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FMC Technologies, Inc. (NYSE:FTI)

November 15, 2011 9:00 am ET

Executives

John T. Gremp - Chairman, Chief Executive Officer and President

Unknown Executive -

Analysts

Douglas L. Becker - BofA Merrill Lynch, Research Division

Unknown Analyst

Douglas L. Becker - BofA Merrill Lynch, Research Division

Great. Good morning. I'm Doug Becker, the U.S. Oil Services Analyst for BofA Merrill Lynch. Welcome, again, to the formal presentations today. Kicking off, we have FMC Technologies. In a cyclical industry, FMC Technologies offer some of the best secular growth through subsea equipment. They're a leader in subsea equipment. Presenting today, we have Chairman, President, and CEO, John Gremp. Please welcome, John.

John T. Gremp

Thank you, Doug. It's a pleasure to be here. And I appreciate that you refer to us as a market leader in the growing segment of the industry. And that is what I am going to concentrate my remarks on, is our leadership position and our opportunities for growth for FMC. The disclaimer slide you're all familiar with.

So when you think of FMC Technologies, which became a new public company in 2001, and you want to characterize our company over the last 10 years, I think growth is the -- really the best way to characterize it. Our revenue during this period grew 4x, earnings per share grew 7x, and our stock price grew 10x. So clearly, and I appreciate again, Doug, for you making that remark about our future growth as well as our historical growth. That's clearly -- growth is what's characterized our company since our inception in 2001. And the big driver of that growth, of course, was subsea, that now represents 2/3 of our total revenue, which this year is estimated to be at $3.3 billion for subsea systems.

The other 2 businesses are Surface Wellhead, which is part of the energy production segment, and also Energy Processing. And I want to take a -- because these businesses, oftentimes, get overlooked on subsea, but they're very important businesses. So this is the only slide I'm going present on surface and processing. But I want to dive a little bit into it because they are important.

First of all, Surface Wellhead. We have a very strong position. We're #1 or #2 internationally, in terms of Surface Wellhead. Domestically, our share's a little bit less, but we're growing in response to North America activity, particularly in the shale plays. We're one of the first Surface Wellhead companies to participate in Barnett, and we developed a very lucrative frac rental program. So we rent fractories [ph]. We provide the services. We've developed some new technology around special manifolds which improved the efficiency during a frac job at the well site.

So our North America business for Surface Wellhead has been growing rapidly. We had record inbound for Surface Wellhead in the third quarter. Our international markets are holding up well. So it's an important business that represents the second largest business of FMC and with our shale play participation, it has the opportunity to grow, and I'll talk a little bit about that later.

One of our most profitable businesses in FMC is our Fluid Control division, which is part -- at the largest part of our Energy Processing business. Fluid Control has also benefited from the shale plays and the high level of North America activity. We're the market leader in specialty treating iron which is commonly referred to as a trade name, WECO/Chiksan. These are high-pressure swivel joints and plug valves used by the industry in the fracking process. We're the market leader with close to 70% market share in the specialized treating iron. It's really a consumable, so it's not -- it's a product that actually gets consumed in the fracking process. 75% of our revenue from Fluid Control comes from that consumable treating iron. So that provides some sustainability. And again, we've had record inbound and record financial results from Fluid Control this year on the strength of North America shale plays.

Also in part of Energy Processing is Measurement Solutions. We're the market leader in fiscal liquid measurement. And our loading systems, we're the market leader in LNG Loading Systems. You know that market is poised for growth.

Back to subsea. Our market share over the last 5 years has just been under 50%, as the market leader. And we get that leadership by being a technical leader, and you'll see some examples of that later in the presentation. We also are a little bit unique in that we took a systems approach to our subsea business. Instead of just providing a component, we provided the entire system, making up each of the components, taking responsibility for optimizing the system and integrating the components. And that's been generally favored by the operators. So it's helped us gain share.

Thirdly, and I'll talk a little bit more about of this later, but we've targeted operators that have a large portfolio of deepwater fields or opportunities or discoveries, and we've approached them for some kind of longer-term relationship, which we refer to as alliance or frame agreements through a strategic partnership where we can add more value to the operators. And we have over a dozen of these kinds of unique relationships, and I'll share some of those later with you.

And then finally, one of the things that make us different and establishes us as the market leader is that we have full subsea systems capability in all of the major deepwater basins. And this is important as most of the operators, they want their project management team, their systems engineers, to be located in the same hemisphere or location. And because of our size and our market share, we have the scale that allows us to have full capability in each of the geographic deepwater basins. So these 4 things have allowed us to have the leadership position, and it also makes that leadership position more sustainable.

