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Oceaneering International (NYSE:OII)

Q1 2012 Earnings Call

April 26, 2012 11:00 am ET

Executives

Jack Jurkoshek - Director of Investor Relations

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

Marvin J. Migura - Executive Vice President

W. Cardon Gerner - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Analysts

Jonathan Donnel - Howard Weil Incorporated, Research Division

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Waqar Syed - Goldman Sachs Group Inc., Research Division

Tom Curran - Wells Fargo Securities, LLC, Research Division

Edward Muztafago - Societe Generale Cross Asset Research

Joshua W. Jayne - Simmons & Company International, Research Division

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

Michael R. Marino - Stephens Inc., Research Division

Operator

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2012 First Quarter Earnings Release Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to your host, Jack Jurkoshek. You may begin your conference.

Jack Jurkoshek

Good morning. I would like to thank you for joining us and our first quarter 2012 earnings conference call. As usual, a webcast of this event is being made available through 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 we make during the course of the call regarding our earnings guidance, business strategy, plans for future operations and industry conditions are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

M. Kevin McEvoy

Good morning, and thanks for joining the call. I'm happy to be here with you today. Our record first quarter EPS of $0.47 was above our guidance range of $0.44 to $0.46 and was up over 20% compared to the first quarter of 2011. Year-over-year, all of our business segments achieved higher operating income led by remotely operated vehicles. We are well-positioned to participate in the next growth stage of Deepwater and subsea completion activity. And our outlook for 2012 remains very positive. We are maintaining our 2012 EPS guidance range of $2.45 to $2.65, another record earnings year.

For our services and products, we expect continued international demand growth and a moderate rebound in overall activity in the Gulf of Mexico.

Yesterday, we announced an increase in our regular quarterly cash dividend to $0.18 from $0.15 a share. This underscores our confidence in Oceaneering's financial strength and future business prospects.

I'd now like to review our first quarter oilfield segment results. Year-over-year, ROV operating income improved on the strength of higher demand in most areas of the world, particularly in the Gulf of Mexico and off West Africa. Our ROV days on hire increased 17%. Sequentially, operating income declined slightly due to geographic mix changes and normal seasonality. Our fleet utilization rate during the quarter was 79%, up from 71% in the first quarter of 2011 and flat with the fourth quarter of 2011. We continue to expect that our fleet utilization for the year will be 80% or more.

Operating margin during the quarter was 29%, the same as a year ago and last quarter and slightly down from the 30% average last year. We continue to anticipate our ROV operating margin for the year 2012 may be slightly higher than that of 2011.

During the quarter, we put 5 new ROVs into service and retired 2. At the end of March, we had 270 systems available for operation, up from 260, a year ago. Three of the new ROVs went to work on board vessels, and 2 went into drill support service on rigs. Our fleet mix during the quarter was 78% in drill support and 22% on vessel-based work, the same as last quarter and about the same as the 79-21 split in the first quarter of 2011.

We still anticipate adding 20 to 25 vehicles to our ROV fleet in 2012, 15 to 20 during the remaining 3 quarters and we presently have contracts for 19 of these. Some of these expected start days could, however, slip into 2013.

Now turning to Subsea Products. Year-over-year, first quarter operating income increased on higher demand for tooling and our Subsea Hardware. Primarily due to project timing, operating income declined sequentially on lower demand for Subsea Hardware and Installation and Workover Control System, or IWOCS services. Consistent with our expectation, products operating margin of 17% for the quarter was less than the 18% result for the first quarter of 2011, 21% of last quarter, and 18% for all of last year. For the year 2012, Subsea Products margin may be slightly lower than 2011 due to an anticipated change in mix. However, we continue to expect a record segment operating income for the year.

Our Subsea Products backlog at quarter end was $402 million, up from $382 million at the end of both March and December of 2011. Year-over-year, and sequentially, the backlog increase was attributable to tooling. Since the end of the quarter, we announced the award of Petrobras' Whales Park Umbilical Contract that added $70 million to our products backlog.

