Oceaneering International Inc

NYSE:OII

Earnings Call Transcript 2021-Q3

[Operator]

Hello. My name is Deb and I will be your conference operator. I would like to welcome everyone to the Oceaneering's Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

With that, I will now turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations. The floor is yours.

[Mark Peterson, IR]

Thank you, Deb. Good morning, and welcome to Oceaneering's Third Quarter 2021 Results Conference Call. Today's call is being webcast, and a replay will be available on Oceaneering's website. Joining us on the call today are Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments; and Alan Curtis, Senior Vice President and Chief Financial Officer.

Before we begin, I would just like to remind participants that statements we make during the course of this call regarding 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 comments today are also non-GAAP -- also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our third quarter press release. We welcome your questions after the prepared statements.

I will now turn the call over to Rod.

[Rod Larson, CEO]

Good morning, and thanks for joining the call today. At this time of the year, most of the questions we receive are focused on the coming year. So we're happy to start by providing you our initial thoughts on Oceaneering's 2022 outlook.

As announced yesterday, we're initiating 2022 EBITDA guidance in the range of $225 million to $275 million. At the midpoint, this would represent a 16% increase as compared to our revised guidance for calendar year 2021 adjusted EBITDA midpoint of $215 million. We're confident in our ability to deliver this solid improvement in 2022 based on the quality and efficiency gains from process enhancements, continued recovery of the global economy, commodity prices supporting increased activity in our energy segments, solid fundamentals in our Aerospace and Defense Technologies segment and year-over-year backlog improvement in our Manufactured Products segment. This level of 2022 performance also underpins our expectation to generate similar levels of free cash flow as compared to 2021.

Now I'll focus my comments on our performance for the third quarter of 2021, our current market outlook, Oceaneering's consolidated and business segment outlook for the fourth quarter and full year of 2021 and our initial consolidated 2022 outlook including the previously mentioned EBITDA guidance range and expectations to generate similar levels of free cash flow as compared to 2021 to support growth activities while continuing to improve our net debt position. After these comments, I'll then take some -- make some closing remarks before opening the call to your questions.

Now to our third quarter summary results. Our planning and preparation were instrumental in our team's ability to navigate through the challenges presented during the third quarter, which included hurricanes, inflation, a tightening labor market and a constrained global supply chain. Despite these challenges, we produced consolidated EBITDA of $50.3 million, a decrease from the second quarter of 2021, but within the guidance range provided at the beginning of the quarter. We made additional progress with debt reduction during the third quarter with $32.5 million of open market repurchases of our 2024 senior notes, bringing the total repurchases to $63 million for the year.

During the third quarter, we generated $36.5 million of cash flow from operations and generated $24 million in free cash flow. Our cash balance at the end of the third quarter fell slightly to $448 million, primarily due to the aforementioned repurchases of our 2024 senior notes.

Offshore work in our energy-focused businesses remain seasonally active during the third quarter. However, our operations in the Gulf of Mexico were muted by Hurricane Ida and high loop currents. In general, each of our 5 operating segments performed as forecast at the beginning of the third quarter.

Now let's look at our business operations by segment for the third quarter of 2021. Subsea Robotics or SSR revenue increased slightly with good continuing offshore activity levels as compared to the second quarter. However, operating income declined primarily from lower margins for remotely operated vehicle or ROV services, attributed to changes in geographic mix and the special bonus that recognized our technicians for enduring extended work rotations throughout 2021 due to COVID-19 challenges. As a result, SSR adjusted EBITDA margin of 29% was slightly lower than compared to the second quarter.

The SSR revenue split was 79% from our ROV business and 21% from our combined tooling and survey businesses compared to the 80-20 split, respectively, in the immediate prior quarter. Sequential ROV days on hire increased slightly as offshore activity remained seasonally active. With an increase in days for both drill support and vessel-based services, days on hire were 14,474 as compared to 14,005 during the second quarter, a 3% increase. Our fleet use was 57% in drill support and 43% in vessel-based services versus 58% and 42%, respectively, in the second quarter. We maintained our fleet count at 250 ROV systems, and our third quarter fleet utilization was 63%, up slightly from 62% in the second quarter. Average ROV revenue per day on hire of $7,858 was 2% lower than the average ROV revenue per day on hire of $8,056 achieved during the second quarter. At the end of September, we had a 58% drill support market share with ROV contracts on 77 of the 133 floating rigs under contract, which was the same share as the prior quarter when we had ROV contracts on 73 of the 126 floating rigs under contract. Subject to quarterly variances, we continue to expect our drill support market share to generally approximate 60%.

