Oceaneering International Inc Q1 FY2020 Earnings Call

My name is Marcella, and I will be your conference operator. I would like to welcome everyone to Oceaneering's First Quarter 2020 Earnings 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 period. With that, I will turn the call over to Mark Peterson, Oceaneering's Vice President of Corporate Development and Investor Relations.

Thank you, Marcella. Good morning, everyone, and welcome to Oceaneering's first quarter 2020 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 Rod Larson, President and Chief Executive Officer, who will be providing our prepared comments; 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 first quarter press release. We welcome your questions after the prepared statements. I will now turn the call over to Rob.

Good morning and thanks for joining the call today. What a difference a quarter makes! We began 2020 with the expectation of marginal growth and improving business fundamentals across all of our segments, and then the COVID-19 pandemic erupted and fueled the further deterioration of the crude oil market fundamentals, as well as the theme park business. This deterioration has brought about swift changes to our customer spending plans that will negatively affect our businesses as long as these conditions persist. As a result, we’re taking decisive action to reduce costs in order to drive financial performance in this environment. With the continuing threat and uncertainty around COVID-19, Oceaneering is actively taking steps to support the safety and well-being of our employees and their families, our customers, and the communities where we live and work. We've implemented preventative measures and developed corporate and regional response plans based on guidance received from the World Health Organization, Centers for Disease Control and Prevention, International SOS, and our corporate medical advisor. Our goal is to minimize exposure and prevent infection, while ensuring the continued support of our customers' operations. Now for our results. For the first quarter, we reported a net loss of $368 million or negative $3.71 per share on revenue of $537 million. These results included the impact of $393 million of pre-tax adjustments, including $303 million associated with goodwill impairments, $76.1 million of asset impairments and write-offs, $13.7 million in restructuring costs and foreign exchange losses recognized during the quarter. Adjusted net income was $3.5 million or $0.04 per share. Despite significant global challenges, we are pleased that our first quarter adjusted results exceeded expectations. The key factor in achieving these results was better-than-anticipated performance within our energy-focused businesses, which included the benefit from cost reduction measures implemented during the fourth quarter of 2019 and the first quarter of 2020. Each of our operating segments generated positive adjusted operating results and positive adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA. And our consolidated adjusted EBITDA of $51.6 million surpassed both our forecast and published consensus estimates. Now let’s look at our business operations by segment for the first quarter of 2020. Compared to the fourth quarter of 2019, ROV average revenue per day on hire decreased 4% on flat days on hire. As expected, ongoing cost control measures and efficiencies, along with fewer installations and mobilizations, resulted in improved adjusted operating performance and adjusted EBITDA. Adjusted EBITDA margin increased to 32% and ROV utilization improved slightly to 65%. Keep in mind that although reported fourth quarter 2019 utilization was 58%, it did not include the impact of the 30 ROVs that were retired at the end of the fourth quarter. For comparison, pro forma fourth quarter utilization, reflecting these vehicles as if they had been retired at the end of the quarter, was 64%. During the first quarter, our fleet size remained at 250 vehicles, the same as year-end 2019. Our fleet use during the first quarter was 68% in drill support and 30% in vessel-based activity compared to 64% and 36% respectively for the fourth quarter of 2019. At the end of March, we had ROV contracts on 95 of the 153 floating rigs under contract, resulting in a drill support market share of 62%. Turning to Subsea Products, first quarter 2020 adjusted operating results exceeded expectations and were comparable to the results of the fourth quarter of 2019. Manufactured products revenue and operating results met expectations. Service and rental results outperformed largely due to higher activity in Norway and West Africa. Our Subsea Products revenue mix for the quarter was 74% in manufactured products and 26% in service and rental compared to a 72-28 split, respectively, in the fourth quarter. Our Subsea Products backlog at March 31, 2020 was $528 million compared to $630 million at December 31, 2019. Reflecting the higher level of throughput and lower level of market activity, our book-to-bill ratio for the first quarter was 0.5. Subsea Projects sequential adjusted operating results declined on lower revenue as a result of seasonally lower vessel and survey activity. Asset Integrity adjusted operating results improved, benefiting from cost reduction activities undertaken in the fourth quarter of 2019 and the first quarter of 2020. For our non-energy segment, Advanced Technologies, our first quarter 2020 adjusted operating result was sequentially flat. Adverse impacts of COVID-19 to our entertainment theme park business results offset gains from our government service businesses. As compared to the fourth quarter of 2019, unallocated expenses declined during the first quarter of 2020 as a result of lower accruals for incentive-based compensation. During the first quarter, we used $32.2 million of net cash in our operating activities and $27.2 million of cash for maintenance and growth capital expenditures. These two items represented the largest contributors to a $66.2 million cash decrease during the quarter. As anticipated, our cash balance decreased during the quarter, primarily as a result of a difference in timing associated with customer progress, milestone cash collections, and payments to vendors on several large contracts. Additionally, during the quarter, we disbursed accrued employee incentive payments