As for our remaining business operations for the first quarter. Year-over-year and sequentially, Subsea Projects operating income was higher, due to the commencement of field support vessel services contract with BP offshore Angola. The improvement was also partially attributable to the addition of the Ocean Patriot to our Gulf of Mexico fleet and our field operations in Australia acquired with the AGR FO in December 2011.

Year-over-year, asset integrity operating income improved on higher international service sales. Sequentially, operating income was about the same. Compared to prior periods, asset integrity operating income margin declined. This was due to a low profit contribution from the operations acquired with AGR FO and poor execution on a project in the U.S. The low profit contribution from the acquired operations was attributable to seasonality, integration costs and operational inefficiencies. We anticipate this segment's margin will return to the historical double-digit range in the remaining quarters of this year.

When we combine the Subsea Projects and asset integrity contributions made by the operations we acquired with AGR FO, the results were slightly below expectation. Not surprisingly, we have hit a few snags as we climb the learning curve on integrating such a diverse operation into Oceaneering. However, we continue to gain confidence that the acquired operations are a good fit and will achieve the expected economic return.

In summary, our first quarter results were above our expectations, and we look forward to realizing another year of record EPS performance in 2012. Our focus on providing products and services for Deepwater and Subsea completions, positions us to participate in a major secular growth trend in the oilfield services and products industry. We were pleased with our cash flow generation capability as demonstrated by $116 million of EBITDA during the quarter. Capital expenditures for the quarter totaled about $93 million, of which $62 million was invested in ROVs and $9 million was spent on the acquisition of a U.K. inspection company.

Now let's talk about our 2012 EPS outlook. As I stated earlier, we are reaffirming our 2012 EPS guidance range of $2.45 to $2.65. Compared to 2011, we expect all of our operating business segments will achieve higher operating income in 2012; ROVs on greater service demand off West Africa and the Gulf of Mexico; Subsea Products on the strength of higher tooling sales and increased throughput at our Umbilical Plants; Subsea Projects on the international expansion of our deepwater vessel project capabilities working for BP offshore Angola and a gradual demand recovery in the Gulf of Mexico; asset integrity on higher international service sales including the contribution of the operations acquired with AGR FO; and advanced technologies on an increase in entertainment projects and improved execution on U.S. Navy vessel service work. I believe we are well prepared for the opportunities we face in 2012 and have the assets in place to take advantage of growing international markets and resumption of non-drill support activity in the Gulf of Mexico.

For 2012, we anticipate generating over $550 million of EBITDA. Our balance sheet and projected cash flow provide us ample resources to invest in Oceaneering's growth. Our CapEx estimate for this 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 in 2012 will be on earnings growth and investment opportunities both organically and through acquisitions.

Moving on to our second quarter outlook. We are projecting EPS in the range of $0.64 to $0.68. Sequentially, we anticipate quarterly operating income improvements from all of our oilfield business segments: ROVs, due to an increase in fleet days on hire, seasonable -- seasonal pickup in demand for construction work, and growth in both domestic and international demand for drill support services. Subsea Products on the strength of a higher profit contribution from tooling sales, Subsea Projects on an escalation of work for BP offshore Angola and a seasonal demand rise in the Gulf of Mexico and asset integrity due to seasonal demand increase and improved execution.

Looking beyond 2012, we remain convinced that our strategy to focus on providing services and products to 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. A late 2011 industry report forecast total annual worldwide exploration and development spending to grow nearly 50% by 2015, while capital expenditures on Deepwater projects are expected to more than double. Therefore, we anticipate demand for our deepwater services and products will continue to rise and believe our business prospects for the next several years are promising.

In the ROV market, I am going to focus on opportunities where our value-added service is recognized; for now, that means customers other than Petrobras in Brazil. At the end of the quarter, there were a total of 93 new floating rigs on order. 53 of these rigs are not contracted to work for Petrobras in Brazil, and we expect all of them will go to work for other operators. On these 53 rigs, 8 ROV contracts have been let, and we have won 7 of them, leaving 45 ROV contract opportunities left to be pursued outside of Petrobras in Brazil. At the end of March, 91 of the 131 high-spec drilling rigs, consisting of dynamically positioned fifth and sixth generation semis and drill ships, were not contracted to Petrobras in Brazil. We had ROV contracts on 69 of these, for a market share of 76%. If all 53 of the non-Petrobras rigs I mentioned are placed into service, this fleet of 91 will grow 58% to 144 rigs.