Turning to manufactured products. Sequentially, our third quarter 2021 operating income and operating income margin were essentially flat with the second quarter despite marginally lower revenue. Third quarter 2021 revenue of $75.4 million remains suboptimal, which continued our challenge -- to challenge our ability to leverage the cost base of this business. Activities in our mobility solutions or nonenergy manufacturing remains subdued, but are expected to see a gradual increase as the economy continues to recover. Our manufactured products backlog on September 30, 2021 was $334 million, improving on our second quarter backlog of $315 million. Our book-to-bill ratio was 1.3 for the 9 months ended September 30, 2021, and was 1.0 for the trailing 12 months.

Offshore projects group or OPG third quarter 2021 operating income was relatively flat as compared to the second quarter of 2021 on an 11% decline in revenue. Revenue benefited from good ongoing seasonal activity and inspection, maintenance and repair or IMR work in the Gulf of Mexico, despite some work delays caused by Hurricane Ida and high loop currents. The conclusion of field activities on several projects in Angola was the primary driver for the sequentially lower third quarter revenue.

Operating income margin improved from 7% for the second quarter of 2021 to 8% in the third quarter of 2021, primarily due to improved performance on the Angola riserless light well intervention project.

Integrity Management and Digital Solutions, or IMDS, sequential operating income was higher on relatively flat revenue. Operating income margin improved to 9% in the third quarter of 2021 as efficiency improvements continue to show incremental benefits.

Aerospace and Defense Technologies or ADTech third quarter 2021 operating income declined from the second quarter of 2021 on a 15% decrease in revenue. Operating income margin declined to 16% as expected due to a higher component of low-margin manpower activities.

Unallocated expenses of $31.8 million were slightly higher as compared to the second quarter of 2021, but less than expected, primarily due to delayed spending on information technology infrastructure.

Now I'll address our outlook for the fourth quarter of 2021. We are projecting a decline in our consolidated operating results on slightly higher revenue with EBITDA being approximately the same as our third quarter 2021 results. Although we do expect to see some benefit from the work that was pushed out from the third quarter of 2021 as a result of hurricanes and loop currents, we still expect to see the typical seasonal slowdown in offshore activities during the fourth quarter. Broadly for the fourth quarter of 2021 as compared to the third quarter, we expect improved operating profitability in our energy segments to be offset by lower AdTech operating results and higher unallocated expenses.

For our fourth quarter 2021 operations by segment as compared to the third quarter of 2021, for SSR, we are projecting relatively flat operating profitability on a modest decrease in revenue as compared to the third quarter. ROV days on hire are forecast to decline due to typical seasonal factors with good survey activity continuing during the fourth quarter. Our forecast assumes overall ROV fleet utilization to be in the high 50% range.

SSR EBITDA margin is anticipated to improve as compared to the third quarter due to the exclusion of one-off expenditures that impacted the third quarter. As of September 30, 2021, there were approximately 15 Oceaneering ROVs on board 11 of the 17 floating drilling rigs with contract terms expiring by year-end. During the same period, we expect to have 29 ROVs on 25 of the 37 floating rigs to begin new contracts.

For manufactured products, we anticipate a significant increase in revenue and operating profitability as the higher level of awards seen over the first 3 quarters begins to flow through our manufacturing facilities. Operating margins are projected to improve to the mid- to high single-digit range as we expect to be better able to leverage our cost base.

Award activity continues to look promising in our energy products businesses. We expect continued near-term headwinds in our Mobility Solutions businesses as our customers seem focused on strengthening their balance sheets before committing to new CapEx projects. We continue to forecast a book-to-bill ratio of between 1.1 and 1.5 for the full year of 2021.

