Oceaneering International, Inc. (OII) Earnings Call Transcript & Summary

Hi, I'm Sean Meakim, the oilfield services equipment analyst at JPMorgan. Thanks for joining us for our Fifth Annual JPMorgan Energy Conference. Up next, we have Oceaneering. And with us, we have President and CEO of Oceaneering, Rod Larson. Rod, good to see you.

Thanks, Sean. Good afternoon, and thanks to Sean and the JPMorgan team for the opportunity to share the Oceaneering story and our outlook on the markets where we participate. Second slide. As we begin, please note that our disclosures regarding forward-looking statements and non-GAAP measures in this presentation. Slide #3. Oceaneering is a suitable investment for several good reasons. We have a strong portfolio of diversified services and products with exposure to all phases of the offshore oilfield life cycle, which continues to play a vital role in meeting global energy needs. Our nonenergy segment diversification of theme parks and government services helps to dampen the impacts related to energy market volatility. We're involved in environmentally friendly efforts offshore from renewables to transforming work to reduce carbon emissions. We're a provider of integrated technology solutions. We have a geographically dispersed asset base and revenue streams. We serve blue-chip customers, and offshore production projects remain imperative. And Slide 4. We're responsive to sustainability issues, like environmental, social and governance criteria that investors are increasingly considering in their estimate and decision-making process. Our sustainability behavior is guided by corporate standards, which define our long-held core commitments. We believe by promoting safety and environment, teamwork and people, a customer focus, operational excellence and ethics and accountability, we emphasize a culture of sustainability while supporting the communities in which we live and work. Slide #5. Our operating segments are organized into 2 businesses: services and products we provide to the energy industry and those that we provide to nonenergy customers. Our 4 energy-related segments are: Remotely operated vehicles or ROVs; Subsea Products; Subsea Projects; and Asset Integrity. Together, these generated about 80% of total company revenue in 2019. Our 1 nonenergy segment is Advanced Technologies, which generated approximately 20% of total company revenue in 2019. Slide #6. Through our 4 energy-related segments, Oceaneering has exposure to all phases of the offshore oilfield life cycle, from exploration through decommissioning. Approximately 2/3 of our 2019 energy revenue was derived from operators' CapEx activities, which includes exploration and development projects. Roughly 1/3 of our energy revenue was derived from operators' OpEx activities, which include production and decommissioning projects. Development and production together generated nearly 85% of our 2019 energy revenue. Slide #7. Our international presence and technical and safety reputation enable us to compete effectively on a global scale with about 2/3 of our revenue typically coming from service-focused businesses. Slide #8. Our first quarter consolidated adjusted operating EBITDA of $51.6 million exceeded our expectations and analyst consensus estimates as well. We were pleased that our 5 operating segments recorded positive adjusted operating results and adjusted operating EBITDA. Slide #9. Sequentially, ROVs reported better operating results despite marginally lower revenue. The improvement came from cost control measures and efficiencies with fewer installations and mobilizations. Sequentially, Subsea Products reported better operating results with revenue and operating results in manufactured products meeting expectations and greater activity from the surface rental business. Our Subsea Products backlog at the end of the first quarter was $528 million compared to $630 million at December 31, 2019. Subsea Projects reported lower operating results on seasonally lower vessel and survey activity, as forecast. Sequentially, Asset Integrity results were higher, benefiting from cost-reduction activities undertaken in the fourth quarter of 2019 and the first quarter of 2020. Advanced Technologies operating results increased on higher revenue from our government service units. Adverse impacts of COVID-19 to our entertainment business results partially offset gains from our government service businesses. And unallocated expenses improved as a result of lower accruals for incentive-based compensation. I should also note that in the first quarter, we recognized certain pretax adjustments totaling $393 million related to goodwill impairments, asset impairments and write-offs, restructuring costs and foreign exchange losses. These adjustments related largely to our Subsea Projects, Subsea Products and Asset Integrity segments. Quarter-over-quarter, our consolidated adjusted results improved $7.4 million, and adjusted operating EBITDA improved $2.9 million. Slide #10. We continue to focus on maintaining liquidity and a strong balance sheet. At March 31, we had $307 million in cash and cash equivalents, and we still have available $500 million unsecured, undrawn revolving credit facility. Our nearest scheduled debt maturity is in late 2024. For the quarter ended March 31, 2020, we used $32 million of net cash in our operating activities and spent $27 million on capital expenditures. These 2 were the largest components of the $66 million cash decrease during the quarter. And now I'll provide some details on each of our operating segments. Slide 11. Historically, our flagship service is providing ROVs, which are tethered submersible vehicles that are remotely operated from a vessel or onshore. We provide ROVs to customers in the energy industry for drilling support and vessel-based services, including subsea hardware installation, construction, pipeline inspection, surveying facilities, inspection, maintenance and repair. Slide 12. Our ROV fleet remained at 250 systems. Sequentially, our first quarter fleet utilization increased to 65% from 58% despite flat days on hire quarter-over-quarter. Keep in mind, available systems declined by 30 retired systems on December 31, 2019. Pro forma utilization for Q4 of 2019, excluding these systems, was 64%. Our ROV drill support days on hire depend largely on the number of floating rigs working, while our vessel-based service is driven by inspection, maintenance and repair, or IMR activities, along with installation, construction and survey activities. Our first quarter fleet service ratio was 68% in drill support and 32% in vessel-based service. Sequentially, the decreases in days on hire per vessel support were seasonal and occurred in the Gulf of Mexico and the North Sea. The decrease in vessel support working