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.