Looking forward, we see no reason why we will not continue to be the dominant provider of ROV services on these rigs. An additional new floating rig has been ordered on spec since the end of the quarter. So with 54 rigs on order, not contracted to Petrobras in Brazil, the visibility of the secular growth outlook for this market remains very promising. Each additional floating rig represents an opportunity for us to put another ROV to work in 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 2012 to 2016 includes an 80% increase in tree orders over the previous 5 years. In 2012, subsea tree orders are projected to be about 560, an all-time high, eclipsing the previous record of 462 trees in 2006 by over 20%. While we don't make trees, orders for subsea trees drive demand for a substantial amount of the ancillary equipment that we manufacture. For example, Quest is forecasting nearly a 50% increase in umbilical orders in the 5-year period 2012 to 2016 compared to the prior 5-year period. Furthermore, renewed industry and regulatory emphasis on safe and reliable operations is providing us additional opportunities to demonstrate our capabilities. With our existing assets, we are well positioned to supply a wide range of the services and products required to support the safe deepwater efforts of our customers. We believe Oceaneering's business prospects for the long term remain promising. Our commanding competitive position, technology leadership and strong balance sheet and cash flow, enable us to continue to grow the company and we intend to do so.

In conclusion, our results continue to demonstrate our ability to generate excellent earnings and cash flow. We believe our business strategy is working well over both the short term and the long term. We like our competitive position in the 2012 oilfield services market, and are leveraged to what we believe will to be a resumption of growth of deepwater and subsea completion activity. 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 are anticipating that we will achieve another record year of EPS performance. We think this distinguishes Oceaneering from any other oilfield service companies.

We appreciate everyone's interest in Oceaneering. 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 Jo (sic) [Jon] Donnell with Howard Weil.

Jonathan Donnel - Howard Weil Incorporated, Research Division

I had a question on the project segment. Clearly, a very good quarter for you here. It came in well above our expectations. I was wondering if you could maybe break that down a little bit for us. I know you had the ramp up of the BP Angola project, but my understanding was, that was going to be more gradual over the course of the year. Could you kind of just break out how much of the contribution came from that? And kind of where that project stands relative to your expectations when it's fully running?

Marvin J. Migura

Jon, most of the improvement came from the BP Angola contract. And we do -- I mean in -- it's pretty much on course for what we had expected, and we do expect it to ramp up in Q2 and hit full stride in Q3.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay. And at that point, will all the -- will you have all your vessels working for it there that are scheduled for it, with all the corresponding ROVs as well?

Marvin J. Migura

We should have everything in service, working by the end of Q2.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay. That's helpful. And then, I guess, sort of related to that too, typically we see the seasonal slowdown in Gulf of Mexico in that segment as well. Was that maybe less impactful this quarter than we've seen in the past? And I know it's a callout market here but could you talk a little bit about how you see that unfolding as we go out into the summer months?

Marvin J. Migura

I think we did have the seasonal slowdown, just exactly as normal. And the weather was pretty bad, but we did have another asset. So the Ocean Patriot made a contribution, and also the operations in Australia acquired from AGR FO.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay. And then -- but your outlook is that, that seasonality will reverse itself as is typical here as well, just from the best of your limited visibility right now?

M. Kevin McEvoy

That is our expectation, but as you say, it is a callout, and visibility is not real strong. But we do expect it to pick up, yes.

Operator

Your next question comes from the line of Brian Uhlmer with Global Hunter.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

I have a question. You're discussing a moderate uptick and ramp-up in the Gulf of Mexico in '12. Are we expecting to see some pent-up demand as we move into '13, that would -- should accelerate that a little bit more?

M. Kevin McEvoy

Well, it's hard to say. I think that the drilling side is clear, is going well. And that's not an issue. The other activity is still a little weak. I think that independence activity is still very, very low, and I don't see anything that looks -- that will change in the near term. I think in the longer term, it is very good outlook with the larger projects that are in the stream there, but that'll be a little ways down the road. But hopefully, it will pick up more than -- it'll certainly be better than it was last year, no question.

