國民油井華高 (NOV) 2003 Q4 法說會逐字稿

Good day Ladies and Gentlemen. Welcome to the fourth quarter and full-year National Oilwell 2003 earnings conference. My name is [Kateland] and I’ll by your coordinator today. At this time all participants are in a listen-only mode. We’ll conduct a question-and-answer session at the end of today’s conference. If at any time during the call you require assistance, please press star, followed by zero, and a coordinator will be happy to assist you.

I would like to now turn the presentation to your host, National Oilwell’s Chairman and CEO, Mr. Pete Miller. Sir, please go ahead.

Good morning. I’d like to welcome everyone to our fourth quarter and yearend 2003 earnings conference call. With me on this conference call today is our Chief Financial Officer, Steve Krablin.

This morning we issued a press release in which we announced fourth quarter results of $14.6 million operating — or, I’m sorry, net profit and EPS of 17 cents a share on revenues of $530 million. For the full year we announced a net profit of $76.8 million, or 90 cents a share, on revenues of over $2 billion.

Included in the fourth quarter results are an eight-cent after-tax charge regarding a Distribution clearing account issue and a five-cent charge associated with foreign pension accounting and the finalization of purchase accounting associated with some acquisitions that we made in 2003.

Steve will expand on those numbers in just a moment, but first I’d like to also say that our backlog for the year ended almost flat from the third quarter, $339 million. Shipments from backlog in the fourth quarter were $150 million and new orders were approximately the same.

What I’m going to do at this point is turn it over to Steve to talk about the financials, and then I’ll come back later and discuss the operations as we see them around the world and more on the backlog and some new product developments that we’re up to. In general we’re very encouraged as we move into 2004. Demand in our international markets, again which I’ll discuss more later, for our products and services, we think will continue to improve in 2004 and 2005. And we feel very good about the future as we look out.

And at this point I’d like to turn it over to Steve Krablin to delve more into the numbers and then he’ll come back to me for some operational overview.

Thank you Pete. During this conference call some of our statements may be forward-looking statements within the meaning of the Exchange Act. I refer you to our press release and our SEC filings for a full explanation of that term and our risk factor disclosures.

If you’re on our mailing list, you’ve received a quarterly financial data sheet that provides not only the fourth quarter results, but also an easy reference to the results and trends over the last eight quarters. This sheet is also available on our Web site, which is natoil.com, and you can contact Investor Relations through the Web site to be added to the e-mail list if you’d like to receive that in the future.

The first thing I want to talk about and try to elaborate on is the Distribution adjustment that we had.

I guess first the answer to that I believe is the most important is this matter relates to periods that are prior to August of 2003. It’s not an ongoing problem in the Distribution Group. We have [technical difficulty]. And it never was a problem in any of our other businesses.

Now, as to what was happening.

Our Distribution Group is a very high-volume, low-dollar business when you’re looking at the number of transactions that go through that. Since the SAP purchase order system involves well over hundreds of thousands of purchase orders, receivers, and invoice each month, the automated clearing account can be very complicated to analyze.

The clearing account is [indiscernible] part of accounting. Debits and credits go into the clearing account where most are matched and offset by the system automatically. To simplify this in a typical situation, a credit to the account is generally created with each purchase and then a corresponding debit goes into this account when the invoice is paid. Most of the time these debits and credits can be matched up by the system, but sometimes, of course, they can’t be matched. Perhaps this is because one of the amounts, either the debit or the credit, was entered wrong or not entered at all. Some of the time it’s because the information was entered slightly differently, like the PO number was missing; a dollar amount was off a little bit. At any rate, these types of situations where they can’t be matched by the system have to be matched manually.

Our problem resulted from the sheer volume of transactions, which, when coupled with the complexities of SAP, made the analysis of this clearing account pretty much overwhelming. As I described, the clearing account contains huge numbers of credits and some of these belong there because they either represent an accounts payable to someone. Some of them belong there because there was a similar offsetting debit that couldn’t be matched, but together they both belong there. And some of the credits in these accounts were there but they didn’t actually belong there because they were wrong or because an offsetting debit entry was never made.

In an attempt to correct the wrong entries in this account our Distribution Group had a process of using a report that was intended to identify the credits that needed to be reversed out of the system. Regrettably, the report also picked up credits that should have stayed in the system because there were similar debits that had not yet been batched and cleared away.

This unintentionally reversed not only the credits that needed to be reversed, but also reversed credits that didn’t need to be reversed. Because these amounts from period to period were so steady, there was no obvious indication that anything was wrong with this. Keep in mind that over the 14 quarters that this occurred we purchased some $2 billion in goods and have millions of entries going through these clearing accounts.

When this was first discovered we immediately stopped taking the credits altogether and began to investigate what was going on. This was a fairly lengthy process, but ultimately determined what I’ve just described to you had in fact happened and ultimately we determined the amount of the correction. The entries that we made in the fourth quarter do correct all of the mistakes that have accumulated. Since this occurred over so many periods, the effect was not significant on any of them. And, as I said at the start, the process is resolved and not something that will affect any future periods.

One further comment, we remain committed to our strategy of direct integration with our customers. Much of that is enabled by the SAP technology platform and this problem does not change our overall direction or in any way how we feel about this powerful tool.

Let me move on to the different segments and we’ll take the Products and Technology segment first. The revenues of $349 million are up about 10 percent over the third quarter. The revenues from capital equipment from backlog were about the same sequentially. They were right around $150 million in both periods, so the increase comes from our non-capital components and from our China joint venture.

