國民油井華高 (NOV) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the National Oilwell second quarter earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. [Caller Instructions] As a reminder this conference is being recorded today, Friday, July 30th, 2004. I would now like to turn the conference over to Mr. Peter Miller, Chairman, President, and CEO. Please go ahead, sir.

Thank you very much and good morning everyone. Welcome to the National Oilwell second quarter 2004 earnings conference call. This is Pete Miller, the CEO of National Oilwell; and with me in the room is Steve Krablin, our Chief Financial Officer. Earlier this morning we released our earnings of the quarter of 21.4 million, or 25 cents a share, on revenues of 534 million. This compares to a first quarter earnings of $11 million, or 13 cents a share, on revenues of 496 million. Now, obviously, we are pleased with the improvement from quarter 1 to quarter 2 and, although we have other things that we believe we need to do, we certainly are moving in the right direction in that regard. Steve will start -- will cover in greater detail with you in a moment the financials. And then after that, I'll come back and talk a little bit about the operations that we're seeing around the world and where we believe the hot spots are going to be as we look to the future.

We also announced this morning that we increased backlog to $441 million from the ending quarter of $412 million last quarter. This incorporates a $185 million inflow of new orders. For the first six months of this year we have had new orders of $386 million, and we think this is an indicator of the capital equipment improvement and the things that we believe will continue throughout this year and into 2005. Additionally, yesterday we announced the signing of a letter of intent for a drilling facility in Kazakhstan in the Caspian Sea. This facility and LOI are for $150 million. These are National Oilwell-designed harsh environment rigs. I'll cover these in greater detail when I talk about the operational part of the business, but I do want to make note of the fact that that $150 million is not included in the 441 million in the backlog. The 150 million came in after the end of the quarter and will be included in backlog as we move into the future.

In general, we're very up beat about the business today. We think that especially in the international arena there are going to be very significant opportunities over the next 18 months and probably even further out from that. I will explain a lot of those as we talk later, but at this point in time I'd like to turn the conference over to Steve Krablin to further go into the numbers with you.

Thanks, Pete. I'll remind people that during this conference call some of our statements may be forward-looking statements within the meaning of the Exchange Act. I refer to you our press release and our SEC filings for a full explanation of that term and for the details of the risk factor disclosures contained therein. If you're on our e-mail list you've already received a quarterly selected financial data sheet that provides not only the second quarter results, but also is an easy reference to the results and trends by quarter for 2003 and 2004. If you're not on our list, this sheet is available at our website, which is www.natoil.com, natoil.com, and you can contact Investor Relations through that website to be added to the e-mail list. Our website is also a source for a replay of this call.

But we are very pleased with the progress that we've made in second quarter, as Pete said, and we have a number of initiatives underway to even make further improvements in margins the rest of this year. Last February, we described the initiatives that we were undertaking in our Distribution group and we believe that we've accomplished what we said and even more than at that time. In April we addressed some problems that we had with lower margins in the Products and Technology group; and we believe that we're generally in line with what we said we would do to correct those. So let's look at the second quarter in more detail.

All of these, again, will be compared on a sequential basis to the first quarter as opposed to the year ago numbers. On Distribution, the revenues in distribution were flat at 218 million on a sequential basis. Decreases in Canada were essential offset by increases in the United States. International revenues were generally flat. As in prior quarters, for general ranges, each of the Canadian and international operations represent about 25% of our revenues in distribution and the balance is in the U.S. Our operating income and distribution continues to improve, and this is a result, primarily, of better margins driven by top line and our purchasing efforts. We're very pleased to have moved back to the 3% operating profit as a percentage of revenues, and that's up from 2.5% in the first quarter. We expect to add another 0.25% or so in the third quarter based on the higher volumes that we're expecting and I think for, you know, guidance purposes we're expecting about a $10 million increase in revenues in distribution in the third quarter over the second. The majority of that increase, of course, is due to the Canadian rebound after the spring break up slow down experienced in the second quarter. As to return on capital, the distribution group is now just over 10% which was achieved in the second quarter.

For the Products and Technology group, revenues increased to 348 million, or up about 14% over the first quarter. Revenues from capital equipment from backlog increased 28 million to 156 million compared to 128 in the first quarter. This increase really gets us back to a level that's been common for the last couple of years and, in my opinion, is not at all "high". Our non-capital revenues also increased in the second quarter by about 15 million on a sequential basis and that's up about 8.5%. Operating income for Products and Technology totalled about 35 million, which is a significant improvement from the anomaly that we experienced in the first quarter of this year. And, you know, while this is a major improvement want to make it clear that we expect to make further strides in this area through the remainder of 2004. The up market that we're experiencing is allowing to us recover some of the top line lost to pricing pressures during recent times and the increasing volume of activity is allowing us to improve our manufacturing efficiencies. In the second quarter, two areas were below our internal expectations and we'll talk just a little bit about those.

Those two areas that surprised us on the downside were China and the Down Hole group. China was lower than we expected due to a customer deferring delivery of equipment from June to July so that's just a quarter-to-quarter slide and is really not that big a deal. The Down Hole group was lower than we anticipated as the Canadian downturn hit them a little harder than we expected and again we believe that that's not going to be a problem in the third quarter. I guess in the expected category, some of our capital equipment coming out of backlog still reflects lower margins than we have historically achieved and lower than we project going forward. This is being fixed as the backlog turns over. We talked about that at great length in the last conference call. So all of these situations, I think, as we move into the second half of this year, are pretty predictable that we're going see further improvements in margins and I think you'll see noticeably higher margins in 2005 over 2004. The third quarter in revenues from capital backlog, our expectations are around 175 million, and we expect even higher revenues than this in the fourth quarter of this year.

