國民油井華高 (NOV) 2002 Q4 法說會逐字稿

Good day, everyone. Welcome to the National Oilwell's fourth quarter earnings release conference call. At this time for opening remarks and introductions I would like to turn the conference over to the president and Chief Executive Officer of National Oilwell Mr. Peter Miller. Go ahead, sir.

Thanks, Vicky. I'm Pete Miller, the president and CEO of National Oilwell, and with me on this call today is Steve Krablin, our Chief Financial Officer. We appreciate you calling in to the National Oilwell fourth quarter and full 2002 earnings conference call. Today National Oilwell reported fourth quarter earnings of 21 cents per diluted share or 17.2 million dollars on revenues at $393.6 million. This compared to third quarter earnings of 22 cents per diluted share or $17.8 million on revenues of $366.9 million. Included in the fourth quarter for the first time, and Steve will elaborate on this a little bit later are the consolidated revenues from our China joint venture.

For the full year we reported earnings per share of 89 cents or $73.1 million on revenues of $1.52 billion. This compares to earnings of $1.27 per share, or $104 million on revenues of $1.75 billion of last year. Capital equipment backlog at the end of the quarter was $364 million. Of this $170 million of it is attributable to the recent Hydralift acquisition and $194 million comes from what was the traditional National Oilwell backlog as reported in the past. I'll expand on the backlog a little bit later when I talk about our operational issues.

We are very pleased with the results of this year, especially given the slowness in the oil and gas business. The rig count in the United States this year averaged 831 rigs compared to 1155 rigs a year ago and 916 rigs in 2000. We feel very positive about the ability that we have to be able to maintain strong earnings through what's a fairly slow period, and as we look into 2003, we see some things that we believe are going to be much more optimistic, which we'll expand upon in a minute.

A special note. I would like to point out that we did complete in the fourth quarter the acquisition of Hydralift as we had announced in the past. A publicly traded Norwegian company and we're very excited about the things Hydralift's going to bring to the table as they combine with National Oilwell. Additionally in January we announced the acquisition of Mono Pumping Products from Halliburton. Steve will expand on both of these acquisitions and what they mean to us but we're very, very excited about the things that they are going to be able to provide National Oilwell as we push into 2003-2004 and beyond.

I'm going to come back a little bit later and give you a rundown on our operations, both on a product basis and geographically, but at this point I would like to turn it over to Steve Krablin, our Chief Financial Officer, and he will expand upon the financial numbers that we've reported today.

Steven Krablin,: Thank you, Pete. As we usually mention on our -- if you are on our E-mail list, you have already received a quarterly data sheet that provides the easy reference to our last eight quarters. This sheet is also available on our website, which is at www.natoil.com and you can also contact the investor relations through that website if you would like to be added to our E-mail list. On this conference call we're also going to have some statements that may be forward-looking statements under the meaning that has with the exchange act and I'm sure everyone on this call is well aware of what that actually means. The -- you know, I listen to a lot of conference calls.

I'm sure not as many as most of you do, and I'm always amazed at how much time is spent detailing quarterly results, annual results, and comparisons of fourth quarter this year to fourth quarter last year. You know, I can't remember the last time I was actually asked a question that related to the fourth quarter of one year to the fourth quarter of the prior and think that that's probably only of interest to newspapers and to government reporting. So what we're going to concentrate on here is sequential numbers. We're going to talk about what's happened in the fourth quarter versus the third. I do think that that will give a bit more information and perhaps provide -- give you a bit more information and perhaps provide a basis for you to look forward as to some type of trend. If you do have any questions, though, on the fourth quarter, one year to the next, please feel free to bring them up in the Q-and-A session.

Let's look at distribution first on our segment analysis. Revenues and operating income were essentially the same. Now, in broad numbers, we have about 20-25% of our revenues in any quarter come from Canada. About 20-25% come from international operations. And about 50-60% then come out of the United States. In the fourth quarter, our Canadian revenues were actually up a couple of million dollars. The U.S. was down a couple of million dollars. International was down a couple.

Now, if you follow the rig count and I'm sure you guys do, if you follow the news and know that Venezuela was hit a little bit, those results that I just announced shouldn't be any surprise to you. The base margins from one quarter to the next were very comparable. The operating margins were very comparable. So there really just wasn't much change in the distribution group on a sequential basis.

I guess I would point out as one meaningful change on a year-to-year basis, our international revenues that I mentioned were 20-25% of the total now, that's probably roughly double what they would have been a year ago, and that's a result of a fairly purposeful strategy of expanding in the international field. When you're looking at the distribution group, the profitability in any of these separate segments is very similar. There's no real difference in Canada versus the U.S. Versus international is what I'm saying. So it's not a particular point of importance. If revenues are coming out of one versus the other. Our return on capital in distribution still remains at approximately 10%.

