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Oceaneering International (NYSE:OII)

Q3 2012 Earnings Call

October 30, 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

Justin Sander - RBC Capital Markets, LLC, Research Division

Michael W. Urban - Deutsche Bank AG, Research Division

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Jonathan Donnel - Howard Weil Incorporated, Research Division

Ian Macpherson - Simmons & Company International, Research Division

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Ole H. Slorer - Morgan Stanley, Research Division

Operator

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to Oceaneering International's Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. Jack Jurkoshek, you may begin your conference.

Jack Jurkoshek

Good morning, everybody. I'd like to thank you for joining us on our 2012 third quarter earnings 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 to Kevin.

M. Kevin McEvoy

Good morning. First, I'd like to begin by saying that our thoughts and prayers go out to everyone affected by the severe storm named Sandy. We hope all of you and your families are safe and out of harm's way.

Now turning to Oceaneering's quarterly results. We are very pleased with our performance which demonstrates the rising demand we are experiencing for our subsea services and products. Overall, our operations performed within expectations, and we remain on track to achieve record EPS for the year.

Our third quarter results were highlighted by an all-time high operating income from our ROV and Subsea Products segments. Given our performance so far this year and our fourth quarter outlook, we are narrowing our 2012 EPS guidance range to between $2.60 and $2.65, up slightly at the mid point from our previous range of $2.55 to $2.65.

We are well positioned to participate in the growth of deepwater and subsea completion activities that is currently underway, and we are initiating 2013 annual EPS guidance with a range of $3 to $3.25. This is up nearly 20% at the midpoint over our expectation for 2012.

For our services and products, we anticipate continued global demand growth to support deepwater drilling, field development and inspection, maintenance and repair activities. This market outlook is supported by industry observations and assessments that deepwater drilling is increasing, subsea equipment orders are escalating and backlog to perform offshore construction projects is at a record high level.

Specifically, in the U.S. Gulf of Mexico, we are expecting 2013 demand for our service and product lines that support deepwater drilling to surpass the level we experienced before the Macondo incident in April of 2010. We are also projecting Gulf of Mexico demand for our non-drill support service and product lines to improve, but not to the pre-Macondo level.

In our view, this level may not be reached for another few years due to the time lag between drilling and subsequent field development activity. Furthermore, we see this time lag lengthening as major and national oil companies now comprise a larger share of the exploration and development activity in the Gulf.

Compared to independent oil companies, the majors and NOCs tend to have larger projects that require more time to evaluate and plan from discovery to first production.

For 2012 and 2013, we anticipate generating at least $590 million and $670 million of EBITDA, respectively. Our balance sheet and projected cash flow provide us ample resources to invest in Oceaneering's growth, and we intend to continue to do so.

I'll talk more about our 2013 guidance later, but first, I'd like to review our oilfield operations for the third quarter.

Year-over-year and sequentially, ROV operating income increased on higher demand for both drilling and vessel-based support services. The 12% year-over-year improvement in ROV days on hire was on the strength of higher demand in the Gulf of Mexico and North Africa. Sequentially, the 4% increase in days on hire was spread throughout most of the geographic areas in which we operate.

Our fleet utilization rate and operating income margin during the quarter were 81% and 30%, respectively, about the same as a year ago. We continue to expect that our fleet utilization for the full year will be 80% or more compared to 77% in 2011. And that operating margin will approximate the 30% we achieved in 2011.

During the quarter, we put 10 new ROVs into service and retired 5. At the end of September, we had 285 systems in our fleet, up from 262 a year ago. 6 of the new ROVs went into drill support service and 4 went to work on board vessels. Our fleet mix during the quarter was 73% in drill support and 27% on vessel-based work compared to a 75%/25% mix both in the third quarter of 2011 and last quarter.

We now anticipate adding at least 33 new vehicles to our ROV fleet in 2012, 5 or more during the fourth quarter.

During the first 3 quarters of this year, we have retired 10 vehicles and currently expect to retire 4 or 5 more during the fourth quarter. I'll address retirements again a little later on in the call.

Now turning to Subsea Products, year-over-year third quarter operating income rose on the strength of increased demand for tooling and IWOCS services. Sequentially, each of our major product categories achieved higher operating income led by IWOCS services and Subsea Hardware. Products' operating margin of 24% for the quarter was a record high, up from 19% in both the third quarter of 2011 and last quarter.