The non-capital components include [indiscernible] tools — that’s the drilling motors and fishing tools — expendable products that we make from mud pumps, our line of smaller pumps and pump components, spare parts that we sell to support the large install [indiscernible] equipment that we’ve sold over many years, and service and repair work. In general, all of these areas participated in the higher sequential revenues in the fourth quarter over the third.

Operating income for this group totaled $42 million and here again there were two noteworthy yearend adjustments. We recorded an additional $2.4 million of expense related to foreign pension liabilities as we did our annual analysis of that. And we recorded $2.2 million in depreciation and amortization of intangibles, which resulted from the finalization of the valuations of the acquisitions we made earlier in the year, in other words, Monoflo and Hydralift. As we withdrew the full assignment of values to the specific assets, there was a need to take a bit more depreciation and amortization.

If these adjustments are added back to the fourth quarter, operating income is approximately 13.5 percent of revenues, which is consistent with our recent results and roughly where we were for the entire year.

Now, even with this add-back, we didn’t achieve our targeted 25 percent flow-through in the fourth quarter. But if you make a comparison of the second half of the year to the first half of the year, in other words — remember we’ve talked many times about how you’ll make these snapshots over little bit bigger periods they make more sense — the second half compared to the first half you’ll see a result that’s well above the 25 percent flow-through.

Now, of course, a part of this over-achievement of the flow-through is also due to the integration savings that we achieved, which were associated with the integration of Hydralift into our other rig system group.

On the Distribution side, the revenues exceeded $200 million for the second quarter in a row and were up two percent sequentially. The increase came most all from Canada, as both the U.S. and the International components, on a sequential basis, were fairly flat. For general ranges, Canada and International remained at about 25 percent of the total revenues within Distribution, and the remaining 50 percent is from the U.S.

Our operating income in Distribution remained positive for the full year, and absent the adjustments that were made in the fourth quarter, were about the same as in the year 2002. Our adjusted return on capital for this Group is about eight percent.

Now, while these numbers are arguably OK for this type of business and maybe look good compared to other businesses of this type, we’re not satisfied with being the tallest midget. We’ve not achieved our targeted flow-throughs of 10 percent on the increased revenues, and our return on capital is about half what we think we should be achieving in this particular market environment.

We are very focused on this problem. We’ve already made a number of internal changes and expect to make more changes to improve these results. Our efforts are across the board. We’re looking for better base margins; we’re looking for lower operating costs; and we’re looking for better use of capital employed.

We do expect that in the first quarter of 2004 that the Distribution Group will again show operating income above $4 million and we expect further improvements in subsequent quarters of the year. And that’s in addition to the improvements that we think will come by being in a better environment, better market environment, during that year.

Going through the other items in the quarter, our corporate [indiscernible] remains just above $3 million per quarter. I think it’s fair to assume that a $13 million amount in 2004 would be reasonable and pretty much expected.

Our interest expense was high in the fourth quarter and that’s due partly to the acquisition that was made in that quarter. I’d expect lower net interest in the first quarter of 2004. My current estimate is that should be about $9.2 million and that amount would reduce over the balance of the year as we generate earnings and continue our efforts to streamline the capital employed.

Other income is primarily the result of [technical difficulty] losses and while these losses have existed for four quarters, I’ll let each of you make your own projections of where the value of the dollar is going to go. If it continues to decrease we’ll still have some minor hits in that.

We did adjust our tax rate down in the fourth quarter to achieve our annual rate of 29 percent. That is lower than we originally believed. And 29 percent is our current projection of the rate that will apply in 2004 and 2005. So, we have made some changes there that will have some big benefits for the future as well.

The minority interests amount does represent some 40 percent of the China joint venture that’s not owned by us and the fourth quarter profitability was higher than the third quarter and overall in the year we’re certainly very pleased with the results that came out of this joint venture. We do expect a similar performance in 2004, so for purposes of estimating minority interests, the annual number of around $6 million we believe would still be reasonable.

On our balance sheet, there are no particular significant changes within the components from the third quarter. Our debt is up roughly by the amount of the fourth-quarter acquisition of Corlac and totals at the end of the year, $610 million. This gives us a debt to cap ratio of 36 percent, or net of our yearend cash balance that will be about $74 million, the debt to cap ratio would be 33 percent.

Our shares outstanding are 85.2 million and fully diluted shares for 2004 — usually fully diluted is maybe 300,000 or 400,000 shares above that amount, so somewhere in the 85.5 to 86 million shares for a fully-diluted basis would be an appropriate number to use for estimates.

Pete?

Thanks, Steve. What I’d like to do right now is kind of go through each one of our businesses a little bit and then really do a geographic analysis of where we believe some of the opportunities are going to be, and most especially in the equipment area, which I think probably provides the greatest opportunity for growth over the next couple of years.

First, in our downhole tools business, we continue to expect that to expand this year. The big issue there for us is we’re introducing some new products, in particular what we call “even wall technology on motors”. It’s a very interesting technology. I won’t get into it too deeply, but really what it does is it gives the motors a much greater life and really increases the efficiency of both the operators and the contractors when they’re drilling. And we think we’re really well placed to be able to provide that technology and especially with one of our largest customers.

Additionally, in our downhole business we’re really pushing hard on asset management programs and alliances, which allow us to become the sole or only one of two maybe providers for our equipment to our customers. This is having good residence. We’ve done a lot of things on shortening lead times on manufacturing to make us much more responsive to the marketplace, so we feel very good about our position in the downhole motors. And we think as drilling, and especially more complex drilling, increases over the next few quarters, we’re going to see some improvements there.

