Oceaneering International, Inc.

My name is Jason, and I will be your conference operator. I would like to welcome everyone to Oceaneering's fourth quarter and full year 2020 earnings conference call. All lines have been placed on me 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 Mark Thurston, Oceaneering's Vice President of Corporate Development and Investor Relations. Please go ahead, sir. Thank you, Jason. Good morning and welcome everyone to Oceanary's fourth quarter and full 2020 earnings conference call. Today's call is being webcast and replay will be available on Oceanary's website. With me on the call today are Rob 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 also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our fourth quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rod.

Good morning, and thanks for joining the call today. There's an old saying that says, what doesn't kill you makes you stronger. And after the events of the last year, I feel Oceaneering is stronger on many fronts. And I'm very proud of what we accomplished in 2020. With all the challenges presented by the global COVID pandemic, including the crude oil demand destruction and resulting price collapse, and the many challenges faced in protecting our workforce while still satisfying our customer obligations, Oceanary still delivered improved, consolidated, adjusted operating results and adjusted EBITDA as compared to the prior year. We also generated meaningful free cash flow with our cash balance increasing by $78 million from $374 million at December 31st, 2019 to $452 million at December 31st, 2020. Today I'll focus my comments on our performance for the fourth quarter and full year of 2020, Our market outlook for 2021, Oceaneering's consolidated 2021 outlook, including our expectation to generate positive free cash flow in excess of the amount generated in 2020, and EBITDA in the range of $160 to $210 million, and our business segment outlook for the full year and first quarter of 2021. Now, moving to our results. For the fourth quarter of 2020, we reported net loss of $25 million, or 25 cents per share, on revenue of $424 million. These results include the impact of $9.8 million of pre-tax adjustments associated with asset impairments and write-offs, restructuring and other expenses, and foreign exchange losses recognized during the quarter, and $9.6 million of discrete tax adjustments. Adjusted net income was $1.8 million, or 2 cents per share, we were pleased that our consolidated fourth quarter adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, was $47.1 million and was sequentially higher than the third quarter 2020 and exceeded both our guidance and consensus estimates. Each of our five operating segments recorded sequential improvement in adjusted operating income and adjusted EBITDA despite lower revenue in three out of the five segments. Fourth quarter 2020 consolidated adjusted operating income of $9.6 million was the best quarterly performance in 2020 and $4 million higher than the third quarter. We generated $104 million of cash from operating activities. And after deducting $15 million of capital expenditures, our free cash flow was $89 million for the quarter. As a result of good operating cash flow, working capital efficiencies, and capital expenditure discipline, our cash position increased by $93.2 million during the fourth quarter of 2020. As of December 31st, 2020, our cash balance stood at $452 million. Now let's look at our business operations by segment for the fourth quarter of 2020. Subsea Robotics, or SSR, adjusted operating income improved sequentially on lower revenue. Adjusted fourth quarter operating results included recognition of approximately $3 million of cost structure improvements achieved throughout 2020. Consequently, our SSR quarterly adjusted EBITDA margin of 33% was better than expected, up from the 31% achieved during the third quarter of 2020 and consistent with the margin achieved during the first nine months of 2020. The revenue split between our remotely operated vehicle or ROV business and our combined tooling and survey businesses as a percentage of our total SSR revenue was 80 and 20% respectively, compared to 82 and 18% split in the prior quarter. As we had anticipated, ROV days on hire declined as compared to the third quarter due to expected lower seasonal activity. Our fleet utilization for the fourth quarter was 54%, down from 59% in the third quarter, and our days on hire declined for both drill support and vessel-based services. Average ROV revenue per day on hire of $7,325 was 1% higher as compared to the third quarter. Days on hire were 12,456 in the fourth quarter as compared to 13,601 in the third quarter. We ended the quarter and the year just as we began with a fleet count of 250 ROV systems. Our fourth quarter fleet use was 60% in drill support and 40% for vessel-based activity as compared to 56 and 44% respectively during the third quarter. At the end of December, we had ROV contracts on 75 of the 129 floating rigs on a contract or 58%, a slight market share increase from September 30th, 2020 when we had ROV contracts on 76 of the 133 floating rigs under contract, or 57%. Subject to quarterly variances, we continue to expect our drill support market share to generally approximate 60%. Turning to manufactured products, our fourth quarter 2020 adjusted operating income improved from the third quarter on lower segment revenue, which was adversely affected by supplier-related delays in our energy products businesses. Adjusted operating income margin increased to 9% in the fourth quarter of 2020 from 5% in the third quarter of 2020, due primarily to favorable contract closeouts and supply chain savings. The COVID-19 pandemic continued to dampen demand for our mobility solutions products during the fourth quarter of 2020. Our manufactured products backlog on December 31st, 2020 was $266 million compared to our September 30th, 2020 backlog of $318 million. Our book-to-bill ratio was 0.4 for the full year of 2020 as compared with the trailing 12-month book-to-bill of 0.5 at September 30th, 2020. Offshore projects group, or OPG, fourth quarter 2020 adjusted operating income improved sequentially on lower revenue. Revenue declined less than expected as the Gulf of Mexico experienced higher amounts of installation work and intervention maintenance and repair activities, with customers having pushed work into the fourth quarter due to the several third quarter 2020 hurricanes. The sequential increase in adjusted operating income was due to better activity-based pricing in the Gulf of Mexico and continued cost improvement. During the fourth quarter, engineering work continued on the Angola riserless light well intervention project. For Integrity Management and Digital Solutions, or IMDS, fourth quarter 2020 adjusted operating income was higher than third quarter 2020 on a marginal increase in revenue. The improvement in adjusted operating income was largely driven by more effective use of personnel as we continue to transform how and where work is performed. Our Aerospace and Defense Technologies, or ADTEC, fourth quarter 2020 adjusted operating income improved from the third quarter on higher revenue. Adjusted operating income margin rose as a result of project mix and better than expected performance in our subsea defense technologies business. Unallocated expenses were higher primarily due to increased incentive compensation accruals related to better fourth quarter operating and financial performance. Now I'll turn my focus to our year over year results of 2020 compared to 2019. For the full year 2020, Oceaneering reported the net loss of $497 million, or $5.01 per share, on revenue of $1.8 billion. Adjusted net loss was $26.5 million, or $0.27 per share, reflecting the impact of $481 million of pre-tax adjustments, primarily $344 million associated with goodwill impairment and $102 million of asset impairments, write-downs and write-offs recognized during the year. This compared to a 2019 net loss of $348 million or $3.52 per share on revenue of $2 billion and adjusted net loss of 82.6 million or 84 cents per share. For the year, activity levels and operating performance within our energy segments were lower than originally projected for 2020. The COVID-19 pandemic negatively impacted operator investments in oil and gas projects due to a decline in crude oil demand and pricing. and entertainment business spending due to limited theme park attendance. Activity levels and performance within our ad tech segment met expectations for the year. Compared to 2019, our 2020 consolidated revenue declined 11% to $1.8 billion, with revenue decreases in each of our four energy segments being partially offset by the revenue increase in ad tech. ADTEC's contribution to our consolidated results continues to grow, representing 19% of consolidated revenue in 2020 as compared to 16% in 2019. Despite the headwinds of lower activity in our energy segments, consolidated 2020 adjusted operating results and adjusted EBITDA improved by $59.6 million and $19.5 million, respectively, led by our manufactured products and ADTEC segments. In 2020, each of our operating segments, with the exception of OPG, contributed positive adjusted operating income, and all of our operating segments contributed positive adjusted EBITDA. 2020 operating performance benefited considerably from the cost improvement measures recognized during the year. We generated $137 million in cash flow from operations and invested $61 million in capital expenditures, resulting in free cash flow of $76 million. We ended the year with $452 million in cash. In 2020, we continued to adapt to the challenges posed in our markets as we dealt with the significant challenges presented by the COVID-19 pandemic by establishing and implementing protocols that have allowed us to protect personnel and customers while delivering on our promises. We implemented a cost and process improvement program to enhance the performance of our businesses. this program targeted the removal of 125 to 160 million dollars of costs including depreciation some examples of these efforts are efficiency enabling projects which some may describe as process improvements rationalizing facilities restructuring or operating segments to better leverage common attributes thereby enabling improved productivity and how and where work is performed initiating supply chain savings and eliminating non-productive assets Through the end of 2020, we have implemented improvements that put us on the high end of that range. The majority of these reductions are structural in nature and are expected to benefit our results in 2021 and beyond. We maintained our commitment to capital discipline by reducing capital expenditures to $61 million as compared to $148 million in 2019, and we maintained focus on our core values. We're pleased with the notable achievements accomplished during 2020. We achieved significant improvement in our IMDS business with adjusted operating results improving by almost $10 million as compared to 2019. With over $250 million in contract awards during the fourth quarter of 2020 and early 2021, 45% of which is incremental business, this segment is positioned for growth in 2021. Our subsea robotics business, a recognized leader in work-class ROV services, secured more than $225 million of contracts during the fourth quarter of 2020. Our ad tech business met its original performance targets created at the beginning of 2020 before the COVID-19 pandemic. The business also recorded several important incremental contract wins, including partnering with Dynetics to support their design of the human lunar landing system for NASA and a contract to operate and maintain the U.S. Navy submarine rescue systems worth up to $119 million, assuming annual renewals over a five-year period. We maintained our commitment and focus on safety. The team remained very