Oceaneering International, Inc.
Q2 2021 Earnings Call Transcript

Published: 29 Jul 2021

[Operator:]

Good morning. My name is Julie and I will be your conference operator. I would like to welcome everyone to the Oceaneering's Second Quarter 2021 Earnings Call. all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. With that, I will now turn the call over to Mr. Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations. You may begin.

[Mark Peterson:]

Thank you, Julie. Good morning and welcome to Oceaneering's second quarter 2021 results conference call. Today's call is being webcast and a replay will be available on Oceaneering's website.

[Rod Larson:]

Thanks Mark. Good morning everybody and thanks for joining the call today. We're pleased to be sharing our positive net income results and solid financial performance for the second quarter of 2021. These results reflect a marked sequential increase in activity as four out of five of our operating segments delivered a revenue increase on average of more than 19%. As announced yesterday, we are raising our EBITDA guidance range to $200 million to $225 million for 2021. And to avoid any doubt or confusion, we are not changing our free cash flow guidance. The confidence in increasing our guidance range stems from our strong first half 2021 financial performance, the increase in demand -- energy demand as a result of the increasing number of COVID vaccinations allowing for an easing of restrictions, the OPEC Plus production discipline yielding supportive commodity prices, and the positive trend in the global economic recovery. Confidence is returning to the energy services industry and especially to those companies that can help their customers with 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. Now, I'll focus my comments on our performance for the second quarter of 2021, our current market outlook, Oceaneering's consolidated and business segment outlook for the third quarter of 2021, and Oceaneering's improved consolidated 2021 outlook including a higher adjusted EBITDA guidance range, continued expectation to generate free cash flow in excess of 2020, and reducing our net debt position. After these comments, I will then make some closing remarks before opening the call to your questions.

[Operator:]

Your first question comes from Ian MacPherson.

[Ian MacPherson:]

Good morning, Rod. Thanks for all the color as always. Just like a high-level perspective visibility for deepwater activity going into 2022. And I know, it's too microscopic to look at your seasonal ROV utilization. So you'll have more robotics activity seasonally in Q2 and Q3. But I would imagine that, we have an uptrend and deepwater rig count visibility going into next year. Can you talk about tendering and what types of discussions you're having with operators regarding their needs for ROVs into next year just generally? And what flavor of growth we might consider at this point for the market broadly?

[Rod Larson:]

Yeah, it does feel good. I'll just say that. We can feel it. But there's no – it's not like somebody dropped the start flag we'll say that. It's a gradual increase. We don't – we can't necessarily see a huge spike in the number of floating drilling rigs. But I think the optimistic thing we see is that, we're going through contract renewals. We're seeing longer contracts. Again, we're seeing people looking for the one and the two-year deals where we were going well-by-well in the past. So I would say that, that's kind of the tone is that yes it's optimistic. Yes, we see it going up, but it's going to be a ramp-up. It's not there's not going to be any big spikes.

[Ian MacPherson:]

Okay. That makes sense for now and it sounds like it's probably maybe biased to firm up from that as we go through the back half of the year. And then I think every earnings call for every company in the world this quarter is asked about how you're coping with inflation supply chain kind of once. I would think of that as being particularly relevant for ADTech but you seem to have a pretty sanguine outlook there. So I just want to talk about any potential storm put out there or how you're addressing those issues and the margin profile business structurally going forward?

[Rod Larson:]

Yeah. I think the steadiness of our contracts and the way that the ADTech work is contracted that's actually pretty well insulated from a lot of those changes, because it's been more predictable. I think where you're going to see it is as we start to contract new work, some of these new orders come in. Generally, we've been well, again, protected in the sense that we had back-to-backs with the large suppliers on the manufactured products and things like that. But I think you're going to continue to see just like everybody else, who knows this whole the great resignation. We're going to – we're all going to see pressure on labor costs, people costs that's going to be something that we have to watch and we have to kind of signal to our customers early. But again, it's happening to everybody. So I don't think there's going to be a lot of pushback when they start to see that, those costs go up. The typical things we're just watching it very carefully. Fuel and a lot of those things on the boats, most of that gets passed along as we go. So I don't see any big cliffs out there. But there is generally a rise like you said, cost of almost everything is going up slightly. So it's just a matter of making sure that we signal early to the customers and we build it into the contracts.

[Ian MacPherson:]

That's great. Thanks, Rod. I’ll pass it over.

[Rod Larson:]

Thanks, Ian.

[Operator:]

Your next question comes from the line of Mike Sabella.

[Mike Sabella:]

Hey, good morning, everyone.

[Rod Larson:]

Good morning, Mike.

[Mike Sabella:]

So I don't think it's – I guess, maybe it's a little early to start thinking about 2022. You kind of commented a little bit on there. I was wondering if you could just kind of poke around on the CapEx budget next year. As you sit here today, is there anything that you would flag that we should be aware of that could require capital next year? And as we think about CapEx over the medium term, how should we be thinking about that? Is that a percentage of sales? And then is the CapEx budget that we're seeing this year? Is that sustainable, or is it – do you think it kind of moves up from there?

[Rod Larson:]

I think you have to watch a few things, Mike. And it's a great question. As you expected, it's hard to answer. But think about things like, you saw, the turnover in the ROV that we talked about in this meeting. And we're upgrading ROVs. We were adding capability to the conventional ROVs, but we're also modifying some of them to work in the renewables market long may continue. That's good stuff. That related to contracts. That's related to the shift to the renewables. So I think that's good. I also like investment in things like freedom some of these changing market opportunities. Those are the growth capital that I expect we'll keep spending on. And then the thing that's harder to predict is do we have to pick up assets for a contract or something like that. I think those are going to be if they come -- if those kind of opportunities come, they're going to come with upside on revenue and upside on EBITDA. So I think probably if you said does it -- is it sustainable? Not really if you're growing, but can you keep it more like a percentage of revenue like you said if you're growing, I would say yes. I think you're kind of triangulating on it the right way.

