to umbilical orders.

Brad Handler - Crédit Suisse AG

Can you tell us roughly where geographically you've got those umbilical orders?

Marvin Migura

Brad, I mean, what we've got is -- what we've noticed this year is going into the year, the biggest risk -- because of our backlog, the biggest risk was for our North Sea plant, and that's the plant that has turned around the most in bidding activity and order intake. Brazil is doing very well with Petrobras and other international customers there but mainly Petrobras. And the whole that we see for '12 is what our own U.S. government has done to us and what activity levels there are going to be in the Gulf of Mexico. And sort of beyond that, we really don't get into specific orders unless they are the size that we announce. But I mean, I think that's the color of the umbilical market. I think also, I talked to the guys yesterday, there is a significant increase in bidding activities that we hope bodes well for -- I mean, some of these are budgetary, but there is much more interest in umbilical bidding than we have seen in several quarters.

Brad Handler - Crédit Suisse AG

Thanks, Marvin, I appreciate that color. If I could still -- hopefully which counts as unrelated follow-up, just the unallocated expenses in the quarter, can you talk to that a little bit and then give us some guidance for the second half of the year?

Marvin Migura

Let me look at that real quick. How much did it go up? I mean, it's all good cholesterol. I mean, that's where my thought goes.

Brad Handler - Crédit Suisse AG

I guess not really a lot. I just -- I think. . .

Marvin Migura

Okay. It went up in -- looking at unallocated expenses, the SG&A portion, we went from $25 million in Q1 to $27 million, about $1.7 million increase. There is just -- we're doing more things for IT to support our rolling infrastructure. We've got some other programs going on. I would expect to forecast something in that similar range of Q2.

Operator

Your next question comes from the line of Jon Donnel from Howard Weil.

Jonathan Donnel - Howard Weil Incorporated

A couple of other questions on the Products segment here. I was wondering in terms of the backlog increase. You talked a lot about the umbilical orders here. I was wondering if there's any contribution of that from just incorporating the Norse acquisition at the end of the last quarter, if that had any effect on the backlog.

M. McEvoy

It was included in last quarter's backlog and this quarter's.

Marvin Migura

A sequential change would have been only in the incremental NCA work that they got.

M. McEvoy

Right.

Jonathan Donnel - Howard Weil Incorporated

Okay. And then did that work increase in the Gulf of Mexico and not with the PNA? I know you talked about that on the last call. And also the IWOCS work in the Gulf of Mexico, was there another sequential increase from there in Products?

Marvin Migura

John, in NCA, it's really too early to tell. I don't say -- not significant enough to mention, and IWOCS had a very strong quarter.

M. McEvoy

Relative to the rest of the Product Group in the Gulf of Mexico, I'd say NCA is so small. It's not mentionable, and we don't really break all that stuff out anyway. But there was a contribution from the Gulf of Mexico from the Products Group sequentially.

Jonathan Donnel - Howard Weil Incorporated

Okay. And I presume that the IWOCS work in the Gulf of Mexico is driven a lot by just the lack of the drilling going on. Were you still seeing that? And is there any risk in the second half that if the drilling work picks up, that there could actually be a decrease in the products as a result of less IWOCS work?

M. McEvoy

I think as drilling picks up, there will be some reduction in the IWOCS work that we have experienced this year. I would not say that that would be significant enough to alter the overall Product results.

Marvin Migura

I think it will damper the growth opportunities in IWOCS for certain because we'll have to fill in with international work because you are absolutely correct that the level of P&A and development work that has been done in the absence of exploration drilling has increased our IWOCS utilization in the Gulf.

Operator

Your next question comes from the line of Andrea Sharkey from Gabelli & Company.

Andrea Sharkey - Gabelli & Company, Inc.

I was curious if you could tell me how much the Norse acquisition added to your Subsea Products revenue in this quarter because there was that strong incremental sequential increase. Just curious how much came from the acquisition.

M. McEvoy

We don't really break out those individual numbers. Sorry.

Andrea Sharkey - Gabelli & Company, Inc.

Okay, that's fine. And then I'm curious if -- this is sort of a maybe out-there question, but it seems like there's a lot more interest in FPSOs and those being built. Are you guys able to participate in that at all and how so? And how are you thinking about potential growth in that market?

