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

Welcome to Oceaneering's Second Quarter 2026 Earnings Conference Call. My name is Rob, and I will be your conference operator. [Operator Instructions] With that, I will now turn the call over to Hilary Frisbie, Oceaneering's Senior Director of Investor Relations.

Thanks, Rob. Good morning, and welcome to Oceaneering's Second Quarter 2026 Results Conference Call. Today's call is being webcast, and a replay will be available on our website. With me today are Rod Larson, President and Chief Executive Officer; and Mike Sumruld, Senior Vice President and Chief Financial Officer. Rod and Mike will provide our prepared remarks, and then we'll take your questions. Before we begin, please note that statements made on this call about our future financial performance, 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. Our remarks also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our second quarter press release, which is available on our website. With that, I'll turn the call over to Rod.

Good morning, and thanks for joining the call today. Our second quarter results, which exceeded the high end of our EBITDA guidance range reflected strong operational execution across our diversified portfolio. Our adjusted EBITDA of $115 million represented our highest quarterly level since the third quarter of 2015, underscoring the momentum that we're building across the business. The Offshore Projects Group, or OPG, led our year-over-year improvements and was the largest contributor to our second quarter EBITDA outperformance. Those results were driven by a favorable project mix of international intervention and installation projects. These projects included ongoing light well intervention services in the Caspian Sea and an installation project in offshore Egypt. . In Subsea Robotics for SSR, the Ocean Intervention II entered service following significant upgrades in 2025 and is now performing survey projects that are expected to keep the vessel utilized through most of the remainder of the year. We expect to conduct a simultaneous operations, or SIMOPs project from the vessel later this year, enabling multiple survey activities to be performed concurrently and improving overall operational efficiency for our customers. We also continue to secure contract awards and extensions across our energy segments, including a recently announced award for ROE services in Brazil that improves our visibility into future demand. In ADTech, we secured new contract awards across a range of defense and subsea applications, including subsea robotics, subsea systems, submarine rescue and submarine maintenance, construction and installation services. Among these awards was a joint contract from the Defense Innovation Unit to support development of an extra large unmanned underwater vehicle. This award highlights the continued evolution of our strategy to deploy dual-use technologies that serve both energy and government customers, while demonstrating our ability to collaborate with partners to meet defense industry needs. In addition, our state Systems team was recognized as a best-in-class supplier by Lockheed Martin for their work on the ARTEMIS program. We also took steps during the quarter to strengthen our capital structure and liquidity position by extending our debt maturities and increasing the size of our credit facility. These actions provide us with additional financial flexibility to support our strategic priorities and pursue future growth opportunities. So with that context, I'll turn the call over to Mike to summarize our second quarter results and to provide more details on our financing transactions, and then I'll be back to discuss our outlook for the third quarter and for the rest of 2026. Mike?

Thanks, Rod, and good morning. Let me start by sharing our consolidated financial results for the second quarter 2026. Overall, our results exceeded the high end of our guidance range led by particularly strong performance from OPG as well as improved results from SSR, manufactured products and ad tech. Compared to the second quarter of 2025, revenue increased 10% to $768 million with growth in every segment, except Integrity Management and Digital Solutions, or MDS. Operating income increased 11% to $88.2 million. Net income attributable to Oceaneering increased 19% to $65 million or $0.65 per share and adjusted EBITDA increased 11% to $115 million. Turning to our cash flow and liquidity. We generated $55.2 million of cash from operating activities. The year-over-year decrease primarily reflected the timing of project milestones, customer receipts and vendor payments. We invested $23.2 million in organic capital expenditures with approximately 34% allocated to growth and 66% allocated to maintenance. Free cash flow was $32 million. We resumed share buybacks during the quarter, repurchasing $10 million of common stock, and we ended the quarter with a cash balance of $629 million total liquidity of $844 million and no borrowings under our revolving credit facility. As Rod mentioned, in late June, we initiated a series of transactions to strengthen our liquidity position and extend our debt maturities. We successfully placed $500 million of senior notes due in 2034 and used the proceeds together with cash on hand to retire our $500 million of senior notes due in 2028. We also amended our secured revolving credit facility increasing commitments from $215 million to $345 million and extending its maturity to July 2031. These transactions will be completed this month. Now let's look at our business operations by segment for the second quarter of 2026 as compared to the second quarter of 2025. SSR results improved year-over-year supported by higher average ROV revenue per day utilized and increased survey activity. Revenue increased 6% to $232 million and operating income increased 3% to $66.3 million. Average ROV revenue per day utilized increased from $11,265 to $11,894 on continued improvements in contract pricing. SSR EBITDA margin was flat at 35% and as higher average ROV pricing was offset by geographic and service mix, including a greater contribution from survey, which carries lower margins than our core ROV business. ROV utilization was slightly lower at 66% compared to 67% during the same period last year as solid activity levels in Europe and West Africa largely offset lower activity in the U.S. Gulf. Survey activity increased as the Ocean Intervention II commenced operations. For the quarter, the revenue split between our ROV business and our combined tooling and survey businesses as a percentage of our total SSR revenue was 77% and 23%, respectively, compared to 79% and 21% during the second quarter of 2025. This shift reflects the increased contribution from our survey business. ROV days utilized in drill support were 64%, while vessel-based services were 36% compared to 63% and 37%, respectively, in the prior year quarter. As of June 30, 2026, we had ROV contracts on 82 of the 139 floating rigs under contract or 59% market share. We maintained our fleet count of 250 ROV systems. Turning to Manufactured Products. Revenue increased 3% to $149 million and operating income increased 17% to $21.9 million, resulting in an operating income margin of 15%, up 178 basis points year-over-year. The improvements were largely driven by continued conversion of higher-margin backlog, increased volume in our rotator balance business and improved results in our Mobility Solutions product line. Backlog decreased to $445 million on June 30, 2026, reflecting execution of previously awarded work. Our book-to-bill ratio for the trailing 12 months was 0.88 compared to 0.65 for the same period last year. We won multiple awards early in the third quarter and expect to finalize those contracts in the coming weeks. Based on our sales funnel, we anticipate additional awards in the third and fourth quarters reinforcing our expectation that backlog will improve in the second half of the year and meet our full year book-to-bill guidance of 0.9 to 1.0. OPG delivered impressive year-over-year improvements with revenue increasing 22% to $183 million and operating income increasing 39% to $30 million. producing a 16% operating income margin. These results were supported by a favorable project mix and disciplined execution on international intervention and installation projects that are expected to continue into the third quarter. Vessel utilization levels declined year-over-year but are expected to improve in the third quarter as we continue to support customers under several frame agreements. IMDS' revenue, operating income and margin decreased due to lower activity levels and related cost absorption as well as increased personnel-related costs in West Africa and the Middle East. While operations in the Middle East have begun to stabilize, which should support improved cost absorption in future quarters, we continue to face uncertainty regarding overall activity in those regions. AdTech revenue increased 22% to $133 million and operating income was up slightly at $16.4 million. Operating income margin declined to 12%, reflecting changes in program mix and timing in our Oceaneering Technologies, or OTECH, business lines. Unallocated expenses of $46.6 million were in line with our guidance for the quarter and relatively flat year-over-year. Now I'll turn the call back to Rod to discuss our outlook for the third quarter of 2026 and for the second half of the year.