Let's look at the products and technology group. Our revenues were up from what we reported in the third quarter. There was a couple of things in there that are different this time and Pete mentioned that we have now shown -- we're showing the China joint venture on a consolidated basis. We do own 60% of this. Reporting it this way is certainly proper. We also had small amount of revenue out of Hydralift that came into the fourth quarter. We didn't really close it until late in the quarter.

So there's not much, but essentially you have about $16 million in revenues that came from Hydralift in China, and so those were not reported in the same manner or at all in Hydralift's case in the third quarter. Without that $16 million, again there's essentially no meaningful change in revenues in the second compared to the third, compared to the fourth quarter. It's fairly flat. The revenues out of backlog at $91 million in the fourth quarter compared to the third is exactly the same number. Orders were up a little bit, perhaps not as much as we originally thought but Pete's going to address that many later in this presentation.

The one thing that I mentioned in the operating income, while the numbers reported in the fourth are slightly higher than the third, most of that comes from the change in going up versus -- up slightly versus down slightly. I'm talking about up a million versus down a million, is the effect of China. It's -- so without that, we actually went down a little bit. Most of that came out of the product mix, out of the capital equipment sales, and what I mean there is that there were relatively more fabrication type items, and I'll include cranes and derricks, that kind of thing in the fourth quarter compared to higher margin items such as mud pumps that would have been in the third quarter. There really was no change in the margins by individual product. It's [INAUDIBLE] a mix of what happened -- strictly a mix of what happened in that particular quarter. Essentially then there's not that much change until either of our segments from the third or even from the second quarter.

I do want to spend more time this time, though, trying to recalibrate a little bit and help you understand what we believe the acquisitions that we have made are going to mean to the company going forward. So I guess initially I would ask everybody to increase the font size on that forward-looking statement because essentially we're going to do something here that we don't usually do and that's kind of project a bit into the future, but I think it's necessary for you to kind of understand what we have done in the last part of '02 and the first part of '03 that's going to change our business. Hydralift, we believe, this year is going to generate somewhere in excess of $320 million in revenues.

In '02 they actually generated $400 million on a pro forma basis and I think in '04 they will be back up to that level. We're actually expecting that number to be down a little bit. We're -- and that's due to a heavy emphasis on the offshore market. If things continue to accelerate the way they have in the last few weeks, that number may change, but at least for a starting point, our belief is that $320 million of revenues out of that in '03 is a very achievable number. Mono pumps we mentioned in the, I think in the press release that we expect about -- they achieved about $80 million last year in '02 for revenues. We would expect something in that area, maybe even a little higher in '03.

In '04 I think in a better market that number will be $100m-plus. China is going to add about $40 million for the year. Again, I think that's a very safe number to put down for a starting point in '03. That number would have been about $30 million in '02. I would think we would easily be in the $50 million-plus in '04 out of that. That's a high, high growth area. Now, you know, allocating that among quarters, which, of course, is what everybody wants to do, I'm going to assume is a starting point that those are reasonably flat.

You know, if you want to tweak those one way or the other based on the way you are estimating our own businesses, I think you have probably enough data to make your own assessments there. Essentially then what I've said is that those three items will add about $430 million in revenue, since we already consolidated China in the second quarter, lets call that $10 million. It was about $8 million, -- let's call that $10 million. It was about $8 million but let's keep round numbers. That means you've got about $440 million of new revenues that we should be achieving in '03 over whatever you are assuming for the old NOI and in your estimates for '03.

Now, operating profit. Hydralift, if they do the $320 million in revenues making 10% on that, or $32 million for the year, it should be very achievable. Mono pumps, they should be hitting closer to $18 million in operating profit on their revenues. A lot of that comes from the combination benefits that we'll be able to achieve there and, of course, there's some in the Hydralift number as well. China on its $40 million, hitting 20%, is achievable for them. Actually they have done a little better than that. So anybody who's worked with me for a good deal of time knows that I'm not going to put out a number here that I think is certainly not very reasonable. Essentially then that means the operating profit for those three would be about $58 million in the -- in '03. Again, you know, you can allocate that out by quarter.

I think that because there is some degree of combination benefits that we're achieving during this period, skewing that towards the second half of the year would make sense. Even, even if the revenues are reasonably flat through that. Now, China, since we'll be reporting it on a full consolidated basis, is the 100% number. So we will have the minority interest that will come out of that and due to the materiality, we'll probably just continue showing that in other income. It now will be a negative in other income because we have the full results up in the operating income. That, of course, is what happened in the fourth quarter of this year when you see a negative there. That's primarily the China minority interest that we're showing.

Interest expense in '03 with the new debt that we've incurred should be around $40 million for the year. So that's an incremental of $15 million. And so you subtract out the minority interest, the interest from the 58 I said there, and you probably have $40 million that's coming out of this. Now, most of you already have China in other income and, you know, whatever you have in there, don't double up with the numbers I'm saying if you are trying to adjust them all. You'll have to take it out of other income. But I'm assuming most of you have somewhere around $5 million or so for China in other income. So essentially you are down to $35 million that we believe is incremental to '03 for the portions that we have just recently acquired.

