My name is Megan and I will be your conference operator. I would like to welcome everyone to Oceaneering's Second Quarter 2020 Earnings Conference Call. With that, I will now turn the call over to Mark Peterson, Oceaneering's vice president of corporate development and investor relations.

Thanks, Megan. Good morning, and welcome to Oceaneering's second-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 today are Rod 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 second-quarter press release. We welcome your questions after the prepared statements.

Good morning, everybody. And thanks for joining the call today. Before I start with the prepared remarks, I want to take a moment to thank our Oceaneering employees, our customers and our fellow offshore service providers for coming together the way they have in the second quarter to work safely and in ways that we may not have previously envisioned. This spirit has made this industry great. And together, we're going to continue to make a difference and make the industry safer than ever before. So thanks again to everybody. Now to my prepared remarks. Today, I'll review the details of our second-quarter 2020 results. I'll provide you with the general outlook for the second half of 2020, and I'll give you an update on our expense reduction activities. After that, I'll make some closing remarks and open the call to your questions. For our second-quarter summary results, considering all the uncertainties surrounding the crude oil markets and the COVID-19 pandemic, we were satisfied with our adjusted operating results. For the quarter, we generated adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, of $40.5 million, exceeding consensus estimates. And we generated $26.9 million of free cash flow. These positive results were partially attributable to our actions to substantially reduce structural costs in light of an expected continuation of lower demand for our services and products. The positive effect of these cost reductions is reflected in our 9% consolidated adjusted EBITDA margin for the second quarter of 2020, which declined by only 14 basis points as compared to the first quarter of 2020, despite a 20% decrease in revenue. I am also happy to say that these benefits have been widespread, with each of our operating segments, except asset integrity, generally maintaining or increasing their EBITDA margins during the second quarter compared to the first quarter. As expected, compared to the first quarter of 2020, the aggregate results of our energy segments declined during the second quarter of 2020. However, this decline was partially offset by improved performance in our non-energy segment, advanced technologies, and lower unallocated expenses. We did experience some operational disruptions and delays due to COVID-19 during the second quarter, but the safety protocols that we and the industry put into place in response to the pandemic limited impacts to our employees and customers. Sequentially, consolidated adjusted operating results declined by $4.4 million, and each of our operating segments, except asset integrity, generated positive adjusted operating results and EBITDA. Our second-quarter adjusted EBITDA of $40.5 million exceeded consensus estimates, and we generated $26.9 million of free cash flow. We had $334 million of cash and cash equivalents at quarter end. Now let's look at our business operations by segment for the second quarter compared to the first quarter. ROV adjusted EBITDA margin remained relatively unchanged at 31% during the second quarter as compared to 32% achieved during the first quarter of 2020. Sequentially, revenue declined by 12% principally due to a 9% decrease in ROV days on hire and a 3% quarterly decline in average ROV revenue per day on hire. The decline in revenue per day on hire resulted from fewer mobilizations and increased standby days, all of which are included in the calculation. Pricing concessions during the second quarter were not noteworthy as we continue to progress our expense reduction initiatives. As a result, and as expected, ROV adjusted operating performance decreased, declining by $2.5 million. This decrease resulted from fewer working drilling rigs, which yielded lower days on hire for our drill support services that were only slightly offset by a marginal seasonal increase in days on hire for vessel-based services. Our fleet use during the quarter was 64% in drill support and 36% for vessel-based activity, compared to 68% and 32%, respectively, for the first quarter. Fleet utilization decreased to 59% from 65% in the prior quarter due to the decrease in days on hire. At the end of June 2020, our ROV fleet size remained at 250 vehicles, the same as it was at the end of March 2020. Our drill support market share at the end of June was 62%, with ROVs on 86 of the 139 floating rigs under contract. This compares to our first-quarter market share of 61% of the 159 floating rigs contracted at the end of March. During the quarter, our customers adapted quickly to the lower commodity price environment, with the number of working floating rigs falling from an average of approximately 121 for the first quarter of 2020 to approximately 96 for the second quarter of 2020, a 21% decrease. Turning to subsea products, during the second quarter, adjusted operating results declined by $5.3 million on a 33% decrease in revenues as compared to the first quarter. Persistent cost reduction efforts helped us achieve an adjusted operating margin consistent with the margin generated in the first quarter of 2020. Revenue in our manufactured products business was impacted by the delayed receipt of materials, customer-driven project delays, and decreased working hours due to COVID-19. Revenue in our service and rental businesses declined slightly due to decreased activity