focused on our lifesaving rules, identifying high-hazard tasks, and developing engineered solutions to mitigate risks. Our total recordable incident rate, or TRIR, of 0.3 for 2020 is a record low for Oceaneering. The following financial metrics improved in 2020. EBITDA of $184 million surpassed the $165 million generated in 2019. Positive free cash flow of $76 million surpassed the $10 million generated in 2019. Cash increased to $452 million. And consolidated adjusted EBITDA margin of 10% surpassed the 8% margin achieved in 2019, despite an 11% decrease in revenue. We continue to make good progress on our sustainability efforts or environmental, social, and governance initiatives. From an environmental perspective, We continue to advance our capabilities as a technology delivery company to help our customers meet their reduced emission goals. We continue the development of clean energy technologies to assist our customers in mitigating carbon emissions. These initiatives include our Liberty, Icerus, and Freedom ROVs. We also continue implementing measures to reduce the amount of greenhouse gases emitted from our own operations. including facility consolidations and employee remote work options, as well as increased recycling efforts. From a social perspective, we continue to explore new ways to make positive contributions in the communities where we operate and to increase workforce diversity within the company. During the year, we created Diversity and Inclusion Council to focus on implementing new initiatives that will further diversify our global workforce. We are leveraging employee resource groups or ERGs, including Oceaneering Women's Network and our recently launched Oceaneering Veterans Network to foster diverse and inclusive workplace. From a governance perspective, we are taking action at the board level as well. We recently announced the addition of two new board members, which expands the diversity of the board while adding new skill sets and perspectives that are crucial as Oceaneering focuses on energy transition strategies. We also formalized our ESG reporting through our board's Nominating and Corporate Governance Committee. During 2020, Oceaneering filed its first sustainability report, which is posted on our website, using the disclosure methodology outlined by the Sustainability Accounting Standards Board, or SASB. Oceaneering continues to hold an ESG Index A rating with MSCI. Now, turning to our 2021 outlook for the markets we serve. Coming into the year, most analysts and research pointed to continued headwinds for the offshore oil and gas market due to the low level of project sanctioning in 2020 and continued uncertainty surrounding COVID-19. With the OPEX Plus actions taken at the very beginning of 2021 and growing optimism associated with numerous vaccine approvals, many analysts and energy researchers are now forecasting Brent pricing to stabilize. in the $55 to $60 per barrel range for 2021 and longer term pricing to be in the $50 to $70 per barrel range. We expect rent pricing in the $55 to $65 per barrel range will support reasonable levels of IMR activity in 2021. Similarly, we believe that longer term rent pricing forecasts of $50 to $70 per barrel will support increased offshore project sanctioning activity in 2021. Analysts and research service projections for other key metrics we track also support these expectations. Analyst data suggests that the floating rig count has stabilized and throughout 2021 will remain close to the year-end 2020 levels of approximately 130 contracted rigs. There were 123 TRIA warrants in 2020 and dry stead forecasts and modest recovery to around 200 in 2021 and back into the 300 range in 2022. Reistad also forecasts three installations of 273 in 2021, which approaches the 2020 total of 299. Also, according to Reistad, offshore projects with an aggregate value of approximately $46 billion were sanctioned in 2020, a 53% decrease from 2019. Sanctioning levels are expected to increase in 2021 to around $55 billion and return to 2019 levels of around $100 billion in 2022. Reistad forecasts global installed offshore wind capacity to increase by 11.8 gigawatts in 2021, 37% over 2020. Our entertainment business will continue to innovate as pent-up demand is expected to grow theme park attendance to pre-pandemic levels by 2022. And finally, government-related markets we serve are expected to remain relatively stable with continued modest growth for the foreseeable future. Now to our 2021 consolidated outlook for Oceaneering. We anticipate our full year 2021 operations to yield positive free cash flow in excess of the amount generated in 2020 and the midpoint of our consolidated adjusted EBITDA range to approximate 2020 consolidated adjusted EBITDA. Based on year-end 2020 backlog and anticipated order intake, we forecast generally flat consolidated revenue with higher revenue in ad tech and IMBS to offset substantially lower revenue from our manufactured product segment. We forecast relatively flat revenue in our SSR and OPG segments. These projections assume no significant incremental COVID-19 impacts and generally stable oil and gas prices. For the year, we anticipate generating $160 to $210 million of adjusted EBITDA, with positive operating income and adjusted EBITDA contributions from each of our operating segments. Apart from seasonality, we view pricing and margins in the current energy markets to be stable. We forecast improved annual operating results in our SSR, OPG, IMBS, and ad tech segments, and lower operating results in our manufactured products segments. Our liquidity position at the beginning of 2021 remains robust with $452 million of cash and an undrawn $500 million revolver available until October 2021. Thereafter, $450 million available until January 2023. We expect to further strengthen this position in 2021 by generating positive free cash flow in excess of the amounts generated in 2020. As has been the case over the past several years, it