Now let's talk about subsea growth. Again, Doug referred to our company in terms of growth, and we're certainly optimistic that the future subsea will be -- will represent one of the fastest-growing segments in the industry. And we get this because an increasingly higher percentage of oil production is now coming from deepwater. The economics for deepwater continue to be attractive, generally between $40 and $60 a barrel. And we've seen in the capital spending by the majors, the annual increase is somewhere at 15%, much of which is devoted to deepwater.

This is the Quest Tree Forecast. The 2011 forecast from Quest is probably a little bit optimistic. We'll probably do less than 300 trees. But the how here is [ph] -- and these numbers will of course bounce around. They certainly look very attractive for the number of tree awards in the next 4 to 5 years, at least as shown by Quest. And our own numbers pretty much reflect Quest Forecast, as well.

I talked earlier about the importance of these frame agreements and alliances, and about 40% to 50% of our inbound orders for subsea over the last 2 years have come from these longer-term relationships. The neat things these about these relationships is that they make our market leadership position more sustainable. If we have a frame agreement like we do with Shell, an exclusive agreement that was recently expanded from a Gulf of Mexico agreement to a global agreement, that means that Shell's deepwater business is largely going to be ours indefinitely, as long as the alliance and the frame agreement exists. So it gives our market leadership position more sustainability.

And just to share with you the nature, these -- all of these logos up here, they -- all the relationships are different. Some are exclusive, some are regional, some are global, some are contractual, some are handshakes. But they all have one thing in common, and that is that there is an intention by the operator to have some kind of long-term relationship with us.

Now why would an operator want to do that? Why would an operator like Shell want to have an exclusive global relationship with us? It's because of the complex nature of subsea equipment and the opportunity to increase value, so just that if an operator can have a long-term relationship with the market leader, they can dramatically drive down their total operating costs. Because it gives the operator and opportunity for repeatability. In the case of Shell, they looked at their portfolio of deepwater projects in the Gulf of Mexico, and they came to FMC and together, we developed a standard subsea system. And across almost 2 dozen projects in the Gulf of Mexico, Shell and FMC built the same subsea tree over and over again, over 80 times. With that kind of repetition and standardization, costs go down, lead times go down, installation times go down, quality, safety, system reliability, all reached record levels. And this is the value that was created by that unique long-term relationship.

And that's really what makes us unique from some of the other suppliers. And just to share, I mentioned Shell, our global, exclusive relationship. With Statoil, we share that with one other supplier. Woodside, and it's an exclusive global relationship. Elog is an exclusive global relationship. BP, we share with one other supplier. We recently signed a global frame agreement with them. Anadarko, it's an exclusive relationship in the Gulf of Mexico. BG in Norway, that's an exclusive relationship in the Norwegian continental shelf. Cobalt is an exclusive global relationship. Total, we share with others. Noble, it's a relationship in the Gulf of Mexico. They all, again, have something in common, a commitment by the operator to develop a long-term relationship with our company. The bars on the right, show the most active deepwater operators over the next 5 years. And you can see a lot of those names are names that -- are companies that we have a relationship with. And so generally over the next 5 years, over half of the subsea tree requirements will be with partners of FMC.

I want to shift now to new platforms for growth. We've talked about our market leadership position in subsea space, poised for growth. Our leadership position has the ability to be sustained because of the partnerships that we have established. In addition to that, we're developing new platforms for growth for our company, and the first is in subsea processing, which we describe as subsea boosting or pumping, subsea separation and gas compression.

All subsea processing requires boosting, and there's different kinds of pumps that are involved, multi-phase pumps, single-face pumps, ESPs, helico-axial pumps. But it typically involves a boosting station and the pump itself. A pump doesn't work without a motor and the motor is just as important as the pump. So the motor, the pump, all packaged together as a station, makes up the pumping system or the boosting system.

Subsea separation can separate gas, liquids, oil or water, desanding, it can be very complex. Once you separate, you lose the hydrocarbon pressures, so then you'll then need to boost. So typically, separation and boosting are used in conjunction with one another. And then gas compression -- this is essentially putting a gas compressor that would be typical on a platform to boost gas for a long offset, would now be done subsea. So these are the 3 components of subsea processing.