W. Cardon Gerner

And Brian, I think it's very important that we underscore what Kevin said. When we're talking about a gradual recovery in the Gulf of Mexico, we're talking about non-drill support activity.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

On -- so on the project side more so?

W. Cardon Gerner

Projects and products and ROVs, and own vessel base.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Right, right. Now do you guys have an internal forecast for Gulf of Mexico floaters that you're willing to share, that you expect for 2012 and moving into 2013 that kind of drives those estimates?

M. Kevin McEvoy

Wait, we do have some statistics there. They're public.

W. Cardon Gerner

But just again, you're just asking -- I mean, I just want to be clear on this Brian, the floaters are all drill support and then yes, so what we -- so what we do have -- yes, we've got some good stats.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay, fair enough...

W. Cardon Gerner

Hey, Kevin was jumping in.

M. Kevin McEvoy

Yes, I mean, as of yesterday, there were 32 floating rigs under contract in the Gulf, and we had the ROV contracts on 31 of them which included 34 systems. In comparison, pre-Macondo, we had 31 ROVs on 31 of the 36 rigs working in the Gulf. So that is as of today and right now, the expectation is that 8 more rigs are coming to the Gulf of Mexico during the course of the year and right now, we have contracts on 5 of those.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

For how many ROVs? Are they all one per or you have some...

W. Cardon Gerner

Yes, no. I think we should just -- yes, just consider that.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Okay, good enough.

M. Kevin McEvoy

So there'll be 39 rigs working in the Gulf of Mexico if those all come as currently announced and scheduled, and we'll have ROVs on 35 of them.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Perfect. And an unrelated follow-up. You mentioned integration and acquisition and how that's coming along, could you maybe provide a little more detail on some of the initiatives that you have; specifically, you've talked about targeting the Australian market previously. And how those initiatives are coming along? And if we can start to try and model that into our 2013 estimates? Or back path to '12 and into '13?

M. Kevin McEvoy

I don't think we're prepared to give any more detail or color on that. I mean it's a -- it was a large acquisition, a lot of moving pieces. And as we did state, we're confident that we will be back on stride in the second, third, fourth quarters of this year. And it's really just the normal stuff that goes on in trying to acquire and integrate a large company like that.

Operator

Your next question comes from the line of Waqar Syed from Goldman Sachs.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Just on Petrobras, you mentioned, low probably market share, but is that 30% kind of market share sustainable for new rigs with Petrobras? Or you think going forward it could be much less than that?

Marvin J. Migura

Jack, you got some stats on that.

Jack Jurkoshek

Yes. I mean, as the Petrobras ROV fleet continues to grow and we're winning these large tranche orders that they're having out there, our market share is going to decrease. No question about that. What it will ultimately get to, I don't know. I mean because there is another bid on the Street that has been opened, and we are third bidder in that. And as it stands right now we do not expect to win that and now there are 2 others ahead of us. And so that is anywhere from 12 to 24 but how that all plays out, we'll just have to see.

Marvin J. Migura

And just to give you some color, we were third, and the price we offered was about 25% higher than that of a low bidder, which was a local Brazilian company that, to our knowledge, doesn't own any ROVs. And according to the bid document, 11 of the ROVs of that 12 to 24 will be used to replace older vehicles on named existing rigs. And we happen to be on 4 of those 11. And our contracts for those 4 expire in the third quarter of 2013, and we don't know, the bid was not specific as to: a, whether it was 12 or 24; or b, what was going to do -- what Petrobras intended to do with the remaining 13, after you account for the 11. So as long as we're not winning the global tenders because we're not willing to take our price down to where it makes no sense for us, I would expect our ROV market share for Petrobras in Brazil, and we're being very specific about that. We love Petrobras outside of Brazil. We love non-Petrobras operators in Brazil because we think they buy in to the value proposition that we offer. So we're focused on the -- those opportunities excluding Petrobras in Brazil, and that's why we're starting to report on that now.

