Good morning. My name is Katelyn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oceaneering Third Quarter 2016 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Suzanne Spera, Director of Investor Relations. You may begin your conference.

Thank you, Katelyn. Good morning, and welcome to the Oceaneering third quarter 2016 results conference call. Today's call is being webcast and a replay will be available on Oceaneering's website. Joining us on the call are: Kevin McEvoy, Chief Executive Officer, who will be providing our prepared comments; Rod Larson, President; Alan Curtis, Chief Financial Officer; and Marvin Migura, Senior Vice President. 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 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'll now turn the call over to Kevin.

Good morning and thanks for joining the call today. On last quarter's call, we highlighted the challenges in the off-shore market arena. Today three months, later the industry conditions we face have not changed and we expect to see more of the same for the forcible future. The leading indicator for deepwater activity, contracted floating rigs declined as the rate of rigs being ideal either by contract termination or exploration continues un-abated. This prevailing market condition required us to re-access a number of remotely operated vehicles or ROVs we have in our fleet, as well as the associated inventory. As a result, we recorded 36 million charge related to the retirement of 39 ROVs and established an associated reserve for excess inventory. Additionally, we recorded an $8.2 million charge for our Subsea product segment, predominantly for tools and inventory in our portfolio used to support deepwater drilling and operations. As reported in our press release, we incurred a loss of $0.12 a share in the third quarter. On an adjusted basis, our EPS of $0.17 was in line with our expectations and the consensus estimate. Sequentially, adjusted operating income declined 27% due to reduced profit contributions from Subsea Products and ROV partially offset by improved results from Subsea Projects and Asset Integrity. While we remain concerned by the near-term headwinds softening the off-shore markets we serve, we are pleased that for at least one more quarter all of our operating segments remain profitable on an adjusted basis. And while some companies struggle to generate cash flow, our mix of business year-to-date generated $263 million of cash from operating activities which was substantially more than the $83 million we've reinvested in organic capital expenditures. Even in these challenging times we're generating substantial free cash flow to expand the range of services…

[Operator Instructions] Your first question comes from the line of Hafen Milka with Clarkson Platue Securities. Your line is open.

I wanted to touch on the acquisition of Blue Ocean. Can you just walk us through a little bit more what the value proposition is there for you and what presence you may have already in the intervention side, and what this does to strengthen that over the next, call it, two years?

Well, we are already engaged in activities such as asset stimulation, and this gives us wider portfolio of services to offer our customers in the future. And so, it’s greater takeability. It allows access internal to the wellbore and we think this is a good place for us to go.

Would this make you a competitor with someone like Helix who owns the assets, or is this more of a acquisition that makes you more competitive with the service company? If you'll help us understand that part.

This is a market mix that is likely below what Helix is after. They have larger assets, more expensive [indiscernible], and this is a market mix that is below that and can be more cost effective.

Okay. And then separately, I wanted to ask on ROVs. It looks like, obviously, you scrapped or removed a significant number this quarter. One, do you feel like this is the last clean-out in the near term or is there more to come? And secondly, I guess and there's operating cost per ROV day increased significantly. Is that just based on the smaller number of ROVs with the cost spread or?

I'll answer your first question. Alan will answer the second one. As far as whether this is last write down or something I can't say that. This is certainly what we do that's appropriate at this moment of time, but as the market continue to change, we may do something else in the future. But right now, this is what we think is appropriate.

And kind of going to your question regarding the cost on ROVs, we don’t see that our cost increased in the sector. Particularly if you exclude depreciation and an adjusted basis you exclude the 25 to inventory write down, you will notice that our cash cost per day -- per ROV day worked actually went down sequentially.

Your next question comes from the line of Scott Gruber from Citigroup. Your line is open.

There's a number of deepwater rigs that are under contract currently but are either idle or working intermittently. When the floating rig isn't working, I believe you begin to receive a standby rate. Is that correct? If so, how much is that laying on realized day rates in the ROV segment?

