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Oceaneering International (NYSE:OII)

Q4 2011 Earnings Call

February 16, 2012 11:00 am ET

Executives

Jack Jurkoshek - Director of Investor Relations

M. Kevin McEvoy - Chief Executive Officer, President and Director

W. Cardon Gerner - Chief Financial officer and Senior Vice President

Marvin J. Migura - Former Chief Financial officer and Executive Vice President

Analysts

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Brad Handler - Crédit Suisse AG, Research Division

Andrea Sharkey - Gabelli & Company, Inc.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Tom Curran - Wells Fargo Securities, LLC, Research Division

Edward Muztafago - Societe Generale Cross Asset Research

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

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

Operator

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

Jack Jurkoshek

Thank you, Jessica. Good morning, everybody. Thanks for joining us on our 2011 fourth quarter and year-end earnings call. As usual, a webcast of this event is being made available to the StreetEvents Network service by Thomson Reuters.

Joining me today are Kevin McEvoy, our President and Chief Executive Officer, who will be leading the call; Marvin Migura, our Executive Vice President; and Cardon Gerner, our Senior Vice President and Chief Financial Officer.

Just as a reminder, remarks that we make during the course of this call regarding our earnings guidance, business strategy, plans for future operations and industry conditions are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

M. Kevin McEvoy

Good morning, and thanks for joining the call. It is a pleasure to be here today. But before I get into my customary opening remarks, I'd like to summarize 3 key points addressed in our earnings release.

First, 2011 was a record earnings year for Oceaneering. Second, we are expecting an even better 2012 and are not changing our previously announced EPS guidance range for the year of $2.45 to $2.65. And third, we are initiating first quarter 2012 EPS guidance of $0.44 to $0.46. We recognize that may appear a little light to some of you. At this time of the year, we always seem to need to remind the investment community of the seasonality of our business especially in the Gulf of Mexico and the North Sea. We usually earn about 19% of our net income in the first quarter and 45% in the first half of the year. Our first quarter guidance is consistent with our historical quarterly earnings distribution.

Now, for my opening remarks. Our 2011 earnings of over $235 million and EPS of $2.16 were the highest in Oceaneering's history. These were notable accomplishments, particularly in light of regulatory-constrained activity the U.S. Gulf of Mexico. This performance was largely attributable to our global focus on deepwater and Subsea completion activity.

Our results were highlighted by best-ever operating income from our ROV and Subsea Products segments. At $484 million, our 2011 EBITDA was also a record high.

In May, we initiated the regular quarterly dividend of $0.15 per common share to return a portion of our earnings to our shareholders, which underscores our confidence in Oceaneering's financial strength and future business prospects. We believe this will not compromise our ability to pursue organic growth and acquisition opportunities to expand Oceaneering's asset base and earnings capability.

In fact, during the year, we continue to fund these opportunities at a record-setting pace. Our 2011 capital expenditures of about $525 million were nearly 2.5x what we invested on average during each of the previous 5 years. Our investment in acquisitions is at around $290 million, was 3x what we spent in total on acquisitions during the 2006 through 2010 period.

In addition to our capital expenditures, during 2011, we repurchased 500,000 shares of our common stock for $17.5 million and paid $48.7 million of common stock dividends. Our balance sheet remained conservatively capitalized. At year end, we had over $100 million of cash, $120 million of debt, $180 million available under our revolving credit facility and $1.6 billion of equity.

We are forecasting our 2012 EPS to be in the range of $2.45 to $2.65, up 18% at the midpoint over 2011 as we expect another record earnings year. For our services and products, we anticipate continued international demand growth and a moderate rebound in overall activity in the Gulf of Mexico.

The price of Oceaneering stock rose by 25% during 2011. We believe this was in recognition of our record financial performance, actions we took to enhance shareholder value and our future business prospects. Our share price percentage increase was larger than any of the other companies in the OSX, which by comparison declined 12%.

Our annual year end share price change has outperformed the OSX in 8 of the past 10 years. Over this decade, our stock price has increased on average 32% per year, twice that of the OSX. During 2011, our market capitalization reached $5 billion.

This was a great way to start my tenure as President and CEO and I recognize and thank our employees who made this possible. Their commitment to safely provide high-quality solutions to our customers' needs is the foundation for our continued success.

I'd now like to review our operations for the fourth quarter. Our overall fourth quarter EPS result was slightly above our guidance range on the strength of higher-than-forecast demand for our diving and deepwater vessel services in the Gulf of Mexico. EPS of $0.54 for the fourth quarter of 2011 was 23% above that of the fourth quarter of 2010, largely due to improvements in ROV and Subsea Products operating income. Year-over-year, fourth quarter ROV operating income rose by over $10 million or 21% on a 12% increase in days on hire and an 8% increase in operating income per day on hire.