Waqar Syed - Goldman Sachs Group Inc., Research Division

That makes sense. That's helpful. The other thing I wanted to address is, for the new builds that are coming in, the new build deepwater rigs, you probably could imagine demand growth about 1 to 1.2 or so, on the drill support side. What incremental -- and can you quantify like what incremental or what the past patterns have been in incremental demand for ROV has been created on the construction side with the new build rigs coming in?

Marvin J. Migura

It's really hard to draw a correlation. I mean, most of the vessel-based activity goes in to field maintenance and installation support. That type of light construction or intervention -- subsea intervention. So I -- we don't have a correlation between new builds, rig deliveries and increase in vessel-based activity. I think it's much later, when the rigs find something and there's a field to work on, is when they put ROVs on boats.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Right. But if you look at the historical pattern, and if you see how the rig count has increased and how the ROV per rig has changed, is there a certain number that has happened? Or has it gone from...

M. Kevin McEvoy

I don't think we look at the business that way. We don't evaluate it that way and don't anticipate it that way. So I don't think that -- we don't see that as a correlation that we would ever do any kind of business planning on. We watch the market day by day, opportunity by opportunity. And we build ROVs to match up with those opportunities as they come. And so guessing about what it might be past that is not helpful to us.

W. Cardon Gerner

And we really maintain 2 separate lists. We have a list of new builds and existing rigs that we track who's on it. And then, we have a list of new vessels and vessel tenders for ROVs that are coming out or operator tenders. And I mean, the vessel list is very long. But it's a much wider open field for ROV providers.

Operator

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

Tom Curran - Wells Fargo Securities, LLC, Research Division

So while we're on Brazil, I guess 2 questions there. The first pertains to the ROV's business. Given Petrobras' expanding weight of incremental demand related to Brazil, how much could that constrain potential weighted average pricing power for you with the ROVs? And one of the reasons I'm asking is because, over the course of the last up cycle, many of us were positively surprised by the pricing power you ended up demonstrating for ROVs globally. And so I'm curious how much Petrobras in Brazil's increasing weight could potentially limit the pricing power you might see over the balance of this up cycle.

W. Cardon Gerner

Not much if we're out winning the work, right? I mean, it really is a different market. I mean...

M. Kevin McEvoy

Most of that variability is also in the vessel base part of our business where increased utilization and spot market type pricing can contribute to higher margins if you get strong enough continued utilization there because it's shorter-term work. So that really is something that's totally outside of Brazil in terms of our business.

W. Cardon Gerner

And if we had taken a different philosophy and said we're going to maintain market share, and we're going to go after work for Petrobras and we're going to win and be the low-cost provider, and cut our rates 25% and add 12 to 24 ROVs to a fleet of 300, then there really would be an impact. And that would be noticeable. But since our philosophy is just the opposite, that we will not bid work that's not economic, then I don't see how Petrobras is -- wait, I think the growing market, and that's what we're trying to show today, that still more than half of the rigs on order are not going to Petrobras. And the high-spec fleet that's not with Petrobras, we have 76% of, it continues to grow and will continue to grow. So no doubt that PBR in Brazil has increasing but...

M. Kevin McEvoy

Weight. I don't think that affects anything outside of Brazil, if that's where you were going now.

W. Cardon Gerner

Yes. I don't think it does.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Okay. And then turning to the umbilicals market. Could you provide us an update on #1 in Brazil, for pre-salt, does it still look as if they're going to attempt to develop much of that with armor wire reinforced thermoplastic as opposed to steel tube? And then #2 on a global basis, what are your thoughts and what was your reaction to Aker's latest announced investment in a new plant in Pekan, Malaysia?

M. Kevin McEvoy

Okay, the answer to your first question is yes. They are sticking with their non-steel tube designs. There are some different hose elements in there and higher pressures that have to be qualified in terms of the new cross-section. But they are still holding to their philosophy of high collapse resistant hoses as opposed to steel tube. On the second question, of course, since we've been saying for some time that there is twice the capacity in the marketplace as demand, it was not a cause for celebration here that there's yet another plant being built somewhere. And I can only imagine that their strategy is, it's closer to Australia, and so that is going to help them. Although, it can't be helping them where they have their other plants, so I don't know, we're wondering why they did buy that.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Okay, helpful. And then last one for me, turning to Subsea Projects, could you give us an update, just broadly in terms of the slate of international opportunities out there, specifically obviously, for the 1 DP vessel that's idle and is eligible to redeployed and then perhaps others, that might not be readily obvious.