Typically, when the rig goes idle, we are not being paid. I mean there are some cases where we might get some equipment rate or something but typically, you are not being paid.

Got it. Are you able to then reduce your costs materially?

Yes. I mean, we removed the people from the rig and essentially there's no cost at that point in time.

Got it. How should we think about the trajectory and realized day rates you're heading into 4Q, and any color on 1Q?

The average revenue per day? Yes, I would expect to see them go a bit lower. Kevin in his call notes, and in Q4 how low to go if we're not certain as you look at the geographic mix and certainly play a component of. You look at the vessel versus rig component could play a little bit and then even FX can play a component. So there's pricing pressures. We certainly see that and expect them to go down a little bit in the forcible future. But to the extent that currency plays or the geographic mix happens, all of those factors weighing on the average revenue per day.

Now, the 3Q drop was less than the 2Q. Should we expect something close to 3Q or should it continue to moderate from here in terms of percentage decline?

I would think that the percentage decline will be closer to the model of the Q3 that we just saw.

Got it. And just one question on go ahead.

I was just going to say, it's not like there's is a lot of new good activity on slowing drill rigs out there. There's just not much activity. Most of what's occurring is the result of discounts that we have to continually a year and then whatever is playing out on the vessel prior to the market, which is still pretty low demand particularly outside the Gulf of Mexico.

Understood. And one question on products. Obviously, the margin compression there will be impacted by a continuation of the revenue decline and lower throughput. Can you just provide some color on the revenue outlook for 4Q? How should we think about the decline there?

I'm not sure I understood the question really.

Color on the revenue decline potential in products 4Q versus 3Q.

Sorry. We are not giving guidance on modeling. We said that we're going to do single -- digit low single digit margins and products and we've giving the answer but not given the numbers.

And I think revenue is dependent on backlog and while we even know what the FID story is there, we get it done. We know new orders in the smaller areas but we are not enough to reverse the decline and working through the backlog what we already have.

Kevin, talked about in his calling notes was lower throughput in the manufactured products business unit coupled with softer demand in our service and business.

Your next question comes from the line of Chase Mulvehill from Wolfe Research. Your line is open.

A question on ROV. If my math is correct, it looks like your cost of services, your cash costs of services, so excluding D&A, was about $74 million in 3Q. Could you help us understand how much of that is kind of variable versus fixed? So that's before SG&A and before D&A, just your cash cost in ROV. What's the mix between fixed and variable there?

We don't have it broken down that way Chase.

All right. And on the ROV side of the business, your margins have held up fairly well. As we get into '17, I would assume probably as some of the higher priced backlog rolls off, that we see EBITDA margins kind of decline from here. Do you think we maintain a free handle with EBITDA margins throughout '17?

I don't think we're prepared to go into margins on '17 at this stage.

All right. I thought you might have a view of that. All right.

No, we're still building our '17 plan. We're in the early stages, so, we're not prepared to go there.

I'll save that one for next quarter's call, then. And so when we think about the extension of BP Angola, does the new contract reprice materially lower, or is it similar to what, on a pricing standpoint, that you're realizing in the third quarter?

We have to negotiate some discount, but I think just to be clear, because it appears that some people may have misread what we wrote, the extension for the contract is two years and we're providing engineering support and project management support and the rest of it for that two-year period. However, the Ocean Intervention III, the vessel has gone through April of '17 with five one month extensions. And so, the vessel potentially goes away sometime between the end of April and five months after that. We have an expectation that at least some of those options will be taken up, but after that, it is BP's call whether they feel the need for another vessel or to keep that one on for the remainder of the two-year period.

Chase, the variability associated with contribution from that contract has a lot more to do with activity level than it will to the pricing.

Okay. So it sounds like there's still -- the scope of this project in '17 is still kind of up in the air. It could be more, or it could be less relative to what you're showing in 3Q. Is that fair?

Post April, that's correct.