Now, to save you some time on the math, you do a -- do our $85 million that includes the 3.2 million shares that we've added in the acquisition of Mono, you are looking at about 25 cents incremental out of these acquisitions. We're very excited about them. They not only fit good but I think they are very, very good in a year that we're not assuming is the best year for any of these acquisitions. And I guess as long as we're, you know, into forecasting, we might as well hit them all. So distribution in the first quarter, we believe that those revenues will be up $10 million to $15 million in the first quarter. Certainly think that's achievable.

Out of the old NOI, you know, revenues, I think that those will be very similar to what we had in the fourth quarter. You know, there may be some mixed change between capital equipment and the noncapital piece, but in using that as a starting point is pretty reasonable. So what I'm saying is take the 238 that we reported in the fourth quarter, subtract the 16 and then that number is probably a reasonable point to add to the numbers that we've added for these other parts. Kind of going through the other assumptions, our corporate unallocated number in the fourth quarter was a little over $3 million. That is probably a good quarterly number. I don't think that's going to continue ramping up, but it's probably not going to go down, either. So my models have $3 million a quarter in them.

Interest on a quarterly basis, I mentioned the $40 million annually, or $10 million quarterly. I think that's probably right. On other income, other than reducing out something for the China minority interest, I have no reason to predict that that would be anything other than zero. It always will be, but it is primarily affected by foreign exchange movements that may come through there.

Tax rate for '03, we're expecting that to come down a bit. My models are starting out at 34%. So that's my best estimate at this point in time. Shares outstanding, we would be at the $85 million shares on a comparable number to where we ended 2002. Of course that's the diluted numbers which can move around depending on what the stock price is.

Depreciation in '03 with these acquisitions should be approximately $36 million, or about $9 million a quarter, and we're expecting CapEx to increase to about that same number, about $9 million a quarter. So again, like in the past, our spending on CapEx will be similar to what our depreciation is.

Now let's talk about the balance sheet a little bit. One of my biggest regrets I guess in the acquisition of these companies is that you are not going to be able to see some of the improvements that we've made in the balance sheet. We always talk about how our balance sheet is very liquid and, you know, a lot of cash can come out of that. From the third quarter to the end of the fourth quarter, you know, before these acquisitions, our accounts receivable went from $354 million to $322 million, or a little over $30 million we generated in cash out of receivables. Inventory likewise went from $454 to $432. A little over $20 million out of that. So $50 million out of receivables and inventory in the quarter which actually helped us and to a great extent to fund some of these acquisitions that we've made.

Now, what we're going to report, because we will have added on a consolidated basis Hydralift and the Chinese joint venture end, the key numbers, we will report cash of $118 million. I'll come back to that and explain, you know, why that's so high. Accounts receivable I expect to be around $427. Inventory, $467. Total current assets will be a little over a billion dollars, one billion, 50 million. Current liabilities will be about $300 million. So again, very strong working capital numbers there. Our long-term debt at the end of the year will be approximately $600 million. That includes our $500 million in public debt and about $100 million in other borrowings. The equity number at year end will be approximately $950 million. So essentially we're still under our debt-to-cap targets of being the same, between 20-40% is where we like to be.

Now let me go back and explain the cash number that was so high compared to where we've been in the past. The $118 million includes about $25 million that has been earmarked to complete the Hydralift acquisition. There was still the final transfer of the building that we bought over there and the catch-up of the final numbers of shares. We showed it as all in equity so that you would get good comparables from year to year, but there was a small amount of equity that still had to be cashed out in January which has taken place. So essentially we're high on cash by about $25 million there. So $25 million from the 118 gets us to $93.

Normally our cash would run about $50 million with our new organization the way we're talking about it. So we're still about $40 million high there. Essentially that comes from the Hydralift acquisition where the cash that came in at the end of the year wasn't applied to their own debt. So that shouldn't be the case in the future. Adjusted for this on a full application, what you would then have would be the cash of more like $75 million with that $25 million earmarked that I mentioned and you would have debt of about $560. I'm subtracting out of the $40 million of extra cash that I just explained.

Now, we've spent about $25 million in cash on Mono Pump in January. We made another acquisition for about $15 million of a small distribution group in early January. So essentially we will be back on a real-time basis at current debt of about $600 million. With the equity that we issued with Mono Pump of about $65 million, our current year-end equity of $950 goes to a billion 15 and therefore even before we net out that $50 million in cash, we would have a debt-to-cap of about 37. If you net out all cash, our debt-to-cap would be about 35%.

Now, I realize I went through a lot of data there and we have the benefit of, you can go back and listen to all this again on your dial-in network. So I'm hoping that will make sense and if we can address any other questions that you may have on that and with Pete, I'll give that to you for a rundown of operations.