The year-over-year margin improvement was attributable to a favorable mix change to more tooling sales and higher IWOCS services. The sequential margin improvement was attributable to higher profitability on IWOCS services and sales of Subsea Hardware and umbilicals. IWOCS margin improved on an increase in fleet utilization in the Gulf of Mexico. Subsea Hardware margin benefited from higher pipeline repair system and clamp sales. Umbilical margin increased on a favorable mix change to more thermoplastic hose product at our plant in Scotland.

In light of the unprecedented products margin we achieved this quarter, we now anticipate that Subsea Products margin for 2012 will be slightly higher than what we achieved in 2011. We are not, however, expecting to replicate the quarterly margin performance of the third quarter anytime in the foreseeable future.

Products margin in the fourth quarter of this year is anticipated to be in the high teens, similar to that of the second quarter. We continue to expect a record segment operating income for the year.

Our Subsea Products backlog at quarter end was $619 million comparable to the $621 million at the end of June, and up from $403 million a year ago. Year-over-year, the substantial backlog increase was attributable to 2 large Petrobras umbilical contracts we secured during the second quarter of 2012, which added over $190 million to our products backlog. Product manufacturing for these 2 large Petrobras contracts is not expected to be completed until the third quarter of 2015.

As for our other oilfield business segments, Subsea Projects operating income in the third quarter of 2011 included an $18 million gain we realized on the sale of a mobile offshore production system. Excluding this asset sale gain from the comparison, third quarter 2012 operating income improved substantially, primarily due to the field support vessel services contract with BP offshore Angola.

Sequentially, operating income was higher on increased demand for use of our Ocean Patriot to perform saturation diving services in the Gulf of Mexico and offshore Trinidad.

Asset Integrity operating income improved year-over-year on higher service sales in Africa and in Norway due to the acquisition we made in late 2011. Sequentially, operating income seasonally declined. The second quarter is usually the more profitable quarter during any given year for our Asset Integrity services due to scheduling of refinery turnarounds and offshore production platform inspections.

In summary, our third quarter results were very much in line with 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 result of $169 million of EBITDA during the quarter. Capital expenditures for the quarter totaled $65 million, of which $45 million was invested in ROVs.

Now let's talk about our outlook. For the fourth quarter of 2012, we are projecting EPS in the range of $0.68 to $0.73. We expect our fourth quarter EPS to be up year-over-year on operating income improvements from all our oilfield segments, led by ROVs and Subsea Products. Sequentially, we anticipate comparable quarterly operating income from ROVs and Subsea Products. The rest of our business segments are forecast to have operating income declines due to normal seasonality.

Looking forward to 2013, we are initiating EPS guidance with a range of $3 to $3.25 based on an average of approximately 108.5 million diluted shares and an estimated tax rate of 31.5%. We have not completed our detailed planning process, but the big picture changes we envision for 2013 compared to '12 can 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 to support drilling and vessel-based projects and continue to expand our fleet. We are expecting our fleet utilization rate will improve to 82% or more and anticipate adding 30 to 35 new vehicles to our fleet in 2013.

We intend to retire systems when they reach the end of their useful lives with little or no adverse financial impact and will now report these retirements only after they have occurred. Given our fleet size, its average age, and our strategy of operating a modern fleet, we expect to retire annually about 4% to 5% of our fleet. We expect to improve our average revenue per day on hire somewhat at least to cover cost increases and maintain our operating margin. We remain committed to growing our fleet and securing as many new build floating rig and vessel opportunities as possible with customers that appreciate our value proposition.

Subsea Products operating income is forecast to improve on higher Subsea Hardware and tooling sales and increase throughput at our umbilical plants. We continue to foresee a very challenging Gulf of Mexico umbilical market for our Panama City plant due to the aftereffect of the drilling moratorium in 2010 and 2011.

Subsea Projects' operating profit is expected to be better on a full year of work on the field support services contract of BP offshore Angola.

During 2013, we expect a modest demand improvement for diving and deepwater intervention services in the Gulf of Mexico. However, the operating profit from our Gulf operation is expected to be about the same as in 2012 due to a reduction in our vessel availability and an increase in drydock expenses.

4 of the 8 vessels we will be operating in the Gulf are scheduled to undergo regulatory inspections and another will be placed in a shipyard for modifications during the year.

Our Asset Integrity segment profit contribution is forecast to be slightly higher on better execution and improved operational efficiency.

Advanced technologies' performance is expected to increase somewhat due to improved operating margin on U.S. Navy submarine maintenance services and increases in theme park entertainment work and manufacturing projects for the U.S. Department of Defense.

Unallocated expenses are estimated to increase in line with revenue growth.

