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Executives

Jeffrey G. Altamari - Vice President of Investor Relations

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

Charles M. Sledge - Chief Financial Officer and Senior Vice President

Analysts

Angeline M. Sedita - UBS Investment Bank, Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

James C. West - Barclays Capital, Research Division

Douglas L. Becker - BofA Merrill Lynch, Research Division

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

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

David Anderson

William Cornelius Conroy - Pritchard Capital Partners, LLC, Research Division

Cameron International (CAM) Q4 2011 Earnings Call February 2, 2012 10:00 AM ET

Operator

Greetings, ladies and gentlemen, and welcome to the Cameron Fourth 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, sir. You may begin.

Jeffrey G. Altamari

Good morning, and welcome to the Cameron Fourth Quarter Earnings Call. Thank you for joining us today. This morning, you'll hear from Jack Moore, Chairman, President and Chief Executive Officer of Cameron; and Chuck Sledge, Senior Vice President and Chief Financial Officer. Jack and Chuck will offer commentary on the results for the quarter, we will open the line for your questions.

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

I will now turn the meeting over to Jack.

Jack B. Moore

Thank you, Jeff. Cameron reported earnings of $0.77 a share in Q4, excluding charges of $0.37, primarily related to the Deepwater Horizon agreement with BP. Revenues for the quarter totaled just over $2 billion, up 12% versus prior year's level, while revenues for all of 2011 came in just below $7 billion, which is a 13% increase over 2010. Orders for quarter 4 totaled $1.9 billion, up 12% versus Q4 of 2010. Total orders for 2011 total over $7.8 billion, a 35% increase versus 2010 and a record year for Cameron without the benefit of a major subsea project award.

This past year, we have talked a lot about the benefits of having expanding our product and market diversity across our customer spending cycles, both onshore and offshore. Our results for 2011 confirm that this strategy is paying off. Actually, every business unit within Cameron, with the exception of Subsea, saw record orders in 2011. Overall backlog finished the year right at $6 billion.

Now let me walk through the operating segments at Cameron and discuss the results for 2011, and our drivers for 2012. Our Drilling Production & Systems businesses finished 2011 with total bookings in excess of $4.3 billion, a 46% increase over 2010. Total revenues of $4.1 billion in 2011 were 9% higher than 2010. Cameron's Drilling Systems orders topped $1.8 billion in 2011. This was driven by record level of new project bookings for both onshore and offshore newbuilds and aftermarket bookings that increased by over 70% versus 2010's record levels.

Our outlook for 2012 is very similar to that of 2011. Our customers' commitment to OEM is not backing off and we continue to see a healthy appetite for newbuild rigs given the high utilization rates our customers are seeing. Plus with the added benefits of Cameron having acquired LTI in Q4, we expect 2012 to be another record year for Drilling Systems. In fact, we've already booked several floater stacks in the current quarter.

LTI provided Cameron a wonderful platform to offer a broader scope of products and services to both onshore and offshore contractors, along with shipyards. But we have work to do. Under Cameron's management, we will provide the objective product development and sales placement that it lacked with the previous owners. We will focus on external opportunities that will allow us to close the technology and product gaps. We will improve the manufacturing processes, and we'll improve lead times and margins. We will place a premium on servicing the existing install base to our global aftermarket footprint.

We've had tremendous support from our customers' employees for building out the Cameron Drilling Systems portfolio, and we're excited that this will move the needle for Cameron for many years to come.

In addition to the focus with integrating LTI in 2012, we will continue to advance the technologies that our customers will demand as we push drilling into deeper and higher pressure applications while staying focused on safe operations. We recently delivered the world's first 13.58 25,000 psi BOP system. This followed last year completion in the first ever 18.75 20,000 psi BOP system that is operating offshore today.

And finally, we will invest an additional $80 million in 2012 in our aftermarket infrastructures to support and sustain our customers' demand for OEM service. The highlight will be the opening of our new dedicated drilling aftermarket base in Singapore's Offshore Marine Centre later this year.

Subsea orders finished just shy of $1.2 billion in 2011, albeit slightly higher than 2010 order levels, 2011 was void of any major project awards for Cameron. While we predicted overall true awards in 2011 will be a low watermark for the industry, we are very optimistic about the number of project awards over the coming years. We see significant opportunities involving in most every deepwater basin in the world. West Africa and Brazil will offer the largest scope of project awards for the industry over the next 12 to 18 months. Nigeria’s Egina, Erha North projects, along with Vienna's [ph] Block 15 in Maersk [ph] and Block 18 in Angola will be significant in terms of their scope and size and breadth.

Petrobras will ramp up spinning for pre-salt trees in 2012 and expect to follow it up with additional orders for frame agreement trees and with significant quantities. In Australia, the Ictus [ph] project is expected to be awarded along with additional products from BHP and Apache. In our view, it is very important that these major projects come to closure in order to improve the environment for project margins as we exit 2012.

As for our investment subsea, we will continue to advance our technologies in global infrastructure as we enter a marketing environment that we expect will yield high returns for the risk that a number of these projects will represent. Capital investments in Brazil, the Far East, North Sea and Gulf of Mexico are well-underway. And these will complement the install commitments that we already made in West Africa.