days was offset by increases in drill support working days in Asia and Brazil. The blue bars on the right chart depict our quarterly average revenue per day on hire. The yellow line tracks are ROV adjusted EBITDA margin. During the first quarter 2020, our average revenue per day on hire was approximately $7,500, and we reported first quarter ROV-adjusted EBITDA margin of 32%. Slide 13. Turning now to Subsea Products. This segment generates the greatest amount of our revenue. Subsea Products supplies a variety of specialty subsea hardware and related services. Our Subsea Products segment is organized into 2 business units: one, manufactured products; and two, service and rentals. Manufactured products include production control umbilicals and specialty subsea hardware. The majority of Subsea Products revenue is generated by manufactured product sales, which historically is the greatest portion of our total Subsea Products segment revenue. For the first quarter, our manufactured products business generated 74% of our total Subsea Products revenue. Service and rental includes tooling rental, subsea work systems and installation and workover control systems used for hydro remediation, well stimulation, well intervention, dredging and decommissioning. This business unit generated 26% of our total Subsea Products revenue for the first quarter of 2020. Slide 14. Historically, the largest contributors to our Subsea Products revenue and backlog had been from our umbilical and specialty subsea hardware business units. Our Subsea Products backlog is highly dependent on the timing of field development and IMR opportunities driven by subsea tree installations and the installed base of subsea completions. With the rebound in customers' FID on projects and subsequent contract awards since 2018, we've been successful in growing our backlog during 2018 and 2019. Our initial expectation for 2020 was for substantially higher revenue on higher FIDs and bid activity and anticipated contract awards, then our market environment changed. Our Subsea Products backlog at the end of the first quarter was $528 million, down sequentially from $630 million at December 31, 2019. Our book-to-bill ratio for the first quarter was 0.5. The current lack of visibility in the subsea oilfield market precludes a meaningful forecast of order intake and book-to-bill for 2020. Subsea Projects, Slide 15. Within our Subsea Projects segment, we own 6 Jones Act-compliant vessels. Three are deepwater multiservice vessels, including the Ocean Evolution, and the others include dive support and service vessels. As necessary, we augment our vessels with third-party charters, which have been shorter term in the current market. In recent years, we have expanded our Subsea Projects segment with acquisitions, including Oceaneering survey services in 2015 and the assets of Meridian Ocean Services in 2016, which allow us to further penetrate the underwater inspection in lieu of drydocking market or UWILD. And the acquisition of Ecosse Subsea Limited in 2018 gives us the capability to provide route clearance and trenching services to the offshore wind market. Slide 16. Our Asset Integrity segment specializes in providing optimized industry-leading inspection services and integrity management solutions that help to ensure that our customers are equipped with the data required to make informed value-adding decisions. We work onshore and top side offshore, upstream, midstream and downstream across the entire energy spectrum, oil and gas, nuclear and renewables. The abundance of competitors, combined with the limited barriers to entry, make pricing in this market very competitive. However, we are seeing initial positive benefits from cost reduction activities taken during the fourth quarter of 2019 and the first quarter of 2020. Slide 17. And finally, our nonenergy segment is Advanced Technologies, also known as AdTech, which achieved record annual revenue again in 2019. The types of services and products our AdTech segment provides can be divided into government services and commercial projects. Government service activity is principally related to the U.S. Department of Defense and major defense contractors. The segment's largest customer is the U.S. Navy, for whom we perform engineering services, prototyping and repair and maintenance services on submarines and surface ships. Commercial activity is associated with the integrated mobile robotic solutions we provide to domestic and international theme parks, automotive manufacturers and retail warehousing. In 2019, government service revenue was 75% of total annual AdTech revenue. In the first quarter of 2020, government service revenue was 83% of AdTech's quarterly revenue. Slide 18. We continue to strengthen our portfolio of services and products. Besides targeting the offshore renewable energy market, we're also focused on technological innovations. Our BORIS and IRIS systems enable deepwater well intervention without the need for a riser, allowing the use of a multiservice vessel rather than a rig. IRIS will be used in connection with the recently announced BP Angola contract. RWOCS is a skid-mounted intervention workover and control system that streamlines the footprint and hardware needed to perform RWOCS services offshore. Our subsea pumping technology enables cost-effective delivery of chemicals to subsea wells, thereby reducing the need for complex umbilicals and other subsea infrastructure. Our satellite agnostic intelligent link, or SAIL system, enables faster connectivity speed and flexibility with offshore communications. And our leading ROV technologies include our resident battery-powered electric ROVs, Liberty and Freedom. The Liberty system, formerly known as E-ROV, is capable of operating for extended periods of time without being recovered at the surface, which reduces the requirements for an on-site service vessel, thereby reducing costs and carbon emissions. The system is piloted from one of Oceaneering's onshore emission support centers using the company's proprietary remote piloting and automated control technology or RPACT. The RPACT transfers RV control data in live high-definition video with low latency using a 4G mobile broadband signal transmitted from a buoy on the water's surface. This technology also deploys machine vision learning and augmented reality techniques and allows for efficiencies and versatility that lead to real-time control of the RV and the tooling. Our Liberty ROV work -- performance first work, excuse me, in 2019, supporting subsea inspection, maintenance and repair activities on the Norwegian Continental shelf for Equinor on a contract for a 3-year term with 2 1-year optional extension periods. Our Freedom vehicle, an untethered resident hybrid ROV AUV, is undergoing offshore trials, and we expect