Thanks, Steve. I'd like to go through a little bit of our operations now and tell you a little bit about both geographically and group-wise. As Steve mentioned, we're starting to see some strengthening in the distribution area.

I think this is a combination of factors. Obviously the Canadian market which I'll talk about in just a moment but we're also really increasing the number of direct integrations and alliances we have and one of the more interesting elements of that has been during a slowdown like this that we've had in the past year, some of our major customers, both operators and contractors, have utilized this as a time to go into some pilot programs to take a look at whether these direct integrations and alliances are the proper thing to do to help them reduce costs and I think what they are seeing is that in fact is the case.

So as we push to the future, we think you'll see more and more of that coming out of our distribution business. Both of our Doan hole tools and our mission business which again are A type businesses appear at this point in time to be strengthening, especially in our down hole tools businesses. We've taken a little bit of a leaf from our distribution side and we've created some real meat asset management businesses in our down hole tools and that really kind of gives us a full integration with our customers, allows us to be the full supplier of their motors and other down hole tools and really gives us a little bit more visibility as we poke into the future and so we think especially again with the Canadian market what it's doing, we're going to see some good strength coming out of those areas.

I would like to talk just for a moment about both mono and Hydralift and for those of you that are not aware, Mono Pump is essentially the leader in the building of progressive cavity pumps and I won't go into a lot of technical detail on that but the other thing that they do that's very exciting for us is they build rotors and staters, and these are pieces of equipment that are used in down hole motors. In the past in our down hole motor business, we've bought out those rotors and staters from third parties.

Now with the acquisition of Mono, we will be able to both bring in those rotors and staters now internally and at the same time continue to sell to some of our customers who we supplied motors to in the past. So we remain independent in that regard but I think we're going to be able to expand the customer base in that. What we've done organizationally is we've kept -- Mono is now going to report into our mission group. The attractiveness there is that there are a lot of the same sorts of businesses with pumps and at the same time they sell to a very diverse customer base which I think is going to be very attractive.

One thing I might note in the Mono business, about 56% of it is international. Again, very attractive for us. We think there will be some pull-through in some other areas that we'll be able to add to in the future. In Hydralift -- and again, as we announced, I think most of you know but I want to expand on just a couple of quick things. That was a publicly traded company on the Oslo Stock Exchange. Essentially Hydralift brings a lot of additive products to National Oilwell, brings it into some different markets also. Essentially it's been a major project company.

The products are big cranes, jack-up jacking systems, automated pipe handling, riser handling and tension systems, Mooring systems and these are all things with the exception of the pipe handling that we haven't really had in the past and it brings in some opportunities to expand in the capital area. In particular, and I think the one thing that is fairly exciting for us is the floating production systems. Those of you that are aware that that's becoming a bigger issue worldwide and I think what those FPSO's, the floating production systems, we're able now to have a market that we didn't have before. On those we're able to sell things like cranes, mooring systems, riser systems, host stations, other type things.

To give you an example, on an FPSO that's a ship, it could be anywhere from $10 million to $15 million of revenues and an FPSO that's a semi-, could be from $15 million to $20 million. I also make note of one other thing. With the Hydralift acquisition I've talked in the past about how on a jack-up rig as an example, the total revenue potential for us today is in the $20, $21, 21.2 million range. With the Hydralift acquisition and the additive products, we'll actually be able to take that over $30, into the $30 and $35 million range. So we think again some exciting things.

Now what I would like to do is just take you on a little bit of a geographic tour to tell you what we're seeing, where the spots are going to be that we'll see increased business and increased opportunity and then where some of the challenges lie. Just starting really with the U.S., obviously as you look at the rig count, we're seeing a little life in the rig count there. It's pockets of life. The Gulf of Mexico and South Louisiana still, those places aren't improving as we're seeing in other areas. I think, though, when you look at things like the Rocky Mountains, the Mid Continent area and some of those, you are seeing areas that I think are going to increase opportunity and especially on a day-to-day business. I would say the U.S. is really going to be an area where it's going to be more in the mission distribution down hole, spare parts, and noncapital P&P business which are going to we think gain because of that.

Those of you that have listened to the drilling contractors, I think almost all of them that have come out have been guardedly optimistic and of course the operating companies in their conference calls, they have had very good earnings. So I think the combination of those two things really I believe is some good business. I want to go to Canada. This year they are projecting over 17,500 well completions as opposed to 14,300 last year. You've got over a 20% increase. We think again the Canadian business is going to be that sort of improvement both on the actual drilling of the wells themselves and the completions are going to play very well to some of the day-to-day type businesses that we have. I don't think you'll see a lot of capital movement out of Canada but I do think that the day-to-day business like that is going to show some very sharp improvement.

An area that you always hear me talk about on these calls is Russia. Russia continues to be a great story and it's a story that's even enhanced now with Hydralift. As an example, Hydralift is doing some things on Sockland Island which we have not done in the past. I think that's going to expand opportunities there.