is our intent to continue to strengthen our balance sheet to ensure that we are well positioned to deal with our $500 million bond maturity in November 2024. For 2021, we expect our organic capital expenditures to total between $50 million and $70 million. This includes approximately $35 to $40 million of maintenance capital expenditures and $15 to $30 million of growth capital expenditures. We continue to closely scrutinize our maintenance and growth capital expenditures, focusing on opportunities that will provide near-term revenue, cash flow, and return. We also continue to invest in new, more efficient technologies that will help our customers in meeting their goals to produce the cleanest, safest barrels to help meet their carbon-neutral goals. In 2021, interest expense net of interest income is expected to be approximately $40 million, and our cash tax payments are expected to be in the range of $35 to $40 million. This includes taxes incurred in countries that impose tax on the basis of in-country revenue and bear no relationship to the profitability of such operations. These cash tax payments do not include the impact of approximately $28 million of CARES Act tax refunds expected to be received in 2021. Directionally in 2021, for our operations by segment, we expect for subsea robotics, our forecast for improved results is based on essentially flat ROV days on higher, minor shifts in geographic mix, and generally stable pricing. Results for tooling-based services are expected to be flat, with activity levels generally following ROV days on higher. Survey results are projected to improve on higher geoscience activity. We forecast adjusted EBITDA margins to be consistent with those achieved in 2020. For ROVs, we expect our 2020 service mix of 62% drill support and 38% vessel services to generally remain the same through 2021. Our overall ROV fleet utilization is expected to be in the mid to high 50% range for the year with higher seasonal activity during the second and third quarters. We expect to generally sustain our ROV market share in the 60% range for drill support. At the end of 2020, there were approximately 24 Oceaneering ROVs onboard 21 floating drilling rigs with contract terms expiring during the first six months of 2021. During that same period, we expect 28 of our ROVs on 24 floating rigs to begin new contracts. For manufactured products, we expect segment performance to decline primarily as a result of the decreased order intake in our energy businesses during 2020. We continue to closely monitor the impact of COVID-19 pandemic on our mobility solutions businesses and currently expect to see marginally higher activity and contribution from these businesses in 2021. We forecast that our operating income margins will be in the low to mid single digit range for the year. For OPG, operating results are expected to improve in 2021 on generally stable offshore activity and margins comparable to the last half of 2020. Operating results and adjusted EBITDA are forecast to improve largely due to the efficiency and cost improvement measures implemented in 2020 and improved year-over-year contribution from our Angola riserless light well intervention campaign. Vessel day rates remain competitive but stable, and we expect to see opportunities for pricing improvements during periods of higher activity. We also anticipate reduced charter obligations and increased flexibility on third-party vessels and on overall improvement in fleet utilization. This has been the case over the last several years. This segment has the highest amount of speculative work incorporated in our guidance. For IMBS, results are forecast to improve on higher revenue with operating income margins averaging in the high single-digit range for the year. Good order intake at the end of 2020 is expected to begin benefiting the business in the second quarter of 2021. We will continue to focus on the effective use of personnel in transforming how and where work is performed. For ad tech, revenue is expected to be higher, producing improved results with operating income margins consistent with those achieved in 2020. Growth in this segment is expected to be broad-based with revenue growth in each of our three government-focused businesses. For 2021, we anticipate unallocated expenses to average in the low to mid $30 million range per quarter as we forecast higher accrual rates for projected short and long-term performance-based incentive compensation expense as compared to 2020. For our first quarter 2021 outlook, we expect our first quarter of 2021 adjusted EBITDA to be in the range of $45 to $50 million unsequentially higher revenue. As compared to the fourth quarter of 2020, we anticipate higher revenue and relatively flat operating results in our ad tech segment, lower activity and operating results in our SSR and manufactured product segments, higher revenue and operating results in our IMBS segment, and in our OPG segment, operating results are forecast to improve on substantially higher revenue as we have commenced operations on the Angola Roger Lewis Lightwell Intervention Project. In closing, our focus continues to be generating free cash flow, maintaining our strong liquidity position, demonstrating meaningful progress in advancing our ESG and energy transition efforts, and improving our returns by driving efficiencies and consistent performance throughout our organization, engaging with our customers to develop value-added solutions that increase their cash flow, and remaining disciplined in our pricing decisions and capital deployment strategies. Finally, I thank our employees and management teams for their continued hard work in these very challenging times. As I stated in my opening remarks, I am very proud of what we accomplished in 2020, and I think Oceaneering is stronger on many fronts as we head into 2021. We appreciate everyone's continued interest in Oceaneering and will now be happy to take any questions you may have.