levels. I do want to highlight that during the quarter, we performed our first drill pipe riser work scope in Brazil pursuant to our previously announced four-year services contract. Our subsea products backlog on June 30, 2019, was $486 million, compared to our March 31, 2020, backlog of $528 million. As expected, there were fewer bookings during the second quarter as many of our customers delayed investment decisions due to the uncertainties regarding oil prices and potential COVID-19-related operating risks. Revenue replacement during the quarter was 67%, and our book-to-bill ratio for the trailing 12 months was 0.83. Sequentially, subsea product's quarterly adjusted operating results improved $1.3 million on an 8% reduction in revenues. Revenue declined due to decreased customer activity. Customers quickly responded to falling oil prices by reducing the amount of call-out inspection, maintenance, and repair work. We are pleased that adjusted operating results improved as a result of better project execution and ongoing cost reduction activity. Asset integrity's adjusted operating results declined sequentially on lower revenue and as a result of nonrecurring costs on certain completed projects. For our non-energy segment, advanced technologies, second-quarter adjusted operating results improved $1.7 million sequentially due to solid performance of our government businesses. COVID-19 continues to adversely affect our commercial businesses. However, cost reduction measures implemented during the first quarter of 2020 limited the financial impact on our second-quarter results. Unallocated expenses for the quarter were sequentially lower as the return on market-based assets held in trust for the benefit of certain post-retirement obligations improved as compared to the first quarter. Additionally, we had reduced information technology costs during the quarter. And now for our outlook for the second half and full year of 2020. Although we are encouraged by our second-quarter results, uncertainty remains for the rest of the year. Many of the markets we serve will likely continue to be impacted by the effects of, and associated responses to, COVID-19, as well as potential reductions in customer spending as a consequence of the volatility in the macro drivers surrounding oil and gas commodity prices. Directionally, we expect continued softness in the demand for our services and products within our energy businesses. Additionally, COVID-19 challenges will potentially affect the timing of our light well intervention project in Angola and near-term demand in our entertainment ride business. On a positive note, we project good performance from our government businesses, which are not driven by commodity prices, and we expect our manufactured products backlog to support good activity levels through the remainder of 2020. Given customer spending uncertainty and potential COVID-19 challenges, we are not providing segment financial guidance for the third quarter and second half of 2020. We affirm that unallocated expenses are forecast to be in the high $20 million range per quarter for the remainder of 2020. For the full year 2020, we affirm our expectation to generate positive free cash flow for the year. Capital expenditure guidance in the range of $45 million to $65 million, our cash tax payments guidance in the range of $30 million to $35 million, and our expectation of CARES Act tax refunds guidance in the range of $16 million to $34 million. And now for an update on our expense reduction initiatives. In our first-quarter 2020 earnings release and conference call, we outlined our plan for a targeted 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. As a reminder, we classified these efforts into four general categories as follows: efficiency enabling projects, which some may describe as process improvements and rationalizing facilities; simplification of our operating structure; compensation reductions; and other cost reduction activities, including supply chain savings and the elimination of nonproductive assets. We classify the majority of these cost reductions to be structural in nature, and therefore, do not expect them to return when activity picks up. These cost reduction efforts are progressing well, and we estimate that since launching these efforts, approximately $85 million of annualized cost reductions have been initiated, with additional savings expected to be achieved throughout the remainder of the year. I would like to emphasize that this $85 million does not include the $35 million to $40 million in reduced depreciation expense that we announced last quarter. So when you add these together, we have reached $125 million, or the lower end of our range. We continue to expect the cash costs associated with these actions to approximate $50 million in 2020. In summary, considering all the challenges we faced going into the second quarter, we're pleased with our results. Much work remains to be done, of course, but I am very proud of how the Oceaneering team has responded to the realities of the markets we serve. Preserving our liquidity and balance sheet remains a high priority in the current environment. We expect to generate positive free cash flow for the full year of 2020 based on the actions we are taking to drive meaningful customer interactions to enable our customers to adapt to new ways of working and achieve their decarbonization goals through digitization, automation, and remote operations; continue to focus on our quality tenets; expand our operational excellence efforts; achieve targeted cost reductions; reduce capital spending; lower cash taxes; and our expectation for CARES Act tax refunds; and generate cash from working capital. We appreciate everyone's continued interest in Oceaneering, and we'll now be happy to take any questions you may have.