At the midpoint of our guidance range, we expect our overall operating margin in 2013 to remain approximately the same as anticipated for 2012. Based on our preliminary numbers, we are not anticipating any meaningful changes in our segment operating margins in 2013.

During 2013, we anticipate generating at least $670 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, including -- excluding acquisitions, is $275 million to $300 million. Of this amount, approximately $175 million is anticipated to be spent on adding systems to our ROV fleet and vehicle upgrades.

Our focus in 2013, as it was this year, will be on earnings growth and investment opportunities both organically and through acquisitions.

At this time, we are not providing quarterly earnings guidance for 2013. For those of you who intend to publish quarterly estimates, I'd like to remind you that, historically, our first quarter is the lowest of the year due to seasonality and typically below that of the fourth quarter of the previous year. Furthermore, we tend to have higher earnings in the second half of the year compared to the first.

Looking forward to 2013 and beyond, 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.

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.

At the end of the quarter, there were a total of 95 new floating rigs on order. 62 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 62 rigs, 11 ROV contracts have been let, and we have won 10 of them, leaving 51 ROV contracting opportunities left to be pursued outside of Petrobras in Brazil.

At the end of September, 96 of the 140 existing high-spec drilling rigs, consisting of dynamically positioned fifth- and sixth-generation semis and drillships, were not contracted to Petrobras in Brazil. We had ROV contracts on 72 of these for a market share of 75%. If all 62 of the non-Petrobras rigs I mentioned are placed into service, this fleet of 96 will grow 65% to 158 rigs.

So the visibility of the secular growth outlook for this market remains very promising. And 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 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 should follow.

There is no industry source of information to track vessel-based ROV demand. However, there has been a measurable trend over the last decade regarding the total size of the ROV fleet with respect to the size of the floating rig fleet. Currently, this trend ratio is 3:1, with the number of ROVs to support drilling at slightly over 1 per rig. The existence of the other ROVs is, by default, attributable to market demand for vehicles to support vessel-based work. If this trend ratio of 3:1 persists, and all 90-plus new floating rigs on order are delivered, future vessel demand for ROVs may grow by more than 180 vehicles. We estimate Oceaneering's market share of the global vessel-based ROV fleet at about 20% and see no reason we would not at least maintain this share in the future.

Quest Offshore's latest subsea hardware forecast for the period 2012 to '16 includes an increase in tree orders of more than 75% over the previous 5 years. In 2012, subsea tree orders are projected to be about 570, an all-time high, eclipsing the previous record of 462 trees in 2006 by over 20%. In 2013, tree orders are projected to rise to 640. While we don't make trees, orders for subsea trees drive demand for a substantial amount of the ancillary subsea production hardware that we manufacture. For example, Quest is forecasting a nearly 50% increase in umbilical orders for the 5-year period 2012 to '16 compared to the previous 5 years.

Furthermore, renewed industry and regulatory emphasis on safe and reliable operations is providing additional opportunities for us 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 and long term. We like our position in the oilfield services market, and we are leveraged to the growth of deepwater and subsea completion activity that is currently underway. The longer-term market outlook for our deepwater and subsea service and product offerings remains promising. Renewed industry and regulatory emphasis on reliable deepwater equipment with redundant safety features 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, and that 2013 will be even better. We think this distinguishes Oceaneering from many other oilfield service companies.

We appreciate everyone's interest in Oceaneering, and I'll now be happy to take any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Justin Sander with RBC Capital Markets.

Justin Sander - RBC Capital Markets, LLC, Research Division

Just a few questions here on the utilization front and the outlook for '13. So continues to be real solid at 81%, though below the mid 80s achieved in 2006 to 2008 period. Can you just talk about some of the critical factors that we should keep an eye on to drive utilization higher and towards that 80% average in the coming quarters? And then also maybe some of the gating factors, whether its labor or anything else that may keep you from getting back to the mid 80% range beyond 2013?

M. Kevin McEvoy

I think the primary driver to that utilization really is the vessel-based activity. And so as you see a strengthening in that market, bigger backlogs on the construction, installation companies is probably a good proxy for what will follow thereafter. And so that really is the primary driver, and we see that strengthening next year as it did this year compared to last.

Marvin J. Migura

And we don't see labor supply as being a negating issue. We are spending considerable amount of money on training new crews and recruiting new technicians. So I mean, it is a continuing challenge, but we do not see that as a negating factor that limit our utilization or growth.

Justin Sander - RBC Capital Markets, LLC, Research Division

Okay. So then if you kind of break it out for the 82% number in '13. You were probably talking about drilling support utilization fairly static and then improving on the vessel side to drive the progression going forward.