related to attainment of specific performance goals in prior periods. At the end of the quarter, we had $307 million in cash and cash equivalents, no borrowings under our $500 million revolving credit facility, and no loan maturities until November 2024. As a clarification, our revolver debt to cap covenant is based on adjusted cap, not equity on the balance sheet. To determine adjusted cap, we add back all previously recognized impairments. Based on our determination, as of March 31, we could draw down the entire $500 million and still be in compliance. Moving on to our second quarter and full-year outlook. We are not providing operating or EBITDA guidance for the second quarter and full year of 2020 due to the lack of visibility in the majority of our businesses. Many of the markets we serve are being profoundly affected by the effects of and the associated responses to COVID-19, as well as the significant reductions in our oil and gas customer spending as a result of the lower crude oil price environment. We maintain our guidance that unallocated expenses are forecasted to be in the mid-high $20 million range per quarter. We are further revising our capital expenditure guidance by lowering the range to $45 million to $65 million and 2020 cash tax payments guidance by lowering the range to $30 million to $35 million. Directionally, we expect decreased demand for our services and products within our energy businesses. We anticipate further COVID-19-related impacts to our entertainment business. Theme park operators are dealing with significant challenges, including the reduction in revenue as a result of closed facilities and the uncertain timing of their re-openings. Our government-supported businesses, which represented approximately 16% of our consolidated 2019 revenue, are not closely tied to the crude oil or public entertainment markets, so contracting activities should be relatively unaffected, absent any COVID-19-related delays. Now turning to our liquidity and balance sheet. In any environment and especially during this complex time, the top priority is to preserve our liquidity and balance sheet. We are taking decisive action to reduce costs by resizing and restructuring our businesses and leaning our operations in this evolving energy environment. We are currently targeting a reduction of annualized expenses in the range of $125 million to $160 million by the end of 2020, inclusive of $35 million to $40 million of reduced depreciation expense. Cost reduction actions being taken include efficiency enabling projects for process improvements and rationalizing facilities, which include increasing focus on remote operations to reduce the number of people working offshore, the consolidation, reduction, or elimination of facilities to reduce lease and operating expenses, and driving our quality tenants throughout the organization to eliminate non-value-added costs. Simplification of our operating structure has been the goal. We've recently and will continue to take actions to simplify the way in which Oceaneering does business by aligning like-for-like activities to leverage people, assets, and facilities to perform services and provide products in a more efficient way. Actions taken to date include permanent headcount reductions and elimination of management layers. Compensation reductions. The base salaries for our senior leadership have been reduced by 15% for myself, 10% for all of our Senior Vice President positions, and 7.5% for our Vice President positions. In addition, we have reduced the Company match on our 401(k) plan by 50% and reduced the expected payouts under our short-term and long-term incentive plans. Other cost reduction activities being undertaken include implementing supply chain savings, where we can bundle purchases across business lines to achieve lower pricing and renegotiate contracts with vendors in light of current market conditions. We're also taking steps to eliminate non-productive assets, which will benefit us with lower inventories and lower carrying costs. In addition to these categories, we also expect to see a benefit from an estimated $35 million to $40 million reduction in depreciation cost as compared to 2019. Although this is a non-cash expense, it is worthy of highlighting because it will benefit our operating performance and position us to return to profitability sooner. Since launching this effort, approximately $70 million of annualized cost reductions have been initiated, and that's net of depreciation expense. Additional savings are expected to be achieved throughout the remainder of the year, with the majority occurring in the second and third quarters. We expect the cash costs associated with these actions to be around $15 million. Now, before I wrap up the call, Marvin Migura, who is well known to many of you, will be retiring from Oceaneering at the end of May, and I wanted to offer a special thank you to him before he starts his next chapter. Over the past 25 years, Marvin has served as our Chief Financial Officer, Executive Vice President overseeing all of Oceaneering's support functions, and over the past several years as a strategic advisor to me and our executive management team. Marvin has not missed one quarterly earnings call during his 25 years. His extensive knowledge of the Company, his ability to focus on the critical issues at hand, common sense, business guidance, and sense of humor have made him an invaluable asset to Oceaneering. Best wishes for your retirement, Marvin. You'll be missed. So in summary, I'm pleased with our first quarter results. I believe these results show that Oceaneering successfully adapted to the market realities in place at the beginning of the quarter. Clearly, significant changes have occurred since then that have drastically changed the anticipated activity and pricing for our services and products moving forward. While there will undoubtedly be many challenges presented as a result of these new realities, I'm confident that with the actions already underway, the quality of our services and products, and the health of our balance sheet, we will be successful in adapting and succeeding in this changing market environment. We appreciate everyone's continued interest in Oceaneering, and we'll now be happy to take any questions you may have. Marcella, we open this up for your questions.

