McDermott International's (MDR) David Dickson on Q4 2015 Results - Earnings Call Transcript

| About: McDermott International, (MDR)

McDermott International Incorporated (NYSE:MDR)

Q4 2015 Earnings Conference Call

February 22, 2016 05:00 PM ET

Executives

Kathy Murray - VP, Treasurer and IR

David Dickson - President and CEO

Stuart Spence - EVP and CFO

Analysts

Jamie Cook - Credit Suisse

Clay Rikard - UBS

John Rogers - D. A. Davidson

Martin Malloy - Johnson Rice

Brian Konigsberg - Vertical Research Partners

Alan Fleming - Citigroup

Matt Tucker - KeyBanc Capital Markets

Operator

Ladies and gentlemen, thank you for standing-by. And welcome to McDermott International’s Fourth Quarter and Full Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the Company’s prepared remarks, we will conduct the question-and-answer session and instructions will be given at that time.

I would now like to turn the call over to Kathy Murray, McDermott’s Vice President of Investor Relations. Please go ahead.

Kathy Murray

Thank you and good afternoon everyone. I would like to remind you that we are recording this call and that a replay will be available on our Web site, where you can find our fourth quarter and full year 2015 results press release and the Form 10-Q we filed today. We have also posted a presentation of supplemental financial information that will be available on the Investor Relations section of our Web site.

Additionally, our comments today will include forward-looking statements and estimates. These forward-looking comments are subject to various risks, contingencies and uncertainties and reflect management's view as of today, February 22, 2016. Please refer to our filings with the SEC, which are available on our Web site, including our Form 10-K for the year ended December 31, 2015, which provides a discussion of some of the factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations. Please note that except to the extent required by applicable law, McDermott undertakes no obligation to update any forward-looking statements.

I will now turn the call over to David Dickson, McDermott's President and Chief Executive Officer for opening remarks.

David Dickson

Thank you, Kathy and good afternoon and thank you for joining us today. From our results today, you can see we continue to make short-term progress driven by improved execution and our change in culture which is in turn building a stronger financial foundation as we manage through this current macro commodity cycle. We are very pleased with our fourth quarter results, and 2015 full year results, as they reflect the impact of all the initiatives we have worked on today and clearly demonstrate the operational and financial turnaround that began in early 2014.

The Company has been significantly strengthened not only in terms of backlog and operating income, but also in terms of its capabilities and competencies in an extremely challenging market. Of special note this quarter, all areas were operationally profitable on an adjusted basis. In addition, by proactively managing the cost structure at the beginning of the downturn, we have not only performed well financially in 2015, but also have positioned ourselves to be competitive in all areas of our business.

Our success in winning the ONGC Vashishta award in addition to a sizeable transportation and installation contract offshore Trinidad demonstrates continued focus on customer engagement and the realization of McDermott’s strong brand reputation. It also demonstrates our ability to balance our geographic portfolio, while remaining a leader in the Middle East.

McDermott’s reputation as a partner-of-choice continues to grow as demonstrated by the recently announced long-term Consortium with Larsen & Toubro. This partnership strengthens our relationship for both clients with our combined capabilities and provides a unique solution for the offshore and deepwater India market. Our commitment to excellence and project execution was further evident during the quarter as our Marine campaign on INPEX’s Ichthys remains on-schedule and we successfully completed the offshore installation and the hookup of the PB Litoral jacket and Topsides ahead of schedule.

In addition, our dedication to health, safety, environment and security, continues with our outstanding performance in safety statistics throughout all areas of operation. We remain an industry-leader in this area. Furthermore, despite the current macro headwind, we hold greater than 80% of expected 2016 revenue and backlog. Our bidding activity remains high and we continue to anticipate a good revenue opportunity pipeline.

Now I’d like to provide an update on the execution of some of our key projects. In Americas, Europe and Africa area, the installation of the PB Litoral jacket and Topsides and the hookup marked the first years of the float-over method of installation in Mexico by McDermott and was successfully completed without incident and ahead of schedule. We are proud of the changes we have made to ensure that this project is executed to McDermott’s global quality and safety standards. The PB Litoral team has done an outstanding job ensuring that the loss on the project has not deteriorated further over the past four quarters.