I'm going to address a little bit about the major Kazakhstan contract that we announced yesterday. First off this is the type of product that National Oilwell is particularly well-suited to undertake, this is what we do. The 150 million contract is expected to generate incremental operating profit of, let's say 25 million plus, I don't want to get into a whole lot of detail at this point in time. But -- and we would currently expect to record revenue this year, 2004, of around 40 to 50 million with the remainder recorded by the end of the third quarter of 2005. Now, without knowing where each of you are with your financial models, I suspect in that 2004 some of that number may be incremental, at least in part, to what you had been expecting. For 2005, this amount may or may not represent an incremental number. I don't know what you have. But I think many of you already have large increases in revenues implicit in your models.

So, said differently, if you're forecasting revenues from capital of around, let's say 900 million, I don't want to try to make that too specific or a projection, but if it's around 900 million you may not find it necessary to change your predictions due to this specific project; but if you're well below that, you may find that what we're seeing with this project and with the types of revenues that should be similar to this project in the near future in this type of environment, you may be on the low side. As always we encourage each of to you make your own market forecasts and we'll try to help you with the capital components as best we can. I do hope that you'll understand if in the future quarters we're not willing to isolate this contract's performance and profitability from our other business as that probably would not be a good answer for us, you know, from a competitive reasons.

Looking at the rest of the income statement and the balance sheet, our corporate expense was just over 3 million, and we continue to expect this to be around 13 million for the full year. Our interest expense in the second quarter was about the same as the first. Our current blended rate is around 5.6%. It appears that interest will probably stay close to this amount for the remainder of -- on a quarterly basis, for the remainder of 2004, as the upward pressure on rates that we're beginning to see will be offset by lower average debt balances. Our tax rate remains at about 29%. That's what we recorded in both the first and second quarters and expect that to stay the same in '04 and '05. The minority interest which is the 40% share of the China joint venture that we don't own, you can see, is about the same as it was in the first quarter. We do expect a pickup in this in the second quarter but it looks like it's not going to be as high as what we had originally projected for this year.

Currently we would expect that minority interest number to be around $3 million. We did have a slowness in starting up a new project that would have been similar to the platform that we did in 2003, and that's being deferred and holding that number down. So while this is a, you know, if you took that minority interest that's just an isolated factor, it might force to increase your EPS. Essentially you're getting-- the revenue component is coming out of other operations that are probably at lower margins than the other one so, all-in-all, you may not find that this has a big affect on your models.

Looking at the balance sheet, there were really no significant changes from the first quarter. Our debt at the end of June totals 579 million, that's down from 610 at year end, and that would give us a debt-to-cap ratio of 33.8%; or net of the cash balance of 62 million, the ratio would be about 31%. So we remain well within our comfort zone of 20 to 40% in debt-to-cap ratio, and continue to, you know, move that number downward. Capital expenditures in the quarter totaled about 7.8 million, and this is still well below the depreciation & amortization expense. Year-to-date we've spent about 14 million and expect for the full year for the number to reach 30, 32 million. Depreciation & amortization jumped in the second quarter as we had a minor catch-up, but for full year we'd expect that to total around 41 to 42 million. For shares outstanding the diluted numbers for the third and fourth quarter we're estimating about 86.5 million, just slightly above where we would have been in the second quarter.

So to quickly kind of summarize the projections for the third quarter, if I went through those quickly. The revenues for distribution, we believe, are going to be up around 4 to 5%, or about 10 million. The capital out of backlog should be around 175 million. The revenues from non-capital within Products and Technology, we believe, will be up also but not necessarily as much as the Distribution group number. And we still, as we said on our last conference call, see the third quarter EPS starting with a 3. Pete.

Thanks, Steve. What I'd like to do now is basically give you a little bit of an operational overview and then talk a little bit about what we're seeing in the international arena. First off, as Steve pointed out, we're very pleased with what our distribution folks accomplished this quarter. We think that the year-over-year growth has been very, very good. It's very profitable. And for the most part when we're talking about that today, what we're really talking about is a Rocky Mountain, west Texas and south Texas play. We're finding those to be very active, most especially in the Rocky Mountains. When I talk about Down Hole Tools our Mission group, and Distribution; the parts of our business that are related to day-to-day businesses, you know, we really see the Rockies as being a good driver of that and I think that's going to continue throughout the year. Obviously all three of those businesses have a little bit of a downturn in the second quarter because of Canada, we see that coming on extremely strong in the third quarter, and very hot in the fourth quarter. It looks to us as if Canada could very well have another record year when it comes to drilling up there and production, and we think that we're very well suited in Distribution and Mission to be able to take advantage of those opportunities.

As Steve said our Down Hole group really was a little lower than expectations, but we're pleased with some of the things that we have going on right now. In particular, we have an asset management program with one of our larger customers that I think will start to manifest itself much more in the third and fourth quarter as drilling activity worldwide picks up; and we've also started placing our fishing tools on asset management programs which I think, again, is very good about helping us develop more revenues and more profitable revenues and locking in more business with some of the major fishing tool companies. A couple of things that are very interesting for our Down Hole group: Number one is we're using a lot more motors to drill straight holes. Places like Oklahoma and the Rocky Mountains are starting to see the efficiency gains that they can gain from motors even though they're not having to turn the well or do extended reach or directional drilling, but rather they're able to make up the time and have less wear and tear on drill pipe, and things like that, by utilizing the motor. So we see strong growth coming in both the Rockies and Oklahoma with this.