For OPG, we project substantially lower revenue and lower operating results due to typical fourth quarter seasonality and the reduction in contribution from field support activities in Angola. Operating income margins are expected to decline to the low to mid-single-digit range, primarily as a result of fixed cost being spread over a lower revenue base. As mentioned, we expect some carryover of third quarter Gulf of Mexico IMR activity that was delayed due to Hurricane Ida and high loop currents, but do not see this as significantly improving fourth quarter results. For IMDS significantly improving fourth quarter results. For IMDS, we expect both revenue and operating results to remain relatively consistent from the third -- with the third quarter of 2021. For ADTech, we forecast relatively flat revenue and lower operating results as compared to the third quarter. For the full year of 2021, we continue to expect operating margin to be approximately the same as the adjusted operating margin for 2020.

Unallocated expenses are expected to be in the mid-$30 million range due primarily to increased spending on information technology infrastructure. And for the full year of 2021, based on our segment level guidance, we are expecting that each of our operating segments, except for manufactured products will show sequential year-over-year improvement. We expect to generate adjusted EBITDA within the narrowed range of $210 million to $220 million. We are also narrowing our guidance for capital expenditure to the range of $45 million to $55 million. Our guidance for cash tax payments remains in the range of $40 million to $45 million. We continue to expect $28 million of remaining CARES Act tax refunds with $4.7 million of this amount received in the third quarter of 2021. The timing of receipt of the remaining $23 million of these payments whether in 2021 or 2022 remains uncertain.

Regardless of the timing of these payments, we continue to expect positive free cash flow generation for 2021 to be in excess of that generated in 2020.

Now turning to our balance sheet. Our net debt position improved during the third quarter as we repurchased an additional $32.5 million of our 2024 senior notes for a year-to-date repurchase total of $63 million. Our cash flow from operations was $36.5 million, and we had $448 million of cash and cash equivalents at the end of the third quarter. We continue to expect free cash flow generated in 2021 will exceed that generated in 2020. We are well positioned to address the maturity of our 2024 senior notes. And we have our undrawn revolver, which steps down from $500 million to $450 million during the fourth quarter of 2021 available to us until January 2023.

Now looking forward to 2022. Confidence is returning to the energy services industry and commodity prices appear supportive to continued gradual growth in offshore oil and gas markets over the short and medium term. And we anticipate accelerating interest and growth in offshore energy transition markets, including offshore wind over the longer term. We believe that our energy segments are positioned to benefit from the growth in both of these markets. We also believe that our government-focused segment ADTech remains well positioned for continued steady growth in aerospace and defense markets.

Accordingly, in 2022, we anticipate increased activity and improved operating performance across each of our operating segments, led by gains within Subsea Robotics and offshore projects. At this time, we forecast EBITDA in the range of $225 million to $275 million in 2022, serving as the catalyst for generating healthy levels of cash flow from operations. With higher projected levels of cash flow from operations, we expect to be able to invest more in growth capital expenditures in 2022. With a firm capital discipline focus, as demonstrated over the past several years, we expect to generate positive free cash flow at levels similar to 2021. We'll provide more specific guidance on our expectations for 2022 during the year-end reporting process.

In summary, based on our year-to-date financial performance and expectations for the fourth quarter of 2021, we're narrowing our adjusted EBITDA guidance to a range of $210 million to $220 million for the full year. I'm encouraged by the positive market fundamentals supporting our traditional businesses and our increasing participation in emerging markets. Confidence is returning to the energy services industry and especially to those companies that can help their customers achieve carbon reduction goals. This, combined with an expected rebound in our Mobility Solutions businesses and continued growth in our government businesses underpin our general expectation for increased activity levels over the next several years. Our focus continues to be on generating positive free cash flow in 2021 and 2022, attracting and retaining top talent, mitigating the effects of inflation and supply chain issues, addressing our 2024 debt maturity, maintaining financial flexibility and growing Oceaneering by leveraging our technologies and capabilities into new markets. We appreciate everyone's continued interest in Oceaneering, and now we'll be happy to take any questions you might have.

[Operator]

[Operator Instructions] Your first question comes from the line of Taylor Zurcher with Tudor, Pickering.

[Taylor Zurcher, Tudor, Pickering]

My first one is just on the 2022 outlook at the EBITDA line, very encouraging, at least relative to what I was expecting. And really my question is specific to the segment. You called out SSR leading the way, but also OPG. And when I think about OPG, it just feels like that segment benefited from a lot of discrete projects in Angola or I should say, one discrete project in Angola and obviously, there's a lot of call-out type speculative work in the GoM that goes on in that segment. So just curious what's framing the improved outlook for OPG in 2022 relative to 2021?