The increase in operating income per day on hire was attributable to a favorable change in geographic mix. About 75% of the growth in days on hire occurred in the Gulf of Mexico and West Africa, both of which are high rate and margin areas of operation. Our fleet utilization overall improved from 73% to 79%. We achieved operating income growth in all of the major market areas in which we operate, led by an improvement in the Gulf of Mexico. During the quarter, we put 5 vehicles into service. Our fleet mix usage during the fourth quarter was 79% in drill support and 21% on vessel-based work.

At the time of our last earnings call, in the U.S. Gulf of Mexico, we were receiving full rates for 25 ROVs on 22 rigs, all of which were working and 0 rate on one ROV on one rig which was not contracted. As of yesterday, we were on full rate for 29 ROVs on 25 rigs, all of which were working. There are presently 26 floating rigs available for use in the Gulf and we have ROVs on all but one of them.

There are 8 known additional rigs currently scheduled to come into the Gulf by the middle of this year, and we have the ROV contracts for 6 of the 8. 2 are existing rigs and 6 our new builds. So by mid-2012, we anticipate there will be 34 rigs available for use in the Gulf of Mexico and we expect to have ROVs on 31 of them.

By comparison, we have ROVs on 31 of the 36 rigs in the Gulf pre-Macondo.

There have been announcements of another 2 new build deepwater rigs being contracted to work on this area commencing in the fourth quarter of 2012. We have secured the ROV drill support contract for one of these rigs and are pursuing the other.

Now, turning to Subsea Products. Year-over-year, fourth quarter operating income increased by $5 million or 16% on better umbilical plant throughput, higher installation and work over control systems services and growth in demand for our subsea hardware and tooling.

As for the remaining business operations for the fourth quarter, year-over-year, Asset Integrity operating income improved on higher international demand for our services. Advanced Technologies operating income rose on higher demand to perform engineering services for the U.S. Navy and an increase in Department of Defense manufacturing projects.

Subsea Projects operating income declined due to lower demand for our services in the Gulf of Mexico.

In late December, we acquired for $220 million AGR Field Operations Holdings, a provider of Asset Integrity, Maintenance, Subsea Engineering and Field Operation Services, primarily to the oil and gas industry. AGR FO will significantly increase our Asset Integrity business, particularly in Norway and provides us subsea inspection tooling we can offer in other geographic markets. As a result of this acquisition, we increased our 2012 EPS guidance range by $0.10 per share.

Also in December, we secured a 3-year field support vessel services contract from BP for work offshore Angola which commenced on the 1st of February, 2012. Under the contract, project management, engineering and 2 chartered vessels each equipped with 2 Oceaneering work class ROVs and associated tooling, will be supplied. This contract represents a significant geographic expansion with considerable backlog for our Subsea Projects business. The expected impact of the work we will be performing under this contact was included in our 2012 EPS guidance at the time of our last earnings call. While the contract started at the beginning of this month, the scope of work performed will expand gradually during the first half of the year.

I'd now like to review our operations for the year. Our 2011 annual EPS increase was highlighted by record operating income performances from our ROV and Subsea Products businesses. Year-over-year, our ROV operating income rose for the eighth consecutive year to nearly $225 million, up $13 million despite lower demand in the Gulf of Mexico for vessel-based services. This was accomplished by increasing our days on hire to nearly 73,000. We're quite proud of this accomplishment.

During the year, we grew our fleet to 267 vehicles, up from 260 at the beginning of the year. We added 24 vehicles, retired 16 older systems and transferred the use of one to our Advanced Technologies business unit for non-oilfield use. In 2011, 29 new floating drilling rigs were placed in service and we had ROVs on 12 of them, with 2 on 2 rigs, for a total of 14 vehicles.

At year-end, we estimate that we continue to be the largest ROV owner with 35% of the industry's world-class vehicles, 2/3 more than the size of the next largest ROV fleet. We remain the primary provider of ROV drill support service with an estimated market share of 60%, 3 times that of the second largest supplier.

Operating margin declined at 30% from 32% in 2010, due to a reduction in work in the Gulf of Mexico. Our Subsea Products operating income increased by nearly $34 million or 37% to a record $142 million. This was accomplished on better umbilical plant throughput, higher installation work over control systems services and growth in demand for our subsea hardware and tooling.

Operating margin declined 18% from 20% in 2010 due to a change in product mix. Umbilical revenue as a percent of our total products revenue in 2011 was 35% compared to around 30% in 2010.

Our year-end Subsea Products backlog of $382 million was nearly the same as at the end of 2010. The product line mix of the backlog did change as it now notably includes more tooling and less umbilicals. While our umbilical backlog declined year-over-year, we are confident that we should secure the necessary contracts which are awarded intermittently to meet our 2012 plan for this product outline.

Asset Integrity operating income improved in 2011 on the strength of higher service demand in Europe and Central Asia. AdTech results were similar to those of 2010 and Subsea Projects profit decreased due to lower demand for our services in the Gulf of Mexico.