Marvin J. Migura

Correct. Correct. And we have taken into consideration the new rig deliveries that are forecasted for the rigs that are expected to go to work. We have not forecasted a significant change in the utilization rate of the existing fleet.

Justin Sander - RBC Capital Markets, LLC, Research Division

Got it. And then just a clarification on the ROV operating margins here. So if I understood the guidance correctly, it sounds like operating income in the fourth quarter is looking like the third quarter level. So we should see operating margins downtick a little bit as a result from the 29.7% in the third quarter? And then I assume, going throughout the course of '13, we kind of see that pick up as the utilization picks up. Is that a fair way to think about it?

Marvin J. Migura

Justin, I m trying to understand why if we are expecting margins to be about 30% for the year, why you would be saying that we'd be having a downtick of the 29.7% from Q3. We're looking -- I think the comment was that we're going to have a Q4 for ROVs that is comparable to Q3. And that we're going to stay at around the same as '11 for '12 on a year-over-year margin basis.

Justin Sander - RBC Capital Markets, LLC, Research Division

Got it. I wasn't clear if that guidance was related to the margin or the actual operating income.

Operator

And your next question comes from Mike Urban with Deutsche Bank.

Michael W. Urban - Deutsche Bank AG, Research Division

As you see the shift in mix in the ROV side from drill support to a little more activity on the vessel side and presumably construction-based activity as well, and of course, you have the new builds coming in as well, that would seem to create a tightening of the market that we haven't traditionally thought of the ROV business as one that gets a lot of pricing power, but as you've often said, most of your competitors are in the construction side. Do you see an opportunity to potentially change that dynamic a bit? It just seems like there's an awful lot of activity out there.

M. Kevin McEvoy

Well, there is, but I really wouldn't see that as a driver to increase prices in that sector. Generally in the past when that's occurred, there has not been -- it's not been in a growth part of the business, and so there weren't a lot of new ROVs being produced and entering into the market as there are now. And so I think that sort of mitigates against raising prices from that perspective.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. So we should continue to think of it as more of a volume-based growth story.

M. Kevin McEvoy

Yes.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. And then kind of unrelated, shifting over to the product side, you cited the Panama City facility as being a bit of a challenge as it has been for a while. Do you get to a point where you have to make a decision there on whether to continue with that facility or at some point just given all the activity that is prospectively out there in the Gulf of Mexico, do you just kind of hang on and minimize your costs there and hopefully the volumes pick up as the Gulf of Mexico shifts more from exploration into well construction development mode?

M. Kevin McEvoy

Good question. We are committed to keeping that facility. We are keeping it busy enough to tick over, if you will. And there certainly is visibility to some Gulf of Mexico ordering in the next 2 years or so depending on what the schedule is for major operators and discoveries that have already been made and how that will go. And we are continuing to focus on foreign projects in order to put through that plant to keep it going, but we think it's going to be a good thing to keep, and we're planning to do so.

Marvin J. Migura

Okay. Absolutely, Mike. I think what we've got is a challenge, but I mean, definitely a contributor. We have done -- the guys have done a great job in reducing our cost and chasing international work and winning international work.

Operator

Your next question comes from Stephen Gengaro with Sterne Agee.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Two questions. One pretty simply. Did you say the -- you ended the quarter with 285 ROVs? I just wanted to make sure I had that number right.

M. Kevin McEvoy

Correct.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Okay. Great. And then second, when I look at your balance sheet and obviously you're in a great position from both a balance sheet, but also a prospective cash flow position over the next several years. How do you prioritize use of the cash and how aggressively will you look at giving cash back to shareholders maybe even more aggressively than you already are versus growth opportunity? How do you look at that and actually think about that?

M. Kevin McEvoy

Okay, well, our #1 objective is to grow as it has been. And the priority has been internal organic growth investment, represented primarily by ROVs and then in tooling. And then secondary -- secondly, looking at acquisitions, which unfortunately are few and far between, you know in the space that we're really interested in. Thirdly, dividends, as you pointed out, we just increased that last time at the year anniversary. So we think that's already kind of a little bit aggressive anyway. And lastly would be share repurchases, which we have no schedule fixed for doing so, but we do have an authorization out there which we could exercise if we think the market is right.

