Oceaneering International, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context and performance
Oceaneering provides engineered services and products primarily to the offshore oil and gas industry, with additional Advanced Technologies operations. Results were pressured by lower commodity prices, reduced customer spending and weakening deepwater activity.
- Q3 revenue was $549.3 million, down from $743.6 million in Q3 2015. Gross margin was $35.4 million (6% of revenue), versus $168.3 million (23%). Operating loss was $11.9 million, compared with operating income of $113.5 million.
- Q3 net loss was $11.8 million, or $0.12 per diluted share, versus net income of $68.5 million, or $0.70 per share, a year earlier. The declared quarterly dividend remained $0.27 per share for Q3.
- For the first nine months, revenue was $1.783 billion, versus $2.341 billion in 2015. Gross margin was $228.2 million (13%), versus $499.3 million (21%); operating income was $74.6 million, versus $328.1 million.
- Nine-month net income was $35.6 million, or $0.36 per diluted share, compared with $203.5 million, or $2.06 per share, in 2015.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $262.8 million, down from $373.1 million. Investing used $117.4 million and financing used $82.4 million; cash increased by $56.4 million to $441.6 million.
- Capital expenditures were approximately $86 million during the first nine months, versus $139 million in the comparable period; 2015 investing outflows also included the C&C acquisition. The company forecast 2016 capital expenditures of approximately $110–$125 million, excluding acquisitions.
- Working capital was $858 million. Long-term debt was $802.3 million on the balance sheet, including $300 million under the term loan and $500 million of senior notes; the $500 million revolving facility was undrawn. The company reported compliance with its debt covenants, including the maximum 55% total capitalization ratio.
- Cash dividends paid in the first nine months were $79.4 million. In October, the company declared a reduced quarterly dividend of $0.15 per share, citing the expected low level of offshore activity through 2017.
Material changes and unusual items
- Q3 included $36.0 million of ROV-related charges: a $25.2 million excess-inventory reserve and $10.8 million of additional depreciation for retiring 39 ROVs. The Subsea Products segment recorded a further $8.2 million of charges, predominantly for tools and inventory associated with deepwater activity.
- The ROV fleet ended the period at 279 vehicles after five additions and 41 retirements during the first nine months. Q3 utilization fell to 52% from 68% a year earlier; days utilized declined to 15,156 from 21,229.
- Subsea Products backlog was $457 million at September 30, compared with $652 million at December 31, 2015. Lower demand and pricing affected all principal Oilfield segments.
- Angola-related foreign-exchange losses were $6.5 million for the first nine months. The company reported approximately $32 million of cash held in Angolan kwanza, whose conversion to U.S. dollars was constrained by the central bank. It also held $60 million equivalent of Angolan central bank bonds as a currency-risk mitigation measure; the $10 million current portion was sold in October at approximately book value.
Outlook, commentary and risks
- Management did not provide specific Q4 or full-year 2016, or full-year 2017, EPS guidance because market visibility was limited. It expected 2016 diluted EPS to be significantly below 2015’s $2.34.
- Management expected Q4 operating income to exceed Q3, partly because Q3 included the ROV write-downs and retirements. It anticipated lower Q4 Subsea Projects and Asset Integrity results, weaker Subsea Products operating income, and a positive increase in ROV operating income versus Q3. It expected full-year 2017 operating income to be marginally profitable.
- Key risks include continued low oil prices and customer spending, falling deepwater rig activity, lower utilization and pricing, reduced backlog, and seasonal weakness. Foreign-exchange exposure and restricted conversion of Angolan cash are additional risks.
- The company expected delivery of the Ocean Evolution subsea support vessel late in Q2 2017. A shareholder derivative lawsuit concerning director compensation remained pending; management did not expect it to materially affect results, cash flows or financial position. Other described claims were generally insured or not expected to be material.
Investor facts to verify
- Whether deepwater activity, ROV utilization and day rates stabilize or continue to decline.
- Whether Subsea Products backlog converts to revenue at sustainable pricing and margins.
- Whether operating cash flow remains sufficient to fund capital spending, dividends and debt obligations, including the planned vessel investment.
- Whether Angolan cash can be converted as expected and whether currency losses or bond exposures change.
- Whether the Q3 asset and inventory charges indicate further impairment or fleet rationalization needs, and whether the reduced dividend remains sustainable.