Our first question is from Sean Meakim with JP Morgan. Your line is open.

Good morning, Sean.

Good morning. So thank you for the clarification on the D&A portion of the cost-out program versus the $85 million level to date that was in the release. I think that's helpful. Could we maybe just dive in a little more into the cost-out program, what are the major buckets that are left to get to your current target? And then, what else do you see is out there? We're still in a challenging environment for offshore for the next six quarters, which I think there's a reasonable chance that's the case. What other incremental opportunities are you evaluating or pursuing? How do we think about the next opportunity set besides what you've laid out here so far?

Thank you for the question, Sean. To answer your inquiry about where the major areas are, I can say that they are quite evenly spread across all our segments. This was evident in the second quarter, where margin maintenance was noticeable across all areas. The positive aspect is that it's distributed evenly, although there may be slightly less activity in the government sector of AdTech since we've identified opportunities there, and we saw that strength reflected this quarter. We've been less aggressive in that area due to good bid activity. However, the rest is fairly widespread. Looking at what's remaining to capture, some of it comes down to timing. For instance, we've talked about facilities. Although we've identified some, it takes time to secure them due to lease agreements and the need to explore subleases. This process is more time-consuming compared to other initiatives like compensation reductions, which were quicker wins. I expect these efforts to continue, and if we need to do more, we'll pivot accordingly. Our goal is to capture the remaining opportunities, focusing on specific regions or segments where we notice declines that may impact our ability to remain viable, especially if we fall below a certain scale. We've been successful by being strategic in our regional operations, assessing the full scope of Oceaneering's activities, and making tough decisions about whether continued presence in certain areas is justified. I anticipate this process will continue, and that’s where we would adjust our strategy if necessary. Alan, do you have anything to add?

Yes, no, you hit the nail on the head. I had my notes down here as well. And I said the next thing we're looking at, obviously, is regional locations, facilities. We started in the Far East as we announced, I think, two calls ago. So it's continuing to evaluate, making certain that we're in the right places to support the levels of business. If they're suboptimal, we're taking a harder look at each of those locations. And process enablers as well. I think that's something the team has been working on throughout the organization, whether it's in the back office or whether it's on the front lines; it's how can we be more efficient at what we do. As Rod indicated, operational excellence has long been a tenet here at Oceaneering, as well as the quality tenets, and we're going to continue to try and focus on that.

Got it. So then just thinking about the free cash flow guidance. It would be great just to maybe unpack, what do we think is a good operating free cash flow number. So maybe excluding working capital and tax items, and kind of what that breakeven level is for an operating free cash number. And then, just one other component to that is the CapEx guidance. So CapEx guidance is $45 million to $65 million for 2020. You spent $38 million year to date. So really, what you're saying is the second half of '20, CapEx has a range of $7 million to $27 million. Can you talk about what drives that range there for the back half of the year?

I'll start on the CapEx side. Obviously, it's going to be more maintenance CapEx-driven. I mean, as Rod indicated, we did get the first system on the drill pipe riser successfully working on contract. So we're very pleased with that and obviously, capitalized it. So there's very little growth CapEx in the back half of the year. As we flex up, there could be some. We have a little bit left on some of the drill pipe riser that we're still completing. But most of it is going to be maintenance CapEx. We're still working on the freedom vehicle that we've been highlighting on a couple of calls, that is still going to have some CapEx associated with it, as well as maybe a little bit on the Liberty or some of the Isurus-type systems, kind of the next-generation ROVs that we're continuing to invest in and then the technologies associated with them. So I think the $7 million is probably more on just a pure maintenance. If we had some other interest, we could flex it up a little bit if we need to. So that kind of go toward the midpoint in the $55 million range is kind of where we're guiding. Looking at free cash flow. Obviously, you can pull out the CARES Tax Act. We got $16 million to $34 million. That is kind of a one-time event this year that we're looking at. So we're uncertain as to the timing of when all of that cash will come in, certainly driving for it this year. But we are subject to what the IRS' ability to get all of this processed at the same time. So part of that could roll over or bleed over into '21 as well. The other components, aside from working capital, which is one of the bigger levers that comes out, Sean, is just that working capital on reduced levels toward the back end of the year should free up cash.