In summary, we believe our annual 2011 earnings performance and cash generation were excellent, particularly in light of the weak market conditions for our non-drill support offerings in the Gulf of Mexico. During the year, we continue to invest for the company's future earnings capability. Our capital expenditures totaled about $525 million, of which around $290 million was for acquisitions, including $220 million in December for AGR FO and $50 million in March for Norse Cutting and Abandonment.

Our organic growth investments totaled approximately $235 million which included upgrading and expanding our ROV fleet and completing the conversion of the Ocean Patriot to a dynamically-positioned saturation diving vessel. We also made investments in ROV tooling, Installation and Workover Control Systems equipment and modifications to increase throughput at our Brazil umbilical manufacturing facility.

Now let's talk about our 2012 EPS outlook. Looking forward, we are reaffirming our 2012 EPS guidance with a range of $2.45 to $2.65, based on an average of 109 million diluted shares and an estimated tax rate of 31.5%. The big picture of the annual 2012 versus 2011 changes we envision occurring could be summarized as follows: ROV operating income is projected to grow on the strength of an increase in days on hire as we benefit from an increase in demand off West Africa and in the Gulf of Mexico and continued to expand our fleet. We anticipate adding 20 to 25 vehicles to our fleet in 2012 and retiring from 4 to 6. For West Africa, we are anticipating an increase in ROV demand for both drill support and vessel-based services in 2012 compared to 2011. For the Gulf of Mexico, we are projecting an increase in ROV demand for drill support services as more rigs go to work in this area. We're projecting that for 2012, our days on hire will increase and then our fleet utilization rate will improve to 80% or more.

Subsea Products operating income is forecast to be higher on the strength of higher tooling sales and increased throughput at our umbilical plants. We do foresee a challenging Gulf of Mexico umbilical market for our Panama City plant due to the aftereffects of the drilling moratorium in 2010 and 2011.

Subsea Projects profit is expected to improve on an international expansion of our deepwater vessel project capabilities to work for BP offshore Angola and a gradual recovery in the Gulf of Mexico. Our Asset Integrity segment profit contribution is forecast to be significantly higher due to the contribution of the newly-acquired operations and increased use of associated subsea technology and tools.

Advanced Technologies performance is expected to increase mainly due to an increase in entertainment projects and improved execution on U.S. Navy vessel service work. Unallocated expenses are estimated to be slightly higher.

At the midpoint of our guidance range, we would expect our overall operating margin in 2012 to be about 15%, the same as it was in 2011. We're expecting Subsea Projects margin will substantially decline in 2012 as 2011 results include the $18-plus million gain on the sale of the Ocean Legend. Excluding this gain, we are anticipating Subsea Projects margin in 2012 will improve over that of 2011. We are not anticipating any big changes in the rest of our segment operating margins in 2012 compared to 2011. It does seem likely however, the ROV margin may improve somewhat as the result of more activity in the Gulf of Mexico and higher fleet utilization overall. Subsea Products margin may be slightly lower due to expected change in product mix.

For 2012, we anticipate generating over $550 million of EBITDA. Our balance sheet and projected cash flow provide us with ample resources to invest in Oceaneering's growth. Our preliminary CapEx estimate for next year, excluding acquisitions, is $200 million to $225 million. Of this amount, approximately $125 million is anticipated to be spent on vehicle upgrades and adding systems to our fleet, about $75 million is for enhancing our Subsea Products' capabilities.

Our focus on 2012 will be on earnings growth and investment opportunities, both organically and through acquisitions.

Moving on to our first quarter outlook, our EPS guidance range is $0.44 to $0.46. This is consistent with the fact that our first quarter earnings are customarily lower than the fourth quarter of the previous year. At the midpoint, this would equate to 18% of the $2.55 midpoint of our annual guidance range. This is within our historical first quarter percentage range. Over the last 10 years, we have averaged 19% of our earnings in the first quarter, with the typical band of 17% to 21% for any particular year.

Our first quarter 2012 guidance at the midpoint is up 15% compared to the first quarter of 2011. We expect all of our business segments to achieve higher operating income, led by a strong first quarter profit contribution from ROVs. Compared to the fourth quarter of 2011, our first quarter guidance is lower based on anticipated reductions in operating income from Subsea Products, Subsea Projects and AdTech.

Looking beyond 2012, we remain convinced that our strategy to focus on providing services and products that facilitate deepwater exploration and production remains sound. We believe the oil and gas industry will continue to invest in deepwater, as it remains one of the best frontiers for adding large hydrocarbon reserves, with high production flow rates at relatively low finding and development costs. Our recent industry report forecast total annual worldwide exploration and development spending to grow nearly 50% by 2015, while capital expenditures on deepwater projects are projected to more than double. Therefore, we anticipate that demand for our deepwater services and products will continue to rise and believe our business prospects for the next several years are promising.