And then, finally in our Down Hole group, in the third quarter we will actually commercialize our Even Wall technology. I've talked about that although bit in the past, but it's new technology that effectively is going to increase the life of motors, reduce the amount of time spent tripping in and out of the hole to take care of the motors and also allow the motors to work in a little bit more harsh environments to include higher pressures and higher temperatures. So we're very excited about what that has. So, effectively, when I talk about our businesses that are related to drilling activity directly: Distribution, Down Hole and Mission; we see those being able to follow the uptick in Canada, and we think we're well positioned to continue to take advantage of the Rocky Mountains and the other strong places in the United States. I might also note, you know, we've probably said for about four or five conference calls we're waiting for the Gulf of Mexico to come back in that regard. Really hasn't. But listening to some of the drillers conference calls this time, I truly believe that maybe the Gulf of Mexico is poised for a little bit of a rebound, and I think as that occurs that really, I believe, provides good opportunities for our businesses in those three categories.

Now I'd like to go to Rig Solutions where the majority of the capital is and, again the big issue here is international. Throughout the world there's a push to increase reserves, to get better equipment in to be able to do these things and we think we're very uniquely situated to be able to take advantage of this; and I'd like to talk about a few of the high spots on that right now. I'll start with Russia, this is actually a little bit of an enigma right now. I think the EU coast debacle has probably forestalled a little bit of business right now and a lot of the businesses over there are husbanding their resources so that they can take advantage of buying parcels of EU coast if it comes out. I think that, hopefully, there'll be some sort of resolution on that in the near future. It hasn't dried up business by any stretch, but I think it has deferred it to a certain extent. On the other hand what we are seeing is that the government is requesting many of the people that are going to be players in this to be able to drill in more of the difficult fields in Russia.

You know, up to this point in time a lot of what's happened has been the exploitation of current fields and I think what the government is looking at is going into some of the more complex areas most likely, and this is my opinion, to really increase the reserves that they have. Well, the good news there is that we think that's really going to spark a demand for more western-type equipment. Right now, we believe that over the next 18 months that you'll probably see the 20 rig packages that are bid in Russia, and these rig packages could be anywhere from about $5 to $10 million. So we think that there's really going to be some great opportunity over there and these packages will start coming out very soon. They're needed, and I think you'll see this a continuation, not just next year but for two or three years afterwards as they really start to develop some of the many more difficult areas within Russia. The other thing that's very good about Russia and the former Soviet Union right now is the offshore component. We're seeing more activity.

We're seeing more activity, obviously, when I've talked about the Caspian issue, and I'll come back to that later. But we expect this quarter to get a jackup rig suite of equipment on that in Russia and we're also placing some equipment on some platforms, both off the pacific coast in Russia and parts of the Caspian Sea. That's really the -- the offshore component is something that's really, kind of, popped up new for us on our radar so we're excited about the opportunity to be able to take advantage of that. So, in a nutshell, we think that, obviously EU coast still hangs over the Russian environment. We're still not certain where we'll be on investment within Russia. We are looking at some options now, but we do believe that over the next year or two we'll achieve or better some of our historical run rates in Russia and I would think to get up in the $100 million range.

Like to good over to the North Sea for just a second. Very slow but it's also in somewhat of a replacement mode, and I've talked about this before. We don't see many of the drilling contractors doing a lot of extra things. We don't see many rigs moving in. However, we are in replacement mode on many of the major platforms, in particular Statoil is doing a lot of things on replacing cranes and we think we'll have a very viable program in there for the next two to three years replacing those cranes and we see more and more of that sort of activity. I've mentioned in the past that as some of the independents get involved in the North Sea, they've actually reinvested money where some of the majors that sold their concessions there didn't really want to, they were more milking it. So we think that, again, won't be a tremendous well spring of increased activity but we think there'll be very, very steady revenues to be earned in the capital arena in the North Sea.

Probably the hottest spot, both literally and figuratively is the Middle East. What we're seeing in there right now is a lot of good opportunity. Currently in our backlog, we have six rigs that are going into the Middle East and we have many other tender opportunities in there. In particular, I want to talk about a couple of places. Obviously Iraq, I think everyone is well aware of the situations there. While there is certainly some security issues, we do see that they are moving ahead within their petroleum infrastructure. They've formed the North and the South Drilling Companies and with that they also have formalized the Iraqi Drilling Company, IDC. We've had meetings with them and, quite frankly, are actually currently shipping some equipment into there. Not a great amount, around a million dollars, but we continue to look at the opportunities there and, again, it's probably anybody's guess on the security situation and obviously we're not going to put National Oilwell people in harm's way; but we do believe that as it settles in there's some opportunity there both on a refurbishment and a new build basis and things are probably moving a little bit more forward than people would realize.

One area in the Middle East that obviously has jumped up recently is Libya. We've had a team into Libya to take a look at what's going on there. We actually visited Concession 103 which is the major development area in Libya and we've talked with the major players there and we're very excited about what's going on there. Libya, part of the oil field has been well taken care of, other parts of it need a lot of tender loving care. We think we're positioned to take advantage of that. We've had a historical reference in Libya back in the early 80s, prior to many of the problems, and we think we're positioned to take advantage of that. I believe that what you'll probably see are a couple of new rigs being bid and sent in to Libya over the foreseeable future every year. And these will be significant rigs. I mean, these are desert-type rigs. They won't be small models. I think you're going to be looking at rigs that could be anywhere from 7 to $14 million in that arena and I think it's going to be a very positive one for us.

The other areas of the Middle East, Kuwait, continues to be very dynamic. In many cases, what you're seeing there now are replacement parts to rigs. They want top drives, they want other components that we're able to move in there as well as looking at new rigs. We're starting to see the--Saudi Arabia look at new rigs. We believe that, over the next six months, there'll be some tenders coming out there probably to the tune of two or three rigs. We think there will be some good opportunity for us. We've got a historical reference, again, there and we look to be very active. I think some of you that follow the Middle East know that there are opportunities in Turkey right now. The Turks -- the TPAO, the Turkish petroleum company is looking very aggressively at being able to expand some of their drilling operations, and I would think over the next six months they'll probably be awarding tenders for two to three rigs and we believe that we'll be a part of that.