Marvin J. Migura

And we did buy 400,000 shares in the second quarter, and I think, directly to dividends, we have no specific plan to increase. But as Kevin said, it's been just since May when we increased the quarterly dividend by 20%. So I think we're going to keep the focus that Kevin said. And right now there is no plan to be more aggressive, but we'll revisit that sort of when it's more prudent to do that. And we think it's more prudent to do it on an annual basis.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

Got it. And then just as one follow-up to that. When you -- is there anything product line-wise, and you may not want to get into so much of that, that you don't own that is sort of directly complementary to what you're doing or are they sort of more sort of smaller niche-y acquisitions that you'd be looking at?

M. Kevin McEvoy

I guess a way to answer that is that while we're not always looking for things that are complementary, we don't see anything that is so strategic that we feel like we're missing something or have to go after something really aggressively. So we're looking for things that are complementary, ideally a product with a service component to it. More than likely, that would be something outside the U.S., but not necessarily so. So that's what really what we're looking for.

Marvin J. Migura

And Steve, I think our focus is, as it has been, to grow geographically with some of our product lines and expand existing product lines geographically to grow the business as opposed to necessarily adding a complementary product through acquisition. But we keep looking.

Stephen D. Gengaro - Sterne Agee & Leach Inc., Research Division

No, you've done it well over the last couple of -- that does make sense.

Operator

Your next question comes from Jon Donnel with Howard Weil.

Jonathan Donnel - Howard Weil Incorporated, Research Division

I had a question regarding the products operating margins and whether there was any contribution from those large Petrobras awards on the top line to 3Q and if that was any of the help on the margin uptick that we saw during the quarter.

M. Kevin McEvoy

No. I mean, that -- that project, both of those projects are kind of long term as we've tried to indicate and really haven't even started to get into the financials yet.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Do you expect that there will be some top line hitting in 4Q? And did I hear correctly that you’d expect the op margins to be relatively flat sequentially here and is that perhaps a contributor to that?

M. Kevin McEvoy

No. Jon. We do expect production in Q4 to have some top line growth, but we did not say that margins sequentially would be flat. We said margins would get back to mid teens -- I mean, high teens.

Jonathan Donnel - Howard Weil Incorporated, Research Division

I'm sorry, I might have said margins, but I meant op income being flat. Okay. That makes sense then.

W. Cardon Gerner

Yes, op inc is correct. Yes, sir.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay. Great. And then I guess regarding the CapEx outlook for next year, it looks like there may be a little bit more going to the non-ROV businesses than what we have seen in the past. Could you maybe give us a breakdown a little bit of where you expect that CapEx spend to be coming from? And I guess is any of that specifically related to the Ocean Alliance upgrade that you all had mentioned earlier during the quarter?

Marvin J. Migura

Jon, I'm sure there's a little bit in for the Ocean Alliance, but we're not going to go ahead and go much beyond -- we don't have a detailed CapEx plan. What we did is, you can see from the numbers exactly the same amount of CapEx as we expect to spend in 2012. And with the ROV adds, we're saying, we're going to roll another one out very similar to 2012. We don't have any more detail of that. We just expect it to be spread among the other segments. But yes, a little bit. I mean, it's not a big modification that's going in for the Ocean Alliance when you look at the magnitude of our CapEx; it's not a needle-moving event.

Jonathan Donnel - Howard Weil Incorporated, Research Division

Okay. Great. And then, finally, from me. Regarding the AGR acquisition, you all had mentioned at the time of that announcement that you had expected it to add about $10 million of op income during 2012. I'm just wondering if we can kind of get an update on how that's progressing from that standpoint. Is there anything, specifically, that you've seen either to the good or bad of that acquisition and how we should maybe think about that going forward relative to kind of the prior expectations that you all laid out there?

Marvin J. Migura

I think everything is going pretty much as expected. And I'm kind of thinking of what we talked about when we did the press release in December. I mean, we're seeing the growth through Asset Integrity and a little bit of activity in projects. I mean, projects, as you know, is being overwhelmed in 2012 in a good way by the BP Angola project, but I don't see any significant change year-over-year coming up because of any changes in AGR.

Operator

Your next question comes from Ian Macpherson with Simmons.

Ian Macpherson - Simmons & Company International, Research Division

I had a question on the ROV unit growth outlook. Is there anything to pull through from the second BOPs that are becoming more common on new build orders for floaters that would relate to more than one drilling support ROV on those rigs?

M. Kevin McEvoy

No, we don't see that. I mean, there could be a onesie, twosie kind of thing where somebody decides for other reasons that they want to have a second ROV. But we don't see that as a trend developing at all.