The new thing about subsea processing, for me anyway, is it's compelling for multiple reasons. It's not just one solution. It can be an enabler in a greenfield application. For example, Shell Perdido and BC 10, the wells -- the discoveries that they had in Perdido and BC 10 were good discoveries, but there wasn't enough hydrocarbon pressure at the seabed to boost of the hydrocarbons the 2 miles to the surface facility. So as they had a great discovery, but they didn't have a way to develop it. They needed to boost at the seabed, to boost the hydrocarbons up to the processing facility. Well as it turns out, pumps don't work when the gas, liquid, frac ratio is too high. So in this case, Shell had to separate at the seabed, now allowing the pumps to work, to boost up the hydrocarbons to the surface processing facility. So in this case, a greenfield application that acted as an enabler to allow Shell to develop that discovery.

In brownfield applications, like the projects shown here, you've got aging wells. The hydrocarbon pressure is starting to drop. Maybe the water pad is starting to increase, as in the case in Marlim. And the increase, the reservoir recovery, subsea processing can solve that problem. Nobody wants to leave a lot of hydrocarbons in the reservoir if you don't have to, and subsea processing is a good solution. Tordis is an example. When Statoil and the Tordis field, an older field in the Norwegian continental shelf, statuably they get 19 million free barrels of oil by extra reservoir recovery by subsea separation and boosting at the seabed. So it's very compelling at a brownfield application.

It also acts a cost-reduction. On the Congro and Corvina project, Petrobras had an option of building a whole new platform, or adding a subsea boosting at the seabed. So they avoided the additional cost to the subsea platform, by doing a subsea processing at the seabed. So the compelling thing about subsea processing, it solves multiple problems. There's been 7 commercial applications for subsea processing, boosting, separation, all different technologies, different parts of the world and different customers. They do have one thing in common, and they were all done by our company.

I want to talk about Marlim [ph], because that's one of the most exciting and most current subsea processing projects. It's the first deepwater subsea oil and water separation. It's applying to the Marlim fields in Brazil, for Petrobras. The Marlim fields are increasing in water cut. The percentage of water that's being produced in these older wells is exceeding the capacity of the topside facility. So Petrobras has a really big problem. They have to essentially shut in some of the wells because their topside facility can't handle all the water that's being produced. And they've got 70 wells in the Marlim field all behaving the same way. All right? So they're have to restrict the hydrocarbon production because their bottlenecked at the topside facility because of the dramatic increase in water cut that they're getting from the Marlim Wells.

The solution, for Petrobras is to separate the water and oil at the seabed, reinject the water and boost the hydrocarbons to the topside facility, eliminating the bottleneck and improving the production flow from the Marlim field. We were excited to be given a direct award with our partner, Petrobras. Petrobras tends to favor FMC and a more technologically challenging complex. They came to us, we worked together with Petrobras, developing new technology, some of which is proprietary including unique separation from our CDS acquisition that we made 5 years ago. Also some pipe and pipe separation which came from a license from Statoil, and then unique boosting packages that we put together with Framo.

It's a very challenging project. There was over a dozen new technologies that needed to be qualified, and we were delighted that 2 weeks ago, we delivered the Marlim system to Petrobras on schedule. Petrobras has had an incredible interest in this project. They -- we weren't sure exactly when they were going to install it and 8 days after we delivered the system, they had it in the water. I've never seen Petrobras act this fast on anything. They can't even approve an invoice in 8 days, let alone install a big Marlim -- a piece of equipment like this, and they did it. And that just demonstrates their interest in this pilot. We think that the Marlim system will become operational before year end, and then after some period of pilot testing, Petrobras will make the decision to buy more of these systems to fulfill the requirements of the rest of the month [ph]. So very exciting for us. It's a brand new technology. We're delighted that we were able to deliver the system on schedule for Petrobras.

I want to talk about the second platform for growth. This is subsea services. It's a little bit further out, a little harder to kind of define how this market will be developed. But what we do know is that the subsea wells are growing in population and they're aging. And as well as age, they need subsea intervention. Today, the reservoir recovery from subsea wells is somewhere between 30% and 40%. That compares with 50% to 60% reservoir recovery on a land well. Nobody wants to leave those hydrocarbons in these wells. As wells age, the operators are going to want to do subsea intervention to boost the reservoir recovery.