We're also seeing a number of opportunities to expand revenues beyond just the tree. Connection systems, manifold systems, well intervention processing, boosting, separation, lack of fuel systems to name a few, are becoming a bigger piece of the mix. Collaboration with customers will be a key driver for Cameron in 2012 with a number of these technologies, especially in the areas of processing and separation as we migrate more of our traditional surface technology to the sea bed. And of course, with the diversity of our product offerings, we will see opportunities for our Valves and Process System businesses embedded with the -- with each of these project awards as they move forward. And while the outlook for significant change in subsea project awards is more imminent now than we've ever seen in the past, the risk of timing is always present.

Surface Systems bookings totaled a record high $1.4 billion in 2011, an increase of 23% versus 2010. While U.S. activity was a key driver for growth in 2011, we continue to see the majority of our Surface bookings evolve outside the U.S. A key driver for our U.S. growth has been the ability to penetrate the shale markets with what we refer to as our frac fluid delivery system. Designed, built and serviced by Cameron, the skid managed systems are portable, that operators place a premium on with its focus on safe, efficient and reliable performance plus they value the flexibility it provides for multi-well frac operations. The current move from gas-directed drilling operations will require us to redirect assets to the liquid plays. There's very good upside with this shift to oil, as our recent investments in South Texas, West Texas, North Dakota and Oklahoma should allow us to accelerate those returns.

The North Sea has been another solid success for Cameron in 2011, and we see it to continue in 2012. Success both in U.K. and Norwegian sectors for high-pressure, high-temperature application has been very rewarding. We do not see the trend slowing down. In fact, we expect to see higher levels of awards in 2012, in both of these markets.

Eastern Europe and the former Soviet Union will not slow down in 2012 either, with a number of shale product onshore in Eastern Europe and the Caspian barricks dry [ph] completion projects continue to evolve and create opportunities for Cameron's growth.

The Middle East outlook is much stronger than in recent years for Surface Systems. Fueled by higher oil prices, we are witnessing a continued ramp up in activities within Saudi, Iraq, the UAE and Oman. And bookings in our Latin America Surface markets had a successful 2011, which should see bigger results in 2012, as oil-directed activities continue to build on 2011's pace. Shale oil activities in Argentina and Mexico will provide additional opportunities for Cameron that we have not seen in the past, as we already are well-positioned and intend to leverage our existing infrastructure to take advantage of these opportunities.

Our surface team has been very successful in implementing their growth strategies, focused on technology, packaged services, geographic expansion and customer service. We expect 2012 will result in another record year.

Our Valves & Measurement segment bookings topped $2 billion in 2011. This represents a 26% increase over 2010 bookings. Overall, Valves & Measurement business represent 25% of Cameron's total bookings in 2011. Our Engineered and Process Valve business unit accounted for 60% of this total. The majority of this was driven by major infrastructure projects across the world in our upstream, midstream and downstream markets. The initiatives we established with our flow management services program back in 2010 had given our customers a clear opportunity to source a broader range of valve solutions from Cameron versus the historical fragmented dying process. As we see the trend with this practice growing in the years ahead, as the complexity of execution on project continues to grow.

Gorgon was a great example in Australia when Cameron has supplied over $300 million in valves with a subsea in LNG infrastructure that Chevron has established. We will see opportunities with projects like Wheatstone, Browse [ph], Ictus [ph] and Vietnam gas continue to evolve in the year to come, in this part of the world. An onshore expansion of pipeline infrastructure in the U.S., China, and former Soviet Union provide additional foundation for a positive outlook for 2012 in our FMS markets.

Another dynamic that we're watching is the Pipeline Integrity Legislation that should come into effect in 2012, which could result in a new wave of replacement and service opportunities for the valve OEMs.

Our Distributed Valves business enjoyed record bookings in 2011 as well, fueled by the expansion and infrastructure of the U.S. shales. While we see a definite connection in orders supporting the dry gas markets, our distributors are already witnessing the ramp up in oil-directed plays. This should be a positive impact for Cameron as oil-directed infrastructure buildup consumes more valves and in larger sizes. Overall, we expect the markets for Valve and Measurements to yield another record year in 2012.

Total bookings for Process & Compression closed the year just shy of $1.5 billion, a 19% increase over 2010. Both Process & Compression business unit realized record orders in 2011. Process Systems has seen great success in advancing soilwater [ph] separation platforms along with MEG reclamation technology where demand is increasing all over the world. As for the onshore U.S., the move to more liquid-rich activities will favor our process packages. Typical liquid wells generate 2x to 3x the revenue potential than the dry gas well platform.

Our focus on the global FPSOs market is also advancing as more pace is being realized with the imminent award of new units. Brazil will lead the way in our focus on compact coal essence, and CO2 membrane technology will drive differentiation for Cameron in these markets. We'll continue to advance our presence in global compression markets. Activity in Asia, Europe and the former Soviet Union will drive incremental opportunities in 2012 for refit. And we've also witnessed a very wide acceptance for our centrifugal process gas technology that has complemented the steady growth in our plan air [ph] markets. Our Process & Compression businesses cut a broad sloth through the global markets and we expect 2012 to be another very good year and strong year for orders with Process & Compression.