Ian Macpherson - Simmons & Company International, Research Division

Okay, good. You mentioned for growth, geographic growth in existing product lines, one geography that stands out. It’s not one; I guess it's many that are similar in terms of the North Atlantic and the North Sea, Norway, the harsh environment domain generally. Is that specifically an area that you would like to have more exposure and can you do that organically or is that something that would be more inorganic if you wanted to do it?

M. Kevin McEvoy

For products in the North Sea?

Ian Macpherson - Simmons & Company International, Research Division

Be it for ROV expansion or products.

M. Kevin McEvoy

Well, I mean, ROV expansion pretty much follows wherever the drill rigs are going, and so that is really not focused on a geography as much as it is on the rig and the operator. As far as products are concerned, we're pretty well represented in the North Sea already. We're really looking to push products more out into Australia, for example, West Africa, East Africa, those sorts of areas that there's not as much of a concentration now.

Ian Macpherson - Simmons & Company International, Research Division

Very good. And just last, quickly, with respect to your guidance for next year in general, are there any aspects that we should look at as being more sensitive to the high end or the low end of your earnings range? And are there other areas that are more set in stone at this point?

Marvin J. Migura

No.

M. Kevin McEvoy

I wouldn't say so.

Marvin J. Migura

No. We've got a narrow range where we picked the mid point. We're plus or minus 4%. A lot of things can happen that move the needle that much. So there's not any contingent situation that causes us to be on the high end or the low end. I think it's just a good mix.

Operator

Your next question comes from Darren Gacicia with Guggenheim.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Just wanted to flesh out a little bit. You're talking about kind of business mix next year on the products side when you look at company, IOC customers versus kind of energy majors. When you think about sort of an added planning time, what is that telling you? Is that saying that, you probably have more activity in '14? How does that delay work and what's the difference? Could you just expand on that?

M. Kevin McEvoy

Well, I think -- first of all, just to remind everybody, that comment was really directed at the Gulf of Mexico. And I think before Macondo, there was a fair amount of, let's say, smaller independents that were operating in the Gulf of Mexico, and they would typically have relatively fast turnaround, single or double well projects, where they would get -- they would -- from discovery to production might be 2 years or something on that order. Whereas today, we see very little of that activity, and it's much more predominantly the majors who are operating in ultra-deepwater, where you've got multiple wells and a complex production scenario to work through and develop, and that planning process and the procurement for floating production equipment and all the rest of it has a much longer timeline, and so that's typically a 5-year idea, from discovery to development. It could be as long as 7. But I think for the Gulf, it would probably more closer to the 5-year range. So that really is what we're talking about. And given that people have just started drilling, let's say, a year ago and finding these prospects. It could be 4 or more years before it really starts happening. We just recently bought an -- update our market forecast for the Gulf of Mexico only by Quest. And according to what they gave us, they said subsea tree installations in the Gulf are not expected to reach the prior peak level of 2008 until 2016.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Got you. So you're sort of still on a slight -- what it seems to tell me, I'm sure you're not putting more IWOCS than the rest, that your margins should extend over the next couple of years as those start to come through?

M. Kevin McEvoy

As that starts to happen...

Darren Gacicia - Guggenheim Securities, LLC, Research Division

At least just a positive part of mix anyway.

Marvin J. Migura

Absolutely.

M. Kevin McEvoy

Yes. We do see good growth opportunity in the Gulf of Mexico once those projects start taking hold, yes.

Marvin J. Migura

Right. And what we're trying to differentiate is we see it in the drill support activities right now. And we're just trying to say that it's only in the drill support activities now, but we believe it will have a great follow-through in later years when we get to that development stage. That's the point of differentiating between drill support and non-drill support.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Got you. And kind of next question, just to make sure I heard you correctly, so you say you're going to be net up the 30 to 35 vehicles next year?

M. Kevin McEvoy

No. We said we were going to be adding 30 to 35 vehicles, and we will announce retirements as and when they occur.

Marvin J. Migura

And that 4% to 5% would be normal per year.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Got you. And is that a function of what's already won or is there some kind of -- some of those being built in expectation of wins?

M. Kevin McEvoy

We only have 13 contracts in hand for the 30 to 35 at this moment in time.

Marvin J. Migura

And every year, when we going into this, we include throughout all of our segments an incredible amount of speculative work that we feel we're going to win, where the projects are not yet identified. So no, it is not on a 1 basis, it is on a projected outlook.