At the end of December, there were 68 new floating rigs on order. 45 of these are planned to be available by the end of 2013. 28 have been contracted long term for an average of 7 years. Of the 28 contracted floating rigs, operators have let ROV contracts on 14 and we have won 7. So that leaves 54 ROV contracting opportunities for new rigs left to be pursued, of which 14 have operator contracts and 40 do not. If all the rigs on order are placed into service, the global floating rig fleet size will grow 24% to 352 rigs. The high-spec fleet consisting of fifth- and sixth-generation semis and dynamically positioned drill ships which currently totals 113 rigs will grow 60%. We historically have had a high market share on the high-spec rigs and are currently on 72% of them. Looking forward, we see no reason why we will not continue to be the dominant provider of ROV services on these rigs.

Each additional floating rig represents an opportunity for us to put another ROV to work and drill support service. As the use of floating rigs grows, we believe it is inevitable that discoveries will eventually drive orders for subsea hardware to levels not previously experienced. And demand for ROVs to support vessel-based activities will follow. Quest offshore's latest subsea hardware forecast for the period 2011 to '15 includes a 58% increase in tree orders over the previous 5 years, in 2012 subsea tree orders are projected to be 618, an all-time high eclipsing the previous record of 462 trees in 2006. While we don't make trees, orders for subsea trees do drive demand for a substantial amount of the ancillary subsea production hardware that we manufacture. For example, Quest is forecasting a 57% increase in umbilical orders for the 2011 to 2015 period.

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

In summary, our results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well, both the long-term and the short-term. We like our competitive position in the 2012 oilfield services market and are leveraged to what we believe will be the resumption in growth of deepwater and subsea completion activity commencing this year. The longer-term market outlook for our deepwater and subsea service and product offerings remains favorable.

Renewed industry and regulatory emphasis on reliable equipment and redundant safety features of deepwater operations has caused our customers to be even more focused on risk reduction. This elevates the importance of the utility and reliability of our ROV services and related product line offerings and reinforces the benefit of our value sell. For 2012, we're anticipating that we will achieve another record year of EPS performance. We think this distinguishes Oceaneering for many other oilfield service companies. In closing, we appreciate everyone's interest in Oceaneering. And I will now be happy to take any questions you may have.

Question-and-Answer Session

Operator

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

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Kevin, if you look at this rig ordering cycle as a whole which began about maybe 18 months ago, has there been any changes in market share by region with the exception of Brazil? Or have you found that compared with prior cycles, that if you just eliminate Brazil, that your market share is as strong as ever around the world?

M. Kevin McEvoy

I think if you eliminate Brazil and also Mexico, we believe it is true, that our market share is as strong as it has been historically.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Okay, good. How about the non-rig side, Kevin? Any stab or any attempt for manned-ROV market share in the sort of vessel-oriented ROV market?

M. Kevin McEvoy

Well, the vessel-based part of the market is always been roughly 25%, give or take, of our overall utilization. There is, over time, we believe, going to be increasing demand for vessel-based ROV services on field support-type contracts and we are as we always have been focused on trying to get ROVs on vessels. I think that's a developing and longer-term event that we're very focused on, for sure.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Can you quantify, Kevin, about the opportunities out there or how many opportunities were there for manned-ROV work in the vessel-oriented ROV business in 2011? And what percentage you won of the percentage that you went after?

M. Kevin McEvoy

I really can't give any details on that. I mean, unfortunately, the vessel part of the market, as opposed to the rig part, is not as clear or as visible all the time and is pretty opportunistic. And in addition to that, a lot of these are seasonal or project-oriented so ROVs are going on and coming off continuously. So it's pretty difficult to characterize that beyond that.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Now is there any trend in the vessel-based business of either more jobs are unmanned and that companies are just selling equipment into that market and that's the majority of the market or no?

M. Kevin McEvoy

I'm not sure what you mean by unmanned. I mean, typically, we have ROVs on vessels and they are manned. It may be a call-out type situation, where you can go from job to job and there could be gas between jobs. But we would never, and I don't think the industry in general, just has ROVs out there with no people on them.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Okay, well I know you always sell your equipment with your trained personnel. I was just wondering about some of your competition FMC or others who would have more of a fail operation, if that was making inroads into that market?

M. Kevin McEvoy

No. I mean, FMC, with Schilling is definitely not a competitor in our view. I mean, they manufacture and sell ROVs to other service providers and so we don't view them as a competitor. And you know, Schilling will sell ROVs to a service competitor of ours, who will put those to work. But we already talked about our statistics and whatnot, so I think that reflects what's going on.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

Okay, and then last question I had, Kevin, I know you indicated in your comments that the Panama City plant was still tough. What is your sense about improvement in that business over the course of 2012?

M. Kevin McEvoy

Well, I think 2012 is going to be a very challenging year, particularly since there hasn't been a lot of discovery activity in the Gulf that would generate any meaningful business in 2012. I do think in the longer-term, say the next 3 to 5 years, there should be an increase in opportunities here as some majors and some larger independents are making discoveries that will eventually end up with development project. So in the meantime, we continue to focus on trying to obtain foreign work for the Panama City plant and such as we have done on occasion with West Africa and Brazil.