Overall, I would conclude that Cameron's diversity in product and geographic presence has brought a long way in 2011, it will provide us ample opportunity for growth in what should be a very robust global market over the coming years.

Now I'll turn it over to Chuck.

Charles M. Sledge

Thank you, Jack. As you saw on our release, our adjusted EPS for the fourth quarter was $0.77 per share. Additionally, we resolved the Deepwater Horizon matter in December which drove $0.37 per share of charges to get us to our GAAP EPS of $0.40 per share. Revenues for the quarter were up 20% sequentially. Not only was this a quarterly record for Cameron as a whole, each segment also established new quarterly records.

As we discussed on our third quarter call, our EBITDA margins did come down during the fourth quarter, coming in at 15.9%.

I would like to focus on this for a moment, so that everyone can get a clear understanding of what drove this decline. DPS' EBITDA margin was 20.2% for the quarter. The sequential decline was due to lower subsea margins and the dilutive effect of LTI. I think it is important to point out that our legacy drilling and our Surface margins actually increased sequentially, with Surface hitting an all-time high. V&M's EBITDA margins were 20% for the quarter, down sequentially, due primarily to the mix of business during the quarter. I will point out that our Engineered Valve group had their highest EBITDA margin percent for the year during the fourth quarter. PCS' EBITDA margins for the fourth quarter were 10.8%. This is should represent the low point for their margins and we should see good improvement in their margins throughout 2012, with the largest gains coming in the back half of the year.

As is typical, our fourth quarter corporate SG&A expenses came in higher sequentially, ending at $48 million. The majority of this increase in the third quarter reflects higher stock and incentive comp as a result of the strong financial results in Q4, and the remainder represents project-related spending. Other costs, as I mentioned, were $0.37 per share, which were driven by the resolution of the Deepwater Horizon matter.

Cash flow from operations for the fourth quarter was strong, coming in at $329 million, primarily driven by a moderation of our working capital needs.

For the year, we generated $208 million from operations despite investing over $600 million in working capital over the course of 2011. CapEx for the quarter was $160 million, resulting in a total CapEx of nearly $400 million for the year. The large buckets for our 2011 CapEx were investments in our drilling infrastructure, our fleet of equipment for unconventional resource plays worldwide and our Brazilian infrastructure, as well as our business system.

During the fourth quarter, we did repurchase a small amount of stock. I would like to take this opportunity to remind everyone of our investment philosophies and priorities. First, we invest in ourselves through our CapEx and working capital programs. Secondly, we invest in accretive acquisitions. And lastly, we return cash to our shareholders through share repurchases. For 2011, we invested over $1.4 billion in our top 2 priorities. Given this, one should expect relatively small share repurchases.

Our tax rate for the fourth quarter came in ahead of expectation at 20.7%. This cost us about $0.01 a share in Q4 against our expectation.

Now turning to 2012 guidance. Assuming no fallout from the current low natural gas prices, we expect revenues to increase in the low-teens. Factors affecting our revenue performance would be the timing of deliveries associated with large projects, our integration efforts and the pace of our shorter-cycle businesses. V&M and PCS should lead the revenue gains, registering gains in the high-teens while DPS will register lower gains due to the overall lower subsea revenues. EBITDA margins for 2012 will be heavily influenced by LTI and lower subsea margins. The combination of these 2 factors will reduce EBITDA margins to somewhere around 17%. I would like to point out that Surface, V&M and Process & Compression should see EBITDA margin expansion for 2012.

Corporate SG&A expenses should approximate $200 million for the year. D&A will be significantly higher in 2012 due to our rate of capital spend, probably around $230 million of D&A for 2012. Interest expense should approximate $88 million. The tax rate should come in around 22% for the year as a whole, but I do want to emphasize, it will vary quite a bit between the quarters. You should use 247 million shares in your model and this guidance should result in EPS for the year of between $3.20 and $3.30. As is typical, the first quarter will be the low point for the year for revenues, EBITDA margins and EPS. Revenues for the quarter could look a lot like the second or third quarter of 2011, while margins might look like the first quarter of 2011.

As I go through more detail on Q1, I would like everyone to focus on 2 one-quarter phenomenons which will occur in the first quarter, drilling and subsea. While DPS' EBITDA margins will improve from the first quarter of 2011, they will be well below the fourth quarter's levels due to drilling and subsea. Drilling margins will be lower, primarily driven by the dilutive effect of LTI. Q1 should be the low point for LTI margins and they should improve throughout 2012. Subsea margins will also decline from the fourth quarter due to significantly lower revenues sequentially without a corresponding reduction in fixed cost. As Jack mentioned, the project list for subsea is full and we are not reducing our commitment to that business. Therefore, we are not cutting the fixed cost structure of that business. I will point out that the subsea margins, again, is a one-quarter phenomenon. Future quarters should look a lot like subsea's fourth quarter 2011 margins as volumes return to more normal levels.

V&M margins will also be depressed sequentially due to a mix of valves being shipped. But again, like DPS, Q1 will be the low point for V&M's margins for the year. PCS margins will, however, improve in Q1, but won't hit full stride until the back half of the year. The combination of these factors should result in EPS of between $0.50 and $0.55 per share for the quarter.