In our Mission and Mono Group, we continue to more or less follow the rig count, especially in our mud pump expendable side. This really though is one of the more — it has the one area that’s still very disappointing to us, and quite frankly, that’s the Gulf of Mexico. Those of you that have heard us before, both in Distribution and Mission, the Gulf is a big issue for us and it’s really stayed flat for the last year. I think that I would not even attempt to make a commitment as to where I thought it was going to go because I’ve been so wrong on it, but it’s stayed reasonably flat.

Fortunately for us we’re seeing some other areas, such as the Rocky Mountains and Canada especially that are improving, but we’d really like to see an improvement in the Gulf of Mexico and I think if that occurs you’d see a much greater improvement in this particular business.

In that we also have Multiplex pumps, which quite frankly, are doing very well today. And a lot of that is because the Multiplex pumps many times have used equipment in the field, but today we are able to — most of that used equipment has been used up and so we’re getting a much greater demand for new equipment, and especially in areas like Venezuela, Nigeria, and in parts of the United States.

So overall, our Mission and Mono business, we expect to really track the rig count and the general activity in the business, and we believe in 2004 again show growth.

Steve talked a little bit about the Distribution side of the business. While we have the profitability there, it isn’t hitting our targets, but we have taken actions to consolidate some areas. We’re streamlining some processes; we’re consolidating some administrative functions. And as Steve mentioned earlier, we believe that as we go into the next quarter we will see the operating profit in that Group exceed $4 million and we think it will improve with these changes that we’ve made as we progress through the year.

Again, we continue to really push our direct integration. We have a great model working with some of our bigger customers and as things improve we get a more interest from that from other customers, both operators and contractors.

I’d like to now go into our Drilling Solutions Group. And really, I think this is where we feel very positive. As I mentioned in the press release, we currently have tenders out for 10 different jackup rigs. I’ve said before that I believe no jackup — any rig that’s built in the Western world without something from National. I can’t say how much we’ll get on these, but I can say we’re very excited about the prospects.

And I’ll also put this caveat out there. I know many times people on this call are tracking this and said, “Well, wait a minute. We don’t know of any jackups being ordered.” On the 10 that I’m talking about, almost to a jackup, these are from companies that are not U.S.-based equity-traded type companies. And further to that, I also don’t believe that these will be jackups that are going to increase, if you will, the capacity in this particular business because many of them are being built by national oil companies that in fact are building them for their own use and it’s not going to displace another rig.

Additionally, I think it also is definitive proof that the technology that these jackups can provide is so much greater than some of the existing rigs, that these really become replacement rigs as opposed to being rigs that are going to increase the capacity in the marketplace.

In addition to that, we’re also seeing platform activity. If you recall a couple of conferences ago, I mentioned a platform that we were doing in West Africa. That’s an ongoing project that has been very successful. We believe there will be some other opportunities this year on the same type of platforms because these are platforms that are being developed to produce the fields that were discovered with some of the deep-water drilling that’s gone on over the past few years.

So overall, we think the offshore market is going to provide some opportunity. It’s going to be an international market, not a U.S.-based market, and it’s going to be one that, especially over the next couple of years, we think is going to provide some good opportunity for us to place equipment and enhance our revenues.

Now, as I take a look around the world the North Sea is an area that I think all of us know is fairly slow. However, one of the interesting things is the refurbishment of many of the platforms that’s going on there, both in the Norwegian sector and the British sector. This has given us a great opportunity to place a lot of cranes, to replace things that have been out there for about 20 years, and they have helped kind of build up in the backlog we’ve been able to get. As we ship cranes we’ve been able to get new ones and then that’s what helped keep the backlog flat.

In addition to that in the North Sea, we’ve placed some good anchor handling systems, and we continue to see a demand for other types of cranes that work both in shipyards and offshore in the North Sea.

As I move away from there, yes, I think the North Sea will continue to be a good reasonable market and hopefully, when rigs start moving back in there, you’ll see an opportunity to expand.

The China market is very exciting for us. We believe that this year there will be 60 new land rigs built in China, as well as an array of offshore platform rigs. The Chinese have a need for technologically advanced equipment. I think all of you are probably familiar with one of the incidents that occurred over the past couple of months where a [indiscernible] gas well was lost and a significant number of people were killed. And I think that, as the Chinese advance into deeper drilling and more complex drilling, it gives them a requirement for a better type of rig.

And as an example, this past quarter we actually have taken an order on one of the first AC land rigs that we’ve built for the Chinese market. And we continue to believe that that’s going to be a very aggressive market for us, both to sell things from National Oilwell into China and also for our joint venture over there to provide products and services.

In addition, obviously, as those of you that have heard us before, our joint venture is continuing to do very well. We’re over three years into our joint venture. We believe that the quality of the equipment that’s coming out of there right now is as good as any place that we have as we manufacture in the world. We think that we will continue to expand the opportunities that we have in China.

In addition to our joint venture, in the past quarter we actually have opened us a facility that we own wholly to manufacture SCR Systems. Predominantly those will be SCR Systems for the Chinese market. Also we’ll be able to do some AC drives in that facility. And we also have an engineering office now located in Shanghai to help support both our joint venture and the operations that we have there.

So I think as we go forward, both the land and the offshore business in China are going to be very positive. Again, the Chinese marketplace and the economy is expanding very rapidly, and the need for oil and gas is paramount there.

Moving on to Russia, basically where we are today as it continues to be a nice spot for us, we’re awaiting the re-election of President and Putin in March. While I don’t think there’s any doubt about the fact that he’s going to be re-elected, I think that what will happen there is once you have that certainty my belief is he’ll probably back off a little bit on some of the things that have happened with people like [indiscernible] with [indiscernible] and will more likely let business return to normal, which I think then is going to open up some opportunities.