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

I mean, you would think given the ramp-up in drilling, wouldn't you, that the Gulf of Mexico market alone, at some point in the future, would provide a healthy enough activity so that utilization of the Panama City plant could be high or is it always going to be dependent upon now international work to...

M. Kevin McEvoy

I think in the future there could be enough work generated here. I mean, the problem is that, at the moment, the major operators and their very large independents are the ones who are pursuing the Gulf of Mexico in terms of exploration drilling that will produce some projects. And these are ultra-deepwater, larger projects that take 3 to 5 years from making a discovery to getting into hardware and installations and whatnot. So I think that's the timeline that we're looking at now.

Operator

Your next question comes from the line of Brad Handler with Credit Suisse.

Brad Handler - Crédit Suisse AG, Research Division

Maybe a line of questioning with respect to the Subsea Projects division. How much of your revenue in 2012 do you expect to be internationally driven now? A fraction, if you would.

M. Kevin McEvoy

Brad, we're not disclosing how much since we have one job, international. We're not disclosing revenues, specifics about the BP Angola work. And it is going to be dependent upon, we're talking about we won't know the run rate of projects until the third quarter because it is going to ramp up in the first half and so we will be able to see the change and it's going to be a mix of some of the Australia contribution that will be in there from our AGR acquisition. And the BP Angola job and plus a ramp-up as we expect a gradual recovery in the vessel-based activity in the Gulf. But we're not, at this point, willing to take a flyer on how much is going to be Gulf and how much is it going to be international. I know I said only one job. We do have the Australian work but we're not at all comfortable with making forecast for that company's operations that we've only owned for a couple of months.

Brad Handler - Crédit Suisse AG, Research Division

Okay, understood. Maybe you can still give -- trying to understand, as you push more internationally and maybe this is the longer-term question. How might the nature of the business change, how might the predictability of it merit perhaps a lot less for call-out work, a lot more kind of here's a certain commitment that's being made for work that will be executed over amount of time. Is that a relevant but as we think about projects going forward?

M. Kevin McEvoy

I think when you talk about outside the Gulf of Mexico, I think that is relevant. I think it is a longer-term view though in order to have some predictability in order to reduce the risk of this type of work outside the Gulf. We're looking for longer-term contracts and that is a developing aspect of the market as more subsea infrastructure is installed and requires constant maintaining than operators are going to go for year-plus or multiple year contracts in order to support that, similar to the BP contract in Angola. But that is an emerging market trend-right now and pretty hard to predict but obviously if the international work that we're trying to get is longer-term, then you would have a lot more visibility of that segment of our projects' business.

Jack Jurkoshek

And one of the things, Brad, if we continue to be successful in growing the international fees, I would expect lower margins because of the pass-through of the vessel costs.

Brad Handler - Crédit Suisse AG, Research Division

If I may, it's sort of still within this topic. I guess I recognize the sensitivity because we're largely talking about one project. But to what degree is there -- how large is the range of possible revenue recognition, revenues earned in 2012? I mean, I see there's some minimal level within your contract. How much bigger could it be off of that minimum?

M. Kevin McEvoy

Well, I think what we've contracted for is pretty clear and there's not -- I mean, there could be some upside but I would say, at this point, it would not be material. I mean, the big picture issue here is that it's going to be a relatively slow ramp-up between February 1 when we actually started the contract and probably get into the end of the second quarter will be at full speed for what we are being contracted to do. At the moment, I don't really see any huge upside variability to that. I mean, there always could be but right now it's just too early to make any predictions about that.

Operator

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

Andrea Sharkey - Gabelli & Company, Inc.

Now, I was looking at the Subsea Projects' margins and if you back out from the third quarter, the $18 million gain that you guys had on the sale of the Ocean Legend, it looks like there was a pretty big sequential jump in the margins? And I was just curious if there was anything one-off going on there or that's more sort of a sustainable level, as you go forward, was that partially from the startup of Angola, what was driving that?

M. Kevin McEvoy

I don't think there's any one-off thing that is of substance and I just do caution that Subsea Projects is a very evolving segment right now with the acquisition of the operation in Australia. And the startup of the operation for BP in Angola. We are adopting a wait-and-see kind of attitude as to what our margin run rate is. I would not take the fourth quarter and extrapolate it. I think it's really going to be until we get to the second half of the year to truly appreciate what that segment is going to go. I know that makes modeling difficult and we respect that. But we're facing the same issues in trying to do our forecast.

Andrea Sharkey - Gabelli & Company, Inc.

Sure. That's understandable. And then, I guess, just looking at the range of your EPS guidance. What's the sort of the swing factor that takes you from the low end to the top end? Is it just how fast Gulf of Mexico comes back or are there other things that are in there?

M. Kevin McEvoy

Well, I think that certainly securing the BP Angola contract, removes a lot of speculative risk out of our forecast. But there's still a substantial speculative work in the overall company plan. And so it would be very premature to make too much out of that, at this point in time.