With that, Jeff, let's open it up for questions.

Jeffrey G. Altamari

Christine, we'd like to open the call now for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Angie Sedita with UBS.

Angeline M. Sedita - UBS Investment Bank, Research Division

You did a pretty good job going through your margins here in Q1 and the progression through 2012, but just to talk to some of the segments. Other than that, BOP aftermarket, specifically, Jack, you've given guidance of about a $500 million run rate in the past, it certainly is clear the contract drillers are having issues. Do you think that the BOP recertification will start to improve? Or is that possible? And do you think that run rate of $500 million is conservative given your substantial share in the installed base?

Charles M. Sledge

Angie, it's Chuck. A couple of things. Number one, we are investing a tremendous amount of time and money and effort into making sure that we can meet our customers' requirements for timely recertification. As everyone knows, this has been a huge shift and a lot of stuff has shown up on our door that we have not seen in years so it is taking us a while to work through it. But it will improve. We are, as Jack mentioned, our Singapore facility, we're also expanding our European facilities as well, and our U.S. facilities. We had $650 million of drilling aftermarket for the year. That's a 71% increase from the prior year. Is that going to be as robust as that going forward? Well, we have a lot more rigs being delivered. Who knows? Time will tell. But it certainly is a good business and one that requires a lot of investment on our part.

Angeline M. Sedita - UBS Investment Bank, Research Division

Okay. And just as a follow-up to that, where do you think or how long do you think it will take for you to be where you want to be, as far as infrastructure, manpower, et cetera, to meet the needs of the industry which has obviously, dramatically changed?

Jack B. Moore

Angie, this is Jack. We will be significantly further down the road by the end of the year into 2012. I don't know that we'll ever get where our customers will want us to be in terms of the responsiveness and the breadth of it. But if you look at how much we're spending both in infrastructure and the number of personnel we're bringing on board, it's a doubling of the effort in a span of 12, 18 months which is a big deal. And we've got to get it right. There's no compromising this process.

Angeline M. Sedita - UBS Investment Bank, Research Division

No, right. Perfect answer. And then just as a follow up, on new orders for BOPs, you mentioned you had a few deepwater stacks that were ordered in Q4. Could you give us an idea how many? And then of the rigs that are currently under construction, do you know how many have already ordered their BOPs, or how many do you think are still outstanding yet to be ordered?

Jack B. Moore

Angie, we looked at that. The number's probably about 8 or 9, I think, that have yet to commit to a stack of the -- of those that are out there that have been committed. So it's probably 1/3 of the ones that have been committed to be built. As far as Cameron, we see a lot of -- I mean, the inquiries and the interest is still -- it hasn't backed off. And I know the timing and the pace, it kind of moves and ebbs and flows but our customers are very, very optimistic about continuing to invest in the offshore space. And when you look at the number of subsea projects that continue to evolve, the discoveries being made all over the world, Eastern Africa now is becoming a hot place. Obviously, deepwater Gulf of Mexico is back on pace again. I think our drilling contractors are seeing a lot of room to make these investments and get the paybacks.

Angeline M. Sedita - UBS Investment Bank, Research Division

Okay, perfect. And then finally, just quickly on the LTI, do you think it will take into 2013, to get those margins where you would like them?

Charles M. Sledge

I think so. I mean, realistically, I'd love to think we could snap our fingers and fix it overnight, but we've got a lot of work going on and some of it will get there quicker. Some pieces of it will get there quicker than others, but we've got some old behaviors we've got to change. We give ourselves high marks for changing behaviors, but it's -- the reality of it is, is we have to take into consideration a lot of things that will have to be done differently.

Operator

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

Kurt Hallead - RBC Capital Markets, LLC, Research Division

So I just wanted to get a general sense from you guys, as you look out into 2012, on the subsea orders. Obviously, we're looking at a similar project lists that you're probably looking at. What do you think the aggregate market opportunity might be for subsea project awards in the next, say, 12 to 15 months? And once again, knowing full well that some of these projects could get pushed and could slip, but I wanted to get your overall sense of the aggregate market opportunity?

Jack B. Moore

Yes, Kurt, we -- Quest [ph] has come out with some numbers that suggest a 600-tree order environment in 2012. Our numbers suggest that could be there. You've got some big awards that just didn't happen in 2011, that we thought with Ictus [ph], Erha North, you've got Egina [ph], ENI [ph], Maersk [ph], Block 18 is probably going to be the latter part of that timeframe, West Nile Delta plus all the things going on in Norway and smaller bolt-on projects. Brazil is going to be the wild card. Kurt, I'm going to tell you right now, there is -- I think everyone will talk about Brazil in a very constructive, positive way and if they do what they're intending to do, then it definitely could be a record year for subsea trees over the next 12 to 18 months, that time period. So we're very constructive on the outlook for subsea right now. I think it's as positive as we've ever seen it and I just think the next 12, 24-month timeframe is going to be a good time to be focused in it.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. And within the context of the guidance that you've provided for 2012, what are you guys factoring in, in terms of the U.S. rig count on a year-on-year basis? So what...