We have placed some land rigs in there recently. Most recently we’re getting ready to deliver a coil tubing rig that’s a very significant one there. We think that will lead to another batch order for that type of rig. But for the most part it has been a little bit on hold and I think it all has to do with the politics.

Obviously, in Russia the big economic boom for them is going to be able to export oil and in some cases if the pipelines get there to the gas, and we’re very well suited to be able to take advantage of that.

We did open an office in [Indiscernible] and [Indiscernible]. Well, I said an office; it’s really a repair and maintenance facility. We’ve got a lot of equipment now in the Caspian Sea, most recently on a [indiscernible] rig that moved in there. And we believe that that’s going to open up great opportunities for, not only further capital equipment, but also to enhance our other non-capital parts of our product and technology business.

We’re looking at some other areas in Russia where we have significant amounts of equipment to open up, similar service and repair-type facilities, which we believe are needed.

Southeast Asia continues — the shipyards there continue to be extremely active. In many cases we sell directly to the shipyards, whether you’re talking cranes, whether you’re talking some drilling equipment. Actually, one of the issues I think that is a little bit of concern today, and that’s the shipyards are really starting to get full around the world and they’re starting to get full with actual ships being built as opposed to rigs.

Because of a lot of the export activity out of China, there’s a tremendous demand for freighters to be able to move equipment around the world. And so, many of the shipyards today are taking a look at building ships, and in some cases they’re starting to ask a little bit more for some of the jackups and other rigs that are being built in those areas.

The other area of concern there is in fact the price of steel. I think everyone knows that probably the prices of steel are moving up worldwide. It’s such a commodity now that it pretty well levels off around the world. For our purposes, we don’t build capital equipment to inventory; we build it to orders that we’re generally able to push the price of steel through. But it does have a negative impact when you talk about very big offshore rigs and the amount of steel that’s necessary. So we’re keeping a close eye on that. But overall, the shipyards are very, very active in Southeast Asia and in China, and we think that will continue.

I mentioned West Africa just a moment ago. We are working on a big project there. We think that there will be some others to come. The other issue in West Africa that’s very positive for us are FPSOs, the Floating Production Systems. And I mentioned the jackups. Currently at this time we have equipment tender offers out for about five FPSOs and we think, as we move through the year, those orders will also come to fruition and we believe we’re positioned to get a few of those.

One of the — probably the more exciting areas in fact is the Middle East. And this is predominantly going to be a land play. One of the things that we’ve done recently is we have expanded our [Dubuy] operations so that we can actually build land rigs in [Dubuy], fabricate them there. It has a couple of real advantages.

Number one, it really shortens the lead time. And the thing about offshore rigs are people kind of accept the fact that it’s going to take a couple of years, 2.5 years to build a jackup, but with the land rigs, in many cases, they want them immediately, as quick as possible. And when you’re able to do that in different parts of the world, it really shortens the time to ship the rig later and puts us in a very good position to be very competitive.

And most recently, this month as a matter of fact, we delivered a 3,000HP rig to Kuwait that we fabricated in our [Dubuy] facility. It was an exciting process for us. This is the second rig we’ve put together there, and we think it’s going to lead to some other good opportunities in the Middle East as you look into the next couple of years.

I think areas that are going to be very active in the Middle East will be Yemen, Saudi Arabia, obviously Iraq, Egypt, Algeria, and interestingly enough, I think a country that’s going to become a bigger player, especially because of their proximity to Iraq, is Turkey. The two drilling contractors there, we sold a rig into there last year and we’re approaching them now about some equipment that we believe they’ll put on order in the first or second quarter of this year.

So, the Middle East, North Africa, really is going to continue to be a very active area, and that’s basically going to be for new larger drilling rigs and work-over rigs. We think that the positioning that we have there will suit us very well as we push forward.

Just coming back to the really to North and South America, Canada is extremely active and one of the interesting things for us is that our Canadian facilities today are really terribly full, or almost completely full, but they’re completely full supporting the Canadian market, which is a little different than in the past. We’ve utilized our Edmondson facility to really help support the Middle East and other areas, but there’s so much going on in Canada right now with the record rig count that we’re actually support that there. And we think that will continue as we go throughout 2004.

Mexico has been a good area, both in the rigs that are moved into the southern part of the Gulf of Mexico for Pemex. And then you’re starting to see now some more land activity going on in Mexico. We would anticipate the Mexican market to continue to grow throughout 2004 and 2005. There is some question about whether the offshore portion might become stagnant and we’re keeping an eye on that, but I do believe that in the land side of it you’ll see more activity in Mexico as they try to improve their natural gas production capability.

I mentioned the Gulf of Mexico. Quite honestly it’s stagnant. You’d probably be better off talking to the drilling contractors about where they believe that’s going. I know a lot of contractors are continuing to move the rigs out, so at this point in time, as we look to the future, we’ve pretty well kept that line flat. I don’t think it will go down, but I don’t think it will go up.

However, there still is and are refurbishment opportunities there. We are continuing to provide additional mud pumps for rigs when contractors bring them in, so it will continue to be an area of good business, but I don’t think you’ll see much growth there.

The U.S. land business, we’re seeing some opportunities there, again on both delivering mud pumps of higher horsepower and also the handling equipment that you see on rig floors. I think those contractors are starting to see some of the technology that was created offshore starting to push the land, and as we are able to refine that technology, make it much more affordable, I think you’ll see more of that going on in the U.S. land rigs over the next couple of years.