W. Cardon Gerner

And I think one of the things that I mean, we think projects and the recovery in the Gulf of Mexico, the rate that the BP Angola work ramps up, how much of the speculative work that we have for umbilicals and the timing of those awards and how soon they can be prosecuted and be recognized as revenue. But the main thing I'd like to point out is if you take the midpoint of our guidance range, we are saying we've got a 4% upside and a 4% downside. And 10 months out from the end of the year, I don't think 4% is too wide a range. So there's a lot of moving pieces within our segments and a lot of speculative work that we expect. So while we're absolutely positive that being awarded the BP work did derisk projects, there's still a lot of other assumptions that are not in backlog.

Operator

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

Jonathan Donnel - Howard Weil Incorporated, Research Division

I was wondering if you could give us a more details on the AGR acquisition and kind of specifically, some of the metal offerings that this brings to your inspection of Asset Integrity division now. I know you talked about the previously about the subsurface inspection tool. How does that fit in with what you have now? How's it provide new opportunities for markets you're currently working with the Gulf of Mexico? And how might that creates some pull through from your other business segments, if any?

M. Kevin McEvoy

Well, I would start by saying that we've had the business for like 7 or 8 weeks or something so we're still pretty much gone through the organizational integration aspects of this thing. I think I've mentioned previously that both companies have started down the path of developing some subsea and inspection tooling technology and that is the focus that we're going to have trying to further develop that and then deploy that is just way premature to make any prediction about what that means in money terms, I think. And I think that the other thing I would say is that AGR was a lot more leveraged to the Asset Integrity part of the business as opposed to the NDT part of the business. The Asset Integrity being higher value, higher margin and so we are certainly going to be trying to leverage off of that to increase that portion of our business.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay, so kind of along those lines too. Given their current basis and their operations in Australia, how do you think about that in terms of going forward? I know it's been a pretty small focus for you guys in the past. Does this give you the opportunity to be bringing in more of your service offerings into that market here? Or is that something longer-term that is going to be less of a focus for the AGR side of the business?

M. Kevin McEvoy

Well, I think we're going to be very focused on what we can leverage out of AGR's Australia footprint. I think that our current presence in Australia is also relatively new on the non-AGR side. I mean, we recognize that this is a quickly developing market. And while we've operated in Australia off and on for probably 40 years, we've recently really tried to ramp up. And we are starting to win contracts and we have very high expectations for the added growth that Australia, as a region, can provide to us. And we view the AGR piece as another aspect of that, that we'll be trying to combine and leverage.

W. Cardon Gerner

And our existing operations, John, were basically based out of Perth. And we feel like their Darwin logistics base is a good opportunity for us to provide a home for some assets and use as a platform perhaps for callout work, for tooling and even maybe vessel-based ROVs.

Operator

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

Tom Curran - Wells Fargo Securities, LLC, Research Division

Starting with ROVs, two-parter. First, of the incremental ROVs you expect to deploy, so the new builds net of retirements that you expect to actually go to work, what percent do you expect to be deployed for drill support? And the second part of the question is, as you look out over the next several years, given the disproportionate portion of the high-spec new builds that will be heading into Brazil, what gives you such a high level of confidence that you'll be able to defend your 70%-plus historical market share, given some of the uglier pricing-based competition we've seen there recently?

M. Kevin McEvoy

Okay, the first -- answering the first question, we currently have firm contracts for 17 new ROVs that we expect to place into service during 2012, 10 are for rigs, 4 are for vessels and 1 each are for a spar, tension leg platform and a drill barge. And obviously, some of these expected start dates could slip into 2013 but that is as well as we could see at the moment. We are obviously pursuing opportunities on additional rigs and vessels and believe we may secure more work commitments for additional ROVs to be place into service during the year. Now your question about Brazil was, could you just restate that for me, please?

Tom Curran - Wells Fargo Securities, LLC, Research Division

Sure. Kevin, in your opening remarks, you had expressed high level of confidence in being able to defend your current share of 72% on the global high-spec rig fleet. And as we look out over the next few years, of the new builds in the construction queue, the majority are going to be heading into Brazil, where least recently, you have suffered share loss because you haven't felt the pricing required to win reflects the value that you provide. And so I'm wondering where the confidence comes from that as we see the high-spec, the global high-spec fleet as it expands, as it shifts ever more heavily towards Brazil, how are you going to defend your share?