Your first question comes from the line of Sean Meakim from JPMorgan. Your line is open.

Good morning, Sean.

Good morning. So, understood on the difficulty of giving formal guidance at this point, but could we just maybe go through some more granularity around how you're seeing some of these different issues, impact to businesses? And I think probably, I want to focus mostly on ROVs, but obviously there's impact across each of the businesses. So, in terms of expectations around customer decision-making in the near term, folks are trying to shed costs, anything that's not nailed down, they're trying to take out. And then on the second side, I would also say COVID-19-related issues, how you're managing through those both on the supply chain as well as in the field from an activity perspective? Some critical pieces there, would love to hear some more granularity around those issues, how you see them to provide some context for us in the next couple of quarters.

Yeah. I mean, Sean, I guess the challenge here has been we do see that you're watching the weekly rig count, the rig counts drop pretty significantly since the beginning of April. So we're very cautious that we're not sure exactly what's happened. I mean, we've had operators that took all us one week and say, we're going to have to discontinue this project and then they get a little relief on moving people in and out of some of the countries where we work and they pick it up the next week. So it's really hard to get a clear picture of what's going on. But I will say we're coming off a quarter with good ROV utilization. We think market share will persist even as rigs drop. So it's just I think the best thing I can tell you is keep an eye on what's going on with rigs, and we're likely to follow that rig count pretty closely. The VAST business, I don't think will deviate much from the way it's paralleled the rig business in the past. We may see a little more brownfield activity on the vessels where people are doing some of the remedial work that they continue to do to keep that production going even if big projects start to get stalled out, because people don't want to make that capital expense. Our customers preserving money for those who are still paying a dividend or just really challenged to come up with the cash to do some of the big projects. So, I think those things are the things to watch. That's the best thing I can tell you on granularity. And then, as far as products go, yeah, same story, right? I think what we're seeing is we're seeing more delays than cancellations. So we do see things where people would like to slow down a little bit, but even that in the manufactured products business hasn't been tremendous yet, but stay tuned. I think everybody is still getting their feet under them in making those decisions.