South America continues to be a decent area. We see some growth in Argentina and then in Brazil, I think that’s really going to be one of the hotter markets for the FPSOs that I mentioned earlier.

That’s really kind of a quick overview. We think, for the most part, you’ve got good activity throughout the world, probably with the exception of the North Sea, which is, as I mentioned earlier, flat.

Finally, I’d just like to talk a little bit about some new products.

Our [Hex] Pump, we sold the first three. I mentioned last time that we had manufactured three and we have sold those. We do have some additional [Hex] Pumps in the backlog. I am extremely excited about this pump. It has probably been as heavily tested as any piece of drilling equipment that’s come out in quite some time. We have put thousands of hours into the testing. We’re very pleased with the results. The customers are very pleased with the results. And I think over the next couple of years this [Hex] Pump has an opportunity to be — to hit a real homerun.

I mentioned the handling equipment on some of the land rigs. One of the things that we introduced in the last quarter was a new iron roughneck. We developed it very quickly last year, using some of the technology we had on the bigger roughnecks. We introduced it in the fourth quarter and at this point in time we’ve sold 20 of these already. We think there’s a great opportunity for more of these. They’re not that expensive. It’s $150,000, but it really does show the ability to move that technology into the land rigs and we think that there’s going to be more opportunity for that sort of control systems and things like that to go on the land rigs.

That really, I mentioned the Even Wall Technology earlier on our downhole tools, and we continue to expand the technology-driven portion of National Oilwell. We’ve got a great R&D function that’s going on and we continue to support the thesis that rigs are going to have to be technologically better. They’re going to be replacing the older rigs. It’s not necessarily going to increase capacity of rigs, but it is going to increase the quality of the rigs that are out there.

So that in a nutshell is where we are today and what we think about the foreseeable future. And at that point I’d like to open it up for any questions that you might have.

(Caller Instructions.)

Your first question, sir, comes from Michael LaMotte of JP Morgan.

Hey, good morning, guys.

Good morning, Michael.

Pete, I wanted to follow-up on this comment about 10 jackups out there. I guess are they actually being built or are they just out for tender on equipment? I mean how far along, are all 10 of these rigs going to get built in your opinion?

Michael, that’s a good question. I would say right now that in some cases we’re actually past the contract stage on these jackups. You know, as you look at them, I would say out of the 10 I would maybe only question one or two. And I really don’t even question those as much as maybe it wouldn’t be in 2004 and they stretch it out to 2005 just by or on some timing issues. But it’s my belief that every one of those is, in fact, a real deal.

And is the equipment being bid on each one pretty similar? I mean I know you’ve put up slides and stuff that suggests I think it’s -- what is it, $35m of equipment?

Yeah, it’s …

You potentially can sell on a unit? Are you, or is there a great spread in terms of, you know, the equipment being tendered into each of these units?

For the most part, I mean you know as you’ve said, as we’ve shown on road shows, you know, we show our revenue opportunity on these, and that $35m number is pretty accurate. I would say though that in some cases, you know, there’s still a lot of competition out there. We will in some of these we’ll approach that number, in others, you know, we could be half as much. In others, you know, we could be a quarter as much. I would, you know, I’d love to tell you that I’m going to get all 10 of them at the full mark but I’d probably have to shoot myself if I thought that. But it’s – I think there’s, it’s a great opportunity there. And I think we’ll get something on all of them but, again, whether we maximize that is another question.

But as to the potential size on each of them that’s available, it is in the $35m range on every one of them.

Right.

Okay. And so that’s what you tendered, there’s no guarantees, obviously, as to what you’ll actually get, though?

That’s correct.

Okay. On China, I was struck by the contrast between the expectation of similar performance in ’04, which to me reads flat versus the bullish comments. And, Pete, that sort of leads me to think that there’s even more growth to come in China. Particularly, as you start to do more complex products and more of your own work there. Am I – can you help me reconcile those two comments?

Well, I think the real key there is that the start of last year we said we’d do 50m of revenue out of that group. We well over achieved that. There were some large platforms there, or one platform out of that group, a lot of good things that were going on. We do think that’s going to be a good area, and I guess I’d say that we have hopes that we’ll well overachieve what I said today, just like we did last year.

Okay. One more quick question, and then I’ll turn over the mike. On the distribution business, I’m struggling, I guess, with why the margins are still as weak when I look at things like inventory turns and some of the areas that structurally might be problematic you don’t seem to have a problem.

And so, Steve, you mentioned that you’re addressing things and in particular base margins and operating costs. Can you give us a little bit more specifics there in terms of what you’re planning on doing to improve that incremental this year?

Yeah, Michael, I think one of the issues for us that’s been very difficult in distribution has been the opportunity to really increase prices. Which is part of the equation. You know, as the drilling contractors have seen an improvement in the rig count it’s really been gradual, and their particular day rates have not followed the way that they have in many other times when we’ve seen growth. And there’s been a lot of pressure both competitively and on us on the pricing.

However, in the fourth quarter we did push through some price increases that we expect will start to manifest themselves in 2004. Additionally, we have taken a look, a very conscious look at where some of our under performing facilities were, where we could consolidate those, and where we could reduce administrative costs, and try to improve the margins in that regard. And that’s, we think we’re starting to see the results of that, and hopefully that’ll show up as we move into the first and second quarter of 2004. But the big thing there has been trying to push through some price increases, and again, there’s a lot of push-back but we have been effective in doing that to a certain extent.

Okay, great. Thanks, guys.