There are also some things in the Caspian Sea as an example, this past quarter, we sold an old used rig that we had which is going to -- be put on a barge in the Caspian Sea which we think will lead to future business and, of course, the land projects that we've talked about, things like [INAUDIBLE], different areas that we've had in the past with Luke Oil and some of those others, we believe that you'll continue to see a positive development for our capital business in China -- or in Russia, and with that you are also going to see with the Hydralift acquisition an ability to even look at more different things in the Russian market. Caveat there is obviously the geopolitics. You know, what's going on in the Middle East is a concern everywhere.

I don't want to belittle that at all and I think that has a tendency to slow things down a little bit but I think with the opportunities that are there -- and the other thing that's very big about Russia is they really want new technology, and we play very well to that. China, Steve gave you the numbers on that. We've got backlogs in our China joint venture at this point in time. We continue to make great strides on the QA and QC there. We've done some neat things on some offshore platforms that I think are going to mark very well for the future and we're also looking today at some additional manufacturing opportunities in China. Today the vast majority of the revenues that we talked about are internal to China and for the time being, that will remain the same but that is a very positive market.

Africa, the north African market last quarter, we took orders for a couple of drilling rigs in North Africa, but the other one that's kind of interesting is the West African market and that's going to be offshore and that will be a market that's going to be positive for both platform development and FPSOs. I think the West African market will play very well for the FPSOs in the future. South America is a little bit of a mixed bag. Again in Brazil you are seeing some positive things. New government there but they haven't made significant changes at this point. I think Petro Bros continues to do things. There is a good deep water play down there.

That's also a big FPSO market, both on building new FPSO and refurbishing semi-submersables to make them into FPSOs. We started some manufacturing in Brazil. We think that's going to continue to be a positive spot. Mexico, again there's a lot of activity that's picking up there. I would say in South America, the real problem area obviously, and I'm not telling anybody anything here, is Venezuela. That has to get some resolution. I would say this, though. I think once you have resolution in Venezuela, you probably, with some of the issues there, you are going to see a market that's going to be opening up, given I think some of the problems they are probably incurring today because of the shut-in on many of these wells.

The Middle East is a real mixed bag also, and again you've got the geopolitics there that concern us. As we take a look at that, we are doing a lot of different things. We sold a few rigs into there in the past quarter, specifically Oman. I think what you are seeing, the Aramco area, the Saudis pick up on refurbishments and spare parts because I think they are gearing up for increased production if necessary, but with the exception of some of that capital I'm talking about is really going to be waiting on seeing what's happening and I don't think people are going to pull triggers on real big investments until we kind of have a little bit more visibility into the future there.

And finally I would just like to talk for a moment about the North Sea. A little slow right now. I think everybody knows that from the drilling contractors. However, we -- they have taken the opportunity to do some refurbishments, upgrade some rigs. So we think there's some good opportunity there.

Bottom line, this is going to be, especially as we move into the second and third quarters, I think a good year on capital and it will be a good year because of the international arena. I don't believe that you are going to see a significant play when you talk about some of the domestic offshore and land folks. However, there will continue to be capital in those areas spent. I want to talk for a moment on the backlog. I said we were $364 million. That's $194 out of the old, what I would call NOI reported backlog. $170 out of Hydralift. What that breaks down to, with the Hydralift being almost predominantly offshore, that gives you about an 82% offshore versus 18% land split. Might make one comment here.

Last quarter I mentioned that I thought our backlog should be bottoming out. It was at 230 at that point in time as opposed to the 194. We took in more orders this quarter. However, one of the issues that popped up there was really a major project that we thought that would complete the order by the end of the quarter. Didn't. That sent that down a little bit.

However, subsequent to that we've just about got everything in place on that order and it really was more of a question of timing and the way we kind of look at an order, we want to make sure we've got our I's dotted and our T's crossed before we stick it in the backlog. I think if you add the Hydralift and NOI, we had about $113 million of new orders this quarter and as we look into the things that we've got over the next three quarters, I think it's going to provide for a very positive development in the backlog area.

So overall, some challenges out there. Our biggest challenges really are in the areas of integration, making sure that we bring these companies together. I think, though, that the opportunities are going to arise are going to be awfully good and with that, I would like to turn it over to Vicky so that she can ask for any questions we might have at this time.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit "1" on your touch-tone telephone. Also if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again that's "star," "1" to ask a question. We'll pause for just a moment. Our first question will come from Jeff Kieburtz with Salomon Smith Barney.

Good morning. It's Andy Hoffman.

Hi, Andy.

Just with all that information that we're digesting, the one thing I wasn't clear exactly was if you are giving kind of an outlook for the Hydralift revenues, what would be your comparable outlook for the capital equipment revenues of the existing NOI business?