Last one and I'll turn it back over. The dividend cut, you still generate enough free cash to cover your dividends. So how should we be thinking about the dividend cut? Does it imply that you'll be more aggressive on pursuing acquisitions going forward?

I think actually it has a little bit more to do with the fact that how much is that dividend being valued. And we just didn't feel, especially with the reduction in the stock price that that rate was appropriating. And so what we'll do with the cash, I think you go back to what we've always said our uses of cash are. It's organic growth and M&A. So you can kind of that that as you will, what we'll do with that cash.

Your next question comes from the line of Ian Macpherson from Simmons. Your line is open.

The 39 ROVs that you retired, would they have been, on average, older or less competitive than your average, such that this write-down is an effective high-grade of your marketed fleet going forward, or would you say that it was push?

I think directionally if that would be correct, then these would be older systems.

I think if you look at the fact there were 39 of them, we have talked about ROVs being $4 million to $5 million apiece, and the net book value we wrote off was circa, $10 million. So I think you could tell this from the write off that it was going to be a lot older assets that we wrote off.

And the number one factor for the write down Ian, is marketability. What was the likelihood, those assets would be going work in the near term, and as Kevin indicated with an average of 9 days or 349 days total in the quarter, these weren’t working, and we didn’t expect them to return to work any time soon.

All right. Thanks. My only other follow-up is could you just give us a just sort of cleaned-up depreciation number for ROVs and maybe for consolidated for Q4 after the charges?

I would say on an adjusted basis it wouldn’t change that much.

Yes, it's going to be down marginally. Not enough.

So the adjusted clean depreciation for Q3 will be down just a tick from Q3 to Q4?

Yes, I would think on an adjusted basis.

If you take out the $10 million.

Your next question comes from the line of Matthew Marietta from Stephens.

Thanks. Thanks for taking the questions. I think I heard the comment that in some of the loose guidance in 2017, you offered marginally profitable. Can you just elaborate, are you talking about the individual segments, or are you talking about the corporate level?

On a consolidated basis, we said.

Okay. Thanks. And then back to the conversation around uses of cash. In the past you've executed buybacks. Could that be an option as well or do you think there's more attractive opportunities in M&A and organic growth?

Buybacks are always an option. As we always say, we prefer to spend it on organic or M&A activities. In today's market, finding organic things to do are kind of difficult, since the market is not really buying much at the moment, and M&A, we are always looking as we always say and it really depends on what's out there is out there that becomes available that fits our industrial logic and adjacency to what we are doing.

And we are looking for M&A opportunity as you can tell with Meridian, Blue Ocean, that these are things that have near term opportunities, that we're not waiting for a return in the drilling cycle to be able to put these things to work. And then it's focused on the OpEx of our business too. I think that's one of the key criteria that we have been looking at.

And when I look at the drivers of the products backlog, I'm trying to calibrate when that may stabilize. What do you think the best look is for us? Are we looking at the number of offshore rigs that are drilling? Because contracting activity, the spread between contracted rigs and drilling rigs is very wide, as wide as it's been. How do we think about the evolution of backlog, because of that big spread that historically we can't really point at a time when the contracted rig fleet is this high?

Our product revenue is driven by two key factors. One is FIDs with new projects where people are ordering umbilicals and connection hard work for new developments or tie back to existing infrastructure. And secondly, it's driven by OpEx demand on producing fields for primarily the services part of that business unit, which has been pretty lackluster for the last 18 months or so?

One more out of me, just kind of getting back to ROV comments. Can you give us some color on the operating cash cost in ROV, how much of that is labor, the pilot, and how much of that is equipment related?

We are not breaking out that level. Sorry.

I tried. Well, thanks a lot.

Your next question comes from the line of Vebs Vaishnav from Cowen. Your line is open.

If I can touch upon an earlier question. But if I think about the 2017 guidance of marginal profitability at the corporate EBIT level, implication is that on a net income level it could still be positive or it could actually turn negative. Any color would be helpful.