But subsea intervention is expensive, especially if you're doing it with a rig. If there's a way to do lower-cost subsea intervention, the operators are going to be attracted to this. And we've developed some unique technology that we're providing to BP, Statoil and to Shell, that allows subsea interventions to be done on a less costly Light Well Intervention vessel. We have 3 of these systems in operation, 2 for Statoil and 1 for BP. They've been in operation for the last 4 years. They're working extremely well. Statoil is very pleased. BP is pleased.

The utilization rates of this capital equipment continue to be -- continues to grow. Performance has been excellent. A lot of operators are expressing interest. How fast this will grow, when it's adopted, how it will look like, what exactly it will look like in different deepwater basins, is going to develop over time, but it's an exciting new technology and opportunity for our company to grow. It makes sense because half of the subsea wells are ours. We have a technology and the experience to provide these kinds of services, and with our 3 stacks that are in operation for Statoil and BP, we're gaining even more experience. So exciting growth opportunity for our company.

I talked earlier about subsea systems and subsea processing, and the way we look at this is the growth opportunity for subsea processing really requires us to own the technologies that are going to become part of the new expanded subsea systems. And to get these kinds of technologies, in addition to our own internal development, we know we need to acquire these technologies, and we have some good examples. CDS, where we acquired unique separation systems. They had only been done topside, but it was technology that was uniquely suitable for a subsea environment. Shilling Robotics, which is the market leader in manipulator arms and they're rapidly developing their ROV technology, provided some unique controls technology that we're using in our subsea system.

I mentioned earlier about subsea boosting and the importance of the motor. The motor is every bit as important as the pump and we acquired Direct Drive Systems, which develops -- which has developed a very unique motor, that again, is ideally suited for a subsea environment. MPM another good example, this is a topside metering company, but it had unique technology that allowed self-calibration of their meters. Well, on the subsea environment, that's highly desirable because you don't want to have to go down, retrieve the meter and calibrate it. Because these meters are self-calibrating, ideally suited for a subsea environment.

All good examples of our company is acquiring companies that have unique technologies, not necessarily applied in a subsea environment. But with our marinization expertise, we can take their topside technology, marinize it and complete the suite of technologies and components required for an expanded subsea system.

Last slide. So if I were to summarize our strategy, the premium that we enjoy for our stock is a result of both our historical ability to substantially grow earnings, which I said earlier is 7x we've grown our earnings over the last 10 years. And the expectations by our shareholders is that we're going to be able to continue this extraordinary growth in earnings. We'll be able to do that by maintaining our subsea market leadership position, and I explained through our partnerships and frame agreements and alliances, that leadership position is sustainable, and that the subsea market as it's defined today is poised for growth. You saw those charts, you know the importance of subsea -- hydrocarbon production coming from deepwater environment, the number of deepwater discoveries, the 40% increase in deepwater rigs that we're going see in the next couple of years, all support substantial growth in the conventional subsea market of which we're the market leader.

But there's opportunities to grow beyond the subsea market as it's defined today, and I talked about 2 new platforms for growth. One, subsea processing, which is compelling because it's solving multiple problems, and our company is establishing a strong leadership position in that market with all the commercial subsea processing applications being developed by FMC. Probably, a little bit longer out, but equally impressive is the opportunity for subsea services. And our company is uniquely positioned to take advantage of this growing market and we've gotten off to a good start with our 3 Light Well Intervention systems that we're providing to BP and Statoil.

A third opportunity, and I mentioned it brief at the very beginning, and that is the shale plays. We currently participate in the shale plays through Surface Wellhead and our Fluid Control division. There's lots of opportunities for us to expand the scope of equipment and services, and we've done that over the last couple of years with frac rental -- rental fractories , rental of frac manifolds, the Well Service Pump. All opportunities where we're expanding the scope of services and equipment that we're providing at the shale plays.

And then finally, because we are talking about earnings growth, just not topline growth, our company has a lot of opportunity to improve in an execution leverage to increase our earnings, and we're working hard on doing all of those things. Again, thank you for your interest in our company. It's been a pleasure to be here. Thank you, Doug.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Thank you. I'll start with the questioning.

Question-and-Answer Session

Douglas L. Becker - BofA Merrill Lynch, Research Division

Certainly, subsea processing is incredibly exciting. Can you give us a little bit of a sense how this business evolves, and what could we be looking at in terms of the market size in 3 to 5 years?