M. Kevin McEvoy

The one that's idle, I'm not sure I'm with you.

Tom Curran - Wells Fargo Securities, LLC, Research Division

I thought you saw the -- an idle DP vessel in the Gulf of Mexico within Subsea Projects?

M. Kevin McEvoy

We have -- we added a DP vessel in the diving side of the business in the Gulf of Mexico. Our other several vessels are in the callout market. And in any given day, they might be idle, but they are working actively in the marketplace, all of them.

Marvin J. Migura

And it is true that the OI-IV could go international, easier than the other, intervention 1 and 2. But right now, we continue to look for term work. And we don't have -- I mean, we have a prospect list but we're not going to share with you what specific jobs we're chasing and...

M. Kevin McEvoy

I think the main thing to think about here is that while we are looking for the right opportunities that fit our business model for wanting to work internationally with a vessel, I would not be expecting this to be some big growth bang in a short term that's going to affect this business. We have what we have. And if we get another job internationally, fine, but there are few and far between that really fit the model that we are trying to follow here.

Marvin J. Migura

Right and we are chasing those few but I really don't think that's something that we should be anticipating. I mean, we're help -- we're -- we want to make sure we execute very well for BP in Angola, so that we can build this book of work. But right now, we're looking for the right next job.

Tom Curran - Wells Fargo Securities, LLC, Research Division

Sure and that makes sense. And if BP were to exercise its option it has to expand the scope of that contract, what would be the earliest, you'd expect them to do that?

M. Kevin McEvoy

That's pretty hard to say. I mean, I think our expectation currently is that, that would be a 2013 event. But they've given us no color on that, and so that's as good as we know at the moment.

Marvin J. Migura

And we don't think that would be one of our boats.

M. Kevin McEvoy

No, no, no. It would not be one of our boats more than likely. But it would be more ROVs and the rest of it so.

Marvin J. Migura

Right.

Operator

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

Edward Muztafago - Societe Generale Cross Asset Research

I'm just wondering on the Subsea Project segment, obviously, the BP project in Angola ramped up, it seems like maybe a bit quicker than we expected. Wondering if you could just kind of help us understand or think about what the potential for margin uplift there is, over the next couple quarters as that project kind of gets to its full run rate.

Marvin J. Migura

Real hard to -- I mean, you got -- it is too many variables and including what's the pickup going to be in the Gulf of Mexico. So we have it modeled, but we're not willing to share that, because we're just -- we're not confident enough that we can give guidance on margin. And we just know it's going be better than last year.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. Maybe can ask it a little different way. In terms of the overall cost that you have to absorb from the project, do you guys think you -- that you've absorbed more than half of the costs already?

Marvin J. Migura

Not sure. Not sure I got that understood, but I mean, most of the cost that we incur or just job or project related and expensed is part of the work. And the other cost such as the mobilization, that can be deferred over the life of the contract. And then the CapEx is going to be depreciated over the normal. So the ROVs that we bill for -- I mean it's -- I mean, the answer is we've incurred way more than half of the cost we needed to, to get the project started, but it's really not kind of like flowing through at any -- not a normal basis. And so, I can't really go too much further than that.

Edward Muztafago - Societe Generale Cross Asset Research

Okay. That's helpful. And then, just as kind of a second question. We obviously have the Central Gulf lease sale, now planned for the middle of the year. And just wondering, in your minds, if we see a very strong central lease sale, how could that potentially change your outlook for the back half of the year? Or is that really more of a 2013 type event for Oceaneering this year?

M. Kevin McEvoy

It would not change our outlook for this year at all and I doubt it would change it for 2013. Because typically, once operators get a new lease, they're going to spend some period of time: a, before they get around to even doing anything with it; and b, once they do start doing some drilling and whatnot, projects are several years out. So I wouldn't expect that to impact us at all.

Marvin J. Migura

And we really do have a pretty good outlook for Gulf of Mexico drilling, if we're going to have 39 rigs drilling at the end of the year. So I think that's a strong -- and maybe some will slip into '13, but there are 31 here today and 8 more on the way.