Other places, Pakistan is starting to really improve upon its oil and gas business. I think some of the opportunities there won't necessarily be new build but they certainly will be in the refurbishment arena and we think we're positioned to take advantage of that also. Finally you have places like Oman and Yemen. We are delivering a rig to Oman later this year. Oman, we believe there'll be some tenders for some rigs coming out of there. So, essentially, throughout the Middle East there are good opportunities. I haven't mentioned Egypt or Algeria, but they'll provide opportunities as well. I think that the Middle East presents the greatest opportunities on land rigs. Additionally, there will be offshore rigs moving into the Persian gulf. We're seeing that now. I think some of the major U.S. drilling contractors have tendered rigs over there. I think there's going to be greater activity in that arena for our day-to-day type businesses as we support those out of Dubai.

And then, finally, the last thing in the Middle East is the formation of the Gulf Drilling Company, I think most of you know about in Qatar; and that is a joint venture between the Qatar Drilling Company and Japan Drilling Company. We have sold them a land rig and we also believe that there'll be some opportunities on some off-shore builds as they previously announced. So, again, the Middle East probably is sitting right there in the middle of being one of the better opportunities we see in the foreseeable future. Steve mentioned China. This quarter we did sign a jackup package with COSL, that was announced in a late May. That was for about $30 million plus of our equipment. Again I'm not telling anybody in this call anything that they don't know but China's got a tremendous growth trajectory. They're talking about needing double the amount of oil and gas in 2020 that they need today. The Chinese want to try to do as much as they can internally.

Obviously like the U.S., I don't think they'll ever be able to change the tide of being a net importer but they want to try to do enough internally so they can produce as much oil and gas as possible. What we're really seeing are some great opportunities offshore there today. Steve mentioned our China joint venture, last year we had an offshore platform in that joint venture that helped us on revenues. This year we've also been awarded another one and we'll start to see the revenue improvement in that arena in the third quarter as we bring that platform on line. Again we have the jackup, there are some other jackups that'll be available in China and I think that they'll continue to push their infrastructure and build up their ability to be able to drill internally. The other thing I think you'll see in China is some of the major players, I believe, want to try to play in other parts of the world. And as that happens there's a necessity for more and better equipment, the type of which we're able to provide. So I continue to believe that China will provide us some great growth opportunities for the foreseeable future and it really is, with the COSL jackup, we think that's the first of what we believe will be some others over the ensuing few years.

West Africa is pretty hot, as most people know, some of the major drilling contractors are moving rigs into the arena. We think that that's going to be an area that will be attractive to us for two reasons. The first one is the floating production systems, the fpso's. And the second one is--are more platforms, be they compliant towers or spars, that will be going into the production areas. We are completing this year a project that we had BB 2 that will -- or I'm sorry, BB 1 that will be going into West Africa and rigging up in the early part of next year. We think there'll be more opportunities for this type of project as we look to the future. In southeast Asia, the real critical thing there is Singapore and the shipyards, and I think most of you are aware of a lot of the jackup activity, and I'll touch on that more so in just a moment when I talk about backlog. But most of the southeast Asia-Singapore activity will really be involved with shipyards and the building of jackup rigs and other equipment, such as fpso's, down there and ship out to other parts of the world.

Finally a couple of comments about South America. Venezuela is actually a little bit stronger than we would have believed. We're selling equipment into there. They're doing some refurnishing there on rigs. For instance, we've sold about six of our iron roughnecks into there, we're selling mud pump and mud pit systems to help refurbish rigs down there; and so we're seeing a glimmer of activity there that we think will expand into the future. Mexico most of you are aware of what's going on in the Gulf down there, but we're also seeing opportunities to go in and refurbish a lot of the Pemex rigs; be they land rigs and some of the offshore rigs. So we believe that Mexico will be a market for components, not necessarily complete rigs but certainly mud pumps, draw works, top drives, the components, and actually that becomes very profitable for us when we sell those on a component basis. Brazil is positive again in the deep water offshore arena and we think that there will also be some good refurbishment and upgrade activities down there as Petrobras decides to improve the Brazilian-owned fleet. We're starting to see some action in that area. The one place I haven't talked much about is United States. Obviously we continue to sell parts and pieces in the United States but, certainly, it's not as active on a complete capital basis as what you're seeing in other parts of the world.

Talk about the backlog for just a moment. As I mentioned earlier the backlog is 441 million. It's kind of interesting, it's 53% offshore at this point, and 47% land. So you've really seen a jump up in land, but a lot of that has to do with the rigs recently that we've sold into the Middle East. We expect the backlog to build next quarter. Pretty much off to, I've already got 150 of it, I guess if I can't do better than that I better take a look, but we do expect to build. Again, we see a lot of opportunity for that to continue to improve as we move through the third and the fourth quarter and into 2005.

Finally just a comment on our project in Kazakhstan. That's going to be two harsh environment rigs. We will be building those in facilities around the world that we have and then we'll ultimately rig them up in our Galena Park facility here in Houston on the ship channel and then we'll ship them to Kazakhstan at that point. This is a nifty project, these rigs are very similar in nature to north slope rigs. Most of the north slope rigs move on wheels. These will move on a rail system that is set up on a manmade Island, and it--again, it's a great design and this is the sort of thing that we have had great success with in the past. We have dealt and built most of the rigs on the north slope of Alaska. We have kept together our team over the years that have really been both the designers and the implementers of this type of rig and we're excited about it. It's one of the the bigger projects that we've received, and the whole organization is energized and I'll look for great things to come out of that. So that's kind of a quick operational overview. At this point, operator, I'd like to turn it back over to you for any questions that our listeners might have.