John T. Gremp

Well, Doug, as you know, in our industry, the adaption to new technologies is kind of tricky. In the deepwater space, operators -- many operators are cognizant of the natural risk and nobody really wants to be the first at anything unless they have to. So it's kind of hard to -- it's hard to predict the adoption rate, which is why in the early days of subsea processing, and it's been around as an idea for a long time, over a decade. In the early days, you didn't see that many people adoptive. Tordis was one of the first commercial applications for subsea separation and boosting, but now, as you saw on the chart, we've got 7 commercial applications. And what we're seeing now is every year, we're seeing 2 or 3 new commercial applications pop-up versus 5 years ago, when we saw one application every other year. So you can see that it's starting to gain traction and gain momentum. When we look out, we can see almost a dozen subsea processing projects over the next 2 years, which, again, suggest it's starting to gain momentum. There's certain estimates, and by even our calculations, this clearly could be a $2 billion market for the industry. I'm going to be a little vague on exactly the timing when it will get there because I'm not sure of the adoption rates. But I think, right now, it's several hundred million dollars a year, and over the next 5 years, I think we should see that grow to $1 billion-plus and eventually become a $2 billion market. Well, it's just a little hard to estimate the pace at which it's adopting, but clearly we're getting traction. Yes.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Can I just a follow-up on that, can you give us a sense for the physical scale? Is there a minimum efficiency scale for these applications in terms of yield size of production levels? What's the sweet spot? Is it sort of 50,000 a day fields? Is it 200,000 a day fields?

John T. Gremp

That's a good question. I don't have a clear answer. I mean, the past 4 was they had 3 boosting systems and had capacity for -- do you remember? Yes, what was the -- it was several -- it was a 100,000-plus barrel capacity. But that was 3 boosting systems. I can't remember what Marlim's capacity -- do you know what Marlim's is? Is it...

Unknown Executive

Is it 50?

John T. Gremp

5-0?

Unknown Executive

5-0?

John T. Gremp

5-0? I think it was 50,000, and that's just one unit. So I think they just keep adding -- adding units to increase the capacity, to be honest. And all the technologies are different, right? I mean if you're desanding, you're separating gas, liquids, you're in deepwater, you're not in deepwater. You're doing oil and water separation versus gas, liquids. It's all different, so it's a little hard to pin down.

Douglas L. Becker - BofA Merrill Lynch, Research Division

But from your standpoint, is there a sweet spot in terms of minimum efficiency? Will you not go to it 20,000 minus play or...

John T. Gremp

I don't think we've established a sweet spot or not. I really haven't.

Douglas L. Becker - BofA Merrill Lynch, Research Division

How differentiated are you versus, say, Cameron or the competitors on subsea processing?

John T. Gremp

Well, we're participating on all the commercial applications, and they're not. So I mean, we're gaining experience, which is good and that's what we want to do. We're getting out there early. We're getting experience not just with one technology, not in just one geographic basin, and not with just one customer. So our learning curve is 7 applications, and the other guys are, I'm sure, working hard to get their first applications. So I think we have a head start, is what I would say. I think we've -- we're really pleased with the acquisitions that we've made. I mean we did -- we've made CDS, which has got this fantastic separation technology. Again, it's ideally suited for deepwater because it doesn't use big -- it doesn't -- it's not -- their separation -- topside separation systems are not based on gravity-based technology, which is not suitable for a deepwater environment. You don't want a big tank 2 miles below the surface of the water. It will collapse. And so, CDS has unique, compact, in-line separation technology, and we've got that and the other guys don't have that yet. I think our DDS motor is really going to help us with the step-change in boosting. So I don't -- I know the other guys are working hard on it, and they're smart and they're going to -- they're acquiring companies and developing the technology. I think they're just behind us, that's all.

Unknown Analyst

Is Brazil asking you to spend money in Brazil? I know that with the rig companies, they're trying to do much as they can there.

John T. Gremp

Local content is very, very important. And our company has been very successful. We've been in Brazil for 50 years. We have 1,700 people in country and we have the highest level of local content of any subsea supplier. We're the only company that actually assembles and tests the subsea control systems in country. So it's challenging. As the market grows in Brazil, the supply chain is very, very challenging. It's hard to keep people. It's a real challenge, but so far, we've been very successful, and I think it just has to do with being in Brazil for so long. We've been very successful in meeting their local content requirements. But yes, they're very strict. You can't cheat. You have to meet a certain amount. They're always trying to increase that amount. It's very challenging. And I think for our company, it's probably a differentiator, is that we probably do local content as well as anybody does in the subsea space, anyway, in Brazil. They're very challenging.

Unknown Analyst

Will you speak about your order levels for 2012 [ph]?