All right, thanks. I appreciate that detail and the context is helpful. So then, just thinking about the cost-out initiative, looking at your cost structure, as you're going through this process, have you done much competitive analysis looking at what your fixed cost structure looks like relative to maybe direct comps or even just other public companies in your sphere? How does your cost out look compared to peers? How will it look once you've completed this latest round? I'd like to learn more about that process and how you've come to this level of cost-out as being sufficient at this stage.

Sure. We conducted a benchmarking analysis against our competitors, including not just general and administrative costs but also a deep dive into our headcount and service costs across HR, IT, and other departments. This approach allows us to identify areas where we may not be competitive. We sought a detailed understanding to effectively address those opportunities. I believe the savings numbers we've shared fall within a certain range, aiming for the midpoint, and even if we don't reach the high end, we expect to outperform our peers. We've widened our comparison to include not only our direct competitors but also some top-performing companies in the industrial sector. Our targets are quite ambitious, especially considering the current market conditions, which feel more challenging for a smaller company like ours. We will need to continue working diligently to achieve these goals.

Understood. All right, thanks for the feedback.

Your next question comes from the line of George O'Leary from TPH & Company. Your line is open.

Good morning, George.

Good morning, Rob. Good morning, guys. How are you all?

Doing good.

First place I wanted to start off was you guys talked a little bit about incremental asset rationalization. You've already done some of that and there were some asset impairments and write-offs, which is completely understandable in this environment. One, I just wanted to better understand how that impacts DD&A going forward and then just kind of what types of long-lived assets fell in that write-off or impairment bucket.

Yeah, I'll take that one. The ongoing kind of DD&A, I'd say, incrementally is going to be another $1.5 million a quarter reduction in depreciation. When I look at what kind of assets, some of it was shallow water vessels that we had that we took some impairments on was the primary component. So a lot of this was not assets that were actually being written off, this was assets that had impaired values going forward.

Okay. That's very helpful. And then, if you think about the geo markets across which you work today and kind of your global presence, kind of, a two-pronged question, which offshore deepwater theaters do you expect share the most resilience in 2020, and part of that question is, where would activity naturally hold up if crude oil prices were below level, and some of that is also where you're seeing the biggest impacts driven by just COVID, any inability to get shift changes done efficiently? And then conversely, which offshore geo markets have you seen the greatest impact from both crude oil price and COVID and where do you expect to see the most incremental weakness as 2020 progresses? So, apologies for multiple questions rolled into one, but it's all kind of tied together.

I wish I could provide clear insights, but discussing all the variables can complicate things. However, I can say that Norway has been performing well. We identified significant opportunities and activity there, which is a highlight. One reason for this success is Norway's longer-term focus and the stable operations led by Equinor, resulting in minimal disruptions. Additionally, Norway has a local workforce, alleviating concerns over personnel movements. Any COVID-related incidents on platforms were minor. In contrast, West Africa presents more challenges due to a limited local workforce. Although we've managed operations effectively, long quarantine periods for personnel create inefficiencies that slow progress. While we maintain business continuity, the labor process is more intensive there. Also, we must consider ongoing commitments to local governments, which can cause projects to advance at a slower pace. In the Gulf of Mexico, we've maintained vessel operations, ensuring business continuity. Operators have more control over their budgets there, allowing them to adjust operations more flexibly. This situation is complex and still unfolding, but we're seeing positive developments in several areas. It's noteworthy that offshore wind activity in the North Sea remains strong, aside from occasional difficulties in personnel movement due to COVID. We're regarded as essential in most of our work, including some entertainment projects, which has allowed us to stay active. There have been very few work stoppages; we had a brief shift issue while we established proper procedures, but we quickly adapted to keep our workforce engaged and our customers operational.

And George, I want to add one component. I kind of got a little bit short on my answer as far as the asset impairments that we took in the quarter. We also had a fair amount that was in our Subsea Products segment, most of which we call within our Subsea distribution, which is umbilicals and hardware-related. So we took some impairment issues related to the facilities in Brazil, Angola, and Rosie. So that would be the other component.