M. McEvoy

We are not thinking about further growth in that market. We're actually exiting the mobile offshore production systems segment. It's just a totally different business, than it was when we started off, and we're not going to be participating there.

Andrea Sharkey - Gabelli & Company, Inc.

Okay. I guess what I was thinking was -- and maybe I'm off base, but would you put an ROV on an FPSO or anything like that? Would there be some sort of opportunity there?

M. McEvoy

Typically, the FPSOs do not have ROVs on them since typically, the drilling is already done, and there's no reason to have them out there. That would usually be a field support vessel with an ROV on it that would be doing field maintenance and whatnot.

Marvin Migura

I think the increased interest in FPSOs is just good news because it just shows how much more offshore production is going to be and the need for umbilicals and, as Kevin mentioned, support vessels with ROVs, but as he said correctly -- I mean, because we know internally FPSOs per se don't generate much work for us.

Operator

Your next question comes from line of Mike Urban from Deutsche Bank.

Michael Urban - Deutsche Bank AG

I wanted to revisit the pricing question on ROVs and maybe attack it a little bit differently. You obviously have a tremendous amount of newbuild rigs coming into the market if, and this is a big if, as you noted, if the Gulf of Mexico comes back in a meaningful way. And then there's also looks, it looks like, construction activity is picking up. We don't typically think of ROVs as having a lot of pricing power, but it sounds like that would be an awful lot of work and awful lot of demand coming through at the same time maybe in the 2012, 2013 time frame. Would you see that as a potential opportunity to get a little more value for the service you're providing?

M. McEvoy

Well, I mean, that's certainly possible. I mean, we, of course, are always looking for opportunities to increase prices. And it is a -- while we do have a dominant share in, at least, the ultra-deepwater part of this market, there is competition. There is always somebody with another ROV, and so we have to manage that carefully. And again, I think if you look at the historical graph or trend of these prices, I think that should give you a good guide for what you should expect in the future.

Michael Urban - Deutsche Bank AG

Okay.

Marvin Migura

Mike, let me just remind you that we are the price leader already in this market, so everybody is pricing off of Oceaneering. So I think you've got some good, strong tailwinds expected with all these new rigs in construction picking back up, and these are going to be high-spec equipment. So generally, we do a pretty good job in getting good price increases when they're available. As Kevin said and what we say all the time, we -- half the people ask us why do you think you'll be able to expect to retain market share when everybody's being so aggressive, and the other half asked why don't you raise prices. And somewhere in the middle is what we try to do. We try to maintain market share and raise prices.

Michael Urban - Deutsche Bank AG

Got you. And you've generally done a good job of that in the past. Unrelated follow-up question, could you give us an update on where you stand in the process, in the Gulf of Mexico and globally, of reengineering subsea equipments, greater redundancy, more functionality and interoperability between your BOPs and ROVs. I know that's been an ongoing process, but it seems like we're finally kind of moving on to the prescriptive phase here of this whole process. I was wondering where you guys stand in that process.

M. McEvoy

Well, primarily, our business in that area has been focused on ROV-mounted [ph] to be able to interface with the panels on the BOP stacks at higher pressures and higher flow rates, and that business continues to grow. We continue to have orders and service that part of the market. The panel part of that market, which is the BOP side, which is really the interface point for the ROV, that business has also been pretty good. And so those are the primary areas that we had been playing in, in that area.

Michael Urban - Deutsche Bank AG

And that's something you're seeing now and manifesting itself in the P&L, or is that more on the come?

M. McEvoy

No. That is manifesting itself within the tooling part of the Products Group, and then there is one other product that we have been primarily selling, which is a -- we call it a 6-shooter or a 6-pack or something like that, but it's a set of accumulated bottles that are independent of the rigs sitting on the seafloor that the ROV can connect that to the panel as another redundancy provision there.

Operator

Your next question comes from the line of Victor Marchon from RBC Capital Markets.

Victor Marchon - RBC Capital Markets, LLC

First question I have is just on Projects, understanding the demand side and capacity and just wanted to see if what you guys are seeing there is leading to increased discussions or looking further at or harder at other markets where you can maybe take some of your equipment out of the Gulf of Mexico.