John T. Gremp

The order level for 2012? Yes. Well, 20 -- I've said in the earnings call, and I think some of the other subsea suppliers have echoed as well, and that is that 2012 looks extremely strong from an award point of view. And I think the reason for that is once the operators became comfortable in 2010 and 2010 with the long-term forecast for demand, and the price of oil, subsea, we talked about this earlier. It's a long-cycle business. Operators are expecting the subsea developments to be in production for more than 20 years. They have to predict what oil prices are going to be in 20 years. And when they felt more comfortable after the economic downturn at the end of 2008, they felt more comfortable in demand. They started up some of these big deepwater projects that they have put on hold in 2009. And because it's a long cycle business and you start up a big project -- it takes a long time to get to the award stage. Almost 2 years. And that's what we're seeing happen in 2012 versus 2011 and 2010. In terms of major subsea projects that were awarded in 2010, it was about 4 or 5. In 2011, I had hoped that there would be more, maybe 10. It looks like it's going to be 5 or 6. But now you look at 2012, and you're talking about the number of subsea projects possibly doubling from 2011. And that's because they're all starting to hit the award cycle from when these operators flipped on the green light back in 2010. So you saw on the Quest slides that I showed that the number of trees could again grow by 50%. Quest says it will almost double. That kind of makes sense to me. I don't know if it's actually going to be double in terms of the number of trees. But somewhere north of 50% growth in terms of awards number of trees, 2012 versus 2011. We also believe that Petrobras is due for some major subsea awards in 2012. I don't know that necessarily for a fact, but they had multi-year frame agreements that they released in 2009, early 2010. They didn't order very much equipment in 2011. By our calculations, they're going to need some more equipment for 2013 and they're going to have to get that on order in 2012. So the addition of Petrobras now back in 2012 with some major awards versus virtually nothing in 2011, the operators kicking off a large number of deepwater projects in 2012, it's really shaping up to be a very strong year. So these projects all have a tendency of moving to the right, depending on local governments, national oil companies. Nigeria has a national petroleum law they've got to pass before people are going to get back into that market. So we have all those kinds of uncertainties, but from what we're seeing, 2012 is shaping up to be a strong market in terms of awards.

Unknown Analyst

In terms of doing backup [indiscernible], let's say we have 550 quids [ph] and you guys get twice as in the market share. And there be 20 million [indiscernible] or 4.5 million of orders, unless there will be some shipping awards right from 2011. Do you agree? And is that [indiscernible]...

John T. Gremp

Where it went -- repeat the number again that you're forecasting?

Unknown Analyst

So of 550 quid has request [ph], using a 40% long-term market share that you guys have, using at least...

John T. Gremp

I see.

Unknown Analyst

[indiscernible] I made it up to be 4.5 million but there will be some upside because some of the products in 2011 that...

John T. Gremp

Yes, we haven't given any indication of what we think the -- our award number will look like in 2012. I'm not sure about the 40%, because a lot of these big projects are going to be bid. We know the pricing is going to be pretty intense on some of these early awards. We've rebuilt our backlog. We're going to be careful and selective on the projects. So I want to be -- we have to see what pricing does to really understand where FMC is going to come out on this thing. But -- and I don't know if we're going to hold 40%. I mean, we had 60% market share in 2010, 60% in 2011. We know it won't be 60% in 2012, because a lot of these big awards are being competitively tendered. But I think, it's -- yes, I'll go this far. I think 2012, in terms of the FMC awards, I think it will continue to be another strong year for us, even though our market share will be down because the whole market will be up, so -- but I'm going to be hesitant to be any more definitive because I think we have this pricing thing out there. And we're not going to pick up awards that don't reflect better pricing. We'll let the other guys have those. And so I want to see how that shakes out before we get a little more confident on what the number -- but I think it will be another strong year for us, just given the sheer size of the market. And you had a question?

Unknown Analyst

Yes, I have a couple of questions. You're very proud of your long-term customer relationships you have.

John T. Gremp

Let's show what I got. Okay.

Unknown Analyst

Do you have any of them that are coming up for renewal in the next 2 or 3 years that you get worried about, especially when you look at the competition? And then secondly, and going back to this pricing, how long are you willing to stand away from these projects and watch your competitors win them before you decide you need to fill your cost here [ph], as well?