Okay. That's helpful. Yeah, I noticed that $54-ish million dollar impairment that definitely caught my attention. So that helps to kind of square the circle there.

Yeah.

I appreciate the color from you guys.

Thanks, George.

Your next question comes from the line of Marc Bianchi from Cowen. Your line is open.

Thanks a lot. I guess just following up to some of the market commentary and questions about kind of how things could progress, I think what I'm hearing here is that maybe ROV probably has maybe the most downside and then AdTech would have the least downside and the other segments would be somewhere in between with perhaps products maybe being closer toward the ROV side, and then the other couple of segments closer toward the AdTech side. Is that, as you see it, maybe a fair way to think about it? Or is there anything you'd correct in that summary?

I believe you've got the right idea. We just need to adjust the mix a bit. The government sector seems to be the least impacted, while entertainment has faced the most challenges. There's no doubt about that, as many parks have completely shut down and we couldn't carry out any work there. We managed to finish some vehicles in our shops, but overall, operations are pretty much halted. However, we anticipate that they will eventually recover and find ways to serve their customers again. We hope to be involved in some technological advancements to ensure safety for visitors returning to the parks. Entertainment is definitely the hardest hit sector. In previous situations, we've noticed that Asset Integrity often suffers significantly, as it consists of costs that customers can delay. Consequently, volume reductions occur rapidly. ROVs experience a slightly different trend; they might have a longer duration before facing a downturn because teams need to complete drilling phases or achieve specific objectives before halting. Products tend to follow a longer timeline since we are still processing existing orders. We ended the year with a sizable backlog, which allows us to continue our work. We've encountered this phase before; typically, survey and ROVs see the initial decline in a normal oil cycle. If we manage the product backlog well, we can cover ourselves for another year. However, when orders decline and ROVs start to recover, we begin to notice a decrease in backlog and manufacturing capacity. Overall, I think you have the right perspective. I'd just suggest paying close attention to the details of AdTech and perhaps the Service and Rental business, which largely depends on customer needs, especially regarding well remediation and light well intervention. If a well is shut in, it could lead to significant production that can resume at any time.

Okay. That's helpful, thanks for that. I guess, in terms of the operating leverage here, do you guys have the cost cuts which should dampen kind of the decremental margin effect somewhat? If I look back to '15 and '16 and I know things are choppy from quarter-to-quarter, but just looking back to those years, the annual decrementals that you had were kind of in the low- to mid-30% range on an EBITDA basis. Should we expect you guys to do better than that now, just given this cost-cutting program? Because I don't remember that we had a major cost-cutting program like this in the prior downturn, but maybe that I'm recalling things wrong there.

I think it depends on how low it goes. We're starting from a lower point, but we also have more price support because our customers understand that we didn't receive any meaningful price relief in 2018 and 2019. Therefore, I don't anticipate experiencing the same pressure we faced during those years. Additionally, we've improved our general and administrative costs, which will also work to our advantage. However, if activity drops to the lower end of the range we've been hearing, it will be challenging to manage the decremental margins if we reach that point.

Yeah. Makes sense, Rob. Thanks a lot for the comments.

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

Morning, Scott.

Hey. Good morning, guys. This is Justin Howe, Scott's associate on his behalf.

Hey, Justin.

Could you clarify if the $125 million to $160 million guidance for the new cost-out program includes the cost savings implemented in the fourth quarter of 2019 and the first quarter of 2020? Is that the $70 million?

Yes, that's part of it.

How much of the cost savings has been realized from the previous programs that have been implemented?

I would say it's predominantly the depreciation that was taken into account in Q4 of last year.

Okay.

We haven't announced any programs. It's been kind of a fluid process. So, most of the non-depreciation ones, we started some of it with Asset Integrity that Rod alluded to on the call last time, but it's just been a fluid process from the whole Q4 forward.

Okay. I appreciate that. And I know you guys said that the volume-related cost reductions are not included in that guide, but kind of given the current market activity, how much additional savings could you see from the variable side?