Darren Gacicia - Guggenheim Securities, LLC, Research Division

Well, given the dominant market share, I mean, I can understand how you can plan ahead. My last question if you don't mind is it strikes me that in you're going to be kind of in a net cash position as you go into next year. I know somebody has asked kind of capital budgeting and returning capital to shareholders, but the one aspect that you said that, that was an annual planning process. Does that mean there's kind of a meeting of the board at the beginning of next year where that kind of gets decided and is there a thought process to an optimal capitalization level and a kind of net debt to capital level that we should be thinking about as we build in our models?

Marvin J. Migura

No. I think when you look at Oceaneering's history, I mean we've been in a net positive, net cash position for a lot of it. We'd like to grow and growth is our #1 priority, as Kevin said, and returning cash to shareholders is a secondary one. And yes, we will look at it. We did -- after 4 quarterly payments, the board chose to increase our dividend by about 20% to $0.18 a share per quarter. And I'm sure that is going to be on the agenda, and it gets discussed a lot. We just think that it's more prudent to have a consistent dividend policy as opposed to doing a special, for example. Any of that could change. It's always up to the board. But right now, I see us staying in a net cash position unless we can find a substantial acquisition. And we've been looking, and we continue to look. But it has to be sort of within our space so we don't do a wild step out. But there is no optimal capital structure, Darren, that we are striving for. It really is -- we try to make the best of what's available and continue to grow.

Operator

Your next question comes from Brian Uhlmer, whose company name was not gathered.

Marvin J. Migura

We know he's with GHS.

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

Most of my questions have been answered. So I just wanted to ask more of a philosophical question as you're quoting some of the Quest forecast and you guys normally have a more tempered approach to your outlook and you discussed kind of the timing of projects getting kind of pushed out to the right on the decision tree. How do you look at -- when you look out in '13 and '14 kind of handicapping what those forecasts are versus what your expectations are?

M. Kevin McEvoy

Dang, how do we answer that? I mean, we already told you that the outlook for the Gulf for our non-drill support next year, while we expect some improvement, it's not going to get back to pre-Macondo level.

Marvin J. Migura

I think -- our belief...

Brian Uhlmer - Global Hunter Securities, LLC, Research Division

I'm thinking more of worldwide here. I mean, you're talking subsea tree number that never happens right?

Marvin J. Migura

I know. But we think Quest is directionally -- I mean, we think they are directionally correct. We never try to pick what 12-month period they're going to be right or wrong in. But let's go back to the number of new drilling rigs that are being added to the fleet, the number of holes that are being poked into the ground. And if you just assume the exact same success rate, you're going to have more development activity over time. So we subscribe to the Quest growth trajectory for the 5-year over 5-year period. And I think it really is a strong story, and we talk about, first it comes in the exploration side with drill support activities and then it comes in development side and then it's in the infrastructure, Asset Integrity side. So we really like that aspect, and we really believe that a lot of stars are aligning now for a continued growth of subsea and deepwater. So -- is it going to be 640 in '13? We don't really take a position on that; we just sort of report it. And we believe directionally, our beliefs and philosophies are very consistent with Quest's outlook.

M. Kevin McEvoy

Kind of unfolding as they had predicted.

Marvin J. Migura

Yes. And '12 is kind of pretty close to what they thought.

Operator

Your next question comes from Joe Gibney with Capital One.

Joseph D. Gibney - Capital One Southcoast, Inc., Research Division

I just have one quick modeling question on the projects side. The reference to the 4 of 8 vessels in regulatory inspection. I was curious if that was going to be front-half weighted in the seasonally slower period in 1Q, 2Q, just to -- appreciate some timing color associated with that.

Marvin J. Migura

I don't know, Jack; do you?

Jack Jurkoshek

I've got it. Joe, if you'll call me later I can give you...

Marvin J. Migura

No, no, I think the answer is, yes -- what we've got to do is we have to do them on the anniversary date. And we always try to do more in the slow seasonal period than not. But I can't recall the details. I would say that directionally, we are -- as Kevin said, the message here is we continue to see strengthening of Gulf of Mexico shallow and deepwater. However, due to our drydockings, it's going to reduce the available days, and it's going to increase the operating expenses. So when you model it quarterly, we haven't done that. So we've looked at the full year, we haven't done quarter-by-quarter, but I know we know what days those are scheduled in a quarter basis. So I'd really hate to kind of get into that right now. So I'm just saying, you got to do the modeling for on a quarter-by-quarter basis, and we haven't done it yet. That will be part of our next detailed planning process.

Operator

[Operator Instructions] Your next question comes from Joe Hill with Tudor, Putter, Tickering (sic) [Tudor, Pickering, Holt & Co.].