John T. Gremp

Two great questions. First of all, on the frame agreements and the alliance and the partnerships, I worry about them every day. They are so important to our company and they built our leadership position and they've made it sustainable. And we really treasure them. It sounds kind of a -- it's kind of a funny term to use, but these are -- these go back a long time. I don't actually believe in the contractual relationship -- we have contracts. We have handshakes. We have winks. We have practices, but they're all based on the same thing, and that is performance. If we fail to perform, it won't matter if we have a contract. It just, it won't -- we have a 5-year frame agreement with BP that gets -- we're only barely in our first year. It has a provision to get renewed in another 5 years. I don't think that -- and Cameron has one as well. I don't think it means anything. What matters is the relationship we have, how we work together and our performance. Because BP is going to decide who gets what based on performance. And our relationship with BP, or Shell, or Anadarko or anybody else, is going to be based on our performance. Because they can cancel these contracts whenever they want. So we worry about them. I worry about them all the time. And we do everything we can to protect them and the way to protect them is 2 things: a high level of performance, don't give the operator any reason at all to move away from you; and always demonstrating that you're creating value. And we have an opportunity in these long-term relationships to create a lot more value than just through pricing. And I gave some examples. When you do something over and over and over again, you get good at it and the operator benefits. And so, the reason we have a relationship with Shell for 15 years in the Gulf of Mexico, and earlier this year they decided to expand it to the whole world, was because of the value that we delivered to Shell, and that we maintained the performance level second-to-none. If we keep doing that, I don't worry about frame agreements expiring because they'll be renewed. But when our performances slips, and we stop demonstrating value through the uniqueness of the long-term relationship, that's what will cause the frame agreements to fall apart. And I think the other suppliers probably covet our relationship. I think -- I'm not always sure why they haven't taken the same approach that we've taken. But I'm sure they would love to get in and break our relationships. But they're based on performance and value-created, not necessarily pricing. And your second question -- I guess it was a long answer to the first question. Well, your second question was?

Unknown Analyst

The second question was basically when are you going to break [ph]?

John T. Gremp

Right. I don't know how the other suppliers think about it. But I know how we think about it, and I know how I would think about it if I were them. And I'd think about the capacity to execute these big complex project successfully. And to do a big EPC project, like one of the big several hundred million dollar projects that are going to be awarded in 2012, you have to have subsea systems engineering capability. You have to have the full suite of projects. You have to have project management experience. It takes a tremendous amount of talent and capacity to successfully execute one of those complex projects. So if I were one of those other suppliers who had a history of maybe doing one EPC contract at a time, and maybe -- maybe or maybe not they did 2 concurrently, but they've never done 3 concurrently in roughly the same time -- I don't mean right on top of each other, but within the same 3- to 6- to 9-month period? If you've never done 3 EPC projects in the same 6- to 9-month period, then you'd worry. You've got 2 awards and you're bidding the third, you've never done 3 at the same time together, you're trying to put together your project team and you got a whole bunch of blanks, you'd say, "Wow, this is going to be a very hard project for me to execute. If I'm going to win it, boy, I'd better make a lot of money, because I'm going to have to expedite. I'm going to have to hire people I don't have. I'm going to take more risks than I normally would want to take. Because I don't have the team, the experienced team, to execute this project successfully. And if I don't execute it successfully, I will pay for it." Liquidated damages, penalties, we've seen some people in the industry get hit with that. Kind of inability to process change orders, supply chain difficulties. You can get yourself into trouble with poor execution. So if I were one of these other suppliers, or even ourselves, I'd look at our ability to manage -- successfully manage a big complex EPC subsea systems project, and I'd start to change my pricing behavior when I realize that I was bidding projects that might be a challenge to execute because of my capacity. And I'm not talking about earth [ph] line, machine tools and how many trees you can manufacture, those are important, too, but they're probably not the critical constraint. If there is a project that was technically intensive, it required a lot of technical talent -- experienced technical talent that you didn't have, then you start to change your pricing behavior. So the punchline is, as some of these major awards start getting awarded and start getting distributed amongst the subsea suppliers, and they start to bump up against their perceived constraint, which will be successfully executing a big complex EPC project, that's when we'll see pricing change. If I had to predict, it would be the second half of next year. We'd start to see some behaviors change, just because the number of projects, I mean, they're winning. But that's how I would play, and we will see what happens. They don't ask me for their pricing advice, so I don't know exactly how to think about it. Yes?

Unknown Analyst

I'm just trying to understand a little bit better, how interesting for the companies could do subsea separation for the oil and water thing like you do in Marlim for Petrobras be? Could you just try to quantify what kind of improvement we're looking at here for Petrobras, and then to that extent, how much would -- how much does it cost to operate such an equipment, and the CapEx as well?