That's going to depend on the volume. If final investment decisions don't take place for umbilicals or hardware, which are key components, and we notice a significant decrease in activity there, that could lead to unwanted savings. This would also affect our top line.

Okay. And then just lastly for me is your CapEx looks like it's going to be, kind of on a run rate basis, $9 million a quarter for the remainder of this year, just kind of wondering if that level is considered sufficient maintenance level? And kind of if we move into 2021 with a kind of a continued activity lag, is that kind of a run rate basis we can kind of model or expect for next year as well?

I think there is still a little bit of growth CapEx that's being completed here in Q2 associated with the drill pipe riser contract for Brazil. So I would say that the $9 million is not going to be amortized equally among the three quarters, it will probably be a little bit more heavy in Q2, as net equipment is about to go on higher this quarter. So, I expect Q2 will have a heavier CapEx demand as we complete those assets, and then it will be lighter in the back half of the year. And that will probably be more of the run rate from a maintenance CapEx that you could look at modeling for '21.

Okay. I appreciate it. That's all from me. Thanks.

Thank you, Justin.

Your next question comes from the line of Kurt Hallead from RBC. Your line is open.

Hey, good morning, everybody, and I hope all your families are doing well.

Hey, Kurt. Good morning. Good morning. And Marvin, congrats on your retirement. All the best.

Thanks, Kurt.

You're welcome. So, gentlemen, I'm hoping you can help me understand some of the logic behind the information you shared in the press release last night and during today's conference call. If I consider all the elements you provided regarding cost reductions, capital expenditure reductions, and tax dynamics, it seems like the midpoint of those components amounts to roughly $80 million in positive cash contribution for the full year. I just wanted to verify that my calculations align closely with the figures you've shared so far.

Your next question comes from the line of Mike Sabella...

So, what happened there?

Hang on. So...

I didn't think it was that tough of a question that you needed to…

So, if you think about...

All those components add up to about $80 million at the midpoint, is that about right?

You're taking the amount from the Cares Act?

Yeah, I took that into account kind of offset your cash tax. I took the depreciation change and concluded that in that dynamic. So, took your OpEx, your CapEx, your cash tax, your CARES Act and your depreciation. Took the midpoint of all that, you add that up, that's about $80 million. Just want to make sure I was understanding that dynamic correctly as you thought about free cash flow for the year.

Compared to depreciation on free cash flow.

Well, again, you get back that out. So, it'd be more maybe in the $40 million, $50 million range, right, something like that?

That's yes, I agree there.

All right, thanks. And then, just curious on the last conference call, you guys suggested maybe working capital contribution of $5 million to $10 million for 2020. I know a lot has changed since that point in time, but you did indicate in your commentary, you did expect a positive contribution from working capital in 2020. To what magnitude do you think that that working capital contribution could be?

I don't think we're prepared to give a range, but we do still see it being positive, and unfortunately a lot of it's going to be generating cash through liquidation of receivables.

Okay, that's reasonable. One last thing, if we were to experience a revenue decline, the specific amount isn't crucial. Let's say revenues decrease by 20% broadly. You mentioned that a 30% decrease in EBITDA, as Marc suggested earlier, could be a good baseline to assess the impact on profitability. Additionally, assuming we factor in your operating expense savings, which at the midpoint would be an annualized run rate of about $100 million. When I consider the exit EBITDA, is that process logical? So, we have the revenue decline, the decrease in margin, and then we add back the operating expense savings to evaluate the exit for 2020. Is that a fair way to approach it?

Yes. I apologize.

No, that's fine. Sorry about making it more complicated than need to be. All right. That's it on my end. Thanks guys.

Thank you.

Your next question comes from the line of Mike Sabella from Bank of America. Your line is open.

Hey, thanks. Appreciate the warning that I was coming next also. So as we kind of think through how probably IMR market sort of develops and I know it's pretty uncertain at this time, but if we just kind of think of a normal cycle, can you just walk us through IMR in a normal cyclical environment and then kind of in an environment where operators are shutting in wells versus in an environment where they're bringing them back on?