Jack B. Moore

Yes, when we put our budgets together, we were modeling about 5%. Couple of the businesses don't really run rig sensitivities. Some of the Engineered Valves -- it's really infrastructure, it's a longer cycle. So it's about a 5% overall number. And really, Kurt, what we're going to have to see is how many of the gas-directed rigs get picked up and moved into the oil areas. And we've got customers that are doing that right now. So timing, dislocation of equipment, as I've said, we'll have to some things around. But the guys feel pretty bullish in terms of the opportunities we have. We had a lot of headroom -- Surface, we think we've got a lot of headroom left in terms of just capturing some share that we really had not focused on. The investments we made, and the right equipment that customers are really putting a premium on is going to help us accelerate that with some of the moves we're going to make.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. And then, once again, in the context of the overall guidance for the year and for the first quarter, obviously, that clearly infers there's going to be significant V-shaped recovery in the earnings progression in one of the quarters throughout the remainder of the year. Is there a sharp snapback expected as soon as the second quarter? Or is it much more third, kind of fourth quarter-related?

Jack B. Moore

No, Kurt. We've got good growth in the second quarter earnings.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Okay. So it'll be very much a V-shaped kind of snapback on that, okay. And then one last comment on pricing dynamics in the subsea, you kind of referenced that a number of different projects would have to come to the floor and then you talked about potentially exiting 2012 would be a point where that could start to improve. It seems like the dynamics on pricing of subsea projects continue to get pushed a bit quarter by quarter. So -- well, I thought with Wheatstone and with Ictus [ph] and these projects being booked, we might be able to see that happen sooner. So can you just give us your perspective on why even with these large project awards booked, you kind of think that pricing is not going to happen until maybe late this year?

Jack B. Moore

Well, I think it's just really a timing of when the awards are booked. I do -- I think we're both on the same page. We need to see the Erha Norths and Ictuses [ph] and we saw Wheatstone booked. I think it's healthy that the industry starts getting these in their backlog and they can clearly see that we've got to get paid for the risk we're taking and not take projects on just to keep -- keep score, I guess you could say. I want to reiterate that I think the whole industry is going to be challenged with making sure that we get the right returns on the risks that are out there, especially in countries where you got a huge amount of local content that's required to be embedded in the numbers -- into the business which creates a lot more risk. But we're starting to see, I think, some signs that, that day is coming. A lot of these projects that we're waiting to get awarded have already been tendered. So some of the numbers are kind of out there and I think as we look at the landscape going forward, we have to push ourselves to lead that charge and we're confident we're going to see some positive results as we get through the year.

Charles M. Sledge

Kurt, it's Chuck. I want to go back your question on earnings progression. I want to make sure that everyone understood and I was clear. The first quarter earnings is a one-quarter phenomenon. You will see significant earnings growth in the second quarter and more modest growth in Qs 3 and 4, from the second quarter level. But I do want to be clear, you will see significant earnings growth in Q2. Q1's guidance is a one-quarter phenomenon.

Operator

Our next question comes from the line of Jeff Spittel with Global Hunter Securities.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

I wanted to talk a little bit about the FPSO market. I heard some positive comments from your colleagues on the call immediately preceding yours about order prospects for 2012, how [indiscernible]

Jack B. Moore

We didn't get to hear it, clue us in.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

I'm sure you're encouraged by that. How big do you think the opportunity could be in '12? Or do you think it's more likely a 2013 event where maybe globally, we could get to a run rate of 15-plus FPSOs ordered?

Jack B. Moore

I don't think that's -- Brazil is going to be the wild card and it's not just Petrobras, obviously, you've got OSX, West Africa, the pace, we've got stock men, you got a bunch of other parts of the world that kind of become positively accretive to it. This is like anything. The reality is more real now than it was a year ago that these are really going to happen. It's imminent that it's there. I think we'll see some things unclog this year, which is we'll get the pace started. Brazil is way behind in terms of their efforts of getting these awarded. Just a lot of consternation about where they're going to be built and how they'll be built. A lot of local content issues that we're all wrestling with in terms of how do we build this stuff competitively in new markets in different parts of the world. So all of that adds to the pace. But Jeff, we're -- it won't all slug out at once, but I think your 10 to 15 kind of pace makes sense to us.

Jeffrey Spittel - Global Hunter Securities, LLC, Research Division

Okay. And then switching over to the M&A climate, I would imagine that I guess, rounding out the drill kits post the LTI acquisition would be near the top of the wish list. Can you kind of weigh how you evaluate deals in that segment of the market versus trying to develop incremental kit internally?

Jack B. Moore

Well, I think it's all about the fit with Cameron and our view of the strategic value that it brings relative to leveraging our aftermarket base. It's a product that we can build more efficiently. Does it fit, connect and complement what we do in the pressure control space. Our customers will help us, I think, see some of the things that they're looking for in terms of the gaps. There's really no easy answer. We've got to lift, Jeff, and I would tell you, that there's always names on the list that aren't willing sellers. But I think what Cameron has been able to do here with LTI is to start, I think, a very good story in terms of building out a broader drilling solutions platform that customers are going to support. And we'll find more opportunities to add to that incrementally.