Unfortunately PEMEX unilaterally extended payment terms to all the supply chain thus delaying some of our cash collections during the fourth quarter 2015. We do however expect to receive payment in the near-term and we continue to remain positive on the near and longer term market outlook in Mexico. We have demonstrated that we can deliver projects in Mexico with the appropriate blend of in-country assets and people along with developing a strong relationship with PEMEX.

Our go forward Gulfport Mississippi spoolbase facility has been handed over to operations and has substantially completed the welding of the pipeline for the LLOG Otis project. We expect this drilling on to our North Ocean 105 vessel in the first quarter of 2016. We continue to focus on the Middle East area with the Aramco Karan 45 project progressing ahead of schedule and the Abu Ali cables project completed ahead of schedule, earning the project team’s special commendations from the client. Execution of Lump Sum project awarded under the renewed Aramco Long Term agreement LTAII is now proceeding according to schedule. As mentioned last quarter the national oil companies in the region remain public about maintaining production and we continue to expect our pipeline of potential projects in the Middle East to be brownfield in nature. As a result our bidding activity remains high in the Middle East area.

In our Asia Pacific area our INPEX Ichthys project achieved all of the agreed upon milestones during the quarter remaining on schedule. We are very pleased with the performance of the Aegir Heerema’s vessel and the Heerema partnership on this project. Our partnership with Heerema is another example of our core strength in developing relationships which ultimately translates to improve project execution and performance. During that quarter Ichthys and the 16th stope of the Brunei Shell pipeline and replacement project was deferred 2017 by a customer as a result of the commodity price environment. We will continue to engage with the customer until they decide on their new project timeline.

Also in the quarter fabrication weren’t begin in the Batam yard for the 22,000 tonnes of modules for Yamal LNG. We will continue to focus on these types of fabrication opportunities as part of our new company-wide strategy for fixed cost absorption. I previously mentioned McDermott was awarded the ONGC Vashishta project in the fourth quarter 2015. We believe that meeting the end-market content requirements through partnering with Larsen & Toubro are demonstrating track-record in both shallow water and subsea and our newer competitive cost structure were the main drivers for winning the Vashishta award at a profitable margin.

As we have just announced, we will conduct the naming ceremony of our new flagship Derrick Lay Vessel, the DLV 2000, at Keppels Singmarine Shipyard in Singapore on Thursday April 14, 2016. The DLV 2000 will add high-end capabilities and versatility to our existing fleet. As the new flagship of our fleet the DLV 2000 will allow us to utilize one vessel on projects requiring a combination of pipelay, heavy lift, back space restructures and offshore workforce accommodation that would normally have to be executed by multiple vessels. We also expect the DLV 2000 to provide us with a key asset for fuel development in remote locations through the combination of these versatile construction capabilities and fast transit speed.

As part of our current work schedule, the DLV 2000 have secured over 80 days on a 2016 marine campaign on the INPEX Ichthys project. We expect to then perform its first pipelay work on the recently awarded Woodside Greater Western Flank Phase 2 transportation and installation project. We also continue to actively bid the DLV 2000 on prospective projects.

Now I would like to discuss our legacy loss, mix and projects. As a result of our cost management our backlog of legacy loss projects has been reduced significantly from last quarter as a KGL hoots project is no longer in a loss position. Regarding the two remaining material legacy loss projects, we expect the PB Litoral project to complete in early 2016 and Agile charter to finish in early 2017.

Looking forward, we continue to focus on the current macro environment and what it means to our clients. Many exploration and production companies have deferred or reduced our capital expenditures. However, as we look at our business expanding and targeted projects at December 31, 2015. We believe we are still well-positioned in markets where capital is available for investment. Additionally, we believe we are more competitive today than ever given our strong project execution, increased cost management, liquidity culture and increased organizational capabilities and competences.

We do expect to continue our focus on our traditional area of excellence offshore EPCI projects until the subsea deepwater market recovers. We continue to have significant opportunities with national oil companies, which we believe are more likely to continue with fuel development project in today's market. With the Middle East area expected to be the greatest contributor to near-term order intake. We will also continue to position ourselves for when the micro environment recovers.