Our next question is from Taylor Zurcher with Pickering, Holt. Your line is open.

Thank you, and good morning. I wanted to ask first on subsea products. Bookings this quarter were expectedly low, and the revenue was down quite a bit sequentially, but the backlog position is still very healthy. And I am just curious if you could help us think about the revenue progression in that segment over at least over the back half of the year just coming out of backlog.

Yes. When you look at the second quarter, Taylor, it was down a little bit, as you noted, and a lot of that had to do with the timing of the receipt of materials coming from some third-party suppliers. We still expect that will be executed here in the back half of the year, more timing than anything. So when I look at the back half of the year, it's going to be certainly going back to a more traditional 70%, 75% manufactured products and probably 25% to 30% service and rental. So it will be skewed more back to a manufactured products revenue stream in the back half of the year as we put more in the umbilicals in the backlog that we're going to be executing from backlog as we talked about in the call notes.

Okay. And a follow-up is more high-level and it's on the ultra-deepwater activity environment in general. I mean, clearly, the pandemic's created the sort of perfect storm for deepwater activity to plummet over the past few months. And at these sort of commodity prices, we're probably still headed lower from here. But it does feel like we probably overcorrected to the downside a bit just given some of the logistical headwinds in place from COVID-19. And so I am curious if you think that's the case as well and if there are any markets out there where maybe there are a few rigs that had to go on standby or temporarily idled as a result of the pandemic that you might see return to work over the back half of the year.

Yes, I agree with you, Taylor. You're correct, and this highlights our reluctance to provide guidance since the market could shift in either direction. While the main issue we’ve encountered is the delay in our work in Angola and some challenges in the entertainment sector in China, there are also positive aspects, particularly on the government side. Our uncertainty primarily stems from market dynamics that everyone is currently experiencing. You’ve accurately pointed out that we might have overestimated our position in deepwater operations. For instance, Norway had a brief setback but is now performing well. Brazil has faced even more interruptions, as when they discover a COVID case on a rig, they must clear and sanitize everything, which can lead to shutdowns lasting from 10 days to two weeks before resuming work. However, we believe that work in Brazil is likely to continue despite these challenges, as it may be less impacted by commodity prices compared to other regions. Thus, while it’s hard to predict the overall trends, we recognize that although the situation could worsen, some areas may find solutions and continue operating. This is something we are closely monitoring.

Great. Well, thanks for the answer.

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

Hey, good morning.

Good morning.

I was kind of wondering if maybe we could dust off part of the discussion around possible debt tenders here. Maybe the window is never open for bonds. Bond prices have come down a little bit again recently. Do you guys think there's another opportunity to move here? And if not, how do we think about kind of optimal capital structure for Oceaneering over the next couple of years just with all the cash sitting on the balance sheet?

I'll address the first part of your question, and then I'll let Alan handle the second. Yes, we are still focused on seeking opportunities. Regarding our debt that matures in 2024, we believe that if a favorable price or opportunity arises, we will consider taking action. There are various strategies to manage that debt, and we are doing everything possible while monitoring the market for the right moment to act. This could present a potential advantage for us and others who have the capacity to move forward. Therefore, we are definitely keeping an eye on this situation.