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Tudor, Pickering. Just had a couple of questions. I just wanted to understand the business a little bit better. So when you guys use an ROV to do a subsea install, whether you're hooking up flying leads or jumpers or whatever, is that revenue dollar flowing through the non-drill support ROV segment or is it flowing through projects?

Marvin J. Migura

ROVs.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

ROVs, okay.

Marvin J. Migura

Right. And if we're using one of our boats, that's flowing through projects. We take the ROV aspect and run it through ROVs regardless of what type of service it's doing, whether our vessel -- our vessel is involved or not.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay, that's helpful. And then just the other point I was trying to understand. Are IWOCS sales coincident with an installation or do they lead a tree installation by a fair amount?

M. Kevin McEvoy

They do not lead the tree installation; they're part of the tree installation.

Marvin J. Migura

And they're also involved in a lot of workovers, as well.

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay. So just kind of getting back to maybe a point you guys were emphasizing earlier. The customer mix in the Gulf of Mexico has changed. We've got some delays in the non-drill support ROV work, it sounds like is a function of that mix change. But IWOCS is picking up, it sounds like. So I'm just trying to get a sense as to when we actually get the handoff from the installation business into the IRM, construction, et cetera, down the road, it sounds like it's at least a couple years, which surprised me a bit.

Marvin J. Migura

Joe, IWOCS is picking up. It really picked up in Q3. But the other thing we have going on is a shift from a predominantly Gulf of Mexico business to having a substantial element of international work in our IWOCS business. So it's not as Gulf of Mexico dependent as it once was, and that's what we talk about when we got geographic expansion opportunities. IWOCS and subsea field development and tooling, those things are very relevant.

W. Cardon Gerner

Just to repeat what Kevin said though, our op inc outlook for '13 on products is not predicated on an increase in profit contribution from IWOCS. It's not.

Marvin J. Migura

It's from tooling, Subsea Hardware and umbilicals.

W. Cardon Gerner

But not IWOCS.

Operator

Your next question comes from Ole Slorer with Morgan Stanley.

Ole H. Slorer - Morgan Stanley, Research Division

But as we look a your ROV business, there you have a very high market share, but clearly some favorable trends with more units potentially added per rig and tied to maybe growth in the rig count, plus a little bit, and you compare that with the Subsea Products. Over the next 2 years, which one of these 2 divisions do you think will show the strongest growth so not to 2013 per se, but if you look a little bit longer term? There's a lot of favorable trend of more step outs and further distances on umbilical side, is that a big driver or is it competition there is still pretty cutthroat? So how these see that opportunity on a 2-year view relative to the ROV business which I would imagine be a lot more steady?

M. Kevin McEvoy

I think your observation is correct. ROV business is more steady. There is more volume opportunity on the product side, maybe 2 years and out, I would say. Of course that is top line growth with historical margins that we have been able to achieve in that segment. So I think that it will be more growth on the product side than on the ROV side over time.

Ole H. Slorer - Morgan Stanley, Research Division

And how much of that organic versus -- I would imagine, I mean, you are sitting now with quite a lot of cash, you could add product through infrastructure, but also if you consider the competition from the Akers, the Technips of this world?

M. Kevin McEvoy

Well, I mean, we invest in organic products in areas that we have a market niche. You think of hydrate remediation activity, acid injection and things like that, that we are moving into, as well as our traditional stuff that we've been doing. And when we see the opportunity, we do it. We don't just build a bunch of stuff and then send it around the world and hope for a job. There's usually some indications of demand out there per customer and then we invest the money and produce another unit and send it where it needs to go.

Marvin J. Migura

And I think our focus continues to be products -- as Kevin just alluded to, is products with a service component. I think that -- and that way, we really don't compete with some of the other players that you mentioned. We do own an umbilical with Aker, but we're not getting into the tree manufacturing business. And I think there's enough ancillary equipment around the tree for us to keep our focus and try to broaden our scope that way, particularly if it has a service component.

Ole H. Slorer - Morgan Stanley, Research Division

So to so you're not terribly troubled by the competitive backdrop. You see the opportunity as outweighing the behavior of competitors?

M. Kevin McEvoy

So far, yes.

Marvin J. Migura

I think we all know that there's way more umbilical capacity in the world than we need, and we know that Aker is adding a plant that will come at the end -- should come into production by the end of 2013. But I mean, we've got to pick and choose wisely, and we think we have capability of doing that and improving our throughput and margins over time.

Operator

[Operator Instructions]

Marvin J. Migura

All right. Thank you, guys, very much. I think we're going to end the call. And y’all have a good day.

Operator

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

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