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Caller Instructions] Your questions will be polled in the order they are received. [Caller Instructions] Our first question is from Jim Crandall. Please state your company name followed by your question.

Good morning. This is Jim Crandall from Lehman Brothers.

Good morning, Jim.

Steve, my recollection is that in the past you've encouraged us to think about when the business is improving, for the entire sort of Products and Technology segment, 25%ish type incremental margins. Is my recollection right there?

Yes.

Okay. You know, you talked about a 30 to 50% improvement here in the press release, I guess, on the capital equipment side. Any comments on how you think the non-capital goods business might improve in revenues in '05?

Well, I mean, our expectations Jim would be that that will move pretty much with the worldwide rig count and the E&P spending. Most people have their own views of how much that's going to grow but, at least the numbers I hear, are generally 10 to 15% and that's increase in 2005 over 2004, and that, you know, seems consistent with what we're seeing in the marketplace at this time.

Okay. I guess I would just make the comment if you want to comment on it that it if you took, sort of, the upper end of your forecast here in revenues and assume that kind of growth in the non-capital goods side of the business you certainly should be pushing up against a $2 kind of number for next year.

Well, you know, the marketplace is looking very good now and, you know, it's been my experience that usually everything doesn't go right but, you know, I'm lacking forward to the one time does it.

Okay. And, Pete, a question for you. In my conversations with various drilling contractors, I really sense -- not that you were viewed poorly in the past, but particularly the offshore contractors I think are speaking very highly of some of your new equipment that you've brought into the field, your capabilities, whereas, let's say, you would have been thought of that way certainly on land in the past. It just seems to me that you're being thought of in a much better light on the offshore side of the business, and I think that's reflecting itself in how you seem to be winning some of these new -- or many of these new jackup packages. Can you comment on that?

Sure, Jim. I think that one of the things that we've tried to do over the years as we've built this company, you know, we've made some very strategic acquisitions with people like High-Tech and Hydrolift and others that we feel really strengthened our position in the offshore market. The other thing that we've done is we've committed many more dollars to research and development and product development over the past four or five years that we didn't necessarily do in the past; and I think that's starting to manifest itself also as we put better equipment into the field. But, bottom line is there's a bunch of good folks that work around here, a bunch of talented engineers, very talented field service people; and hopefully as things improve we're able to better take care of our customers. So we appreciate the comments, but we do believe we're better positioned today, strategically, to take advantage of any offshore business.

Okay, great. Thank you very much.

Thank you. Our next question comes from Scott Gill. Please state your company name.

Yeah, Scott Gill with Simmons & Company. Good morning.

Good morning, Scott.

I guess first for you Steve, you're talking about the Down Hole business. Canada hit harder than expected. Can you quantify for us how much the Canadian revenues were down in the second quarter and perhaps even the impact to operating income?

Scott, I don't have it broken down that way with me. Essentially the Down Hole group was pretty much flat with the first quarter. Really what I was addressing is we had expected the second quarter to pick up a bit, the way some of the other items did. So it wasn't that Down Hole was bad as much as it just didn't go up the way we thought and so we're expecting that to improve in the third quarter.

I guess, Steve, if we looked at Canada would you say that your margins in Canada are better than your margins in the U.S. and, therefore, you had an unfavorable mix item on the operating income line? Is that a fair way to look at?

You know, I don't think there's any significant difference one place or the other. Really, anywhere in the world. It's not a -- you know, geography doesn't dictate our prices very much. Or the margins.

Pete, with respect to this order in Kazakhstan, your letter of intent, when did you first begin conversations with AGET?

Scott, this is a fairly long-term project. As you'd expect, anything like this isn't something that comes together in a day or two. We've actually been involved in -- well, to be honest with you, we first took a look probably three years ago at the Island concept in general and had some people in our London office that really, you know, presented some ideas in that. And then it's probably been about, you know, 18 months ago that we started taking a look at it in-depth and then the actual negotiations themselves have probably been ongoing for about six weeks.

And I guess are there any other projects of this magnitude that you're currently in those early stages of discussion with customers right now?

Well, there are always project out there like this, Scott. We don't talk a whole lot about them because, again, as I pointed out here, when we're talking 18 months ago we're not sure when it's going to go and I don't want to be putting information into the marketplace that we kind of go, well, is this one going to happen in 18 months, two years, three years, I don't know. But there are projects like this, really, that are around almost all the time on different fields throughout the world. Maybe not necessarily the magnitude of $150 million, but certainly of the magnitude of 50 to $75 million, in arenas like that.

Well, clearly you're very up beat about the prospects for National Oilwell into '05, and I'm just trying to understand if there are more of these bigger projects out there that give you confidence that it's not just an '05 event; that this carries forward into '06.

Oh, I think, Scott that even without a project of the magnitude of 150 million, I'm very up beat just because of what I believe are going to be rig packages in the 25 to $30 million range and land rigs in the range of 7 to $10 million that are going to be built. I think there'll be enough of those that'll continue to help us improve the bottom line.

Thank you.

Our next question comes from John Tasdemir. Please state your company name followed by your question.

Hey, guys. With Raymond James. You guys obviously did a great job in improving the margins in the P & T business in the second quarter. I'm just kind of looking out further, is there anything, you know, different mixes of business, steel costs; anything that would prevent you guys from enjoying the same type of margins that you have had in the past, up, 2001 time range of 15.5% type margins over the longer term?