No. I think really it is, is there an opportunity to act? But I think at the same time, how does the revolver play into the debt structure? How do we maintain liquidity? How do we get beyond the 24s? Certainly, looking at each and all of those things over the next, I'll say, 24 months, with the revolver coming up in January of '23. So we're very pleased with our liquidity position today, but we recognize we need to address that not too far out from where we are today, just to make certain that we can see an upside in this market. We do see that we will have to go back to the markets and revenue will return. As we indicated in the call notes, we are working on how do we improve the top line, not just take cost out at Oceaneering. So while we are generating from working capital today, I do see down the road, it is something that we need to be able to have the flexibility to address this increasing revenues at the same time. So I think that's one of the key elements we're trying to blend into our overall discussion on debt is looking at the upside that could be coming in the coming years.

Got it. Could you please clarify the cost cuts? I'm sorry if you already mentioned this, but was the $85 million figure a run rate as we entered the third quarter, or was it what you realized as a benefit for EBITDA in the second quarter? If it was a quarter-end figure, how much of that should we expect to carry over into the third quarter?

Yes. When we mention this, Michael, we are really referring to the cost-saving initiatives we've implemented. As with any of our actions, if we implement a compensation reduction early in the quarter, we won’t see the complete benefits right away. There are varying degrees of realization for these savings. The $85 million we aim for represents an annualized cost reduction for Oceaneering. The amount we actually realize in the quarter will depend on when these changes take effect. As we move into the third quarter, we expect to see more of these initiatives coming to fruition, along with new ones being introduced. There’s a growing wave of changes happening. By year-end, if we achieve that $85 million target, particularly with the reduced depreciation expense, we anticipate that most of this annualized amount will be realized in 2021.

Our next question is from Ian MacPherson with Simmons. Your line is open.

Thanks. Good morning, Rod. On AdTech, my notes may have been skewed from last quarter, but the performance in Q2 was good, better than I have been expecting. And recognizing that the government side is the much bigger piece of it, do you see a repeatability more or less or even in the same ZIP code of the first-half results from AdTech looking into the second half, notwithstanding the fact that some of your entertainment business is still experiencing COVID headwinds in the second half?

I believe that what we can expect is that nothing occurred in Q2 that isn't repeatable. Our cost reductions on the commercial side are sustainable. However, considering the ongoing situation with COVID, I can't say that the entertainment business will have a strong recovery in the second half of the year unless we receive significant positive news, particularly from China. It seems like we will maintain the same pace as in Q2. On the government side, our government business has been performing well with strong bidding activity and solid results. Therefore, I think Q2 performance is repeatable, if not surpassable.

Good. That's helpful. Thanks. And then, the main value drivers in oilfield being ROV and products for the time being. For ROVs, for example, contemplating a continued glide down with activity as the rig count probably suffers a little bit in the second half. The EBITDA decrementals that we saw from Q1 into Q2, which is kind of 45% decrementals, taking your margins down 2 points. To me, that's how I would think about modeling the decrementals going forward, which would put me into kind of 27%, 28% EBITDA margins later this year. Does that make sense to you? Or do you think that with the cost-outs, that maybe you could do a little better than that?

I think that, again, when we talk about cost-outs, and I know the question came up earlier, when we get to the level of close to $85 million we've taken out, we're talking about process improvements. We're talking about some other things, not just headcount cuts, for example. And so I think we'll continue to work on that. I don't think it will be a lot worse, but we got to really count on more incremental benefit from our cost improvement maybe is the way to put it when we talk about process change. We got to keep after that, because, like you said, there's a trend there that we got to get ahead of.

Thanks for the color and insights today. Appreciate it.

Your next question is from Vebs Vaishnav with Scotiabank. Your line is open.

Hey guys. Good morning and thank you for taking my questions.

Hi, Vebs.

Can we speak about just the governance, what you have around the debt today and how you stand? And is there like any adjustments that are allowed in those covenants?

Yes, Vebs, with our debt covenants, we have a debt-to-total cap, which is on an adjusted basis, as you just indicated. So the impairments that we've taken in the last couple of years are added back to the overall equation. So as the covenant stands, it's on a total debt-to-total cap adjusted at a 55% level. If you do the math, we're probably in the low 30% range.

And it also means that we have access to our revolver, the full amount of our revolver as an anecdotal way of looking at it.

Can you provide an update on the Angola project work? It seems like it's been postponed from the second quarter. When can we expect that to start happening?

Yes, Vebs, please go ahead and finish your question.