[Rod Larson, CEO]

Taylor, I think you nailed it. I mean, discrete projects, right? And so when we look at the contracting activity right now, request for quote, what we see very tangible market signals. And we see that improvement in the customer signal to us. So I would just say stay tuned. Hopefully, we'll be able to share some of that news more specifically in the next month or so. So that should clear some of that out.

[Taylor Zurcher, Tudor, Pickering]

Okay. Understood there. And then a follow-up just on capital allocation with the improved EBITDA generation in 2020. Two, it certainly makes some sense or you certainly have the flexibility to increase your growth spend next year. And it's just interesting to me that the sort of buckets you called out on the growth capital spend for next year, which were largely all non-oil and gas type opportunities. So curious if you could just help us think about where you're seeing the best opportunities to allocate growth capital today? And how we should think about capital allocation between your traditional offshore oil and gas-oriented businesses versus some of your other non-oil and gas oriented segments?

[Rod Larson, CEO]

Sure. Happy to do that. So it's interesting when we look at it. I look at our -- kind of our new product development stream and about maybe 10% of our new product development is focused on things that are specifically oil and gas. And then the other 90% is things -- they may have some application in oil and gas, but they're also targeted for other developing markets. So I think we've got a nice balance of the markets we serve and the direction we're going because especially whether with the new product development, that's key.

And the other side for oil and gas is we know that most of our markets are still oversupplied. So they don't require a lot of doubling down on capital. So where do we spend in the oil and gas market, we're looking at ways that we can help our customers reduce their carbon footprint. So you think about things like freedom, autonomous vehicles that will create fewer days of large vessels being on the water to support subsea activities. Also our Liberty resident ROV vehicle, that's one that we see money going to. And then [indiscernible] which is a vehicle really specifically built to support the offshore wind market. We see some opportunities to build more for the offshore wind, route clearance, more route clearance type equipment. And then on the nonenergy side, again, building out on some of the things we do. Our Mobility Solutions business is one where we've got more AGV-type vehicles that we can build some -- also some opportunities maybe longer term and entertainment.

And then finally, I think the one that's most exciting for us that a lot of people don't see is the IMDS business In more data and being able to do more predictive modeling for our customers. When you think about carbon reduction, obviously, escapes are one of the biggest things that we avoided. So being able to do a more robust analysis for our customers and being able to give them greater insight into their infrastructure, very, very strong opportunities there. So we think there's great opportunity to build on that business and to expand our capabilities.

[Operator]

Your next question comes from the line of Ian MacPherson with Piper Sandler.

[Ian MacPherson, Piper Sandler]

How do you think about the most promising offshore deepwater basins next year? I think we see a lot of movement in Brazil and [indiscernible] South America at large as an obvious growth point. Others to me are less clear directionally. I mean, it seems like the Gulf of Mexico, theoretically has nowhere to go but up, and we see some big 20,000 projects starting up, but not immediately in the first half of next year anyway. And then maybe the North Sea and Norway already are off of their cyclical bottom, a little bit earlier than the rest of the world. So I don't know how those project into '22. So I wanted to ask you how you're thinking about the key basins from a growth perspective, '21, into '22?

[Rod Larson, CEO]

Well, Ian, I think you nailed it. I'm trying to see what I can add there. Definitely, South America is strong with all the investment [Guyana], particularly. But Brazil opening up a little more to the IOCs, I think, can create some opportunity there. So that looks good. You mentioned Gulf of Mexico. I think it is very project specific, but get big [indiscernible] [BHP Trion] is one that could be bigger in the Mexican side of the Gulf of Mexico. We don't always talk about that, but there are some big projects there that have potential if they taking kind of go according to schedule. You've got -- you still got Norway, like you said, the activity has been really well sustained and that we like that one because it's generally a consumer of technology so that we always like to see things happening in Norway. But I think one that you didn't mention so much is West Africa. And we do see improvement in West Africa, maybe not a boom, but coming -- getting some of it strength back. So that would be good as well, especially for us. We've got that strong presence in Angola. Whether it's based on new work or just reinvestment in the infrastructure that's already there, obviously, that's been great for Oceaneering. So I think high commodity price would bode well for West Africa as well.