With that I would like to turn over the call to Stuart Spence, our Executive Vice President and Chief Financial Officer for a review of our financials.

Stuart Spence

Thanks, David and good afternoon everyone. Today I am going to cover our fourth quarter and full year financial results, then I’ll discus our CapEx spend, followed by our backlog and current bid pipeline, then provide an update on our cost saving initiatives, finally I’ll discuss our guidance for 2016 based on current market conditions.

Before I get started today, I would like to remind you of the new reporting majors we introduced in the third quarter. As previously mentioned, in addition to our GAAP reporting, we will also report certain adjusted financials net of one-time items to provide a clear understanding of the underlying performance and drivers of our business. To support these efforts, I would like to draw your attention to our press release and supplement slide deck that detail the reconciliation of the GAAP to non-GAAP financial majors.

Now on to the fourth quarter of 2015 and year-end results, revenues for the fourth quarter were 67.4 million down 138.4 million or 17% over the sequential quarter and then 139 million from Q4 2014 revenues of 806.4 million. This decrease was driven by comparatively low activities on the INPEX Ichthys project during the fourth quarter of 2015. The key projects driving revenue were in our Asia and Middle East areas, as far as the continued progress made on PB Litoral in Mexico. In Asia the INPEX Ichthys and the Brunei Shell pipeline replacement projects drove revenue. In the Middle East to larger projects Aramco Safaniya Phase 2 and ADMA 4 GI projects drove revenue recognition.

Our constant focus on improving our biding and execution during the past year has made a positive impact as our adjusted operating income totaled 48.2 million during the quarter, excluding 8.7 million of restructuring expenses and 26 million of mark-to-market non-cash pension charges. Operating income for the quarter was positively impacted by the successful negotiation and agreement of weather-related recoveries in the Middle East. A change order on the INPEX Ichthys contract, cost reductions as a result over the McDermott Profitability Initiative, reversal of liquidated damages related to a schedule extension on PB Litoral and better than expected utilization in the quarter. As David mentioned the KGL hoot project is no longer in a loss making position and our loss project portfolio contributed positively to gross profit during both the fourth quarter and the full year of 2015.

Cash provided by operating activities in the fourth quarter was 60.6 million compared to cash provided by operating activities of 20.7 million for the third quarter of 2015 and 119.3 million in the prior year comparable quarter. Improvement in the fourth quarter over the sequential quarter is attributable to advance payments on newly awarded projects and collections of weather-related recoveries both in the Middle East. However, these improvements were partially offset by PEMEX unilaterally extending payment terms to its suppliers, including McDermott.

For the full year, the Company reported revenues of 3.1 billion compared to 2.3 billion for 2014. The year-over-year improvement was driven primarily by the INPEX Ichthys project, the Brunei Shell pipeline replacement project and progress on the PB Litoral project. Our adjusted operating income for the year was 174.7 million in 2015 excluding restructuring charges of 40.8 million, a legal settlement of 16.7 million and non-cash mark-to-market pension charges of 26 million. This compares to an adjusted operating income for 2014 of 23.7 million, which excludes restructuring charges of 18.1 million and non-cash mark-to-market pension gains of 2.9 million.

2014 adjusted operating income included gains on sale of assets of 46.2 million. Fourth quarter 2015 operating income includes overhead, under-absorption of approximately $21 million due to project sequencing and seasonality. Cash provided by operating activities for 2015 was 55.3 million compared to 7 million for the full year 2014. The increase in cash provided by operating activities is primarily driven by continued focus on project execution as well as cash savings resulting from MPI. As I previously mentioned the supplemental slide deck available on our Web site provides additional financial information.

Moving to the balance sheet, at December 31, 2015, we reported 781.6 million in cash and restricted cash, an increase in total cash from the third quarter of 14.4 million. This is primarily driven by 60.6 million of cash flow from operations offset by 36.7 million of capital expenditures and debt repayment of 9 million. Restricted cash decreased this quarter as a result of the expiring of cash collateralized letters of credit. We have not had a structural change in our contracting terms and conditions during the quarter, related to working capital other than the previously mentioned PEMEX unilaterally extending vendor credit terms. Letters of credit issued under our LT facility totaled 384 million and cash collateralized letters of credit totaled 102 million at year-end 2015.