At this time, if you would like to ask a question, a star, then the number one on your telephone keypad. To withdraw your question, press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Sean Newcomb from J.P. Morgan. Your line is open.

Morning, Sean.

Thank you. Morning.

Maybe we'll start out. In manufacturing products, well, first I should say, thank you for all the detailed guidance. There's a lot of granularity that you offered. So starting in manufacturing products, I'd love to just get a little more detail on how you see awards in 21, including umbilicals. I'm trying to get a sense for how much inbound do you need in 21 to hit that margin target, or do you have enough line of sight to get into that range, even if orders don't pick up, maybe it's a little...

a latter half of 21. i i put it this way sean and and thanks for the question we've got uh we've got the the two biggest projects we're working on will run throughout the year so that's you know that's the lion's share of what we've got in the plan and then we do expect that we'll be able to pick up some orders we're not overly aggressive with what's built in the plan but but we'll need to have some incoming in the first half of the year. But that's across the board. That's not just in umbilicals. That's in some of the other connected hardware in the mobility solutions as well. And so we see some of that coming in all around the board. And as you know, I mean, some of those big projects in umbilicals are a longer line of sight. So that's not entirely what we've got in the plan. I think we've hedged that effectively.

Got it. Thank you for that. I think that makes sense. And then, you know, I think everyone's trying to unpack these new energy markets and understand the value chain a little bit better. So things like offshore wind. Can you maybe just talk about how you perceive differences in those markets compared to your traditional energy markets in terms of competitive dynamics, contracting terms, pricing? Just how would you compare the two in terms of traditional and markets versus these new emerging ones that you're pursuing?