it will soon be capable of performing commercial light work and inspection activities. Onshore mobile robotics and automation are also key focus technologies, as demonstrated by our innovative theme park rides and AGV, automated guided vehicles, and related systems. Slide 19. One of our top priorities is to preserve liquidity and maintain a strong balance sheet. We're taking decisive action to reduce costs by resizing and restructuring our businesses and leaning our operations in this evolving energy environment. We are currently targeting a reduction of annualized expenses in the range of $125 million to $160 million by the end of 2020, inclusive of $35 million to $40 million of reduced depreciation expense. Cost reductions actions are taken and including the following: efficiency-enabling projects or for some process improvements such as increasing focus on remote operations to reduce the number of people working offshore; the consolidation, reduction and elimination of facilities to reduce lease and operating expenses and driving our quality tenants throughout the organization to eliminate nonvalue-added costs. We're simplifying our operating structure. We have recently and will continue to take actions to simplify the way in which Oceaneering does business by better aligning like-for-like activities to leverage people, assets and facilities to perform services and provide products in a more efficient way. Actions taken to date include permanent headcount reductions and the elimination of management layers. We've implemented compensation reductions. The base salaries for our senior leadership have been reduced by 15% for myself, 10% for all of our Senior Vice President positions and 7.5% for our Vice President positions. In addition, we've reduced the company match on our 401(k) plan by 50% and reduced the expected payouts under our short-term and long-term incentive plans. Other cost reduction activities include -- being undertaken include implementing supply chain savings, where we can bundle purchases across business lines to achieve lower pricing and renegotiate contracts with vendors in light of current market conditions. We're also taking steps to eliminate nonproductive assets, which will benefit us with lower inventories and lower carrying costs. In addition to these categories, we also expect to see a benefit from an estimated $35 million to $40 million reduction in depreciation expense as compared to 2019. Although this is a noncash expense, it's worthy of highlighting as it will benefit our operating performance and position us to return to profitability sooner. Since launching this effort, approximately $70 million of annualized cost reductions have been initiated, and that's excluding the reduction in depreciation expense. Additional savings are expected to be achieved throughout the remainder of the year, with the majority occurring in the second and third quarters. We expect the cash costs associated with these actions to be around $15 million. Slide 20. We expect to generate positive free cash flow in 2020. As stated earlier, our top priorities are to maintain our liquidity and our strong balance sheet. We're taking decisive action to reduce costs by resizing and restructuring our businesses and operations in this evolving energy market. Critical factors to achieving free cash flow include realizing the targeted reduction of annualized expenses in the range of $125 million to $160 million I just spoke about by the end of 2020. In addition, we are taking actions to reduce capital spending to a range of $45 million to $65 million. We expect to benefit from lower cash tax payments in the range of $30 million to $35 million and anticipate CARES Act tax refunds in the range of $16 million to $34 million. Finally, we expect to generate cash from working capital, particularly during the second half of the year. Of course, the timing of certain contract awards and related payments across milestones can have a material impact on our cash flows. It is our intention to continue to maintain our strong balance sheet and to ensure that we are well positioned to deal with our nearest debt maturity in November 2024. We will be closely scrutinizing incremental maintenance and growth capital expenditures, focusing on opportunities that will provide near-term revenue, cash flow and return. As indicated on the earlier liquidity slide, at March 31, we had cash position of $307 million, undrawn $500 million revolver available until October 2021 and thereafter, $450 million available until January 2023. As a clarification, our revolver debt-to-cap covenant is based on adjusted cap, not equity on the balance sheet. To determine adjusted cap, we were able to add back all previously recognized impairments. Based on our determination as of March 31, we have the ability to draw down the entire $500 million and remain in compliance. Slide 21. The recovery from the 2014 energy market decline was brought to an unceremonious halt by the economic impacts of COVID-19 pandemic and the crude oil production impasse between OPEC and Russia. Midway through the first quarter, the fundamentals of the oil and gas market began degrading significantly, resulting in a substantial decline in crude oil prices. Operators began cutting CapEx budgets. Spending has slowed. Many of Oceaneering's market drivers indicate declining demand for our products and services. However, as of May 13, there was a small bright spot with Rystad still forecasting a slight increase in tree installations year-over-year from 287 in 2019 to 308 in 2020 or a 7% increase. I would also like to emphasize that while these data points all relate to 2020 activity, several of them, including tree orders and FIDs, are also expected to be significantly challenging in 2021 and beyond. Slide 22. The energy markets will be tested in 2020 like never before. Fortunately, we're prepared to operate efficiently during this downturn. Our organization is leaner and organized to make us flexible and ready to pivot with the offshore energy markets and the broader industry. There will undoubtedly be many challenges presented as a result of these new realities. However, I am confident that with the actions already underway, the quality of our services and products and the health of our balance sheet, we will be successful in adapting and succeeding in this new market environment. Our focus continues to be generating meaningful positive free cash flow, maintaining our strong liquidity position, improving our returns by driving efficiencies and cost and performance throughout our organization and engaging with our customers to develop value-added solutions that increase their cash flow without compromising our focus on safety performance, quality and sustainability. Thanks, everybody, for your attention.