John T. Gremp

Well I don't -- I apologize, I don't have all of the Marlim information. But I think you can appreciate -- as I think their water cut is in excess of 50%. So you now have this big Marlim field you've invested all this money in and you're constrained and bottlenecked, and you're able to produce only a fraction of the hydrocarbons that you used to produce because the water cut is so high. And your options are to build a whole bunch of very, very expensive platforms, all the for the process -- all for the requirement of treating water which is growing from 50% -- but I don't know the exact number, but I know it's about 50%. So you're building all this expensive capital investment for an old field so I can treat water. And they're not doing it because they can't make the numbers work. And so they spend $80 million for a pilot that avoids the whole topside facility, which is never going to pay for itself because it's just going to be all this capital to treat water which is worthless. Or you spend $80 million and you put a pilot, and you reinject it and you save all that money and you boost production, it's -- I'm avoiding your question. I don't know, I don't know the economics. But I'll tell you what I do know is these people are so interested in this technology. They took the Director of Emp, Estrella, every one of his Executive Vice Presidents and 200 other Petrobras managers and they brought them all to our technology centers so they could stare at Marlim when it finished its SIT. I've never seen that level of interest by Petrobras. So I've got to say the economics on this thing must be terrific or they would not be paying attention. I mentioned earlier, from hand over to going in the water was 8 days. I've never seen a move this fast. They must be -- are very, very interested. Solange Guedes, who is the head -- the Executive Vice President for Petrobras who runs all production outside the pre-salt, whenever she -- for the last 2 years whenever she saw me, she only had one thing to say. "Marlim. Are you going to make it on time?" That's all she would talk to me about. So the level of interest by Petrobras in this pilot is unprecedented. So it must be very important to them economically.

Unknown Analyst

[indiscernible] meeting for them for the last 2 [indiscernible] so...

John T. Gremp

They did talk about it? Okay.

Unknown Analyst

Yes. Every meeting, they did talk about it. So they were talking about it every week for the last [indiscernible]. It's fair to assume then just a [indiscernible] would be just [indiscernible] water, the water production in the [indiscernible].

John T. Gremp

Yes. Again, I just -- I don't know how they calculated it. I just know that they are very interested, so it must be economically very, very attractive to them.

Unknown Analyst

One last question. We've seen Schlumberger get more involved in subsea? Curious, when you see them competing with FMC, how are you addressing that?

John T. Gremp

Well, I think -- Schlumberger is a service company and they recognize the growth in subsea which kind of validates our premise. I mean, it's always great when an icon of the industry, and Andrew Gould and the company as fantastic as Schlumberger, they list their key priorities going forward and subsea makes their top 5. And it makes their top 5 because I think they recognize the growth and the importance of the industry. So I think it's good, I mean it validates that -- our projections for growth and the importance of subsea in the future. So it makes sense that as the world's premier service provider in the industry that they would want to make sure that the fastest-growing space in the industry, that they've got covered from a service perspective. And they've been -- as you know they're the market leader, I think in landing streams which provides a subsea service. They provide, obviously, wireline services and so forth, on -- in a subsea application. So I think it just -- it makes sense that they would be very interested in services associated with subsea. I think -- there's downholes -- I mean, I don't know exactly what all their plans are, but I mean, their downhole services, which I think is very appropriate for Schlumberger to continue their -- or redirect their efforts in terms of subsea. The services we're talking about are maintaining and inspecting and dealing with the new equipment on the seabed, and the services required to go through the completion equipment. We're not providing downhole services. We do it in conjunction with Schlumberger. We help Schlumberger get through our subsea tree. We use our intervention work over control system, which essentially disconnects the production control system and reconnects it for a service application. These are activities that are dealing with the production equipment which is what we know, and that's not -- I'd just be surprised if Schlumberger is not interested in that piece. Schlumberger is interested in the downhole services and the services related to the work they do, but they know they need to adapt that to the subsea environment, which is growing. So, yes, I think -- it may just make sense that they're attracted to the space with so much growth and they're going to be focused on services which is -- makes sense as well.

Douglas L. Becker - BofA Merrill Lynch, Research Division

John, Brad, thank you very much.

John T. Gremp

Thank you.

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Source: FMC Technologies, Inc. Presents at Bank of America Merrill Lynch 2011 Global Energy Conference, Nov-15-2011 09:00 AM
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