If you would have asked me that question probably three, four years ago, I would have told you that it's a tough market, that the pricing is a little bit harder to get, that they contract a little harder than some of our oil field customers. I think, number one, things have gotten better there. I think we're able to establish the value of uptime and and new technology and a lot of things. So we're able to place more technology into that market than we have in the past and then establish longer-term relationships. So I think they were, and to be fair, they were a little hesitant about will we remain interested if there's another pickup in oil and gas. So we've built those relationships. We've turned them into something better. And in the meantime, you know, oil and gas has gotten a little more challenging. So I think it's really rebalanced quite a bit. And we would say that those are good projects to have now. Yeah, and I think, Rod, one of the things I would add is just partnering with them in the development of the S-verse vehicles and things of that nature to help them be more efficient in their operations has been something we've been very proud of in the last 12, 18 months and the uptake there.

I appreciate that. Thanks. Your next question comes from the line of Taylor Zucker from Tudor Pickering and Holt. Your line is open.

Hey, thanks, guys, and good morning. Our first question is just with respect to the 2021 guidance. Obviously, a big range at the EBITDA line, 160 to 210. And I know we've still got a ways to go before we close out 2021, but could you just help us think about kind of the probability of outcomes there? getting to that higher end of the guidance versus the lower end and just really trying to get a sense of how confident you feel and getting to the midpoint of that guidance about $185 million of EBITDA next year or this year?

Sure. I think we feel pretty good because, you know, More of the news that's happened most recently is really putting some confidence out there about a more stabilized commodity price and being in that range. And I think more confidence about that range. So I think we feel good about, say, the midpoint and the upper end of the range. Certainly today it is looking good. But it's really that range is going to be most strongly driven by the stability and the level of the commodity price. Because I think about I would walk through sort of the timing of these. If we've got a good near-term commodity price, that spurs a lot of the IMR activity that we get. Those are quick-turn projects. Those barrels are already behind pipes, so if we can help them produce more through their existing wells, they don't need permits for that, generally speaking, not like a drilling permit. So there's more that we can do there, especially with a riserless intervention campaign. So that can happen fast and drive that range up. Then, you know, maybe later in the year we start to see more rig contracts get picked up, better utilization of the contracted rigs. So that helps on the upper end of the range. And then finally, you know, getting some FIDs in the door, getting enough confidence over the longer term that we've been stable for a while at a better level, and that's going to drive more in the manufactured products business too. So it's all about that confidence. That is by far the biggest number for us in this range.

Understood. That's helpful. And piggybacking on one of Sean's questions, In manufactured products, obviously that's the segment that's going to have the most acute headwinds in 2021. Based on the kind of order outlook you have in your plan today, do you have any confidence that 2021 might represent the bottom for manufactured products, at least from an operating income perspective, or is that a little bit too soon to call at this point?

No, I think what I just kind of refer back to what we were talking about. It certainly looks like when we look at the rice to data and others around project FIDs that, you know, that 2020 was a low point. And so if we see those project FIDs, like, like so many are saying start to increase, I think that we should see, I mean, we're going to, we're going to track with FIDs and if they go up, then that's going to be good for ocean airing as well. So that's what, that's what's out there in the market right now, as far as all the customer budgeting and, and the expectation. So I would kind of go with that. I think it looks like we should start to see that. And unfortunately, that business rate lags a little bit. So low FIDs in 2020 tends to have its effect in 2021. An improvement in 2021 will start to build in 22 and beyond. So I think you've got it right. Awesome. Well, thanks for the answers.

Your next question comes from a lot of folks from Bank of America. Are you flying this up and

Good morning. I was wondering if we could just circle back to the 1Q guide. You know, I know there's a lot of moving pieces here. You know, the guide calls kind of higher revenue, you know, flattish EBITDA quarter over quarter. Can you just kind of walk us through some of the moving pieces here? You know, are you seeing some costs come back into the system? Or, you know, is there anything else impacting 1Q or maybe some benefits that helped out 4Q?