Thanks, Rod. I appreciate that overview. I think back, when I look to the last couple of slides in the deck, just about the updated outlook, how does that -- your latest view today maybe differ from what you were thinking as you were heading into the first quarter call. We obviously learned a lot in the last few months. And then just I'm more curious about how does that shift in outlook influence your thought process around incremental cost-out initiatives, rightsizing of the fleet, I mean basically kind of where you thought you were then to where you are today, to what extent does that influence your future decisions?

It's an interesting kind of roller coaster that you're on, right? Because actually, when we're going into that call, I think a lot of the unknowns were -- it happened so fast. I think we were very concerned about the rest of this year and 2021 and even how long it would last. While we probably felt a little more confident that you start to see more things evolve, I don't know that the news has gotten better necessarily. I think we got a little more clarity on what the customers were thinking, how they were going to handle their business. Probably the best thing that happened since then is that we've been more resilient with -- related to COVID-19, meaning that I'm surprised that we've had very few work interruptions. Even Brazil, where they've had strong outbreaks, it seems like we -- they come off the rig, they clean the rig, they test everybody and they go back to work. So the business has been resilient in that regard, but we still feel that downward pressure that the commodity price and the long-term demand outlook is keeping everybody pretty cautious. So I think while we have greater clarity, it's directionally pretty much the same.

Right. Okay. So you mentioned your ability to work through a lot of COVID issues. That's certainly great to hear. The pace of rigs coming off-line broadly has been probably faster than I think the industry was expecting a few months ago. You've had the benefit, maybe more so than some peers in terms of cost out, helping you in terms of your ROV margins end of last year, beginning of this year. So as more revenue likely comes off and you feel more of that impacts, are there more adjustments you can make there? Just curious about how we should think about margin progression for ROVs.