Also, I was just going to ask about the hedges just given like one of your larger peer has had many issues with Angolan kwanza. Just what hedges are in place?

Sure. I'll start by saying that our primary focus is on the customer's desire to proceed with the work, as well as our willingness to undertake it. However, mobilization has been challenging due to the significant logistics involved. We have personnel who need to be mobilized in Angola, and we also require a specific timeframe to ensure that we can complete the work, especially when it involves live wells. It's crucial for us to have confidence that we can finish the project once we start. We're monitoring the situation closely, particularly the COVID developments in West Africa, to determine when we can safely execute the entire project. While I think it will be difficult to complete everything in 2020, we are hopeful to at least initiate the work. The timeline is uncertain due to the unpredictable nature of COVID. Regarding hedging, I want to note that most of our contracts, particularly in West Africa, have costs that align well with the currencies we deal with, providing a built-in hedge. Therefore, we don't anticipate facing significant exposure to the kwanza when the contract is executed, as our currency matching should cover our spending and revenue effectively.

Got it. I think that's helpful. And maybe if I can squeeze in one more. So it sounds like, obviously, third quarter is typically seasonally strong but obviously, given the macro, we don't really know. But it sounds like in the Energies business in each of the business, it could be modestly down from 2Q to 3Q, maybe Products is flat to modestly up and advanced technologies, maybe it's flat to modestly up. Is that a fair way of looking or characterizing the three next quarter?

Yes, I think so. Yes, go ahead Alan. Jump in.

No, no, I think you called it and I think products being up certainly somewhat of a little bit of a slide from Q2 into Q3 on some of the raw materials that we didn't get in Q2 that we anticipated to put into the production process. So we anticipate those will happen in Q3, which will drive top line but very little bottom-line impact at all just because of the nature of the materials we're putting in. So it could impact top line, but I wouldn't drive a lot of profit from it.

And like advanced technologies, like the government business can offset the commercial aspect?

I think what I would look at is very similar to kind of the Q2 aspect where we had low levels of entertainment and commercial business. Similarly, I would think it would be led in Q3 by the government businesses.

Our final question comes from Blake Gendron with Wolfe Research. Your line is open.

Hey, thanks, guys, for not forgetting me on here. Just want to swing back to ROVs and specifically on the margin, it looks like 800 bps of margin degradation from pricing at least if implied day rate is sort of a proxy for pricing. Obviously, offset by a lot of the cost-out that you continue to take from that business. If I look at first-half margins, though, relative to an implied day rate, that's an all-time low. The margins on the EBIT side are fairly high for ROVs on the first half versus, certainly, the 2018 through. You've rationalized the fleet. It's more capable. It's probably lower cost. But appreciating you are adding some auxiliary services now just to maybe sweeten the deal. And then, in the context of the drillers likely not taking any lower pricing just because they can't, I am just wondering, modeling on the implied day rate and how that impacts the margin, what we should expect even in the worst-case scenario for activity in deepwater. Just some of the puts and takes and your thoughts around ROV margins would be really helpful.

Certainly. Let me begin with the day rate. We examined the day rate thoroughly because, as you mentioned, when you exclude the decline in the number of days, it seems like we experienced a decrease in the day rate. However, that's not accurate. We maintained the day rate quite effectively. We consider any active day even while on standby. This past quarter, as you might assume due to COVID-related issues, we experienced challenges in moving personnel on and off the rig. Even for our own team, we faced difficulties. This led to an increase in standby days, either while mobilizing or demobilizing the rig. These standby days factor into the overall calculation at a lower rate, which gives the impression of a reduced price, but we haven’t had to lower our prices. Unfortunately, we are in a rig category where price reductions are not feasible. Thus, our pricing has remained stable. Looking ahead, we need to continuously challenge ourselves to improve. We can achieve the same value for our customers by leveraging remote capabilities, which allows us to employ fewer personnel on the rig. For instance, individuals can take on multiple roles, such as operating the tooling, managing RWOCS or IWOCS systems, handling communications, and conducting surveys. Having multi-skilled workers reduces costs for our customers and also benefits Oceaneering, as we share in those advantages. It's crucial that we focus on these aspects to improve our margins in the future, along with advancements in remote operations technology. These strategies are significant and feasible, providing benefits for both us and our clients. When discussing price reductions, these are some of the cost-saving measures we can offer without resulting in disadvantageous outcomes for either party.

