Oceaneering International, Inc. (OII)

OII 
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Oceaneering International, Inc. (OII)

Q3 2009 Earnings Call

October 29, 2009 11:00 am ET

Executives

Jack Jurkoshek - Director of IR

Jay Collins - President and CEO

Marvin Migura - CFO

Analysts

Neil Dingmann - Wunderlich Securities

Chris Glaseem - Simmons & Company

Max Barrett - Tudor Pickering Holt

Joe Gibney - Capital One Southcoast

Phil Dodge - Tuohy Brothers Investments

Yvonne L├╝scher - Credit Suisse

Victor Marchon - RBC Capital Market

Presentation

Operator

Good morning. My name is Natasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oceaneering International third quarter earnings conference call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Jurkoshek, you may begin your conference.

Jack Jurkoshek

Good morning, everybody. We'd like to thank you for joining us on our 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 is Jay Collins, our President and Chief Executive Officer, who will be leading the call; Marvin Migura, our Chief Financial Officer; and Bob Mingoia, our Treasurer.

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

I'm now going to turn the call over to Jay.

Jay Collins

Thank you, Jack. Good morning, and thanks for joining the call. It's a pleasure for me to be here with you today to talk about Oceaneering. Our third quarter earnings per share of $0.90 were at the top end of our guidance range we gave last quarter, above the Thomson One consensus estimate and sequentially better than our second quarter result. This performance was highlighted by achieving record ROV operating income.

We now expect that our annual 2009 EPS performance will be the second best in Oceaneering history, an accomplishment that will be particularly gratifying at a time when other oilfield service companies are expected to report substantial earnings declines. We're narrowing our annual EPS guidance range to $3.32 to $3.38.

Looking into next year, we believe deepwater drilling activity will continue to grow as new floating rigs currently under construction are added to the worldwide fleet. We do not, however, expect deepwater construction activity to increase, as we anticipate project deferrals to continue until there is a recovery in hydrocarbon demand.

Consequently, we are forecasting our 2010 EPS to be relatively flat with 2009, in the range of $3.25 to $3.55. Our 2010 forecast assumptions include unit volume growth and increased operating profits from ROVs, improved operating efficiencies and results in Subsea Products, declines in Subsea Projects, activity levels and operating income, and a lower contribution from MOPS due primarily to the expected retirement of the FPSO Ocean Producer.

I'll talk more about our 2010 guidance later. Now I'd like to review our operations for the third quarter.

Our ROV business achieved all time high quarterly operating income as we obtained a record high days on hire of nearly 17,500 and an operating income margin of 33%. Sequentially, quarterly operating income rose 9% on a 3% increase in days on hire and a 5% improvement in average operating income per day on hire.

The daily profit improvement was achieved by our ability to control cost and excellent operational execution, which resulted in a decrease in cost per days on hire. Year-over-year, ROV operating income increased 7%. This was accomplished by growing our days on hire by 4% as we grew our fleet size, and improving our average operating income per day on hire by 3%.

Our fleet utilization of 79% was down from 84% in the third quarter of 2008, due to a reduction in demand for ROV construction support services. During the quarter, we added 11 systems to our fleet and retired three. At the end of September, we had 243 systems available for operation, up 20 from September a year ago.

We now anticipate adding 28 to 30 new systems to our fleet this year, five to seven in the fourth quarter. Our fleet mix utilization during September was 72% in drill support and 28% in construction and field maintenance, the same as in June of this year. This compares to a 64-36% mix in September 2008.

Year-to-date, ROV operating income margin has been 32%, 200 basis points better than the first three quarters of 2008. Our various Subsea Products operations perform pretty much in line with our projections for the third quarter, with the exception of our BOP Control Systems, which incurred $5.5 million of unanticipated costs on two systems that are in the final stages of manufacturing. These two systems are larger and have the capacity to handle more functions compared to the systems we've previously delivered. We underestimated the material and man-hour costs to scale up the size and capabilities. We anticipate delivering one of these systems by year end and the second system in the first quarter of 2010.

Overall, Subsea Products operating income declined sequentially due to the unanticipated BOP Control Systems costs. Absent these costs, segment operating income margin would have been 15%, slightly better than what we achieved in the first two quarters of this year and the same as our 2008 annual performance.

Year-over-year, Subsea Products operating income declined on lower umbilical plant throughput and higher BOP Control System costs. At the end of the quarter, our products backlog was $328 million down slightly from $350 million at the end of June.

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