And then the projects in East Africa. There have been big projects there that -- whether it's the Total Energy's work that got held up a little bit by some of the political interest in Mozambique. But there's an opportunity for that stuff to pick up again as well. So I'd say watch Africa, that could be maybe one of the swing activity places for most of us in deepwater.

[Ian MacPherson, Piper Sandler]

Great. And then I was going to ask just following on to Taylor's question before on capital. It looks like you're -- you should be below 1x leverage by the end of next year. What can you say today about the ambition to return cash via dividends or buybacks or preference between the two. And how important that is as part of the capital strategy at Oceaneering?

[Rod Larson, CEO]

Yes. I'd say [TBD]. I mean, we've got a lot of great -- I think a lot of good ideas on growth. But I don't want to give anybody this idea. Some of the growth in the emerging markets, it's got to be timed right. So we're going to have to keep an eye on that. If we find that some of these things aren't developing as fast as we can. I don't want to put a bunch of stuff on the shelf and wait. And maybe if that creates an opportunity, we'll go back to revisiting the dividend. But for right now, I mean, I think we're being pretty conservative about that anyway. So I don't think we're talking about a lot of that to be questioned right now, but nothing is off the table. We want to be really, really disciplined and only kind of deploying what we think we can get a good return on. And if that creates an opportunity to do something in the future, we'll definitely look at that.

[Operator]

[Operator Instructions] Your next question comes from [Samantha Hu] with Evercore ISI.

[Unidentified Analyst]

I'd like to go back on the ROV and offshore stream. Definitely, it seems like there's been a couple of rigs that are being reactivated for fairly decent contracts, and you guys highlighted that you have 49 ROVs on 37 rigs starting [indiscernible]. I was wondering if you could talk to maybe the staffing of technicians for those ROVs. Are you able to actually just move people coming off of rigs onto another rig? Are you able to hire back technicians that you previously had? Maybe you can tie to you speak to how sort of challenges and logistics that you have to deal with in terms of the rates coming back and then what you're dealing with on the labor side?

[Rod Larson, CEO]

I think you hit on a great issue is that, that is challenging. So far, we've been pretty effective. Again, your -- you got it right. We go back and get some of those people. We were operating far more ROVs at one point. So we had a bigger staff then. So we've been able to go back and get some of those people back. But like everybody else, some of the people who quit doing this kind of work aren't that anxious to go back to working offshore and especially when there's -- they saw what happened during COVID where people had extended hitches, that's one of the reasons why we paid that special bonus last quarter. So incentives have to be there for people to kind of return to work. But we've always been successful. And one of the things that I think people miss is we look at some of the phenomenon that are happening, for example, in the U.S. But when we put out the call to employ more ROV techs in [Guyana]. And if we were doing it in Mexico, which we have done in the past when we called [indiscernible] Angola, in the Far East, both India and Malaysia and Indonesia. When we put out the call there, it's -- the lines are long. We still -- we can still draw a lot of talent from those areas to serve our international locations.

So I think that, that's always been the seekers being able to train locals and being able to have great local content and then not be particularly leveraged to any one labor market. So that's been helpful. Is it challenging? Yes, it's challenging. But it's -- again, it's one of those places where our global footprint has been really helpful.

[Unidentified Analyst]

Okay. Great. And just also -- I mean, I don't think you gave -- maybe it's too early, but is there any way to get some sort of commentary around bookings for manufactured products next year? Do you think you'll be able to hit sort of the similar booking range for next year?

[Rod Larson, CEO]

I don't know that we're ready to talk about levels. Kind of like what I said about projects, I'd say, just watch the news, maybe we'll at least give you some color on some things that are coming in because we do expect there'll be some news to share in the near future. So again, stay tuned, and we'll give you at least a little more anecdotal evidence that tells you what those levels might be.

[Unidentified Analyst]

Okay. Thank you for providing 2022 guidance.

[Operator]

[Operator Instructions] Gentlemen, we have no questions in queue. Do you have any final closing remarks?

[Rod Larson, CEO]

No, I would just say that since there are no more questions, I'll just wrap up by thanking everybody for joining the call. And this concludes our third quarter 2021 conference call. Thank you, Deb.

[Operator]

Thank you for participating in today's conference. You may now disconnect your lines.