Well I think that's how we use word marginal. It's too difficult really to tell for us at this point. Too early.

We're still building our 2017 plan and early indications are as dividend [ph] marginally profitable if the operating income line and that's for our guidance. It was given for 2017.

Fair enough. Congratulations on the extension for the BP Angola project.

Thank you.

Is there a way we can think about the magnitude of decline in the pricing that we got, and also at the same time if the charter costs decline? So are we talking about maybe 15%, 20% or is it significantly above that?

We really can't provide any color on that. We've never broken out sub-segment activity in the projects group and we're not prepared to do that.

Or specially pricing per customer.

Pricing per customer and I mean you can assume that anytime, no matter what asset or service we're talking about a customer is trying to get further discounts that were also at the same time trying to reduce our cost and that would include charter rates and that sort of thing.

Fair enough. Just trying to see if I think about the floaters, which is a completely different market, but if those day rates are down 40%, 50%, are we thinking that way?

Floaters are certainly different category.

Okay. Last one from me on the Heerema project, can you update us on how well we're ramping up on that, number of ROVs already deployed and still left to be deployed?

Well, I mean I can tell you that we had mobilized some of the ROVs, but really this is going to be a function of the work schedule that Heerema has on its various projects. And so, that will show up in the results as it happens but for the…

Yes, I think what we've indicated is it's probably more a 2017 story than a 2018.

We're really in a preparation stage now, getting mobilized onto the vessels and they were transiting to wherever they're going in and we'll see the benefit of that in the next year.

Your next question comes from the line of Blake Hutchinson from Howard Weil. Your line is open.

For most of the year I guess within Subsea Products, you've pointed out that you're facing kind of two-pronged pricing and absorption pressures. I guess, at least as it pertains to what we see as backlog and what you're forecasting for 4Q results, is it safe to say that a lot of the beneficial legacy pricing has now been flushed out of the system in backlog and we're kind of at what you see is what you get levels at least. So we don't have to worry about that being another shoe to drop in the mix?

That's correct.

And then I just want to make sure as we go along here, we understand what at least we're seeing superficially in terms of your pricing in ROV or your rate per day on hire. As you said, you're not bidding a lot of new contracts on the drilling front. So we would think that pricing there would be stable ex whatever mix factors as you peel off of contracts.

That's right.

And therefore, most of what we see in terms of price degradation, if indeed there is any, would have to be from the vessel market, which we should consider high turnover and competitive at lower rates, or perhaps much lower rates than your current drill support. Is that the way we think about how pricing plays out there?

Not necessarily because the activity there, the day rates aren't necessarily worse. The level of activity changes whereas a drilling rig -- when it's drilling is paid every day. The vessels are days that they work in and then your idle the days between. So it's not quite that simple.

But that would still suggest that a lot of what we'll see in terms of what spits out on the pricing front is just as influenced, or maybe wholly or more influenced by mix really than any pure pricing decline at this point?

That would be…

I think it's becoming more that way for sure.

I guess what I was kind of getting at is you would actually, oddly, almost expect pricing to stabilize even though you're pulling off of contracts here.

Yes.

Your next question comes from the line of Edward Muztafago from Societe Generale. Your line is open.

Just wondered, some of the major service companies have been suggesting that the Gulf, which of course you all have a lot of exposure to, perhaps that the earliest potential recovery there is second half of '17. As you guys sit there and look today, and I know you've given some preliminary operating profit guidance. Do you think we could see a two-half 2017 that's lower than one-half 2017 for the Company, or can you a at least comment on what you might be thinking there?

I would say that my opinion or our opinion is probably as good as anyone else's, or as bad as anyone else's depending on how you look at it. But I think that we are hoping that the second half would be a bit better. But it's pretty hard to predict if that impact true or not. If a team which seems to be the general consensus is one thing, will start really to improve, you would think that in line with the conversations about FIDs that are expected to be approved, particularly in the second half of '17, that that should start indicating an improvement out there. And while it may take a little bit of time for NFID to trickle to in a word that we would have the ability to go after, at least I think it will signal some incremental demand for the OpEx side of the business, which has been pretty lackluster till now. So that’s the way I see it.