Moving to CapEx, capital expenditures for the fourth quarter were 36.7 million, which includes 5.8 million of capitalized interest. During the fourth quarter, an additional 9 million of planned CapEx spend for our flagship vessel the DLV 2000 was deferred to 2016, bringing the total DLV CapEx spend expected in 2016 to approximately 189 million. There has been no change to the total expected spend on the vessel of approximately 432 million, excluding capitalized interest. Total CapEx expenditures for the full year of 2015 were 102.9 million, including 22.7 million of capitalized interest, 37.9 million of spend related to the DLV 2000, 12.3 million related to our CSV 108 vessel delivered in the first quarter and $4.8 million was spent for our vertical trig system upgrade on the CSV 108 currently under construction. The remaining amounts were associated with project related items and maintenance CapEx.

Now turning to order intake, we reported a backlog of approximately 4.2 billion at year-end of which 69% is related to our offshore operations and 31% is related to our subsea operations. Bookings in the fourth quarter totaled 478.3 million driven primarily by a new profitable order from ONGC for their Vashishta field and a T&I award offshore Trinidad along with change orders on existing projects. Of the 4.2 billion of backlog, 2.4 billion is due to roll off in 2016, $1.3 billion in ’17, and 0.5 billion in 2018.

As I mentioned earlier, our legacy loss project portfolio has decreased from three material projects at the end of the third quarter to two material projects at the end of the year. The PB Litoral project and the Agile charter project are the only remaining material loss projects in the legacy portfolio. The PB Litoral project is expected to be finished in the first quarter of 2016, and the Agile charter project is expected to be complete in early 2017. For further details on the roll off of these projects please refer to the supplemental presentation.

Our bids and change orders outstanding at year-end was 4.4 billion compared to 2.6 billion at the end of the third quarter of 2015. For the fourth quarter revenue pipeline approximately 72% of our outstanding bids and change orders relate to our offshore operations. Our list of target projects totaled 15.2 billion as of December 31, 2015. The decrease in target projects is primarily due to projects moving from targets to bids outstanding as well as the few projects slipping out of the five quarter time horizon due to the current macro environment. As a reminder, target for those projects that we intend to bid on and we expect would be awarded to us or our competitor in the next five quarters. Approximately 73% of the value of our target projects relate to offshore operations.

As of December 31, 2015 the combination of our backlog, bids and change orders outstanding and target projects, which makes up our potential revenue pipeline, totaled 23.8 billion, up from 23.6 billion in the sequential quarter. Also, our bid pipeline increased by 400 million, primarily due to national oil companies maintaining a high level of bidding activity, especially in the Middle East. Once again, we have provided additional information on the breakdown by project type, region, and work scope of these various items in the supplemental presentation on our Web site.

Moving to cost restructuring, as I mentioned in previous quarters, at the end of 2014, we embarked on a planned cost reduction exercise to improve our profitability and flexibility, called McDermott Profitability Initiative or MPI. The objective of the exercise was to bring a change to our overall cost structure and address our fixed costs, while still maintaining the revenue and capacity potential of the Company. We have now substantially completed MPI other than our move from Singapore to Kuala Lumpur and some final sourcing initiatives. We are pleased to report the Company realized approximately 150 million of annual cash savings in 2015, and expects to realize annual cash savings going-forward of approximately 150 million as compared to the 2014 benchmark.

As part of our new cost culture, we proactively continued to look at new ways of improving our cost structure. As such, we initiated the additional overhead reduction program, or AOR, in the fourth quarter of 2015. This program will include headcount reductions affecting direct operating expenses, as well as SG&A. The program is expected to be substantially complete in the first quarter of 2016, and should generate greater than 20 million of end-year 2016 savings. We expect total restructuring cost to be approximately 10 million in 2016, of which approximately 5 million is associated with the AOR program.