Steven Krablin,: You know, we made the prediction strictly because that's so new and everybody needs to recalibrate their models. I don't really want to get into predicting everything. So I'm going to leave that to you. I mean, I think that, you know, so much of what we get in that area on the old NOI, as referred to it, is international land, that things can change there very quickly. You know, we can build a land rig, you know, in 90 days. So things are can move very quickly. It makes me prediction, you know, essentially not worth any more than anybody else's.

Okay. And also following up on the same type of issue, Pete gave some good commentary geographically but what are the types of projects, capital equipment-wise, that seem that you are most optimistic about? Are they a split of offshore rigs, on-shore rigs? Is it a specific region that you are counting on as your biggest near-term opportunity?

Yeah, Andy. I think really when you take a look at this, it's going to be a fairly good split. There's some interesting things in West Africa offshore right now. I think some of the FPSO's, both in West Africa and Brazil are going to provide some great opportunity and then when you talk about Russia, you are you really talking about a combination of things. You are talking what we've done over the past couple of years with bringing in some of the smaller, highly mobile rigs. That's going to continue to be there as well as some of the enhanced opportunities on offshore like the Sockland island. There's some different things in Kazakhstan that take a different rig. So I would say today the best opportunities are really going to be Africa, Middle East with a big caveat on the geopolitical situation, and Russia.

Thank you very much.

Our next question will come from John Tasdemir with Raymond James.

Thanks, guys. You actually answered most of my questions but one quick one while getting all the detail. Do you guys have a PP&E number at the end of the quarter?

Steven Krablin,: Consolidated, it's, I think it's $208 million.

Okay.

Steven Krablin,: That's with the, you know, Hydralift and China.

Okay. And as I, you know, plug through these numbers, it looks like the sum of all this, these acquisitions, you know, when you look at your overall margins, operating income margins, you know, maybe it takes it down just a hair. Am I doing the math right on that? I mean, obviously the Mono Pump business is a high margin, China's high margin but it looks like the Hydralift is a little bit lower than traditional; is that right?

Steven Krablin,: Well, that would be this year perhaps.

Yeah.

Steven Krablin,: But that's more around the fact that we're assuming a 20% decrease in what they actually achieved in '02 and less than in '04. So it's more around the timing of that. I mean, once they are working at a considerable level, there's no real difference in the margins.

Okay. Well, thanks, guys. I appreciate it.

Thanks, John.

Gary Russell with Stifel Nicolaus has our next question.

Good morning, everyone, and also thanks very much for all those details. I don't think I have to do any forecasting out of my model after all that, Steve. Thanks. A couple of small questions, though. I got a little lost with some of your comments on the China thing. On an apples-to-apples basis relative to the third quarter, if you were reporting it the same way, how would the fourth quarter have looked there?

Steven Krablin,: It would have been -- actually the third quarter in China was a very high quarter. I think our number was a million seven in China in the third quarter. The net number in the fourth would have been a $1.2 million on a comparable basis.

Okay. That helps. Thanks very much. Also, Canada. Pete, you expressed some optimism with regard to Canada. One of your competitors on the distribution side still seems to be struggling there. I was wondering if you could speak a little bit to your optimism versus, you know, versus how that's coming together. Is your optimism a little further down the road or are you getting strength out of Canada already?

No, Gary, we actually, as Steve was pointing out earlier when he talked about some of the numbers, we actually saw an improvement in Q4 in our revenues in Canada, and from what we're seeing, this is the 12th of February and we've had some visibility on some of our numbers and we don't think that we're going to see anything but a continued improvement even in Q1. You know, we've got -- I can't downplay the fact that we've got some great management up there and we've got some wonderful opportunities with our direct alliances in integrations. We've done a lot of neat things up there with them, Gary, and really the preponderance of our revenues in distribution in Canada are really in the production side of the business as opposed to the drilling side. We're making some inroads in the drilling side, but we really have the vast majority in the other area. So, you know, it really has been a combination of being successful with some quotations, having probably understand that the system we put in place really helps them reduce cost and quite frankly, we're very excited about Canada going into the second quarter. You know, you've always got your issues about break-up and the like, but with the number of wells and that number I gave you was seventeen two this year on well drilling and completions, we're pretty excited about where we are up there.

Okay. Great. Pete, one more, as long as I've got you. You mentioned the good order flow over the next few quarters. I was kind of thinking that backlog would trough somewhere around the second quarter of 2003. Would you still tend to agree with that?

Yeah, I would. I mean, you know, the problem that we have, and I have to -- you know, I have to experience that because I had looked at a trough last quarter. It just really kind of comes into the order flow. I truly believe that a lot of these orders that are sitting out there are being impacted somewhat again by, you know an overused word, but the geopolitical situation and, you know, the things that we know that are there that are real deals and we know where we are, I would expect the trough in the second quarter, even maybe in the first quarter. However, I put the caveat out there that as people start backing up on making a final commitment to some of these multimillion dollar projects, you know, they are liable to back up a month or two and then that impacts your reporting on that. I will say this. I mean, 2003 certainly, in the first half, is going to -- you are going to see a trough and you are going to see a movement up. I mean, I just -- I think with the things that we are looking at out there, that has to happen.