Got it. That's helpful. Did want to revisit the cost-out program and just put a fine point on maybe some of the language around what you mentioned. So $85 million, appreciating that you already have the depreciation piece in hand. The $85 million, is that of today or is that quarter end? And then, when you say initiated, is that the processes are in place and maybe you're not realizing the full $85 million? Or have you already realized the full $85 million? I guess, I am just asking in the context of my notes here. I think you previously mentioned $54-or-so million annualized at the end of the first quarter. So just trying to understand from a timing perspective, it seems like you're getting out ahead of the cost cut timeline. And then, I am wondering, too, if we kind of stay in this unpredictable environment, if there's upside to that $160 million number moving forward?

You're on the right track. When considering the $85 million, keep in mind that it reflects the situation at the end of the quarter. We had strategies to achieve $85 million on an annualized basis, but we didn't fully benefit from that throughout Q2. Therefore, these factors should contribute more positively in Q3 than they did in Q2, and we aim to add more to the identified $85 million. It's a growing figure. If we reach the $160 million, accounting for the reduction in depreciation expense, that's something we should be able to realize predominantly, if not entirely, in 2021. As that number increases, it's somewhat of a leading indicator, but we continue to enhance it. We also get to see more benefits from it in each subsequent quarter. Regarding the $160 million, if we encounter challenges, we’ve emphasized the importance of revisiting regions and contracts. We need to enhance processes, not merely cut costs but improve efficiencies as well. Some of these enhancements take time to implement, and in some cases, we need to deal with existing lease expenses before we can exit a facility. Shutting down a site means not incurring further maintenance costs, but it takes time to eliminate all expenses related to that facility. Moving forward, if the market becomes more challenging, there will certainly be additional opportunities to identify costs that can be removed, allowing us to strategically exit locations that are no longer feasible for us or are simply not viable at our scale.

So, Blake, I want to try and be clear, though, when we're looking at in Q1, we identified it as being $70 million, that moved to $85 million. We're trying to say these are structural. This is not the variable cost associated with going and performing a job. That would be even a bigger number. So we're trying to be focused on what is sustainable cost out, structurally driven costs that, as Rod said, would not return in 2021.

Got it. Yes, no, that makes sense. I just want to make sure it was point in time and not quarterly average. And then, to your point about variable costs on top. I mean, even if you pull out those structural costs, the decrementals are still really good in the second quarter. So definitely understood on that and appreciate the commentary. If I could sneak one quick one in here, just on energy transition. Obviously, it's a topic that is very current while activity levels and the outlook are still relatively subdued. Can you just remind us, specifically in projects, where you play in some of the renewable space, and maybe what some of your leading-edge conversations are with customers or potential projects in that?

No. Projects are a significant part of our operations, particularly in ROV support. We are assisting many large vessels involved in wind projects, especially in the North Sea. In Europe, we've established strong relationships with major contractors, which has been beneficial. As you may recall, we acquired Ecosse, which focuses on route clearance, including trenching and boulder removal. We have ongoing work in that area. Our skills are highly transferable to the marine environment, and we plan to pursue more opportunities there. Surveying is one of our key areas of involvement, with our survey team actively engaged in projects along the East Coast of the United States. Additionally, we are increasingly focusing on asset integrity as we expand our IMR and inspection services for the growing installed base. We believe we can leverage our expertise in asset integrity and management to enhance our contributions in this field. We are making concerted efforts to recruit personnel experienced in this segment so we can pursue more projects. Overall, our penetration into this market has been positive, and it represents a favorable development for the oilfield sector, given our extensive experience in marine construction. This expertise could potentially expedite the transition to offshore wind energy, enabling faster progress than relying solely on new entrants to the market. Overall, we view this as encouraging news for our industry.

Excellent. Excellent. Really appreciate the update, guys. Thanks.

Great. Well, since there are no more questions, I just want to wrap up by thanking everybody for joining the call. And this concludes our second-quarter 2020 conference call. Thanks, everybody.

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