For the full year of 2016, the Company expects revenues to be approximately 2.9 billion and adjusted operating income to be approximately 115 million, which excludes the expected restructuring cost of 10 million. We also expect the adjusted operating income to be slightly weighted towards the first half of the year due to project sequencing. As previously highlighted, absorption of our asset-based cost structure in 2016 is a focus for us.

For the full year of 2016, we expect gross interest expense of approximately 74 million and capitalized interest of approximately 10 million, and net interest expense of approximately 64 million. Of the expected 74 million in gross interest expense, we expect 60 million of that to be in cash and the other 14 million to be amortization. We also expect our taxes to be approximately 55 million for 2016. We expect full year of 2016 adjusted net income to be breakeven. Additionally, we expect adjusted street-EBITDA to be approximately 240 million and covenant EBITDA trailing 12-months to be approximately 285 million. Which we believe provides adequate coverage for our minimum required covenant EBITDA of 251 million with 28 million remaining for EBITDA add-back.

With the CSV 108 completed in early 2015, our remaining capital expenditures to complete the DLV 2000 during 2016 are expected to be $189 million. We expect to spend approximately 20 million completing the CSV 108 vertical lay system and 48 million during the year on the other remaining maintenance and project-related expenditures, while maintaining the capabilities and reliability of our assets. In addition to those figures, we expect approximately 10 million of capitalized interest to be reported as capital expenditures in 2016. Also, we expect to have approximately 580 million of cash and restricted cash and 840 million in gross debt at the end of 2016, assuming contracting terms and industry norms and working capital remain stable and PEMEX returns to normal payment cycle.

Furthermore, we expect our free cash flow to be approximately negative 160 million. The majority of this is due to the 189 million of CapEx related to the DLV 2000 in 2016. Adjusted for the DLV 2000 CapEx, our free cash flow is expected to be approximately 29 million. We expect our Middle East business to generate free cash flow in 2016, despite the fact that we expect assumption of working capital as a result of a normal ramp-up of project spend for recent awards.

Our guidance is based on our view of the business outlook. However, given the macro commodity environment, we may see pressure from potential CapEx spending delays, stronger competitive pricing pressure due to contraction in certain markets and our own lower utilization. For now, McDermott will concentrate on what we have control on, which includes continued focus on our highest value proposition opportunities, strong execution of our existing backlog, customer alignment and focus on our utilization and cost management.

Now, I would like to turn the call back over to David.

David Dickson

Thank you, Stuart. As we have discussed, McDermott made significant progress on its turnaround with 2015 being the year where we have executed and improved our operational performance. This has been demonstrated by improved operating income and an increase in backlog that McDermott has not achieved since 2012.

In addition, our reputation in the marketplace continues to grow and our relationships with major customers and business partners continues to strengthen. This was demonstrated in winning the ONGC Vashishta project and entry back into the offshore market in India in consortium with Larsen & Toubro, as well as our continued successful partnership with Heerema on the INPEX Ichthys project.

As for our organization, we will continue to focus on talent and strengthen the now significant core capabilities of the organization to further our operational and financial success in 2016 and beyond. In addition, we have added a Director position to our Board and welcome Erich Kaeser’s experience and insights. His extensive executive management and operational experience in the global energy industry, particularly in the Middle East markets, will be an invaluable asset for the Company and will compliment the extensive experience of our current Board.

So as we look to 2016, we will be focused on bidding new profitable work to secure 2017 and 2018 awards through the increased capabilities and competencies of our organization, as well as leveraging our relationships with customers and partners. We also expect to remain focused on maintaining our new standard of operational execution. Given the continued backdrop of a lower for longer oil price environment, our order intake focus remains centered around three core themes; firstly, the markets where capital is available for investment; secondly, the brand fuel and producing basins with the lowest production cost; and lastly, focusing on national oil companies who remain committed to their production levels.

We also continue to concentrate on the items that we can control, including customer alignment, asset utilization, cost management and liquidity culture. As Stuart mentioned earlier, we commenced our McDermott profitability initiative before the current downturn. We have more recently enacted the additional overhead reduction program and with our new developed cost culture, we believe we are more cost competitive than ever and will continue to strive to remain so in the future, as we scale our business to match customer demand. We believe that McDermott has completed its turnaround phase started in 2014. And with a substantial portion of expected 2016 revenue in backlog, we look forward to a solid year despite the macro backdrop and continue to be focused on the long-term positioning and prospects through the cycle.