M. Kevin McEvoy

And I think the time lag is, what it is for these big projects. I mean the majors seem to be targeting the deeper water parts of the Gulf of Mexico these days, and they are making discoveries. And I mean, you know the names of all the ones that are out there, and generally, we are not participating on the installation of those facilities. But it offers a building book of potential intervention business for us, which is really our core business in the Gulf of Mexico on the ROV vessel-based project work that we do. So we see that as a very positive sign. And whenever this really starts up in terms of the Subsea intervention aspect of it, it looks like there's going to be a good run of projects out there to keep it going.

Edward Muztafago - Societe Generale Cross Asset Research

That's fair. And then, you obviously get a -- sort of a seasonal decline off the boats in the first quarter on the ROV side of the business. But given where the field construction and maintenance side of business is in the Gulf, was that reasonably de minimis in the first quarter of this year?

M. Kevin McEvoy

I mean...

Marvin J. Migura

No, no. I mean we had serious as normal seasonality in our vessel-based ROV utilization as normal, I mean we...

Edward Muztafago - Societe Generale Cross Asset Research

Okay.

M. Kevin McEvoy

Is that what you were asking?

Edward Muztafago - Societe Generale Cross Asset Research

Yes, yes, just trying to understand, I mean obviously, the utilization rate was basically flat from quarter to quarter. But absent that seasonal decline, the core utilization rate would've been higher than that. So that's all I was trying to understand.

M. Kevin McEvoy

Okay.

Marvin J. Migura

I think there's a lot of mix going in to the geographic mix in there. It's not just Gulf of Mexico vessel based. I wouldn't jump to that conclusion.

M. Kevin McEvoy

Right.

Operator

Your next question comes from the line of Josh Jayne from Simmons & Company.

Joshua W. Jayne - Simmons & Company International, Research Division

Quick one on projects, I know we've talked about it a lot but just to ask it a little bit differently. I just want to understand the revenue side from a seasonality standpoint because we've gone from a business that was predominantly Gulf of Mexico, now with a lot more international weighting. Could you just talk about if we sort of stripped out the BP contract, what we would be expecting in a normal year from a seasonality standpoint?

Marvin J. Migura

No. We would be then be talking about how much -- there's too much granularity. If we talk about that, we would be talking about exactly how much revenue we're billing BP and we prefer -- and we don't disclose individual contract details. Sorry about that.

Joshua W. Jayne - Simmons & Company International, Research Division

Just directionally. I mean because now there's the AGR component. I mean could you provide a little bit of color around that, differences between Q1 and then, how it might progress over the year? Or you guys aren't going to give that out?

Marvin J. Migura

We're not going to give that.

M. Kevin McEvoy

I think it's -- we're just…

Marvin J. Migura

We're not going to give it out. We're going to wait to see how things develop and unfold. And I know right now, there were a lot of moving pieces. And I appreciate the difficulty to model, and it's difficult to project as well.

Joshua W. Jayne - Simmons & Company International, Research Division

All right. A quick one on the ROV side. Could you update us on how many firm contracts you have for the new ROVs that you're going to put in service for the balance of the year?

Marvin J. Migura

I think Kevin said we have 19. Of the 15 to 20 that we expect to add, but we're...

M. Kevin McEvoy

Some could slip into '13 before they get started though but currently, they're -- we're -- they're on schedule for this year. But that's a moving target, as you know.

Operator

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

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

Just to follow up on umbilicals, I think Brazil and Scotland are doing a little better. I'd imagine Panama City is still the weak link. Could you just, kind of talk about the outlook for Panama City and the outlook for more throughput there?

M. Kevin McEvoy

Well, the Panama City plant is -- the outlook is not great. There's not exactly a lot of activity in the Gulf of Mexico on umbilical orders at the moment. We are sized accordingly for that plant. We are looking for, as we always do, orders from outside the Gulf of Mexico, either Brazil or non-Petrobras operators or West Africa. But it's a very, very challenging market in the Gulf of Mexico right now for the umbilical business.