I believe you've highlighted an important point. It will be interesting to see if this situation unfolds as a typical cycle. In a normal cycle, when wells aren't being shut in and companies manage their spending, we initially observe a decline due to a quick reaction to halt activities, leading to a drop in operations. Once companies feel they've stabilized at the new oil price, increasing production from existing infrastructure tends to be one of the first steps, as it's often the least expensive option. I think this process generally works well. However, in this scenario, it may be more extreme. Shutting in wells may require additional work to restart them. When considering some of the hydraulic tasks we perform, such as flow line and hydrate remediation, we might see a significant increase in that type of activity when attempting to restart wells. Therefore, it seems likely that this situation could represent an intensified version of what we typically see in a normal cycle.

That's helpful and makes sense. And then, I'm sorry, I had to hop on a little late. Did you walk through kind of how the cost cuts will focus on the segment or is it – should we really think that this is cutting across the board?

I believe you can view it in a more general sense, Mike. We've undergone a significant organizational redesign, and as we mentioned in the call, we are merging similar functions. Thus, trying to assign specific resources to each group may not be as informative as assessing the overall picture. For instance, how do you divide resources among groups when consolidating them into a single facility? These considerations are better evaluated from a higher-level perspective.

That's great. Thanks a lot guys.

Your next question comes from the line of Blake Gendron from Wolfe Research. Your line is open.

Thank you very much. Good morning, everyone. I appreciate the comments about the covenant, which I missed. My first question is regarding the ROVs. Can you provide an update on the commercial aspects related to the rigs follow-up? I assume there’s a contractual element involved, making it somewhat more complex. It seems that floaters, similar to what we observed in 2015, will likely be affected in the short term. If we do witness rig terminations in a lower oil price environment, how will that influence your ROV business? Is there any termination payment involved in that scenario? Additionally, I’m curious about your strategy during this downturn, especially with offshore rigs potentially being stacked, for gaining market share once rigs resume operations. Thank you.

Blake, there isn’t really anything special about termination fees for us. It all comes down to when those rigs are terminated and stop working, or even when they're contracted but stop work, leading to a loss of revenue for us. Each day lost is a working day lost. So, by monitoring the working rig count, you can see how it's impacting the drill support aspect of our ROV business. On the upside, in terms of market share, we are truly capitalizing on remote operations and have been putting considerable effort into de-manning, utilizing hybrid ROVs, and resident ROVs that not only help reduce carbon emissions—since we don’t need a vessel to support them—but also allow us to operate from several support centers worldwide, minimizing the need for personnel on the rig. We're already seeing a heightened interest in this as people recognize the challenges of moving personnel, especially in current conditions. The ability to keep staff from traveling and utilize machines that either move around or are already on-site is a key advantage we need to leverage. Additionally, when considering new capital expenditures—focusing on new builds rather than maintenance—this is where we will continue to invest, particularly in automation and resident vehicles that align with the future of the oilfield, rather than the traditional methods we've used in the past. We must embrace the cutting-edge of what technology will look like moving forward, and that's our clear direction.

That's helpful perspective. In Advanced Tech, you provided a solid overview of the differences between the government and entertainment sectors. R&D expenditure has been concentrated on that, particularly in software. I am curious if there are any shifts in focus due to the uncertainties in oil and gas as well as some global markets. Do you plan to continue allocating R&D spending towards that segment of the business, considering it might be more resilient given the current state of commodities?

I would say that even though the entertainment sector is facing challenges, the technology we apply—particularly in software and vehicle control systems—is still very relevant. The same technology we utilize for entertainment also applies to our AGV business. Therefore, it's important for us to keep investing in that area. Just as I've mentioned regarding automation in ROVs and factories, we can use our vehicle technology to reduce the need for workers to be in close quarters. I believe the demand for this technology will increase, and so we must continue our investments. I appreciate your comments about resiliency as I think it strongly applies to these two businesses.