Operator

Our next question comes from Mike Urban with Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

I wanted to dig into the guidance a little bit. I recognize that since you kind of talked to us last, you closed the LTI deal. But Chuck, you have previously have been talking about margin levels kind of similar to what you saw in Q3, kind of that 18% range and I definitely understand that LTI is dilutive. I'm a little surprised that it's that significantly dilutive to the margins given that they're -- there's not a ton running through there right now, at least on the pieces that you acquired. Is there something incremental that's happened there? Is it some of these costs in the subsea side that you're maintaining until volumes recover, or is there something else that changed? I'm just trying to get a sense for the moving parts and what changed versus last quarter?

Charles M. Sledge

No, it is LTI. When you look at the volume going through, remember, go back to the press releases around the acquisition and look what this business did in 2010. It was virtually no margin. So no, that is -- at the end of the day, that is the absolute vast majority of what is causing it.

Michael W. Urban - Deutsche Bank AG, Research Division

Got you. And then as you look at the U.S. business, you talked about a clear positive opportunity for you as you shift -- as you see the shift out of dry gas into the oil and liquids plays. But you also had said, there may be a need to shift some of the equipment around. Is there any kind of transitory issues there or downtime as you move that equipment around? And is that kind of affecting the outlook as you see today, just not really not knowing how much of that stuff is going to have to move and how long that's going to take?

Jack B. Moore

Well, I think there's a little bit of -- you don't always -- it's not an exact science. But I would say more people dislocation than anything. A lot of our equipment this skid-mounted, it's not rolling stock per se like trucks. But it's really more people-related and making sure we get the people in the right place to ramp up those incremental opportunities that are going to be increasing in other markets. That will be the big challenge.

Michael W. Urban - Deutsche Bank AG, Research Division

But all else equal, you would see it as a being net additive to your business?

Charles M. Sledge

I think we have to kind of -- let's see how this plays out. The intensity -- there's a lot of movement right now, of taking one down and moving one up. So right now, we see net-net, it not having a any material impact. But it's early and let's -- we'll continue to see how it evolves.

Operator

Our next question comes from the line of James West with Barclays.

James C. West - Barclays Capital, Research Division

Jack, on the subsea side of the business, we've been talking about this major expansion and awards here for a while. We started to see projects get awarded too. Wheatstone was awarded, you got Ictus [ph], but we haven't seen a major project award from Cameron yet, at least not recently. So my question is, when are we going to see it? Is there an issue with market share or is it your customers?

Jack B. Moore

No, I think a lot of it is the behavior of Cameron. I mean, we've got a lot of opportunities in our bandwidth. This is what I think the story we've been really hoping that the investors would see. We've had a record bookings year without -- subsea was literally less than 20% of our bookings. And I'm not saying that's good, I'm not saying that's bad. I'm just saying that we aren't going to be driven to, I think, to take on incremental risk in some areas and projects that we don't feel is rewarding. And we've had a lot more discipline with the subsea team as a result of that. And it's -- I know it creates some question marks in -- with some of you guys and -- but I will tell you that our commitment to subsea is as big as it's ever been. When you look at the opportunities -- we touched deepwater not just in the subsea hardware space. When you look at the rigs, you look at the valves, you look at our process equipment, we view this -- we've been participating in other areas of the subsea business that doesn't always get a lot of press. But the awards and the visibility they get, I know it's fun to talk about. But you also have to recognize that we have been a lot -- we've practiced a lot of discipline in how we looked at those projects and are continuing to do so. We just feel we've got to make sure that we're getting the returns that represent the risk we're taking. Because we've seen the other side of that.

James C. West - Barclays Capital, Research Division

Understood. And you suggested earlier, I guess, that your competitors do appear to be becoming more disciplined. So that would suggest that some of these largers [indiscernible] will go your way?

Jack B. Moore

I hope they are. If they can eventually get to -- it's like when you're -- when you go out to eat somewhere and you've already had a big lunch, you become very selective when you look at the menu. We kind of are expecting some of that behavior to exist. And I'm hoping that's where it gets to and I think we're seeing some evidence that's starting to evolve.

Charles M. Sledge

James, it's Chuck. I'll just add one quick thing to what Jack said. We report subsea. You see that order number, but there' probably in '11, was north of another $1 billion dollars deepwater driven subsea bookings in Cameron's portfolio. So I think people don't -- it's not as transparent as just our subsea business unit. But again, another $1 billion at margins that are multiples higher than people taking tree work for right now.

James C. West - Barclays Capital, Research Division

Okay, fair enough. Maybe just following up on at least, the deepwater team here, on the blowout preventers, I know Jack you mentioned 8 or 9 rigs that have been ordered that haven't booked their BOP equipment yet. On top of that, do you have a sense of what the amount of -- or I guess, the number of rigs that are out there that have yet to be ordered that you're chasing?

Jack B. Moore

There is -- the number's in probably the low 20s. It does not include Brazil. Brazil number is 21. There was some discussion last week, I was down in Brazil, it could be as high as 26. But obviously, they're going to be very challenged in terms of the competitiveness of getting those done. So that's just a little bit of a moving target but when you look at the global landscape in terms of where this is going to evolve over the coming years, the pace of which you can't always predict, it's going to be a good story.