M. McEvoy

Well, I would say that we have been pretty consistent in our strategy of focusing on the Gulf of Mexico with our vessel asset. It's just a whole different business jump to move to another international area. Having said that, we have looked at specific opportunities outside the U.S. that would fit our risk profile and commercial requirements. But I'd say generally speaking, we're not looking to making a big push to go outside the Gulf of Mexico. I mean, this has been a great business for us in the last several years, primarily kick-started by the hurricane work and maintained by that work, which is largely over. So we're now back to a more traditional Gulf of Mexico environment for these services. Having said that, we are also in a very down period right now due to lack of permitting. It's not just on the exploration drilling side, permitting has been very, very slow to come for all the other stuff that gets done in the Gulf, and that has affected project work as well. So I do think that that is going to slowly improve, and we would expect that once things get running a little bit back to normal that operators will up the pace of their maintenance, especially in the deepwater side.

Victor Marchon - RBC Capital Markets, LLC

And the second I have is just on Products and looking at it in the second half of the year. It seems that expectation's that that business will be down versus the first half. And given backlog, is it fair to assume that the expected decline is coming from margins, lower margins due to the mix, higher mix of umbilicals relative to the revenue side?

M. McEvoy

Well, there's 2 things there. I think, first of all, we did say previously that we were somewhat front-end loaded in terms of the umbilical business and the IWOCS business. And secondly, any increase on the umbilical side does have a decrease effect on overall margin for that segment.

Operator

Your next question comes from the line of Tom Curran from Wells Fargo.

Tom Curran - Wells Fargo Securities, LLC

Kevin, it looks like a fairly seamless transition so far.

M. McEvoy

So far so good, Tom.

Tom Curran - Wells Fargo Securities, LLC

Sticking with the Subsea Products to start with. Curious, looking across the 3 non-Multiflex segments, DTS, IWOCS and Subsea Field Hardware, for any of those 3, are you getting close to a decision point on investing in additional capacity? And if so, what metrics are you focusing on? What would be the triggers, and where would you make that investment?

M. McEvoy

Well, let's start off by talking about tooling. I mean, we just spent $56 million acquiring NCA. But as far as adding plant -- we bought a little company in Australia. But as far as adding capacity, I think our jobs have adequate capacity to grow considerably in Norway, in Houston and Australia and the U.K. So I don't see -- but I think the opportunities for tooling is in bolt-on acquisitions, where we've been pretty focused on the last months. IWOCS is equipment, and I think we're looking and trying to expand geographically. And then Subsea Field Development, I think we've got adequate capacity to grow orders. That's my take on it, and we're expanding, trying to produce in other states as well.

Tom Curran - Wells Fargo Securities, LLC

Okay. And then turning to Subsea Projects, have there been any meaningful changes in the competitive landscape since the last destructive hurricane season in '08? And if so, what type? And then could you please remind us of the specific services you provide when it comes to the response effort?

M. McEvoy

Well, I think, there are some vessels that have left the Gulf of Mexico as a result largely of the completion of that work. Others still remain, which is sort of depressing the market at the moment. The services that we provide are vessel-based ROV and diving and also tooling. We provide a lot of the cutting equipment. Generally speaking, this is shallow-water work and primarily a diving exercise. And typically, what we've done is incorporate an ROV into that as well so that you can increase the safety factor for the diver in the water, and then DTS or the fueling guys provide all the cutting tools and whatnot for that work.

Tom Curran - Wells Fargo Securities, LLC

And is any of that new, or had there been any meaningful technologically differentiating products or services added over the last 3 years?

M. McEvoy

I wouldn't say there's any technological advances there, no, from our side.

Marvin Migura

Tom, let me make sure I understand the question. You were asking specifically about the scope of services that we can provide when and what situation?

M. McEvoy

Hurricane damage, downed platforms and that sort of thing?

Tom Curran - Wells Fargo Securities, LLC

Right. Those first-call immediate-response services.

M. McEvoy

I think what we provide is really not so much technology as we've got a full package of the products and services necessary to immediately respond to something like that.

Marvin Migura

And the additional, which will be ready in Q4, an additional SAT boat, would be increasing capacity but not a change in technology. Not for downed hurricane platforms or platform inspection.

Operator

Your next question comes from the line of John Lawrence from Tudor, Pickering.

John Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc.

Just one more on IWOCS, if you don't mind. Just on the international push, I think you've done well in West Africa, and the North Sea is an opportunity. Could you just kind of talk about quantifying the international opportunity on IWOCS for us?