With that, I would now like to open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jamie Cook with Credit Suisse. Your line is open.

Jamie Cook

First, congratulations on a nice quarter. I guess my question relates to, you talked about PEMEX and delayment in payment. I think you said you expected it in the near-term. Can you just sort of quantify how big that is and what risks do you see to delayed payments for some of your other customers, in particular, with your concentration in the Middle East? And then can you talk about as you’re negotiating new projects or potentially new awards or any of the terms changing I think, in your prepared remarks you said you assume contract’s terms don’t change. I am just wondering how realistic that is? Thanks.

Stuart Spence

Thanks Jamie, it is Stuart. Just to answer the PEMEX question, first. We suffered approximately 116 million of delayed payments from PEMEX in the fourth quarter.

Jamie Cook

Okay.

Stuart Spence

We are actively working with them and we feel very comfortable that that cash will be forthcoming early 2016. In terms of working capital terms in our contracts, today on the bids that we are making, we see a stable environment and we would hope that that would continue. I think our prepared remarks just position ourselves for a potential lower for longer cycle and if that has any detrimental impact to working capital terms. Thirdly, on the Middle East market, we remain very comfortable with all of our working relationships with all clients in the Middle East and the payment terms and contractual working capital terms are being adhered too.

Operator

Thank you. Our next question comes from the line of Steven Fisher with UBS. Your line is open.

Clay Rikard

Thanks. This is actually Clay Rikard on for Steve, thanks for taking my question, just to follow-up on Jamie’s question in the Middle East. Can you discuss maybe how this value messaging on pricing terms and timing have changed over the last few months if at all?

David Dickson

No with -- this is David Dickson. What I would say since certainly in the nearest short-term we haven’t seen any changes in anything that we’re doing particularly in Saudi as you know our agreement that we have with Saudi is they are long-term agreement which is an agreement with the terms and conditions have already been set and what we do is we’re competing on a pricing basis. So we haven’t seen any impact or any change whatsoever. Our bidding activity with Aramco remains high and we expect that to continue throughout 2016.

Clay Rikard

Great, thanks. And then just in terms of the guidance it looks like the revenues are now about flat with your initial range but the operating income is up a little bit and I know there are some adjustments in there. But I am just wondering if there has been any change in your expectations for profitability of the business, or some of the regional margins going into 2016?

Stuart Spence

Clay this is Stuart. We’ve increased our guidance from the initial indication that we gave at our Investor Day in 2015, really for two factors, the first is that we are now showing our guidance on an adjusted basis, so we adjusted our restructuring costs, and the second element is around our additional overhead reduction program, we have upped our guidance to reflect some of the savings that we will see in the year associated to that program, which is approximately $20 million.

Operator

Thank you. Our next question comes from the line of John Rogers with D. A. Davidson. Your line is open.

John Rogers

Just first of all another follow-up just relative to the PEMEX situation, what are you expecting to work off in 2016 for PEMEX? In other words how much more work are you due to collect on this year and I guess my anticipation is there a risk on collections there?

Stuart Spence

John this is Stuart. We have two active projects with PEMEX at the moment. We have the completion of PB Litoral which we expect to handover the facility in the first quarter. And then the second contract we have is on Ayatsil-C which is at the early stages it's in the procurement stage. We work with PEMEX extremely closely on the collection side as you’d have seen them in the -- proactively last year they delayed payments through their entire supply chain not just McDermott we are continually given assurances by PEMEX that it's a timing issue and certainly not an ultimate collection issue and we positively continue to work with them on that basis.

John Rogers

Okay. But I mean orders of magnitude revenue, what is -- how does that?

Stuart Spence

Sure, on the remaining scope of PB Litoral and the Ayatsil-C we would probably have around $80 million of exposure on those contracts.

John Rogers

Okay, great. That’s helpful. Okay, and then secondly your comments relative to how did the year plays out due with the cash flow being more weighted towards the first half. I assume that’s also true of the way you’re thinking about operating earnings?