Your next question, sir, from Terry Darling of Goldman Sachs.

Thanks. A couple of follow-ups on a number of those items, as well. You know, Steve, you’ve given us a lot of color on the outlook for the capital business in ’04. And I’m wondering a couple of points there. First, Steve, you often give us a sense as to where you expect bookings in the subsequent quarter to be. I’m wondering if you’d be willing to do that? And, in addition, I mean, Pete, your prior commentary suggests you expected the order rate to be kind of flattish through the first half of the year, and the pickup really to be in the second half of the year. Is that still where you’re thinking is today?

Yeah, I think, Terry, where we are right now. You know, I’ve been kind of talking about this for three or four quarters in a row. You know, we’ve gone from, you know, 360, we’re around 360, down to about 340, continue to be at 340 on backlog. I would suspect and I guess I hate to put too much out there because then, you know, I haven’t been as accurate as I’d love to be on this. But I would say that as we go into the first quarter we could be talking at the end of the first quarter flattish again. And I would think as we go into the second quarter we probably ought to start seeing a little bit of move up in that. But I’ll also, you know, qualify that that it could stay flat. I don’t anticipate it going down from what we see out there.

And so the big issue for us, too, is how quickly we can churn through the backlog because in many cases especially as we get in land rigs those aren’t going to be in the backlog anywhere near as long as some of the equipment that you get in the offshore rigs. So I would say it’s safe, best to say it’s going to be flattish through the first two quarters.

And Terry, as to the question of what we think will come out of backlog, go through revenues in the first quarter, it looks like right now that, you know, our anticipation, things can change, you know, but the anticipation is that the revenues out of that quarter will be down in the first quarter. You know, our expectation instead of the number around the 150 it might be down in the say 125 type area, it’ll be down some. And but that’s around the timing of the issues as opposed to any problems or any change in the environment.

That’s helpful. We appreciate that there are a lot of moving pieces in there.

I wanted to shift to the margin on the products on the technology side, and Steve, also here appreciate there are, you know, small numbers, or the changes in the numbers are small that we’re talking about here. And you had pointed out the value. I’m trying to look a little bit longer term, which I’m going to try to stretch out and just try to think about the incremental margins for ’03 in total versus ’02 in total.

And, you know, when I strip-out some of the noise from this quarter and in prior quarters I’m coming up with about an 11 percent incremental margin year-over-year. And I know we’re not in an environment where we’ve got pricing. And I understand that we’ve got some higher component or mix related to passthroughs and so forth. But I’m just trying to think through any other issues that might have weighed on ’03 results beyond those two items?

Well, the key thing, and this is why I picked the second half. It wasn’t just to get a good answer, like might be suspected. But the key thing looking at ’03 and ’02 is that we acquired Hydralift, [Mono] [ph], and these kinds of issues. Those came through with their own overhead rates so they’re not, it’s not fair to look at it in incremental on those types of numbers. Much of the increase in volume, quite honestly, from year-over-year is from that. It’s not a real change in – to the extent we can separate it out it’s not a real change in the business that we had in 2002 as much as those acquisitions that were added either right at the end of 2002 or right at the start of 2003.

Okay, and the last question from me. I’m just trying to put your comment on the $4m of operating income for the distribution services business into some context. And you know, traditionally you’ve talked about the 10 percent sequential flow through margins that would suggest, you know, if you’re up roughly 1m sequentially from the 2.9m adjusted, you know, that you’re looking for revenues to be up about 10m sequentially, part A, is that correct?

And secondly, I’m struggling with how to think about, you know, what normalized margins are here in the business. And perhaps you can elaborate a bit on your cost savings initiatives, you know, in terms of quantifying what kind of impact that is? And quantifying some of the pricing commentary, Pete, you made, as well?

Yeah, I mean as to the revenue numbers it is our expectation that that number is going to stay in the same general area as where it’s been in the last couple of quarters. And so, the improvement over the adjusted 2.9 that you have mentioned, you know, it is really – well, I mean, look, where you really get on that is I could reconcile that 2.9 to where I had [2.4] [ph] in the fourth quarter. It’s just one of those things where we don’t try to do that where we try to identify every single item as an unusual item. Because quite honestly every quarter has unusual items.

It’s really just a matter of getting back to the basics that we did have some, you know, some unusual additional costs. There were some inventory adjustments. There were some severance costs. There were a lot of little things that went through in the fourth quarter, and it’s just our belief that we’re going to be back at the same level in that same range for profitability.

Did I miss the question? I’m not sure if I got all of the questions with that?

Well, I’m still just trying to think, but I mean once we digest all of the initiatives and changes, you know, that you’ve made is this the 1.5 percent margin business at this revenue run rate? Or is this a 2.5 percent margin, you know, level business? It’s with the restatements and so forth, I’m just trying to think through, you know, what the core profitability is of the business. I understand you’re not happy and you’re going to continuously to improve it, but if we’re kind of strip stuff away here, you know, what kind of a level of margin do you think we’re really at right now?

Well, you know, this year with, you know, just the adjustment of the [clearing] [ph] we’re at 2.25, and so I mean that’s kind of where we are. And, you know, it’s our belief that that number ought to be in the three to four percent range.

Okay, thanks.

Your next question, sir, is from [John Tasmere] [ph] of Raymond James.

Thanks, good morning, guys.

Good morning.

One thing that I was pretty happily surprised to see was the strong growth in the non-capital P&T segment, moving up pretty dramatically in the fourth quarter. I guess my question is, you know, was a lot of that driven, you know, by Canada? Can we expect to grow on that base of revenue in the first quarter or were there any unusual items? Just trying to get a sense for first quarter estimates going forward.