You know, I would just say, first of all, you look at some of the things that we talked about already, and Alan will help me out here, but one of the things is the riserless light well campaign is a good part of the Q1 story. I'll hit on your question about costs. We don't see any real significant costs creep back in. I would point your attention to a little bit of, and I think it's temporary, but a little bit of struggle getting people through the UK right now, just with the impact of the new strains of COVID-19. That's slowed down some of that and means people are in quarantine a little bit longer, but that's not significant. I think most of the things we're seeing, if they're coming into the system, they're temporary pieces. Overall, I feel like we've got good control. And then You know, kind of in the background, we've still got – we're still realizing more and more of the good work we did in the cost reductions in 2019 and 2020. So some of that's still coming in. So I don't think costs are really a big concern for us in Q1. Alan, any other comments that you'd add? No, I think you hit the high points. I mean, OPG certainly is – you know, mobilized and are out working on the, uh, rice and slight well intervention campaign in Angola. You know, one of the other stories I think we've talked about in the past is the drill pipe riser contracts that we had working for Petrobras in Brazil. Uh, all three systems are on contract, uh, beginning to this, this quarter, uh, where we had two of them beginning in the middle of last year. So, you know, that's incremental as well. So the costs continue to be a focus in looking at improvement plans, but we're not seeing, you know, creep in that area at this point.

Understood. And then maybe just more of a kind of a high-level question. You know, we're hearing a lot about Gulf of Mexico, you know, so much uncertainty from a regulatory perspective. You know, it seems like so far the impact has been pretty minimal. You know, some have even kind of called towards a pull forward of activity just to get ahead of the regulatory changes and where commodity prices are today. You know, how are you guys thinking about the Gulf of Mexico, you know, kind of longer term, how it plays out over time? Even if, you know, kind of new development slows, what do you think, you know, what do you think it all means for, you know, some of the more maintenance-oriented services?

Well, I think actually, you know, and that's I like the way you said that, because I think one of the tradeoffs we see is if we start to see maybe a little bit of a hang up in permitting, it could allow us to do more of the maintenance work, more of the IMR. Because, you know, if you've got some money to spend, you've got a decent commodity price and you can't drill a new well, but can you get the most out of the wells you've got? That could that could turn some, you know, change the work. but we actually have good participation in that kind of work. So that could be good for us in the near term. Obviously, any long-term issues in the Gulf of Mexico would be more serious for all of us. But I think that's one of the things we're watching very carefully, obviously.

Understood. Thanks, everyone. Thank you.

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

Thanks. Good morning, Rod. Congratulations here on the results. And I know it's been a lot of heavy lifting in 2020, and we're seeing some fruits. Thank you. Yeah, thanks for all of the detail. When I look at oceaneering and the breadth of your services and technology through the lens of energy transition, to me, it seems much broader than just offshore wind. getting less attention than some other areas, but ocean bottom mining for rare earths, offshore projects for carbon capture and storage. These are all areas that to me seem synergistic with what you already have under your tent. So how are you thinking about these different markets for energy transition in terms of what you already have and not just replacing your business, but growing your business into new areas?

No, it's absolutely a key focus for us. And I think we're trying to help people understand that some of when we talk about our investments, it's got to be focused on those types of activities, not just greater industrialization, broadly written, definitely not more of the same. We need to turn this corner with, and a lot of our customers are doing it. So that's That's really helpful. So we place a high emphasis on the places that our current customers are going because we know we've got the sales channel there, but also just the things that play into our strengths. Like you said, subsea mining, it's still wind, but floating offshore wind is an even bigger deal for us because it's a deep water play. Some of this repurposing, potentially repurposing platforms to be hydrogen producing, that would definitely help our IMDS group because that integrity management of extending the life of these assets as they're being repurposed, there's a lot of great opportunities out there. It's actually pretty exciting to say, okay, we need to look at all of them, but then we also need to make some really good bets on which of them have scale, which of them happen the soonest, and which of them are best suited to our capabilities.