No, John, I think with -- if the volume that we're expecting in 2005 and in 2006, I mean again, we see this as truly the beginning of a cycle that's been, you know, that -- of a capital equipment group that was saturated 20 years ago and that saturation is now gone. I think you can move back into that. Kind of elaborating a little bit on Jim's question earlier, we don't typically make as high a margins on capital equipment as we do on spare parts. So you can approach a mix issue around just volume out of capital equipment if that's all you have. The offset to that is that we begin to have manufacturing efficiencies as we start to move into that. So when we're talking about our guidance do we change it, it could change over time, it hasn't changed over the last really eight years. So as you add volume of any type, you'll be -- you'll certainly be going above the 10% now and I think you can be back into that, you know, 13 plus percent where we were for most of 2003 very quickly.

And also, Pete, you talked a little about getting some of the lower price backlog through the system. What's -- you know, what's generally-- what's pricing doing at this point for various pieces of equipment? Is it moving in line with steel costs? Is there a little up side? What's -- any thoughts there?

Yeah, John, I mean basically when you look at the capital business, you know, each one of the bids is almost a discrete event in its own right. What we have to do, and what we're doing today, is ensuring that when we're bidding something, especially if it's going to be a little bit of a longer term bid; we certainly are protecting ourselves on steel prices, be it contractually, you know, putting a surcharge in, whatever. But if we know a bid is going to be done very quickly where we can get the steel on order then we don't necessarily have to do that. But when you really talk about capital praising, you know, this isn't something that's done off a price list, it's not like bits or mud or our distribution where everything's kind of sitting out there.

We have to look at what's going on on a case by case basis, where we believe we want to be on a particular project, who the competition is; because one of the things that really is occurring today is this truly is a global marketplace. Much of our competition they're going to be European manufacturers, they're going to be manufacturers in places like India or China that we're having to compete against so we believe that we're going to be in a better pricing environment, but at the same time, when you're dealing with the capital stuff it becomes very, very difficult for me to say, oh, we're going to increase prices by 5% or 10%. Because, again, we're looking at everything on an individual basis to see what makes the most sense for us.

Okay. Ad just finally, any prospects on the ideal rig yet?

Actually we've sold some already. And we'll continue to -- I didn't mention that in the operation overview but we have sold two, I believe we have another one on an LOI and we have some very interested buyers. I believe when I come back to you next quarter, we'll have sold even more.

Thanks, Pete.

Thank you. Our next question comes from Robin Shoemaker. Please state your company name followed by your question.

Yes, Bear Stearns. Hi. Steve, did you say that we should anticipate about a 25 million operating profit out of the Kazakhstan contract?

I said 25 million plus.

Plus, okay, because, kind of, a 20% margin would be 30 million and I just wonder what the component of third party equipment is within this 150 million that might have a lower margin than your equipment that you will directly supply.

Robin, it's probably in the 60/40 range of our own equipment versus someone else's, so we'll make, you know, relatively higher margins on the 90 million versus the 60 million piece. So I'm kind of giving a blended rate here. We are going to place all of this in the backlog because it's a discrete item as opposed to treating it as a buy-out. I mean, it's a--we are making fair margins on it. And, again, I'm trying to set a bar where I think I can certainly deliver and my expectation is to overachieve that.

Okay. And just in the timing sense would the profits fall out pretty closely with what you called -- or what you gave us as the revenue breakdown of 40, 50 million this year and 100 million in '05?

Yes, we will use percentage of completion accounting on it. So, if I'm right on the revenues it'll fall exactly that way.

Yeah, okay. On the margins this quarter, the pricing environment was obviously tough for awhile and you're working out of backlog some things that were pretty competitively priced, I think you made that point pretty clear. When did we start to see that--or up until what time was this pricing pressure on capital equipment really most severe and when did it really start to improve?

Robin, it really-- probably through the first half, the first three quarters of last year. While there was a lot of capital that we were able to bring in, it was still probably more of a--of a much more of a competitive environment, not that today's isn't. And also, I think, we were caught a little bit on the big upswing in the steel prices, so it was really the last -- or the first three quarters of last year. I think as we moved into the fourth quarter we started doing things on steel pricing and then certainly in the first and second quarter we've been more aggressive in the pricing. And, quite frankly, in many cases have turned down some opportunities that we might not have turned down a year earlier because of some of the competitive pricing.

And do you think you've got the passthrough of raw material costs now, you know, where it needs to be?

We believe we do.

Yeah, okay. Then finally, just wanted to -- seems to me that NOI has been kind of uncharacteristically quiet in terms of acquisitions compared to prior years. Just wonder if you see this -- the current environment where things are getting a lot stronger as one where acquisitions would probably taper off or where you still see -- or are you still devoting a fair amount of effort to that?

Robin, I was going to get to work on that right after this call. No, it really is a decent environment right now. There's been a number of things that have been presented that we have taken a shot at. You know, I think a lot of people in the entire group, there's probably been a depressing effect from S-Ox 404 as people really tried to get all of that done this year. The people who would normally be doing some of the other work are already pretty overloaded on things like that. But I think as we move into the second half of the year with, kind of, a better outlook from all the companies you'll start getting consistent expectations. And that's really the important part in acquisitions, is to have consistent expectations. It's not so much whether they're high or low, but are they consistent? So I think you'll see, not only us, but the entire industry hit another round of mergers and consolidations.

Okay. I look forward to that.

Thanks, Robin.

Thank you. Our next question comes from Tom Escott. Please state your company name followed by your question.