Operator

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

Douglas L. Becker - BofA Merrill Lynch, Research Division

Just hitting back on the diversification of Cameron. Can you give us some rough order of magnitude for some of these projects? Like with the subsea tree project that we can see, but what the opportunity is in the Valves & Process Systems. And obviously there's no standard rule, but maybe just try and quantify a little bit what that opportunity is and then maybe on some of the well intervention, separation of life fuel systems that you highlighted in the prepared remarks, just trying to get a -- just some rough thoughts about how we can think about the quantification?

Jack B. Moore

Well, I think, as we talk about opportunities beyond the trees, connector systems, boosting systems, the processing side of it, these are on scales of $40 million, $50 million kind of chunks of opportunities. Connector systems can be much, much bigger. And your customers aren't always your traditional end-users. They could be a subsea 7, a psi pam [ph], and all of this going into the subsea infrastructure. And the connector technology obviously evolved with the likes of Cameron's and FMC's and others. But that's becoming a big, big, big piece of the pie. And it doesn't always get counted as the tree. The separation technology, again, it's evolving market. It's going to get bigger and bigger and bigger. I wouldn't say it moves the needle today, but it won't for Cameron today, but it definitely is going to in years to come. So -- but really, I think the near-term opportunities are going to be in the proven technology areas that we're seeing more and more footprint get on the seabed that requires a lot of this support that isn't necessarily a tree. And on the way forward, with how we collaborate with customers, whether it be the BPs and the Chevrons and the Exxons and the Petrobrases and the Totals of the world, in terms of evolving some of the things they need for future subsea development, it's -- I think it's going to be a very measured pace, but I think if you'll look up in 3 to 5 years and it will look a lot different than it does today.

Douglas L. Becker - BofA Merrill Lynch, Research Division

And how about on the L&G side I guess, maybe just more specifically, I guess Gorgon has been a big success. Just when we have Wheatstone, Ictus [ph]...

Jack B. Moore

What we did, we talked about our FMS group, which is our -- really, it's a valve management of our Flow Management Service systems but it's really how do we take the Cameron portfolio of valve infrastructure and capability and bandwidth and offer customers, maybe a broader solution, like for L&G infrastructure or subsea transportation. And Gorgon was a great example. Wheatstone's going to be another great opportunity that's coming right behind because we got a great relationship with Chevron in this part of the world. BP, the same. We've got frame agreements in place with them, as well as Exxon to support their projects, Woodside, with Browse [ph], we have just a lot of opportunities where you're seeing the L&G infrastructure continue to expand and evolve. It's primarily in Asia, where we can put a lot, a lot of different capabilities around it in terms of the valve infrastructure. And then setup service agreements afterwards. We've got a very strong robust service organization in that part of the world as well, but we'll sustain it.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Okay. And then just a real quick one for Chuck, just the comments that subsea revenue increases in the second quarter, just based on what you see in terms of backlog in the flow, is that where you -- have the confidence that we'll do see the recovery in subsea revenue in 2Q?

Charles M. Sledge

Oh absolutely. The backlog is there, it's scheduled for delivery in second Q. It will happen.

Douglas L. Becker - BofA Merrill Lynch, Research Division

But just a scheduling thing in the first quarter?

Charles M. Sledge

Just scheduling and the timing of deliveries. That business is lumpy. We do not get to smooth out our revenues using the cost to cost accounting method.

Operator

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

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

I want to talk a little bit about the settlement. I think most of us, we're sitting here thinking, "God, you've guys sold this thing a long time ago. How could you be possibly be liable here?" Obviously, a good chunk of change. So a couple of questions. First, what was your thought process? What was the logic in the settlement?

Jack B. Moore

Marshall, let me tell you. The company we had an indemnity with refused to honor it and rejected the language that we agreed upon 11 years ago when it was sold. We felt it was important to our shareholders to secure an indemnity directly with BP in this matter and that's what we did.

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

Okay. And we had some cost bleed in the Q4. Are there any -- is there anything else we should expect going forward on this?

Jack B. Moore

We'll continue to have some defense cost relative to the brand and make sure as trial dates come to fruition in Louisiana, that Cameron's well-represented to make sure that our brand does not get somehow put into a negative position.

Charles M. Sledge

They should be minimal though.

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

Good. And last part of this, do you change your contract structure here? Do you change the...

Jack B. Moore

Yes.

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

Help us to understand how this doesn't happen again. I thought you guys were indemnified?

Charles M. Sledge

Marshall, it's pretty easy. The customer in this case said the language didn't cover the situation. So we are getting a language that we both agree would cover this situation going forward. It's pretty simple.

Operator

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

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

In the Process & Compression business, could you just give us a little color on what's going to turn margins here in the first quarter, and then what further improves them in the second half of the year? Just a little bit of understanding on kind of what's going on behind that to understand why the improvement occurs?

Jack B. Moore

Yes, a couple of things. Number one, the margin in backlog is improving. That's always the fundamental issue with getting margins up, is priced better, which we have done over the last 12 months. Secondly, as we talked about, we did do a system conversion middle of the year. And so we've had a lot of cost coming through and some, to be quite frank, some disruption that has hurt our execution. And we're putting that behind us. And so those cost will go away and the execution will get better and we're seeing the signs of it.