Yeah, that makes sense. You know, I would say I think it's probably helped not hurt to shed more light on the granularity of ad tech for the market understanding your business or your valuation and And when you get to the point of having scale with all these different energy transition opportunities, even if it's initially total addressable market and then at some point, you know, current revenue run rate, I imagine that would be helpful for your story as well. Do you have some aspiration to put more specificity on those numbers for current business and prospective business, you know, maybe during 2021?

I think we'll probably be cautious. I like the idea of understanding what the capabilities are, but I think we're going to be conservative as always that we don't want to oversell something that doesn't have the right scale. So I want to make sure that we aren't misleading anybody by getting excited about the ideas before they have meaningful financial impact. But a point well taken. I think we will try to at least give glimpses of where we're going, and then we'll with all the cautions of how long it takes to get there. But I appreciate the comment. Great. Thanks, Ron. Yep. Thanks, Ian.

Once again, if you would like to ask a question, please press star and the number one on your telephone keypad. Your next question comes from the line of Blake Jender from Wolf Research. Your line is open.

Hey, thanks. Good morning, and appreciate all the guidance and the time here. Wanted to circle back on to Subsea Robotics. Seems like a pretty flat outlook for the floater count baked into what you're contemplating for 2021. We'll see what the back half has in store for potential acceleration there. You talked about IMR. You talked about the Gulf of Mexico idea. I'm just wondering, you know, as we start to get a few more floaters into the into the water here and the market starts to normalize, whether it matters all that much if it's an existing customer of yours or if it's a new customer. I'm just wondering if it's existing customers that are adding more rigs as opposed to additional customers coming into the market, what the market share implications could be for you on the robotic side.

Great question. Obviously, it's easier if it's an existing customer. It's especially easier if we're already on the rig. And we've been talking a lot about trying to stay on the best assets, the ones that are most likely to go to work. And we've been very effective. So I think that really helps us with the new customers is, hey, we're already here. It reduces your mobilization costs. And we've got a track record established with that rig, which they can tell you if they're satisfied with that relationship as well. So and just watch kind of the rigs, but that actually plays in our favor because of our position on those high-quality assets. But we fight for all of them, as you might expect.

That makes sense. And then for my follow-up, you know, I think it would be, Tough for me to go through the working capital, especially with all the moving pieces in your outlook. So maybe from a free cash conversion perspective, from EBITDA perhaps, could you just walk through, now that you've reoriented and rejiggered some of your segments, how would you characterize each in terms of high free cash conversion versus low free cash conversion? The reason I'm asking is if we see, obviously, growth,

upside and downside in each each line you know that could that could impact the uh the free cash flow conversion ultimately moving forward thanks yeah no i think you know the way most people have kind of looked at it in the past uh blake is going in and looking at eba dot and you're kind of how you convert that and then going at 185 is your midpoint you can look at our capex guide we 50 to 70, a midpoint of 60, which is consistent with what we did this year. Interest expense, cash about $40 million of net interest expense, and then cash taxes, a midpoint of 37.5. So if you look at that, you get to a number of about 47.5. You just take the midpoint of all of those. And then we said on our last call that we did expect to generate... working capital release associated with some project milestones this year as well. And that gives us the confidence to kind of give better than the 2020 free cash flow. And then one thing, that's our operating that's coming out. And then we also have the CARES Tax Act that Rod had in his prepared remarks. That's another $27, $28 million that we would anticipate on top of that.

Totally understood. So, you know, we have it down for 2021 because you've given such good guidance. I'm just wondering for maybe the out years. I mean, I don't want to lead too much, but if we see A and D tech continue to grow in excess of the cyclicality of some of your energy segments, I mean, is this, you know, a materially capitalized business for you such that the conversion over time starts to improve?

Yeah, if you look at both IMDS and ad tech, those do tend to be more diversified. more or less very light in capital intensity. So those are ones that we do like the growth prospects in, and the returns are nice. Very helpful. Thanks, Jeff.

Yep.

There we go. Further questions? I'm going to call back over to Mr. Rob Burson for closing comments.

All right. Well, since there are no more questions, I'd like to wrap up by thanking everybody for joining the call. This concludes our fourth quarter and full year 2020 conference call. Have a great day.

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