One of the elements is each of them is going to respond at a different time as well. So when you start looking into projects which we have vessels in the Gulf, if we see the brownfield activity, those will pick up sooner than would a product in umbilical, most likely, which tend to be longer lead items.

That's fair. And so I guess, as a second question, which is maybe perhaps a little bit related to that, you did highlight this attempt to sort of shift more work to vessel-based activity. As we start to see the recovery materialize, to the extent that you have a higher mix of vessel-based work, does that mean that the business, at least relative to how it's performed traditionally, would recover a bit earlier, a bit later? How do you see that perhaps changing the inflection for Oceaneering?

For the vessel business as it relates to IMR work, we'd definitely be on the earlier edge of that recovery. It speaks to what Kevin just said about the OpEx. Construction installation would be a normal type of progression because that’s related more to the development work but certainly if we are on that IMR side, which we talked about some of our recent investment, that is an earlier recovery.

Okay. Yes, that makes sense. Brownfield, shallow water, we could make an argument that second half is higher than the first half?

That’s correct.

Your next question comes from the line of David Smith from Heikkinen Energy Advisors.

Sorry if I missed it, but did you all give the split for Subsea Products revenue between manufacturing versus service and rental?

We do not.

It will be in our Q that’s coming out.

Do you know off the top of your head if it was approximately similar to the prior quarter or?

It was reasonably similar to Q2.

Okay. Which could imply that, I guess, that third-quarter service and rentals would have been down versus second quarter? And if that's right, just on the -- if that's a softer contribution from rentals and services. Was just wondering to get some color on whether that's just about low activity levels or if you're seeing a greater impact from pricing competition or market share versus the second quarter?

It's really activity levels.

Okay. Appreciate it. And sorry to revisit the comments about marginal profitability in 2017. But just in the context of a growing view expressed by some of your peers that Subsea tiebacks and deepwater Brownfield activity could improve meaningfully in 2017 versus 2016, was just wondering about your view of that activity, that the tiebacks and deepwater Brownfield activity, how your view of that in 2017 impacts your comments about marginal profitability?

There's talk about that happening, but until I see real projects with names on them come out from oil companies, like, when's that going to start? Do they have it in their budgets for 2017, and they'll really come? Or now they don't have it in the 2017 budget. So it's going to be in 2018. I don't know the answer to the question. I think our conversations with our customers confirm that that is a place that they are really going to be looking hard for activity and they have some projects in mind, but until they actually come to the market, it's difficult to say when it's going to occur. I would love for it to happen in the second half of 2017.

And if that prediction is true then we will meaningfully benefit from that as well. So that will be good.

So we're not counting on our chickens until we at least see an egg.

Your next question comes from the line of Cole Sullivan from Wells Fargo. Your line is open.

As we think about the OpEx on an active ROV basis, how much more of that can come down? I know you said it was sequentially down in the third quarter, and you guys have been working on lowering costs there, obviously, over these last, throughout the downturn. How do we think about how much more can actually come out there? Is it going to be more activity driven as if demand were to fall further, or is there some additional cost levers you can pull there?

It is obviously very related to activity levels and I think we have indicated in prior calls that at some point you've got a fixed cost footprint in terms of geography where you have basis and these kinds of things that at some point you just can't do anymore without restoring your business. So at the moment our thinking is that things will start to recover in time before we get to that point and so we're not going to have to go there, but so it is activity denominated and we continue to make reductions in various places and what not, particularly in infrastructure and support for the business on shore.