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

So it's still slow. Would you consider shutting that plant down at all? Or it's just still a long-term asset?

M. Kevin McEvoy

Long term.

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

Long term, got it. Okay and then just one more follow-up on ROVs. Given the...

W. Cardon Gerner

And John, let me just say something about -- I mean, we talked about how drilling ramp up is occurring in Deepwater, Gulf of Mexico. I think the long-term outlook for Deepwater products in the Gulf is just strong. And so it would be very shortsighted to say, why don't we lose all that talent and shutter the plant and then, well, you're not going to get orders when the orders come to the market if you don't have a plant. So we are -- I think we've got a really talented group of people who as Kevin said, have right sized that operation. And I think we're doing the -- not only the economic thing, but we're keeping it alive and well, so that we can do some of the big projects that come along. We are not thinking about shutting down Panama City at all.

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

Okay, great. Makes sense. And then, Kevin, just given the visibility you have on the ROV side, for '13 just on ROV additions. I mean, very bullish out there, would kind of a same addition amount as 2012 be reasonable to assume for '13?

W. Cardon Gerner

It's just too early.

M. Kevin McEvoy

Yes. Yes, it would. Yes, it would.

Operator

Your next question comes from the line of Michael Marino from Stephens.

Michael R. Marino - Stephens Inc., Research Division

Guys, has your outlook for the IWOCS business kind of changed beyond 2012 -- I guess 2012 is going to be a down year, but beyond that, what's your outlook for IWOCS? I guess what I'm trying to get to, has the market changed with maybe a bit of a customer shift to bigger boys in the Gulf of Mexico being less likely to use you guys for the IWOCS? Or is 2012 just a function of activity and kind of timing?

M. Kevin McEvoy

Well, I think if anything, 2012 is more of a normal year than we experienced last year where there was very heavy demand when actually a good portion of that we didn't really see coming. But it was there, and we were fortunately able to take advantage of it. So last year was a particularly good year and we're back to maybe some more normal levels here right now. So there, from our point of view, has been no shift in market demand or our place in the market in the Gulf of Mexico.

Michael R. Marino - Stephens Inc., Research Division

Okay. And you would kind of expect that business to increase with Gulf of Mexico rig count going up and no kind of change to the way you'll track the market.

M. Kevin McEvoy

Well, eventually. But I -- bear in mind that IWOCS units are used for -- in some instances for setting trees, but generally, the drilling rigs are doing that -- more of that than not. And then it's an intervention activity. So it's a question of how much P&A work and/or, well intervention work is there going on. That's really when the IWOCS units are strongest at play.

Michael R. Marino - Stephens Inc., Research Division

Have you all seen any or had any success outside the Gulf of Mexico? I know you've been trying to ramp that business for a while, how is that tracking?

M. Kevin McEvoy

Well, we continue work on that. It is a more difficult market outside of the U.S. We do have a number of units in various locations around the world. So we have had some success in that, over the course of the last couple years. If we -- we would certainly like to grow that business further and are trying to do that. And we are adding some systems that have availability to do that. But it's a kind of a slow process, and there aren't -- the opportunities are not as many. And there's a lot more competition outside the Gulf of Mexico.

Operator

[Operator Instructions] Your next question comes from the line of Waqar Syed from Goldman Sachs.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Just quickly, on the Subsea Products business, could you provide us with a split -- revenue split, between OII, OIE and Emeritus?

M. Kevin McEvoy

No Waqar, we never split all that stuff out. It would be way, way too confusing for all of us if we started doing that.

Waqar Syed - Goldman Sachs Group Inc., Research Division

Okay. Just quantitatively versus the last year 2011 fourth quarter and the first one, in the split shift -- did the split remain the same? Or is it shift more in one direction or other?

Marvin J. Migura

We said that umbilical throughput that products for the balance of the year was going to go up because of increased umbilical throughput. And that margins were likely to go down because of change in mix. I think those 2 go hand-in-hand.

Operator

And there are no further questions in queue at this time. I turn the call back over to the presenters.

M. Kevin McEvoy

All right, thank you very much. We appreciate everyone's interest in Oceaneering. Have a great day.

Marvin J. Migura

Take care.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.

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