Thanks, Mike. We expect to build on our positive first half results as we anticipate revenue to increase in the third quarter and adjusted EBITDA to be in the range of $115 million to $125 million. Comparing our third quarter 2026 to 2025 by segment, for SSR, we expect increased revenue and operating income as ROV utilization improves and survey activity continues. For manufactured products, we expect revenue and operating income to decrease slightly. Improved results from our availables and rotator valves business are expected to largely offset decreases in hardware production, pipeline repair and our Grayloc connectors. For OPG, we expect revenue and operating income to increase with higher vessel utilization in the U.S. Gulf and West Africa and the continuation of international intervention and installation projects. . For IMDS, we expect revenue to increase in operating income to be relatively flat. For AdTech, we expect revenue and operating income to increase with higher activity levels in OTECH and marine services. We project unallocated expenses to be approximately $50 million. Returning to our 2026 outlook. Our first half performance has increased our confidence in our full year outlook and supports raising the low end of our adjusted EBITDA guidance range. We now expect consolidated adjusted EBITDA to be between $400 million and $440 million for 2026. At the same time, we've updated our IMDS outlook to reflect ongoing uncertainty in the Middle East and reduced activity in West Africa. We now expect IMDS operating income to decrease significantly compared to the full year of 2025 and for operating income margin to be in the low single-digit percentage range. The outlook for other operating segments remains unchanged, with performance trending in line with or ahead of our prior expectations. In summary, we are pleased with our performance in the second quarter and first half of the year. Disciplined execution, healthy demand across most of our businesses and a strengthened financial position to support our confidence in the remainder of 2026. While we continue to navigate challenges in our IMDS business, our other operating segments have contributed to first half results that exceeded our guidance. We remain focused on delivering value to our customers and shareholders. We appreciate everyone's continued interest in Oceaneering and we'll now be happy to take any questions.

[Operator Instructions] Your first question comes from the line of Keith Beckmann from Pickering Energy Partners.

Congrats on the quarter guys. My first question is just, obviously, we got the refinancing this quarter. You guys have kind of built a nice net cash position and you kind of $10 million a quarter buybacks now for a little while. Just wanted to get your thoughts on this capital allocation change at all? And maybe what opportunities are out there, given you guys got a longer runway now?