And Cole I think yes I think that's the critical component is at a certain level you had the fix cost infrastructure and that's what we're going after right now, is looking at how we can reduce cost through shared services and combining different groups and changing the organization structure so that we don’t have the four accounts payable, we have three they can do the same amount of work. Standardization of process is to benefit it and all of that would actually start to benefit that ROV revenue cost per day that you – cost per day out of which you are looking at. So we have to not just to attack the cost of shore but we have to attack the cost on shore as well. That's what we're looking at doing.

That's right, we've been working on that.

But I do want to state because there've been a lot of questions about what percentage is fixed and what percentage is variable and ROV is a largely, at least short term fix. The fixed part is as to Kevin said, it's locations. It's not plants that are non-fungible. So how much is variable? Well, the personnel are largely variable and the plant portion is fairly small and for what it is fixed, it's more of a short term fixed. So, we can make those adjustments as we need to.

On the backlog in products, how do we think about how the pacing of the backlog conversion into revenues has changed? Is it stretching out at all relative to 12 months ago? I would think that that's the case. And how do we expect that to continue based on the current levels of backlog you see?

It's not really stretching out, remember because these things all have a delivery date. So we have target dates with associated LVs. So we can't sort of slow play this backlog work. So we deliver when we deliver and we work on replenishing that backlog quarter-by-quarter.

[Operator Instructions] Your next question comes from the line of Brad Handler from Jefferies. Your line is open.

I'd like to -- this question is probably going to seem a little forced, or at least the timing of it, but I wouldn't mind just floating it and seeing how you react. So assuming that the conversations related to products, and specifically related to umbilicals, are skewing toward tieback opportunities whenever they come, as opposed to larger projects, larger wells with set hosts and the like, can you talk to us a little about the relative opportunity -- presumably, again, in umbilicals? What I'm trying to get at is how much does it matter, maybe on a per kilometer basis, if it's a 50-kilometer tieback as opposed to something that's a lot closer to the host? Is it at least interesting from that perspective?

They are equally interesting. I'd say at this point, we'd be pretty happy to get an order of any type.

I understand.

I think it's really more -- it's not – you used the word skewed. I just want to make sure we're thinking about this the same way. We see the tie back opportunity as something that will just happen earlier than the FIDs will, A, happen, and B translate into orders and into the book. So, from a standpoint of cycle time, and revenue recognition and rest of it, a tie back is better in the short term for us from that perspective. But anyway, but I don't think that -- I'm not necessarily seeing that the market is going to skew to tie back. It's not like there's hundreds of them out there just waiting to be done. Hopefully though the number of them in the next 12 - 18-month timeframe that will keep some activity going in plants before the FID greenfield bigger project work comes along.

I appreciate that color, actually. That is interesting. If I think about a dollar per kilometer basis, I'm still curious for this, if you can give some insight to it.

It is too complicated. Every umbilical is different and it really depends on the cross sections, obviously, construction of it and that sort of thing. So it's just newly not meaningful to try and put any color around that. They are all equally interesting to us but frequently.

Sure. That makes sense. I shouldn't…

If I would though, I'd offer you one thing. It's not dramatically different because remember, if you offer a large product, a lot of times those are fought over because they select the assets. That is all about absorption. So sometimes the margins on the bigger projects can actually go lower than on short side back whenever, because you have to be able to deliver and quickly after being able to make room in the plant to get them out. so it's just really hard to say which one gets the best price.

Interesting. Does a long tieback, though? Is there some engineering aspect to it where if it happens to be very long there is it does get a lot more expensive on a per kilometer basis or is that not even necessarily true?

No I wouldn't make that correction at all. I mean again it depends on a cross section, but the engineering activity is similar. I would say that if it has a lot of wells involved, we have a lot of interconnect. Engineering is maybe more is required because you've got all that connection hardware, UTAs and all that sort of substitute.

We have no further questions at this time. I turn the call back over to the presenters.

Okay, thanks very much. Since there are no more questions, I'd like to wrap up by thanking everyone for joining the call. This concludes our third quarter 2016 conference call. Have a great day.

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