Pritchard Capital. Good morning, fellows. Just two things that hadn't been touched on. One, early part of the discussion Steve was talking fast, I was writing furiously and I just want to clarify, did you indicate Steve that for modeling purposes for '05 the revenues out of capital equipment or out of backlog ought to look something in the 900 million range just for modeling?

Well, yeah, I mean, I guess the -- it's our belief that, you know, you're going to be delivering 200 plus per quarter next year, in those areas; and so really I was just cautioning people that if you already are at or about 900, I mean, you can't have every project be incremental and, you know, so this 100 million or so that will come out of the Kazakhstan project in the next year, if you're at--you're below 800, you probably--you do need an adjustment. If you're above a billion, you probably have plenty, at least where we stand right now. So just trying to hone it in a little bit.

Well, my sense is if earnings estimates are still $1.65 next year then people are not forecasting 900 million in capital equipment. So it probably has to get ratcheted up. But my other question is this, you guys talk a lot about many of the divisions, you really keep a very low profile talking about this non-capital equipment. You know, in the quarter, you know, non-capital equipment revenue year-to-year was up 23% year-over-year top line. I mean, it was huge. Now, you had earlier indicated that, you know, that pretty much sort of tracks the worldwide rig count; but clearly, you know, year-over-year this number, this number marches up, you know, very smartly and it's well up over the year-over-year above world rig count. Is it that you're putting more products and have added some new things going through that revenue stream? Are you taking share from somebody else, or is there anything to kind of account for why the non-capital -- or maybe it's just that customers are buying a lot more parts and services to refurbish these old rigs. Is there some explanation for that?

It's a good question, Tom. You're absolutely right. We talk about the capital side because that's what differentiates us from others, but if you just even look at the Products and Technology group, it's almost 200 million in a quarter that's non-capital. The big parts of that, of course, are the Down Hole group; the Mission group- the extendable products group, what we term as a name of Mission as a product line; and the Spare Parts would be the really large components of that. The Spare Parts, of course, had been affected by slowness in the gulf. That's always a very good area for that, and the offshore market is much stronger for there. So, you know, we do have good positions there. We have really done some good things in those areas to get in closer with our customers, to be able to get larger shares of their business; so I think we have made some great strides in those areas. We tend just to, you know, out of as much choosing what to talk about we probably don't talk about those as much as we perhaps should.

Well, I just, you know, it looked like one of the strongest areas of the whole company in terms of operating performance and, you know, it just didn't get talk about that much. Of course, if you book another $150 million contract I guess that takes all the attention. [ LAUGHTER ]

It's, I guess, given the choice, -- well, anyhow, back to you.

Well, anyhow, back to you.

Thanks, Tom.

Thank you. Our next question is from Michael LaMotte. Please state your company name followed by your question.

J.P. Morgan. Good morning, guys.

Good morning, Michael.

I want to sort of get back to the issues that, Steve you said, impacted you this quarter starting with China. Can you give us what the revenue was? I apologize if you've done that explicitly, but I'm assuming that you actually absorbed all of the costs related to the shipments but it just didn't get out the door.

Yeah, well, it was built into inventory, I mean, essentially on some of these things, and because it's a -- you know, we aren't allowed to recognize revenue until we deliver it to the customer. We just couldn't recognize the revenue, but that now has gone, I think, in July already so that won't be an issue for the third quarter. I mean, essentially the, you know, on a -- the China runs anywhere from 5 to 8 million a quarter absent getting some of these larger pops, but it's very profitable area for us typically, so when you start covering the overhead the incremental numbers out of there are very nice.

Right, because you cited China still working through some low price contracts through the P&L and then lower Down Hole because of Canada, and P & T operating income came in at 35 million. Pete, on the first quarter conference call you said 40 million. Is it safe to assume that those three items really accounted for that 5 million difference?

Yes.

Okay. And then getting to the issue of the growth in the business next year, and the margins on that, you're obviously having to take on, particularly for these bigger projects, like in Kazakhstan, a lot more engineering costs, cost of bidding is higher. And I'm just sort of curious as to other capital equipment companies that have passthrough and other large project associated costs really do complain about lower margins-- significantly lower margins than just the straight equipment sales, say $35 million jackup package. That doesn't seem to be the case here. Can you address that?

Yeah, Michael, most of the -- for instance, engineering costs associated, we won't be bringing on really any incremental engineers for this particular project. This is one that we're able to do with our in-house group. But, obviously, in the past we've incurred some expenses to be able to keep these groups together and I kind of mentioned that a little bit last quarter, you know, we knew we had some things coming. And then the other thing is when we bid projects like this, effectively, there is a cost associated with it and that, generally, is just run through as an SG&A expense of what we do. So that's why a lot of times you have a higher cost in time frames leading up to the fact that you were finally awarded this.

I think a lot of other engineering groups, though, really concentrate more on the engineering. Here the critical element for us is our engineering group really develops the product in support of us selling the product. It's not a pure engineering deal. Pure engineering, gosh, if you make 10% on that if you're an engineering house that's probably a decent margin. Here our engineers are really in support of being able to develop and sell our product. We don't generally like to do engineering just by itself and we discourage it many times when someone comes in and says let's look at a study, but we do want to do engineering when it coordinates with selling our equipment and that provides the better margins.

Okay. I guess sort of where I'm going with this, is on a normalized basis we understand that 25%, you know, plus or minus incrementals is the right kind of way to think about business; but the incrementals for the first half of this year have been so bad, are we going to see a snap-back and see better than 25% incrementals in the back half as some of these cost absorption issues begin to--, you know, you're obviously going to be booking a lot more revenue out of backlog without any incremental engineering costs, et cetera, in the back half of this year, China, et cetera. Is it safe to assume in Q3 and Q4 that we could get above 25%?