[Mike Sabella:]

Perfect. That's a very helpful answer. And then your leverage ratio is down to 1.5 times. You guys seem to be more confident that the 2024 maturity was under control than any point in the past couple of years for sure. Is there a target leverage that you all can share with us that you are looking for at this point in the cycle? And then as you get there? I know you mentioned some potential growth CapEx. Could you just talk about other capital allocation priorities that you could have heading into next year?

[Alan Curtis:]

Yeah, Mike. Yeah, I certainly think, obviously, the lower the leverage ratio; the more comfortable we are as a company. But I think it's getting that fine balance of being able to have some growth CapEx in our plan for next year. I mean you ask Rod, is it sustainable? Yes if you're not growing. But I think it's looking for those niche technologies, looking for opportunities to find other ways we can grow into adjacent markets from where we are today. And I think that's where we would probably spend a little more on the CapEx. I don't think it's going to be one that would change our overall leverage ratio significantly from where we're at today though. So I think the 1.5 is certainly given our guidance for free cash flow this year and the expectations that you can start reading through into next year should be reasonably well there. So that would just point towards a potential lower leverage ratio.

[Rod Larson:]

Mike, I'd just add when we talk about the capital, the ROV fleet being fairly stable if the drill support market is stable that's that renewal and replacement that tends to go on. But on the good side if you start to see other fleets that we would like to be operating people movers, hospital AGVs for hospitals and manufacturing plants. Those would be the kinds of things that I would speak to as the good upside.

[Alan Curtis:]

Yeah. And I think the other part of that leverage ratio, we're always looking at is what is the runway when does the maturities really come due? If they were due tomorrow that would lead us to maybe a slightly different conclusion, but with the debt maturities into 24 and 28 that gives us confidence we have the ability to deal with them.

[Mike Sabella:]

Yeah. Thank you.

[Alan Curtis:]

Thanks Mike.

[Operator:]

Your next question comes from the line of Taylor Zurcher.

[Taylor Zurcher:]

Hi, good morning, and thanks for taking my question. Good to see the 2021 EBITDA guidance range moved higher. I guess my question is for the back half of the year, it sounds like you've got some better visibility towards a healthy seasonally adjusted level of activity for IMR work in the Gulf of Mexico. Just thinking about the high end and the low end of that range. Could you just help frame for us, what the primary wild cards would be or drivers on getting to the high and low end of that range? Is it primarily the level of `IMR activity you're seeing or that you will see, or are there some other factors that could play a role as well?

[Rod Larson:]

No, you got it. And remember IMR runs through both Subsea Robotics and OPG. So if we see a longer season where there are more boats on the water more IMR work that seasonal activity kind of extending out really strong through the third quarter and even bleeding into the fourth quarter you could see -- you could see the high end of the guidance coming from both the Subsea Robotics business and OPG. So yes, that's good news that believes in both of those businesses.

[Taylor Zurcher:]

Got it. And my follow-up you touched on this a bit in Q&A already, but if I heard you correctly, you added two Isurus systems in Q2. And I'm just curious how conversations with customers are progressing around some of these new technologies like Isurus and the Freedom and Liberty vehicles. And it sounds like you can do these retrofits in a pretty capital efficient manner. But just curious and what we should see moving forward in terms of market adoption of those sorts of technologies?

[Rod Larson:]

Yes. And I like the way you said that, because number one, there is a retrofit component. But if I had to rank these, the Isurus demand is here now, because that is really related to shallow water work that's happening in the renewables business. So it is front and center and that's why you see us talking more and more about adding those units. The other side of it is the compatibility with the Isurus with a lot of the support systems that we have, the overboarding system, the wind system that lowers it to the water, the control cabins everything else, it's got a lot in common with our standard system. So we can -- it's the ultimate recycling program. We can use a lot of existing hardware to put an Isurus system out, which reduces the cabin cost, it increases our speed to be able to deliver. So that's good. And it's the one kind of again front and center. Liberty would be next. And Liberty is the resident system. Again, it's got a lot of similarities with the traditional ROV system, a little more CapEx intensive in the sense that it's got a battery pack and it's got a buoy that comes with it and some other things, again, probably nearer to fruition because it's really you talk about technical readiness level it is closer to the things that are already being done today. So we see the customers' confidence with that kind of technology is up front and center. And then Freedom, again, offers a lot of kind of new capability. And with new capability, the technical readiness is a little more challenging, more things to prove, more trials to run, but the capability unlocks is even bigger than perhaps the other two. So I kind of put them there about timing-wise, proven easy stuff on the Isurus system that really makes a difference in the daily operating sort of doing things that you didn't know that you could do with the Freedom on the other end. It all kind of plays together, and it gives us some encouraging signs that over time all of these things are going to be happening in their own -- on their own time cycle, which kind of delivers over time in a really nice way.

[Taylor Zurcher:]

Great. Thanks for the answers.

[Rod Larson:]

Yes. Thanks Taylor.

[Operator:]

You have no further questions at this time.

[Rod Larson:]

Thank you very much. Well, since there are no more questions, I'd like to wrap up by thanking everybody for joining the call. This concludes our second quarter 2021 conference call. Have a great day.

[Operator:]

This concludes today's conference. You may now disconnect.