Okay. Great. One last question for Steve and then I'll turn it over to someone else. Post acquisitions and all this stuff, Steve, should we still be looking for incrementals to be about the same for the two divisions, 25% P&T and 10% distribution?

Steven Krablin,: Yes.

Okay. Thanks very much, guys.

Thanks.

Tom Escott with Pritchard Capital has our next question.

Good morning, fellows.

Morning, Tom.

Forgive me if this was covered. I did get interrupted in the middle of all this dialogue and I may have missed a point you made. A couple of things. I heard you mention, Pete, $113 million of total orders and I think you were referring to the old NOI plus Hydralift, and was that $113 million, was that sort of a pro forma number run rate from the fourth quarter, or is that sort of a, your best take as this March quarter '03 new order rate?

Tom, that was the actuals that came in in the fourth quarter. That was the actual of the National Oilwell new orders and the new orders that came in through Hydralift.

Okay. And then were you implying or directly saying that you thought that that new order number would trend upward in this current period as well?

Does that imply? You know, Tom, I think we're seeing some things out there that are really positive. We know we're standing in very good shape on a couple of major projects where we expect the final documents to be signed. However, I put the caveat on there that the, you know, the situation in the world sometimes pushes that back a month or two. What I would say this, is in the first half of the year I think if you can push that all the way out until July, is going to see a real positive improvement in the backlog order flow.

Okay. Well, I guess at some point then we'll get to what they call a book-to-bill ratio of over 1.0 which would clearly be, you know, very, very positive indeed.

Absolutely.

And did you touch on the 3 million shares that Halliburton owns? I didn't hear a comment on that. Has that been cleared the market yet, or is that still hanging over?

Steven Krablin,: Tom, I actually don't know. I mean, we registered those shares. So I don't think I have seen enough volume since we have done that to think it's gone, but truly it's -- I mean, it's all a Halliburton decision. They could do it if they wanted to.

Right. Clearly it's all in their hands. I just, I can't get a straight answer out of them and I just wondered if you had had any way of knowing if it had crossed. I would think you would probably know, you know, as soon as it was done.

Steven Krablin,: I think I would know, and at this point in time I don't know that it has. So I'm assuming that it has not but I would say that's a 95% likelihood that it has not.

Okay. Well, thanks a lot.

Steven Krablin,: Okay.

Thanks, Tom.

Justin Tugman with Simmons and Company has our next question.

I wanted to touch on Hydralift a little bit. You've given some very good numbers here. Can you talk a little bit about some of the cost savings that you were expecting now out of this deal since it has been closed?

Steven Krablin,: Justin, we're working very diligently today on the integration, and I think in the past we've talked in the context of about $10 million of cost savings. We think that's very achievable and we should get there. We're working right now. It's kind of a -- I won't go into all the details of the process, but, you know, we've done a lot of acquisitions and we've got, we think, a pretty good and unique process. We've put together teams from both organizations to take a look at the things that we do jointly, where we can make those much more efficient and, you know, where we might have some opportunity for some significant cost savings. We are moving ahead on that pretty, pretty dramatically. As a matter of fact, I've got groups coming in here to give me a report out at the end of next week, but we think as we look at that, we ought to be look inning that $10 million range and again, it's a combination of people, facilities, a lot of different things, insurance and things that we can bring together and really achieve some good synergies.

And, Pete, when you look at the backlog of Hydralift, any reason to think that their margins would be a little bit less than the backlog that I guess, I call it the core NOI had?

Yeah, I think they had some areas in there that they probably looked at a little bit differently. A lot of their work, Justin, is major projects, and the tendency of many of the major projects is to have a blended margin that's a little less because you are buying out a lot of stuff, and as you buy out equipment, -- when I mean buy out, I mean you are asking somebody else to manufacture it, you bring their product in, you put a little bit of a markup on it and you sell it with the things that you made. You know, traditionally the things that you see out of National Oilwell are own make products and you get a little higher margin. So I think there is a challenge there on some of that, but it's such that we believe that, especially as we move into the second half of this year and 2004, you really won't be able to tell a whole lot of difference between the margins, the old National Oilwell versus what we're achieving with Hydralift.

Okay. And then the final question I have on Hydralift. Given the weak state of the North Sea market and you shade that there's been some opportunities where companies have taken advantage of the slow time to refurb and upgrade some of their rigs, what's your sense now in terms of the inquiry level from the customers of Hydralift?

Steven Krablin,: Well, Hydralift actually may have been located in Christian sound but Hydralift is very much of a global company. When you look at a lot of their projects, the things that they were doing, they were really doing them all over the world to include a lot of business here in the United States. While they may have gotten their start, you know, really being localized in the North Sea, I think the Ex-Chairman and CEO did a tremendous job of really globalizing that company. So the reality of it is this, Justin. I mean, we really are getting a lot more exposure to international projects all over the world with Hydralift and not so much just concentrating on the North Sea. Now, granted, in the recent past they had some great success on some Norwegian platforms, but they have really been able to expand that out. So I don't think that the slowness in the North Sea is going to really impact that operation that much. Obviously it will impact it some because they have things there, but it's not going to be that great.