Stuart Spence

Yes, in our guidance we said that our operating income would be slightly weighted to the first half of the year. We would expect our cash profile to be similar, but obviously driven by our PEMEX collections that we’re currently working on.

Operator

Thank you. Our next question comes from the line of Martin Malloy with Johnson Rice. Your line is open.

Martin Malloy

I was wondering maybe if you could give us a little more help in terms of potential timing of the awards. As you look to the Middle East and there has been some in the press some significant projects that are, according to the press expected to be awarded first half of this year?

David Dickson

Yes, Martin we have -- as we look at our bid pipeline we have several outstanding bids which are in the Middle East. So that includes both Saudi and Qatar. And in discussion with our customer, we would expect some of these to be awarded to whoever successful in the first half of this year.

Martin Malloy

Okay. And then any update on the IO joint venture with GE?

David Dickson

Yes, we continue to develop IO. We more recently we just had an executive review of IO. IO is working on some study that as we have said many times before IO is looking at what I would call development and production solutions for our customers across a broad range of activity. So, it is just not subsea but also looking at how it can resolve in some areas gas compression issues for our customers so we’re looking at a blend our studies which are ongoing at the moment. So we’re very satisfied with the progress that IO has made today.

Operator

Thank you. Our next question comes from the line of Brian Konigsberg with Vertical Research Partners. Your line is open.

Brian Konigsberg

Can you expand a little bit more on your JV with L&T? Obviously you got the award national award in Q4, if their market has been described previously just very aggressive from a competitive standpoint. Just kind of you talk about, do these margin -- does the margin profile fit the traditional margins you see in those markets? And what can you do to protect yourself to the extent there is their collection which is just quite aggressive on pricing, maybe terms?

David Dickson

Yes, Brain if you look at the India market, particularly the ONGC is, that is a market which is forecasted to grow over the next few years. And as we looked at India, and we wanted to look at more from a long-term strategic point of view, McDermott had been in India for several years previously but this is obviously in the emerging market which includes both shallow and deepwater. And as we looked at this, we were respecting the fact of that is a move for local content in India, but we also know that local content in India also provides some benefits in terms of cost. So very early on before we actually submitted our bid, we started some dialogue with Larsen & Toubro to set up this joint venture should I say agreement between us, which we also announced today and that was very strategic as part of winning the Vashishta award. We also looked at our execution to ensure that a large piece of the work was executed in India, taking advantage of L&Ts facilities, and also taken advantage of what is lower cost execution. So we’re very happy with this. And also positions a Company extremely well as we look at further bids which we expect will come through from -- as bids will come from ONGC through 2016.

Brian Konigsberg

Got it, thanks. And then just secondly, can you just touch a little bit more on the restructuring. So you are not spending a whole lot in getting quite a bit of savings riding well above 100% return. Can you just give me first of all more detail on exactly the plans you are intending to implement, and just why the savings are actually so strong?

Stuart Spence

Sure, Brain. This is Stuart. As our management team looks at our overall cost structure towards at the end of the fourth quarter, we still felt that we could make some more efficiency-based savings, predominantly driven by headcount, but also on some operational initiatives. So we made plans in very late, end of Q4 and we are now starting to execute those. We’re also seeing that as you have noted that we’re not incurring a significant amount of cost to generate return and we’re also not in any way diminishing the competency capability, or capacity of the Company. So this is a purely efficiency led drive that we’ll try and wrap-up as much as we can in the first quarter.

Operator

Thank you. Our next question comes from the line of Andrew Kaplowitz with Citigroup. Your line is open.

Alan Fleming

Hi this is Alan Fleming this afternoon, how are you?

David Dickson

Hi, Alan how are you doing?

Alan Fleming

Doing well, David, I guess I'll start off with a question on backlog and revenues. So you have about 2.4 billion in backlog it is set to roll-off in ’16. I think that's mostly flattish first what you had last quarter. So maybe you could just talk about your confidence in getting to that 2.9 billion? It looks like maybe you even you took off the bottom-end of that range if you had at your Analyst Day. So are you going to -- do you think you can get there with just scope changes and maybe some book and burn work? Or do you need one or two more decent sized bookings in the first-half of the year to get there?