I think what's helped us a lot, like you said, is we were working on order structure. So it wasn't just sort of that incremental cost out and trying to keep the overhead up to speed with the rest, the frontline costs, which is hard to do over time, right, because you run into that either fixed or semi-fixed cost. I think since everything was fairly flexible right now, I mean, everything seemed variable because you're working on the model, we've been able to build something that I think will help us more than had we not been in that process. So I feel pretty good about what we think our forecast -- our forecast going up at the end of last year was pretty accurate. Unfortunately, I'm afraid our forecast going down this year will likely be the same. But we've got a plan. We're watching the overhead. We're watching the cost out. Obviously, you keep doing the work while you got the work to do. But as soon as those are -- when you hit the bank, you've got to quickly get that cost out. And I think we're on top of it. I think we've got -- unfortunately, we've played this half of the game before fairly recently. So we're watching it carefully. Gross margin progression, I mean, we're going to fight really hard to not lose much of that. I guess it was a tough thing to not get a lot of price in the last year, 1.5 years. But then it's also sort of created some stability where we're at. So while the customers would also always like a little more price, I think we're -- we've got a pretty good track record that we're going to continue to deliver and we're at a price point that probably needs to be held for now.

Got it. Got it. That's really helpful. So then also within ROVs, you've highlighted some remote technology opportunities. Clearly, across the upstream, that's been a real focus. And to some degree, the customer base has been awakened more broadly from an organizational perspective of what can be done remotely. So I'm curious, to what extent is that creating initial -- more dialogue to around the Liberty ROVs. And just really, that also dovetails to the next natural question, which is to say, to the extent that there are growth opportunities at this point in the cycle, how ready are we to deploy capital in order to attack them? That's…

It's a great question. I think, first of all, it is surprising. I remember, I was -- one of my last meetings going into a customer's office, and it was that meeting where everybody was wondering whether or not you should be shaking hands, right? So it was that time when we started. We knew what was going on, but we didn't know how bad it was going to get. And in that meeting, we talked about remote technology. And I remember talking about some of the things like Liberty in an installation here in The Gulf. And it was sort of -- it was really just one of those, what does that technology look like and everything else. A month later when we were wondering how we're getting people to the rigs and every person was a quarantine issue, and everybody was a potential infection for the rig, we got a call back and say, "So how close are we? What would that look like? And what would the price be?" So a lot of these things that were interesting technology got real very quickly. And so I think it is playing into kind of that good part of the business. And whether it's Liberty, which is the resin vehicle; Isurus, which is the high current vehicle that we built for the renewables industry, renewals are really strong. I mean they've held in, so our work there feels good and having the technology available. We're going to be really diligent about not building more of the same, right, more capacity that -- in an already overserved market. But those things that have that ability to work in a new way is a great opportunity. And in true Oceaneering fashion, especially Liberty or Isurus, they're built on our current technology. We can get a lot of that cost strictly by taking one of the drill support ROVs that's coming off service and basically doing kind of a high-end overhaul and putting that back to service as a new technology. So lots of reusable pieces in tech there.

That's really helpful, Rod. I appreciate that detail. And then I guess similar question in products, just thinking about margin progression. On the one hand, you did book some solid backlog. On the other hand, we are trying to battle through in terms of potentially deferrals from customers or delays from customers, just given even their work from home issues, ability to stay fully up and utilized from a manufacturing perspective. We got an overview earlier, but just how do we see that progression in terms of margins as you balance those pieces near term and maybe intermediate term, if the order cycle remains challenged, let's say, into next year.

I think, again, there's an opportunity here in the sense that we've got -- we still -- we had a pretty solid book for 2020. And so we were running 3 shifts, and we were very, very busy. We haven't had cancellations yet, but we have many customers that are telling us don't go fast, we could delay delivery. So it gives us that opportunity to really manage cost because the time becomes less important. So we're able to watch the shifts to do more with the same number of people or fewer people, and so I think there is that opportunity to do some things to manage the cost and protect your margins. But you know how it's going to be. Very few FIDs, and those FIDs are going to be really hard fought. So I think we're going to continue to have a lot of margin pressure on any new wins. So we're going to have to execute really well on the ones we're working on today.

Right. No, that's totally fair. And that's about all the time we have. But Rod, just want to thank you again on behalf of JPMorgan. Great to have you back at the conference. Looking forward to shaking your hand in person next time we're allowed to do so. But in the meantime, thanks, everyone, for joining today.

Thanks, Sean.