Okay. And final question, you had mentioned that, if I'm interpreting you correctly, that you had an order on a major project that was delayed from being booked and the orders in Q4. Assuming that slips into Q1, what's the magnitude of that order?

It's a very significant one and I really don't want to tell you the exact magnitude because first off, I can't even really say the customer because you don't want to release things like that until they are really done and it's one of those things where the process is such that the magnitude can change a little bit, too, as you really redefine the scope of work. We might do this and we'll actually say we can do a little bit more and maybe add $5 million to it but I will say, you know, it's a good project, it's one that the project itself didn't slip as much as it slipped at my timetable on getting it in.

Okay. Thank you.

Uh-huh.

Terry Darling with Goldman Sachs has our next question.

Thanks. Some follow-up there. Pete, any chance that that order slips into the second or third quarter?

I don't think so, Terry. I feel pretty comfortable with it right now. But I will tell you this. I haven't had the I's dotted and the T's crossed completely yet but I feel comfortable. We've got some things that we know we've got it, but again, it's -- you know, you've got some sanctioning issues on money and it's -- you know, I'm kind of like Jerry Maguire. Show me the money before we put it in there.

Fair enough. Steve, I'm wondering if you could give us the total order number for Hydralift for all of 2003. Or for the total company combined, if you have that, whatever you might have there.

Steven Krablin,: I don't have an exact number, Terry. It's probably around -- I'm trying to force the, mentally, the change in their backlog. It's probably around $350 million of orders that came in in '02.

And that number --

Steven Krablin,: that backlog fell -- is that about right?

I think so, but I don't have that number.

Steven Krablin,: If it's in that area. I'll have to check on that.

Okay. And then for National Oilwell, something in the $200 million range?

Right around $200 million, yeah.

So you are at $550 million, something like that, combined. You know, in order of magnitude, percent Delta '03 versus '02, do you think we're, you know, up, counsel -- down, or sideways relative to that number in '03?

Up.

Order of magnitude?

I gave you the up. [ LAUGHTER ]

You guys have been so forthcoming, I'm trying to figure out where the road ends here.

It just ended on that. [ LAUGHTER ]

That's very helpful. Steve, on the numbers that you indicated for '03 for Mono and for Hydralift, what were the cost savings assumptions baked into the Hydralift? And I'm wondering if you had any synergy, either synergy, revenue synergy which you could address a little bit, or cost savings numbers from bringing Mono into your organization.

Steven Krablin,: We would assume that there is something in the area of $5 million in benefits out of Mono and that is in my number.

Okay.

Steven Krablin,: On Hydralift, I probably don't have as much in that number as what we think we can actually achieve.

So the $10 million is what we think we can achieve and you got something less than that?

Steven Krablin,: Yes.

. About 25 cents incremental was enough. So I quit.

Fair enough. On the acquisition --

Steven Krablin,: obviously I didn't know the stock price at that time.

On the acquisition and the distribution business, what kind of revenue level are we talking about on that number? -- on that acquisition rather?

Oh, the revenue side of that? $20 million type number. I mean, it's relatively small in the distribution.

Steven Krablin,: Yeah, I would say $15 million to $20 million, right in there.

And was that U.S. or Canada?

Steven Krablin,: U.S..

Okay. And was that -- so you are looking at a $5 million per quarter type rate. Was that built into your first quarter distribution revenue indication, Steve?

Steven Krablin,: Yes.

Okay. And you may have given this earlier. I apologize if I missed it, but you gave the revenues from the China joint venture in Hydralift in the fourth quarter. Did you give the operating income effect and, if not, could you?

China was about $2 million in the fourth quarter. So it was roughly $8 million of revenues, $2 million of profit. And Hydralift was about $8 million of revenues and just a few hundred thousand of profit. I mean, basically we got the holiday season out of Hydralift. So we didn't make much money on -- it wasn't very additive to earnings. It was not a negative but it wasn't much one way or the other.

Okay. And in terms of, you know, thinking about the cash flow statement, use of free cash as the year progresses, Steve, assume you are going to pay down whatever's left on that debt piece that stands at $100 million today but is less than that I guess because you paid a little off. Do we assume that number goes to zero in terms of your priority use of free cash?

Steven Krablin,: Yes.

Okay. Great. Thanks very much.

Thanks, Terry.

There are no further questions at this time, gentlemen. I'll turn the conference back over to you for any additional or closing remarks.

Well, we greatly appreciate your calling in and we look forward to talking to you at the next quarterly conference call. Thank you very much.

That does conclude today's teleconference and have a great day. Thank you very much.