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

And then on CapEx, I guess I'm wondering how you get $500 million spend?

Charles M. Sledge

Well, a lot of it is when you're building plants, expanding our plant in Brazil, we're expanding our aftermarket facility in Brazil, these are big, big undertakings. Our Board approved these actually over one year ago. Well, in the middle of them, and we'll spend a lot of that money this year. The aftermarket ramp up for drilling was something we kind of got aggressive on and put the pedal to the metal of mid-last year. And so the decisions to do it, once you plan it, get property acquired and get the footprint and then you start putting machine tools and buildings in place, that's where the money gets spent and a lot of it is just kind of landing in 2012. And so that's really the majority of it. Normal machine tool replacements, what I call maintenance capital, will we see that day again, with Cameron? I don't know. We continue to see opportunities to grow the footprint. We're expanding our offshore support base in Australia. That's underway. We're expanding our offshore base here in the Gulf of Mexico. That's underway. You always see opportunities that we think will benefit the bandwidth and support the growth. So we'll -- just happens to be a lot of it in one year after. Actually, this is probably a little abnormal if you look at past years and future years.

Charles M. Sledge

Yes, big buckets. Brazil, Singapore drilling, Iraq and continuing to invest in the unconventional resources so that we can get our traditional wellhead share in those markets.

Jack B. Moore

Yes, that's well north of half of it.

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

Okay. And then last question I had, just on the Distributed Valves business. Are you seeing any change in order patterns from your customers?

Jack B. Moore

We're seeing the shift. We -- what you're seeing is inventories in the gas areas are -- the ordering is slowed way down, and they're going to work their inventories down. We're seeing orders in the oil-directed areas: Eagle Ford, Granite Wash, even up into obviously, the continued activity in the Bakken ramp up a little bit. So net-net, we're seeing -- we're not seeing a whole lot of negative news here. It's -- we're watching it, we're going to follow it.

Operator

Our next question comes from the line of David Anderson with JPMorgan Chase.

David Anderson

In your PCS business last quarter, you were talking about some execution issues. They're holding back the numbers. In this quarter, again, the revenues are pretty good but the margins were down quite a bit. I'm seeing the back -- the inbound orders were strong in this business but I guess, I'm just kind of trying to understand here, those execution issues, how long are they going to linger and how does that backlog come out through revenue? Does that kind of hold it back this year? Can you just kind of help me understand kind of what exactly is going on in that business?

Charles M. Sledge

No. Okay, Dave, as we said, you've seen the bottom in the fourth quarter. You'll see margin progression each quarter going forward, and the issues that caused the third quarter and fourth quarter margin degradation, we think, are getting close to being in the rearview mirror. You're going to see the signs next quarter, that margins are up, kind of going the right direction. As far as sequentially, revenues, you shouldn't see any big blips in revenues. It's really not causing that. It's simply some inefficiencies in the plants. It is cost we incurred in our spending to make sure everybody understands the new system and is operating effectively on the new system.

David Anderson

So do we get back up to that kind of 13%, 14% level in kind of the second half of '12, that kind of thing? That kind of number?

Charles M. Sledge

Should. Should, yes.

David Anderson

Okay. And also, I was just kind of curious with LeTourneau, a lot of talk at the top of the call. Where do you think those margins kind of normalize out at? I mean, is that kind of a 20%-ish business? Is that kind of above or below kind of your other businesses?

Jack B. Moore

It should be north of 20%. And at the end of the day, if it was north of 20%, it's costing us about almost 1 percentage point on our EBITDA margins for the year.

Charles M. Sledge

The key there too, is the aftermarket getting that mix up. They haven't really focused on it. It's an area we've got -- we are dialing up the focus on. So that will help the mix once we get it to where it needs to be.

Jeffrey G. Altamari

Christine, we have time for one more question.

Operator

Our last question is from William Conroy with Pritchard Capital Partners.

William Cornelius Conroy - Pritchard Capital Partners, LLC, Research Division

Jack, Chuck, maybe just a quick one, one last one on LTI. I think I have been operating under the assumption that it was going take a while to get those margins back up and you're suggesting a pretty quick snap up, not necessarily to par with the balance of the relevant segment, but a snap up in Q1. What are the issues or can you explain to us what the issues are specifically in LTI that you resolved in the current quarter, that enabled the snap up really material progress then back towards the DPS margins in total?

Charles M. Sledge

Well, a couple of things. Number one, we said, the first quarter, they will not be anything to write home about. It's an improvement throughout the year. It will be nowhere near, if you take the year on average, where they will be in 2013. It's everything that Jack said. It's making sure we're pricing it appropriately, which we have started to do. It's making sure we're efficient in the manufacturing process. It is making sure we take cost out of the business.

Jack B. Moore

Bill, we still have dislocated manufacturing operations. And we're still building equipment in Longview for instance, that doesn't need to be there but we've got to create a place for it. And that just -- again, that's going to take us a little time to get that situation resolved. It's something we inherited. We know we did. We're planning on it. But this is a story that will get better as we get through the year.

Jeffrey G. Altamari

Thank you, Christine. This concludes our fourth quarter earnings call. I would like to thank you, ladies and gentlemen, 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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