David Dickson

So, if I look at it, obviously, we look at it historically we are an organization that generates a certain percentage of revenue from change orders has been through our activities. And over that previous year, and that’s the range between 7% and 14% of our existing revenues. We also have book and burn work, which traditionally run in places like Gulf of Mexico and in Asia. The other area is obviously new awards. And as you look at our pipeline revenue, you see a slight change from that was in Q3, so that’s also reflective. But even in this current environment our bidding activity again particularly in the Middle East remains robust. And we would expect those projects to be awarded by the customers through this year. So as we think about our current 2.4 billion of revenue in the current backlog, and as we look at it and compared it to last year, I think we see that there is sufficient opportunities there to meet the guidance that we have given today.

Alan Fleming

Okay thanks David, I appreciate that. And then maybe Stuart a question for you on utilization, I think in your prepared remarks you mentioned that it remains kind of a focus for you guys. Are there any changes to the expectation you laid out in November in terms of how we should think about asset utilization in 2016? I think you had talked about under-absorption in fab being higher as you move through the year. Is that still the right way to think about it? And is there anything you guys can do to support vessel utilization levels in 2016 short of just winning new work?

Stuart Spence

Yes Alan so if you look at the utilization outlook for 2016, generally it is in line with the discussion that we had around our Investor Day. It’s at a higher level, materially higher level than 2015, hence the focus within the Company. We are looking at specific strategies, as David mentioned earlier. We are looking at fabrication only strategies to absorb the fixed cost structure of our facilities. And we’re also looking at various opportunities, either on the spot market or supporting existing contracts that we have with the vessel fleet that we have. So, we are continually looking at new ways and different ways of generating additional marine utilization as we move through 2016.

Operator

Thank you. Our next question comes from a line of Matt Tucker with KeyBanc Capital Markets. Your line is open.

Matt Tucker

I believe at your Investor Day oil was trading around $40 per barrel. It's obviously taking other your leg down since then. Based on your bids outstanding, your target list or guidance doesn’t seem like a lot has changed. But could you comment on any kind of high level changes you are seeing in customer and/or competitor behavior just since your Analyst Day in reaction to this next leg lower-end prices?

David Dickson

Hi Matt, it's David Dickson here. I would say since our Investor Day, which was only some two months ago, we haven't seen any, what I would say our material changes. Obviously, we have had some success since then with the awards in India. And obviously we announced the award of the pipeline in Australia, the Greater Western Flank 2 project. So we’re starting to see projects come. Clearly the macro environment is going to be with us for some time. And I am not going to go into dialogue about how long that is likely to last. But as I said that if you look at our pipeline of bids, you see there a split, of something like 70% is in our let's call it our traditional and conventional offshore business and that looks like to continue on this path, whilst we see some of the deepwater projects obviously being more challenged in this cost environment. So, a big focus again is on areas such as Middle East, such as Mexico, and some parts of Asia. So as I said earlier in my prepared remarks, I feel that as an organization we’ve extremely well-positioned and with a new cost structure, even more competitive that this is hopefully are in a reasonable position as we bid work through 2016.

Matt Tucker

Thanks David that’s very helpful. And then apologies if I missed this, but the execution schedule for Greater Western Frank I guess when does execution start to ramp-up there?

Stuart Spence

This is Stuart. The Greater Western Flank project will begin -- we will be doing engineering and some procurement this year and the main installation happens in 2017.

Matt Tucker

Great, thanks. And then just last one, just one up on the guidance. I just want to be clear that I kind of understand the moving pieces. It sounds like you were including about 5 million in restructuring in the initial guidance, that’s now close to 10 million, and you have pulled that out of the adjusted guidance. And then there is 20 million improvement expected as a result of the most recent restructuring decision, is that accurate?

Stuart Spence

This is Stuart. That is an accurate description, yes.

Operator

Thank you. [Operator Instructions] And I am showing no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Kathy Murray

Thank you very much. And thanks again for participating today. Operator, this concludes our call.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!