M. Kevin McEvoy

Well, I think what we stated was our current percentage of that market and our belief that we see no reason that we shouldn't maintain a dominant share in that segment, I don't think we said we were going to keep the 70%. But specifically, with respect to Brazil, I mean, it is true that, that area is pretty challenging commercially. There no doubt will be another award for a large number of systems there. And depending on who wins that, that will be a further indication of what's in store for us there. But we do not believe that it is worthwhile for us to pursue low-margin work in Brazil for Petrobras. It's a very difficult operating environment. I think the news is full of folks that have stumbled on increased costs and all kinds of other logistical issues, and I think we've got a good business there. We still have, I think, in the 40 percentile region of market share in Brazil. And we do continue to win some jobs there at prices that are attractive to us. So we're going to maintain that strategy. So I guess to recap, I think if you discount Brazil or don't talk about Brazil, we certainly believe that we'll maintain the dominant market share that we have enjoyed in the ultra-deepwater fleet. And Brazil is an evolving deal. I mean, they're making big orders for lots of things. And my personal observation is that for a place that is really just trying to start up, a lot of industry for local content in developing their own economy, they're ordering a lot of stuff, expecting it in a time frame that I will be very, very surprised that if they're able to achieve it.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Okay. Turning to Subsea Products, could you quantify for us how much you've improved Multiflex's run rate margin at this point?

M. Kevin McEvoy

No, we really don't break that out. There's too many pieces within the whole Subsea Products' basket of companies and things that we do. It would just be a nightmare.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Okay. Then turning to IWOCS, maybe an update there on the current total fleet size and where those assets are deployed by market?

M. Kevin McEvoy

We've never really given that out. I mean, it is predominantly Gulf of Mexico. We do have some reasonable international exposure, and we are continuing to try and grow that part of it. I think the IWOCS business was very strong in 2010 and in 2011. And we do expect that to decline in 2012 because initially, in the Gulf of Mexico, when it was difficult to drill an exploration well, it was pretty easy to get a permit to do other things that required the IWOCS business. So I think there was a level of business there that is not sustainable.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Okay, and are those assets readily redeployable?

M. Kevin McEvoy

Some are. I mean, it really depends on the region of the world where they go. I mean, some of them are kind of Gulf of Mexico specific in terms of water depth and certifications and whatnot. But I don't see that -- I don't see the inability to provide a system to some international location as being an impediment to our growing that business.

Tom Curran - Wells Fargo Securities, LLC, Research Division

All right. And then last one for me, Marvin, how about just an update on the M&A pipeline and in particular, the prospects out there internationally?

Marvin J. Migura

You know, we don't have a pipeline that like others we can quantify how many hundreds of millions we're going to spend any given quarter. Right now, we are continuing to look. You stated it. Our focus is international, and what we're really looking for is something in the Subsea Products segment that has a service component so we don't have to deal with just a manufacturing margin and higher risk of execution as we've read about recently. So we're focused on continuing doing what we're doing. We had almost $300 million, $290 million of acquisitions in 2011. We'll just see how well we can keep that rate up, that was an extraordinary feat and -- but we're still out there with growth in our operations being our #1 objective and focus primarily on organic being augmented with acquisitions.

Operator

Your next question comes from the line of Edward C. Muztafago with Societe Generale.

Edward Muztafago - Societe Generale Cross Asset Research

I got on the call a little late so pardon me if you've already talked about this a little bit. But we've kind of heard over the course of 2011 here some of the subsea equipment manufacturers announced delays in shipments and project delays. And so I was wondering if you could just talk a little bit higher level as to how the risk of further slippage or equipment delivery delays kind of plays into your 2012 outlook and guidance and both specifically with respect to the ROVs and Subsea Products because as you indicated, the tree sales are a driver of demand, and so they're longer lead time, I think, than some of your products. So maybe you could just kind of walk us through your thought process there?

M. Kevin McEvoy

Okay, there's a couple of pieces there. I think with respect to the ROV business, I don't think there really is too much there really is the rig deliveries and their construction schedules. And I think there's pretty good visibility that obviously if they slip, then a start date for a contract that we may already have is going to slip along with it. So far, that has not been a driving factor in our ability to put ROVs to work because the vessel side of that kind of takes up the slack. With respect to products, it is true that the trees are generally longer lead-time item. But they're -- I think the difficulties and the issues that some folks have been having are not really reflective of a, our business; or b, even if we are providing some connection hardware or something to the same project, because usually these difficulties end up appearing pretty near the end of the project, orders are already in, deliveries are made, and so far, we have been fortunate not to have any significant impacts of our own in terms of inability to deliver.

Edward Muztafago - Societe Generale Cross Asset Research

Okay, that's helpful. And then maybe just as a second question if we can sort of flip back to Brazil a little bit. There's obviously a fair amount of chatter about subsalt development going horizontal there. And clearly, one of the implications is that they'll ultimately need less rigs to develop the subsalt reserves. Can you just talk generally speaking as to how that type of a genesis might play out for you and maybe even potentially if rigs go to work elsewhere, is that more beneficial than if they were to physically be working in Brazil?

M. Kevin McEvoy

Well, if they went to work somewhere else outside of Brazil, I think that's favorable in our view, whether there is any opportunity for Petrobras to reduce the number of drilling rigs they currently think they need to do their development programs or not, I really couldn't comment on that, I don't know. But I mean, obviously, if they can reduce that, then that's less ROVs. But presumably, we'd be looking to see whether those rigs can be utilized elsewhere in the world.