Oh, I think a lot of that is the result of Canada. You know, especially in our [down hole] [ph] sector, we’ve got good worldwide visibility but for the most part Canada is a very active part of that. And so, I think as you go from the fourth quarter into the first quarter and some of that, it’ll probably be more flattish because of the things that you’ll see drop off.

You know, to give you an example in Canada last week they had to basically shut everything down, or I’m sorry, it’s been a couple of weeks ago they shut everything down up there because it went to 40 below zero. And, you know, you started to see sales pale-off because of the HSC requirements to get the people inside and really not drill quite as much. And so you had some issues like that.

But I think for the most part it was, it really showed some of the things going on in the U.S., too, and especially in areas like the Rocky Mountains. But Canada played a part of that, and as we push into the first quarter, you know, we don’t expect to see the same sort of growth, and it more would be probably flattish, and then start to grow again.

Okay. And then, I guess switching gears back to the capital component, and I probably know the answer to this, you’ve done it already. But as far as the lower 48, you know, land contract drilling business, are you getting any signs or any inquiries for any types of parts or components?

Absolutely. You know, I think that as you look in the lower 48, you know, one of the things that I mentioned earlier, John, on the iron roughback, as an example, that we had developed, the majority of those have actually gone through land drilling contractors in the lower 48. And a lot of that is the technology advancement. We’ve sold some SCR systems, as an example, to some of the contractors, really to upgrade their rigs. We’ve sold some mud pumps so that, again, to upgrade rigs, some mud pit systems. And so there is some activity with the land contractors in the lower 48. It’s not like it was a year ago where you really weren’t selling hardly anything. So that, and we would expect as the rig count, if the rig count does continue to move north I think you’ll see more activity in that area.

Okay, well, I appreciate it you guys. That’s all I had.

Thanks.

Your next question, sir, comes from Gary Russell of Stifel Nicolaus.

Good morning, guys.

Good morning, Gary.

My first line of questioning was along the lines of the orders and what-not, but we’ve addressed that quite a bit. It sounds like the order pickup was pretty broad based and not any one thing in particular to point to?

I think that’s a good explanation. I mean I think as we take a look across there’s just a lot of activity going on in a lot of different areas. And we’re actually pretty pumped about it.

Okay, and congratulations on the Hex Pump sales. Did you, you said you have some more Hex Pumps in backlog now, is that correct?

That’s correct. We’re very, very excited about the Hex Pump, Gary. I mean we’ve, I think our customers are excited about it. The results of the pump have been extremely positive, I think. You know, we’ve, right now it’s being installed on some rigs. We’ve had the results, of course, from some of the wells we’ve drilled in East Texas, and so I’m very excited about it. And I think it’s, hopefully in the next conference call I’ll be able to talk in even more glowing terms, and probably put some more facts and figures out there.

Oh, okay. And can you tell us how many you have in backlog right now?

No, because I don’t have the information in front of me. I don’t have that right now.

No problem. And of the orders, or the bids you’ve got on the 10 jackups that you talked about earlier, do any of those include Hex Pumps?

You know, at this point some of the tenders will, in fact, include Hex Pumps. Some do not. They wanted traditional pumps, others do.

And some we bid both ways.

Right.

Got you. Okay. The last question, I think, back, shifting over to Russia. You mentioned a little bit of slowdown due to the political environment. Can you give us a sense for where the revenue run rate is there now, or at lest expectations in the first quarter? And do you expect that to revert back to your earlier run rate as early as the second quarter?

Well, I think – I don’t want to hit quarter to quarter on Russia necessarily, but I would say, you know, the guidance that we’ve given in the past, Gary, has been like 50m to 75m is what we’ve gotten out of there. And we’re kind of more toward the high side in the last few years. And I would expect that we’ll see the same thing out of Russia this year. It’s just going to be a little later coming because I think of some of the uncertainty regarding the political situation. But we certainly believe that this year we’ll match what we’ve done in the last few years.

Okay, and then currently would you be just closer to the lower end of that range, or are you below that?

Yeah, we’re closer to the lower end right now because they’re just, you know, there’s opportunity there, we’ve identified the opportunity. There’s customers that we’ve done things with historically. We know it’s there but it’s just a question of pulling the trigger.

Got you. That’s all for me. Thanks a lot.

Thanks.

Your next question, sir, from [Robin Schumacher] [ph] of Bear Stearns.

Yes, good morning, Pete.

Hi, Robin. How are you?

Good. Most of my questions have been answered, but you talked a bit about the Middle East market, and I wanted to go back to that a second. You, in Iraq you had said earlier on that most of the rigs there were built by National Oilwell or one of its predecessors. And I wonder if there’s any further movement along that line in terms of refurbishment of rigs there? And then I would ask you if you have looked into the Libyan situation? Are the rigs in Libya which may open up to once again to Western investment, are they National Oilwell original equipment, as well, or what’s the situation there?

Robin, first, on Iraq, we have had, we’ve had some business in Iraq. We’ve sold some parts in there on, you know, for different refurbishments and things like that. We believe, though, that, and you know, all of you that read the newspapers know this anyway, that that’s probably moved out a little bit into the second half of the year. There’s still some infighting as to whether or not KBR or the Iraqi National Oil Company is going to spend the money. And we think that’s all getting sorted out. It’s still a tremendous area for us. But I think that the potential for significant revenues is really stretching into the second half of 2004 for us at this point. We’re still positioned very well, not, certainly not losing anything there. It’s just a question of when it picks up.