M. McEvoy

Well, I mean, we are certainly expending some degree of effort to try and push that business outside of the Gulf of Mexico. As you note, we have had some success in West Africa, and we have -- we currently have a system down in Brazil, and we're building a couple more systems to grow the fleet. And these things do tend to move around as well, so it's kind of hard to pinpoint where they are at any given point in time. But I'd say from maybe 3 years ago, we had 0 systems outside the Gulf of Mexico, and today, we might have half a dozen.

Marvin Migura

And I would just add that the North Sea is a very competitive market with low margin, so that's not a high priority for us.

John Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay, so mostly West Africa, I'd assume.

Marvin Migura

And we hope Australia.

John Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay, that's helpful. And then just on the acquisition market, are there any other Norse Cutting acquisitions out there, maybe reasonable valuations?

M. McEvoy

Well, we would like to hear the other side of the Chinese wall to bring us some, but no comment.

Operator

Your next question comes from the line of Ed Muztafago from Societe Generale.

Edward Muztafago - Societe Generale Cross Asset Research

I was just wondering if you could talk a little bit -- there's obviously a lot of high-spec rigs coming in, and I'm assuming that the ROVs that go on those are higher-margin, higher-revenue. Absent an improvement in ROV pricing, is there any reason for us to think that we wouldn't see improvement in margin and revenue per ROV? And then really, to that extent, with the pricing recovery, assuming perhaps the Gulf of Mexico finally gets back to some level of normal activity, would you opine that ROV margins possibly go back to the sort of 32%, 33% range?

M. McEvoy

First of all, I would say that the Gulf of Mexico inactivity has not really affected our pricing. I mean, we just quit working, or we were getting paid less because -- kind of a discount on standby sort of thing. So I think it would be inaccurate to say that the Gulf of Mexico situation has affected our pricing. In terms of the higher-spec rigs, I mean it is true, especially for the -- getting into the 4,000-meter capable systems, that those ROVs are higher-spec and more costly than others, and the price is going to be higher. Whether the margin is higher is topical with any bid, any client. I don't think you could necessarily assume that margins would perform any differently in terms of growth over time than it, again, as we've said, as it has over the past recent years.

John Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc.

Sure, sure. I mean, I wasn't implying that the Gulf had hampered or hurt pricing, but clearly, a recovery in the Gulf would materially tighten the market, and one would assume that that would lend to a little bit of pricing power.

M. McEvoy

I think we have a lot more leverage, I would say, in utilization increases than we do in incremental pricing, which tends to be pretty small as a comp, and it's just a cumulative thing. And it's good and we like it, and we always try to get it. But leverage is really in utilization, I'd say.

John Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc.

Sure. And no opining as to whether you could get back to 32%, 33% margin in ROVs?

Marvin Migura

We said when we achieved those that those were pretty lofty accomplishments, and we didn't think they were sustainable. Where you add a lot more high-spec equipment, the depreciation component goes up. I think Kevin has given a very good response to -- in relationship of pricing and utilization. I think the juice is in the number of days worked.

M. McEvoy

Right. And in a really tight market, your utilization, if it is really high, can get you those numbers, but that is almost unsustainable, except for fairly short periods of time.

Marvin Migura

I think what we have to see is to get the kind of utilization that guides those sorts of margin is a robust drilling and a robust construction and field maintenance market. And we haven't seen one of those for quite some time. So I think we've squeezed as much cost out of it as we can. And I would expect with higher utilization, we'd be seeing more cost pressure on our labor as well. And so it's a lot of moving pieces, and I think the respectable margin of 30.7% is pretty strong.

John Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay, fair. And then just as a second question, given what we're seeing in terms of increased offshore activity in Mexico, does that present any opportunity for the Products and Projects business -- businesses, I should say?

M. McEvoy

I would say that we're always kind of looking at Mexico, and it just really hasn't matured to the point where we see it as anything meaningful at this point. It's still characterized by very shallow-water stuff. Until they start finding some oil or gas in deeper waters that really plays to our main focus -- but I mean, ultimately, eventually, that is going to happen. But I'd say it's not going to happen -- I can't see it happening in the next 2 years, anyway.

Operator

There are no further questions at this time.

M. McEvoy

Great, thank you. Goodbye, everybody.

M. McEvoy

Thank you very much. Take care, guys. Have a good day. Bye-bye.

Operator

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

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