Operator

Your next question comes from the line of Daniel Burke from Johnson Rice.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

I have a question on the Subsea Products. If we look at Subsea Products and the revenue growth rate you enjoyed excluding umbilicals in 2011, you mentioned IWOCS but what reasons are there to believe that revenue growth rate would overall decelerate here in 2012 given the capital investments you're making in that sector?

Marvin J. Migura

I don't think there is a reason to believe that the growth rate or the sustainability, I think Kevin mentioned about IWOCS not being having a very good year in '10 and a very good year in '11. And we believe there is some aftereffect that when rigs go back to drilling exploration wells, they're not going to be using the IWOCS units as frequently as they had been. Other than that, I think your premise is pretty sound with the investments we've been making. We think that tooling and Grayloc and rotator valves and all of those specialty items that we provide will continue to grow.

Daniel J. Burke - Johnson Rice & Company, L.L.C., Research Division

Okay. And then switching to products on the margin side. I guess my presumption, I know you've made substantial improvements at Multiflex. But I guess I assumed in '12 that the Multiflex was probably -- or excuse me, '11 that Multiflex was probably towards the lower end of the margin range within products. I guess, what are the dynamics that could allow products' margin to decline in '12 given the healthy growth rate in revenue from the non-umbilicals side?

M. Kevin McEvoy

Well, it really is a function of mix and the predominance of umbilicals versus the rest of the Subsea Products offerings in that. And there still is roughly 50% worldwide umbilical plant capacity that is not being used at the moment. And so that is keeping margins pretty tight. And so until or unless that significantly changes, the margins on the umbilicals side are not going to see any dramatic improvement. I think maybe our ability to win more work will help us on the volume side in the amount of contributions that umbilicals solutions does provide to that segment.

Marvin J. Migura

And Daniel, while the non-umbilical side is growing, we are expecting the product mix in '12 to continue to shift to higher throughput on umbilicals. So while Panama City plant has been discussed and is facing a challenging market, we're expecting more throughput from our U.K. facility and our Brazil facility. So we look at the mix continuing to change being driven by higher throughput. And Kevin mentioned that while we're not forecasting any significant change in our margins, we could see products a little bit lower as the mix of umbilicals continues to strengthen.

Operator

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

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

Just on the 20 to 25 new builds for 2012, could you remind us of your capacity for additions? And then I think you raised it from -- you had 15 to 20 last quarter. I think you raised that. Is that correct? And then finally, would you consider raising it again if the market is strong enough?

M. Kevin McEvoy

We'll build as many as the market will take, that's for starters. I think we have not, so far, experienced any situation where we have not been able to deliver or provide in ROV even for emerging opportunities that we didn't see from a distance in order to satisfy a contract requirement. In fact, quite the opposite, we have won contracts because of our ability to quickly provide a system that probably most others would not be in a position to do because we have such a strong supply chain, and we're just able to ramp it up or ramp it down. So while I don't think we give any particular number as to what our capacity is, it's certainly a lot more than 20 to 25. And unless there was just some dramatic demand coming from someplace that I can't even fantasize, I would not see that as a problem for us.

Marvin J. Migura

We have said before that we could build 3 a month, if we needed to and yes, as Kevin said, if capacity is not a -- let me add another shift and push more ROVs through. And these are ROVs being placed in service. So most of the time, we're talking about a delivery that occurred or is going to occur early so that we can get it on if it's going to a new build rig. And since we said we had 17 contracts, we thought there was more upside to -- than adding 15 to 20 when we did change it to 20 to 25. But -- then I've been asked, why didn't you change your guidance? It's because there is a lot of speculation as to the exact date some of these rigs and vessels go to work. So we still have, and we have a lot of spec work in our ROV forecast. So we did go from 15 to 20 last quarter to 20 to 25 being added during '12.

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

Okay, that's helpful. And then just switching gears to the AGR business. Is that going to see typical North Sea seasonality?

M. Kevin McEvoy

I think that -- I mean, there certainly is North Sea seasonality. Whether it is as dramatic as it has been historically, I'm not sure because right now, I think there is an increased emphasis on collecting data and doing asset integrity. We see an increase. That's part of why our 2011 was better than 2010. And so when demand is coming up like that, it tends to overwrite some of the -- what used to be seasonality. So it's kind of difficult to really peg that too closely there.

Marvin J. Migura

Directionally, the answer in our forecast is yes. We will see that kind of seasonality. Remember, in the first quarter -- I mean, most of the inspection first of all is in Norway, and they are weather challenged in Q1, and most of the activity occurs in the second and third quarter, tailing off again in the fourth. The other thing I might say is that we would expect lower margins in Q1 because we're still going to be incurring some integration costs in Q1 as we sort out how we best run our combined businesses.

Operator

There are no further questions at this time. I'll turn the call back over to the presenters.

M. Kevin McEvoy

Thank you very much. We appreciate your interest in Oceaneering.

Marvin J. Migura

Take care, guys.

Operator

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

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