Libya is an interesting area. Again, very much like what you see in Iraq today. There are 82 rigs in Libya. Essentially 40 are working, and out of that 40 the vast majority of those, 25 of them are work-over rigs and the other 15 are drilling with I think like 13 on land, two offshore. And they are essentially National Oilwell vintage. They are desert rigs. They – we think that given the bright political situation if sanctions, in fact, are lifted and the opportunities are there we think Libya really provides a lot of the same sort of opportunity that you see in places like Algeria which, you know, is doing some of the deeper drilling. They have a significant number of rigs there. And so we think that the potential on a place like Libya is significant. However, we also have to stay attuned to the political situation there.

Right. Okay, thanks a lot.

Your next question from of Ole Storer of Morgan Stanley.

Hey, good morning.

Good morning, Ole.

Hi. I just wondered if you could help us get a little bit of a handle on what the revenue opportunity for you could be like if you hit the kind of homerun on one of these 10 jackups?

Well, if we hit the homerun on a jackup, and essentially if you take all of the things that we believe that we can put into a jackup it’s approximately $35m.

And that would include everything from the control systems?

That’s controls, that’s all of the drilling equipment, that’s the structures, that’s cranes, that’s everything that we currently manufacture. Yes, jacking systems for the legs. It’s the whole boat.

And isn’t it the case that a little of the cost overruns that they’re on rig construction in the previous cycle is because of the operators mixed components from a whole bunch of sub-suppliers, and they didn’t kind of talk together, as well, and all of that? And so from that experience if you get a contractor on one of these rigs do you expect to get a substantial package?

Well, I, you know, I think, number one, your comment is spot on. I think as you take a look at many of the cost overruns they were associated with many different pieces of equipment trying to come together and communicate with each other, and having issues around there.

I think that they’re really, as you take a look at a lot of these jackups today, one of the things that we’ve tried to do strategically is be able to integrate the entire rig package. And so when you start talking about especially on the rig floor, the derrick, the pipe handling system I think that’s one package that really needs to come together on an integrated basis. However, you could also then do the jacking systems or the cranes independently.

And so I think in some cases people are going to come out and say ‘hey, we want the whole thing done,’ and in some cases they’re going to say ‘we want the drilling suite done but maybe we’ll go over here for jacks or here for cranes.’ And then in some cases you still have people that like to pick and choose. So we think certainly by selecting the integrated package you really minimize the opportunity for cost overruns, but not everybody is going to do that.

And how much of a revenue, sale would the drilling package be for you guys?

Oh, you know, approximately, say you just talk about the drilling suite itself, about $20m.

Okay, so that would be the [reduce this, it’d be after] [ph]?

Yeah.

With those 10 jackups, will two of those include the [BR] [ph] order, units?

Well, we never tell anybody what the 10 are because I don’t want to do my competition’s work.

Oh, I would imagine that Hydralift would be in a good position for those anyway.

If I could, just get some more comments on another sort of item I picked up in one of the trade rags. Something about you guys coming out with a 1500 horsepower land rig built in China that you could market to the international markets at around a $7m all in delivered price. Can you kind of comment on this? And what your plans are with this product?

Well, I think rather than comment specifically I’ll just give you a general comment, although we believe that it’s incumbent upon us to try to drive costs out of the manufacturing process as much as we can, and ultimately you’d hope to be able to share those costs with your customer and be able to retain some of that benefit for yourself.

And I believe that if you can drive down the cost of the drilling rig by doing different things in efficiencies and manufacturing, the location, that you really can help create a market that is, in fact, going to provide new builds as opposed to refurbishment. And so, certainly, conceptually I think that’s the direction that you really want to go.

So initially will this be a product that will be aimed at say the Middle East, Russia, China, or will it be – at what point do you think that this product will be competitive in the North American market versus let’s say the two big players continuing to refurbishing rigs? How far away from that point do you think we are on the rig count right now?

Well, I think that it’s always our goal to really be able to manufacture anything at National Oilwell where we feel it’s, we have the competitive advantage, and really have the customer not have to worry at all about where it was manufactured. And, you know, the same warranties, the same standards of quality, and the same support will apply. And so we believe that the things that we’re doing regardless of if we’re doing them in Norway, or Edmonton, or China are applicable to the worldwide market.

But we, you know, to further elaborate, the, you know, with a rig in the price we’re saying as long as we can provide a payback to customers wherever they are in the world, either through technology or efficiencies, and also lower prices to them that’s what’s going to drive their decision is that payback.

Yeah, I would imagine that your three major land rig customers in the U.S. still have rigs that they can put back to work with very little incremental investment, but at some point those rigs are going to require incrementally quite a lot more. And I was wondering how far away do you think you are from that inflection point? Is that another 70 rigs, another 100 rigs? And would that be the point at which you this time around would come in and offer replacement rigs rather than refurbishment?

Well, you know, they evaluate that decision themselves. I mean we believe it’s in that 50 to 75 range, you’re starting to get major pressure on rigs that are really fit for purpose of where the demand is right now. So, but I don’t know that I have the right answer on that, but that’s where we think it is.

Okay, well, thank you very much.

Thank you.

And sir, your final question for the question and answer session comes from Mr. [Justin Tugman] [ph] of Simmons and Company.

Everything has been answered. Thank you.

Thanks, Justin.

Okay, sir. I’ll hand it back to you because that concludes the question and answer session.

We appreciate everyone’s interest, and thank you for dialing in. And we look forward to talking to you again at the end of the first quarter. Thank you very much.

Ladies and gentlemen, that concludes the program for today. You may now disconnect.