I would say we still say organic first, inorganic growth second and then return of capital to the shareholders, again, with the share buybacks being primary right now. So let me lock down those 3. When I think about organic, 1 of the things I -- thanks for giving me the opportunity to point this out. We still are very proud of our energy business. And so we look for ways to invest and grow that energy business. And I would just say think about investing more around the core, the highest performing parts of that energy business, especially like SSR, for example. And sometimes, people wonder, well, you know how much more capacity can you absorb. It's not really just about capacity. We think about the way we deliver value, and that's through automation, through high-tech services, being the best provider out there, giving the customer what they really want. And that's -- they're very focused on a specific set of services done really reliably, high availability, high availability in any weather, those kinds of things. With a greater automation, I think that's where we're really pushing that core business. And we intend to not just defend but to grow that core part of our business. So there will be investment made there. And then when we switch to sort of the other part of our core business that defense side, where we know that it could be bigger. And we really see opportunities for us to expand in that space. and that may require not just some organic investment like we have made around the big projects that we've been winning, but also around some inorganic things, some places where we think we can really add value but not go out and compete with some of these, I mean, just unbelievable valuations around some of the tech and defense. So while we are definitely playing in that space, we have tech of our own we think of our specialty really being about the people who have proven experience, getting the stuff offshore, off and on a boat, that really making these things work in real time. And so we think we can partner with other companies there, but we also think there are some other businesses we can either increase their participation in defense or even bring existing businesses to have a greater, I think, greater volume in defense business. So there are some really good opportunities there. And I think out with any big shifts, we'd like to continue to do our share buybacks. We think if the opportunities are there, we are opportunistic, but we're not taking them off the table and look at something else.

Awesome. That's really helpful. And then my second question is just here around -- I don't want to get too ahead of myself. But thinking into 4Q and then into next year. offshore, I just wanted to think about the SSR, how do you utilization to be potentially into next year and then kind of twofold on the PC side of the business, really strong 3Q looks good as well. How sustainable is that going forward? It sounded like Caspian -- and Egypt did really well, but just trying to think about the growth trajectory of OPG after a really strong quarter there.

Yes. Let me start with SSR. I mean we see -- just like so many other people are calling out, greater rig utilization, which means I think, greater use for ROVs. Also on the tree installation side, the tree orders and reinstallations being strong, that bodes well for ROVs as well, our ROVs on vessels. So I think we see both of them. We've got some, for example, some rigs that are still being contracted, but they may be moving from region to region. So I think you see some increase. And then we see as those rigs get into position and other increase kind of in that range of time that you mentioned. So I think SSR looks good. Again, continued utilization of the survey vessel which is the other part of SSR. So that also looks strong. And then tooling, which goes along with the RV. I would say that's good. For OPG, I think the thing to watch is a lot of people said, "Hey, an increased share price should drive OPG intervention work should be happen and people should be picking up rigs on U.S. land if the commodity price stays high. As we -- I think everybody sees -- we see dipline around that. We don't see people just going crazy, but we do see, I think, increased interest and increased activity. So it's not -- while it's not a big spike. I think we see that happening. I think more importantly, it's longer term. I think we see more longer-term confidence in doing projects and thinking about things. We don't see this as being a short burst in time. I think people see more the demand being up for a longer period of time and geopolitical issues moving around from here to there, but we'll continue to leverage the infrastructure we have in place and to make new developments. So I think that longer-term outlook is actually voting as strongly for OPG as just the near-term commodity price. Mike, would you add anything?

I would and just to that last point, I think, with rigs also you're seeing longer-term contracts which is a great indicator of the operator recognizing that there -- they need to lock into these rigs now at the prices, which are still fairly favorable to a few years back, and extending those out, and we're going to extend along with them. So I do think it's good from a macro perspective as well. Yes. I mean, ROV contracts reflect the same. We're getting longer -- more and longer RV contracts as well. So yes. Yes.

[Operator Instructions] Your next question comes from the line of Josh Jayne from Daniel Energy Partners.

One of the things we've heard from some of the diversified as they alluded to a change in tone and conversations with NOCs around energy security how they're framing spending moving forward. I think Rod, you alluded to it a little bit in your last answer. But any insight you could provide with NOC discussions and maybe walk around the world a bit to offer where you think you could see most growth over the next couple of years just in light of everything that's happened in the Middle East.

Yes, sure. I mean I think the first one I call out is Brazil. Brazil is definitely active again, Petrobras, very interested in leveraging their strength as being a very large producer out with the Middle East. And so I think there's a really strong one. And we see that, right? I mentioned the ROV contract, but we see other activity down there as well. So we build contracts coming out and stuff like that. So I think Brazil is the first one I'd call out. Africa. I think Africa is still strong, and there's -- there's a lot of good projects in the works, people looking -- going back and looking at places that haven't been as active recently and then, of course, the new stuff. So things around Namibia and Senegal and others, we saw the Totale announcement in the Orange Basin. So I think watch Africa definitely. And when you think about energy security, Australia, in Australia and the Far East again. So I kind of rank them in that direction, not necessarily because that's where the biggest opportunities lie. But I think we've got -- we've got a lot of weight in the first 2. So for us, I think they'll affect us most. But Australia is a really interesting one. I think I'd watch that because certainly, they have the ability to move fast relative to, say, say, Africa or somewhere else because they've already got so much infrastructure.

Proximity to China and the demand of the economies and where the demand is high. And I would also say Equinor, right, in North Sea A lot of activity there. 30% of their gas goes to Europe to talk about security. Does that grow -- and do you see more activity with some of the tiebacks in Norway. I think you're going to see more of that as well.