Got it. Thanks a lot guys. I'll turn it back.

Thanks, Blake.

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

Hey, good morning. Dave Smith from Heikkinen Energy. Wanted to ask, given your significant cash balance and expectation of free cash flow for the year, I'm curious how do you view the opportunity to take advantage of the wide discounts that your debt is trading at?

I'll start off and then let Alan expand on this. We are very focused on potential opportunities. We've mentioned how our cash usage has changed, and that's why we've maintained those cash reserves for now. Throughout this period of market dislocation, we've been trying to assess our best options since our bonds are not heavily traded. It wasn't completely clear if we could make a significant move to buy back bonds. We're considering our options, and I believe our perspective aligns with yours. Alan, do you have anything to add?

No, I think you captured it quite well there, Rod. I think it's one that should we do anything, we'll report on it when required.

I appreciate it. And I was going to ask if you're getting more traction with remote ROV piloting. It sounds like you are. Just wanted to make sure I understood. Are you getting real interest in remote piloting for drilling support?

We can do it for some of the drilling support, but really platform work and things like that, where we've got the ROV station for, I would call it, more intermittent work is probably where we will see it most often, and that's where we can have that opportunity to be able to launch an ROV that's not as frequently used as it would be on a vessel, especially, but on a drilling rig as well.

Great, thank you very much.

Yep. Thanks, Dave.

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

Thanks. Good morning.

Good morning, Ian.

Rod, I wanted to ask how do you feel this most recent crisis has changed the calculus on industry-wide M&A? Obviously, from our seats, we see the need for the industry to consolidate more and rationalize overhead, etc. And from your seat, I know that no one likes to crystallize their value at dropped prices but how do you think it's going to unfold from here and what do you think the opportunity looks like for Oceaneering to participate?

I completely agree, Ian. It's clear that as our peer group of service companies has reduced in size, the opportunities and activity levels have changed. If we continue to see reduced activity over the long term, it makes sense to seek partnerships and combinations. You correctly pointed out two significant challenges. First, we need to find opportunities where there is a true synergy, so we can benefit from efficiencies rather than just experiencing increased general and administrative costs. Second, we need some time to stabilize and understand our true value, especially given the significant impact on share prices recently. We all need to come to terms with the new reality and recognize when relative values have stabilized for these combinations to occur. From Oceaneering's perspective, our priority right now is to focus on what we're currently doing. If we want to be a consolidator, we must demonstrate that we can effectively manage all the necessary aspects of consolidation. This is precisely what we're doing by aligning our resources, optimizing our facilities, and ensuring our organizational functions can support various businesses. These efforts will prepare us to pursue deals in the future when the timing is right. Even while we await further developments, we are readying the Company for those opportunities.

Thank you, Rod. Alan, I have a follow-up for you. We have touched on the guidance questions to some extent. Regarding free cash flow for the year, starting with a deficit in Q1, I assume that EBITDA may decline sequentially throughout the year. Therefore, we expect significant free cash flow in the second quarter, likely supported by some working capital releases to mitigate the target of achieving neutral or positive free cash flow for the year. Is it reasonable to assume that Q2 will represent a significant reversal in cash movement compared to Q1?

No, I think it's going to be more Q3, Q4. I think Q2, as I alluded to, we will have heavier CapEx in Q2 than we do in the back half of the year. We anticipate getting some of that cash tax refund in the back half of the year as well, and with lower levels of revenue, we should be able to generate more from our balance sheet in the back half of the year as well. Revenue hasn't dropped off that precipitously yet, so that will probably be a back half of the year story.

Okay, thanks for that clarification. Thanks for the answers today, guys.

Yep. Thank you.

There are no other questions at this time. I will turn the call back over to the presenters.

Thanks, Marcella. Since there are no other questions, I'd like to wrap up by thanking everybody for joining the call. And this concludes our first quarter 2020 conference call. Thank you, everyone.

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