Michael, I don't want to -- I want to deliver a little bit before we get to -- too far down those lines. It's like, you know, we always talk about flow through, I had a nice flowthrough in Distribution this time didn't I?

Yeah, you sure did.

It kind of depends on where your starting point is on that so I think talking about flowthrough from a quarter that was pretty poor, the first quarter, just doesn't lend itself to being productive. So, it kind of depends on where your starting point is and it's so hard to know where everybody's mind is on that. I think it's just real difficult to get to -- I certainly don't want expectations above 25%.

Okay. That's fair. You brought up Distribution which was going to be my next question. Obviously very good execution there. Anything that prevents from you progressing, you know, marching on to sort of the 5% peaks that we've seen in previous cycles?

Just volume. We -- 5% I think really does become a peak in those areas unless something significant changes, but, you know, it's our belief that we can, you know, we've made some pretty good strides from 2.5 to 3.5 -- I mean to 3 and, you know, I've said 3.25 in the third quarter, perhaps. So we're approaching 4 and, you know, with the industry the way we see it for 2005, I'd like to see us get there next year.

Okay. Super. Lastly, Pete, on hex pump. How did we do order wise, how's the performance?

We've got now, Michael the hex pumps that we've sold-- we sold in the first half of the year are all installed on the rigs. Those rigs unfortunately are moving to locations and they haven't been up and running as much as we'd want. We actually didn't push taking any more orders until we had all those pumps running. They will be running here shortly. I think, as a matter of fact, one of the rigs is supposed to start almost any day. We've got a goodly number of quotes out there with people right now and my guess is that as -- when I talk to you at the end of this quarter we'll have some other orders in. The bottom line is the slowness on this hasn't had anything to do with the pump, it's more just getting it installed on these offshore rigs and deploying the offshore rigs.

Okay. Great. Thanks so much guys.

Okay. Thank you.

Thank you. And our final question is from Terry Darling. Please state your company name followed by your question.

Goldman Sachs. Thanks. Just a couple of points of clarification. Trying to think about the order outlook in the back half of the year, you know, implied by a 900 million revenue number, Steve, out of backlog and I'm just kind of looking at the relationships in the past. Seems to me you're going to be lacking about 500 to 600 million of orders in the back half of the year does that sound about right?

Meaning in the back half of this year?

In the back half of this year, yeah.

No, because I think what you're seeing is a lot faster turn in some of these as we move into the land side. I don't think your backlog needs to get that large. Again, I mean, effectively if you pull the backlog right now or adding in this 150 million you're almost to 600 right now. So I think if you ended the year at 600 you would easily be in position to deliver 900 million type of capital equipment numbers.

Okay. And then, you know, is the outlook on the 900 million inclusive of anything from Iraq or Libya?

No.

Okay. On the Down Hole business if -- can you just remind us-- if I remember from the past, Canada as a percentage of that total segment is in the 30% range. Have I got that right?

Yeah, roughly. It's 25, 30% type numbers, yes.

Couple other, just points of clarification. If we think about your third quarter earnings discussion, and, you know, backing into an incremental margin for the Products and Technology group needed to do 30 cent plus, it seems to me you've got to be in that 35 to 40% range. Am I missing something there?

I'm not sure I follow that, Terry.

I mean, you know, to get--if you assume that your revenues are up 10% in Distribution with your normal 10% incremental; if you assume 175 million on coming out of backlog on capital; if you assume the rest of the P & T side is up something less than 10 million, I think you indicated; you've got pretty much every piece of the puzzle here except for the Products and Technology margin. So, first off, appreciate that. But, secondly, if we're backing into a margin to get to 30 cents plus your incrementals have got to be more like 35 to 40% if I'm doing the math right.

Well, they -- they could be on that individual component, recognizing that I've given ballparks on everything else so I wouldn't take anything that I've said as--too literally.

Okay. And then one other housekeeping item is '05 tax rate, do we need to think about that as anything different from what we've seen this year? Sounds like you're going to have, maybe, even a bigger mix of your income coming from foreign jurisdictions. Is there any potential for that number to actually go lower as a result of that?

I don't think so. I think 29 would be our best guidance now for '05 as well.

Finally, Pete, you've been really on target with the jackup orders over the last 6 to 12 months. Wondering if you would be willing to share with us your prognostication for incremental jackup new build orders. I think you've talked about, kind of, 10 to 15, you know, on a rolling 12 month basis. Does that number look like it's accelerating or are you still sticking with something like that?

No, I think right now that number, Terry, seems to be the appropriate number. As we've identified it right now, we believe that there's about 18 that are out there but I'm not sure that two or three of them are not necessarily what we'd believe to necessarily be real deals. And so I think the 10 to 15 rolling target, I believe, at this point in time is pretty good and I certainly wouldn't change it downward but I don't think I'd change it upward at this point either.

And when you're saying 18 out there, are you including some of the things that we know about, like the Kosul existing rig, I think you mentioned another potential one from them. Is the 18 that you're talking about there inclusive of, kind of, what's known at this point?

Oh no no, I'm talking about 18 that are unawarded at this point, that people are talking about that we'll tender or other people will tender. Now, again, out of that 18 I have reason to believe that 4 of those may not be real deals that'll actually go to tender, but I think between 10 and 14 are, in fact, real deals and those are not associated with the ones already awarded.

Thanks, guys. Have a great weekend.

Okay, Terry. Thank you.

Mr. Miller please continue with any closing statements.

Well, I appreciate everybody calling in and listening in; and we look forward to talking to you again at the end of the third quarter. Thank you very much.

Thank you, sir. Ladies and gentlemen, this concludes the National Oilwell second quarter earnings conference call. You may now disconnect and thank you for using AT&T teleconferencing.